Iraqi woes magnified by economic crunch

Far from the frenzied atmosphere of Washington, the Persian Gulf waits to see if the other shoe will drop in the Iran arms transfer crisis: Will the infusion of new weapons to Iran terminally shift the war balance against Iraq? Analysts tentatively conclude that Iraq remains able to contain the Iranian military threat in the six-year-old war. But the apparent reversal of the United States' avowed policy of neutrality, as revealed in recent weeks, adds serious complications for Iraq in what has already been its most stressful year of the war.

In the first half of 1986, Iran regained the military initiative against superior Iraqi forces by capturing Faw Peninsula in February, and, in July, it ousted Iraqi troops from the Iranian border town of Mehran. This reversed Iraq's 1984-85 momentum gained through a vigorous campaign against Iranian oil installations and industrial centers.

The impact of these defeats on Iraq's morale has been magnified by its worst financial and economic crisis of the war.

Iraq has a foreign debt estimated at $50 billion, the result of a conscious attempt by President Saddam Hussein to fund the war through foreign borrowing. Though only $15 billion to $25 billion of that debt is of immediate concern, much has already been rescheduled. This year, Iraq for the first time had to defer repayment on international bank loans.

This situation is embarrassing, if not destabilizing, for Baghdad. Despite increased exports, low oil prices will keep Iraq's 1986 revenues below those of '83. Nevertheless, it still has several cards to play in its struggle for economic survival.

It won an important concession in August when the Organization of Petroleum Exporting Countries exempted Iraq from a production quota, thus enabling it to export 1.7 to 1.8 million barrels a day. Pipeline expansions are expected to boost Iraq's export capacity in the next two years.

Despite the uncertainty of the oil market, Iraq's foreign creditors are banking on a future Iraqi economic boom fueled by this aggressive oil policy. All Iraq's major creditors have shown willingness to reschedule its debts.

But it is inevitable that it will become increasingly difficult for Iraq to secure credit. Budgetary belt-tightening, a fact of life for the past four years, has grown more severe. While Iraq is not now in serious danger of being unable to provide the economic necessities for its 15 million people, there are visible signs that imports have been cut back.

These conditions will only grow worse with the continuation of the war. It appears that in the next one to two years, Iraq will find few, if any, external sources of new credit and will be forced to impose sharper cuts in domestic spending.

This raises the question of how willing the Iraqi people are - or will be - to suffer serious economic hardship for the sake of the war. A number of analysts - contrasting what they see as the narrow basis of President Hussein's domestic support with the widespread fervor for Ayatollah Ruhollah Khomeini in Iran - project a short future for the conflict, once intense economic distress takes hold in Iraq.

It seems ill-advised, however, to disregard the strength of popular Iraqi distaste for Ayatollah Khomeini and his brand of Islamic revolution. A multitude of opportunities for a pro-Khomeini upsurge in Iraq have come and gone in the past seven years, and the Ayatollah's precepts and example have yet to make a significant, positive impression on the Iraqi masses. Tightening grip on power

In the wake of these pressures and of Iranian calls for a ``final offensive,'' Iraq has made a number of important political and military adjustments.

Shortly after the debacle at Mehran, Iraq's ruling Baath Party convened a special congress. Numerous changes were reportedly made in the upper echelons of the party, and the net result strengthened Mr. Hussein's grip on power. These deliberations also seem to have produced a signal departure in military decisionmaking - by stripping operational control in military matters from the political leadership and giving it to the military.

Observers of the war have consistently argued that political leaders' interference in military matters contributed significantly to Iraq's ineffectiveness on the battlefield. Though little is certain about Iraq's internal political deliberations, the effect of this reported transfer of authority was evident in an immediate improvement in the Air Force's performance.

Most dramatic were August's long-range air attacks against Iranian oil loading facilities at Sirri and Lavan Islands. These raids were complemented by effective attacks against Kharg Island, another major Iranian oil terminal. Iraq has kept up the pressure against Iran's Gulf and onshore refineries. As a result, Iran's oil output since July has been halved to less than 1 million b.p.d. in exports. The arms transfer crisis

Although these Iraqi measures blunted the widespread image of an immediate Iranian threat, the revelation of US arms sales to Iran involves serious military and political consequences for Iraq.

In military terms, these arms transfers contradict the US policy of military neutrality in the Iran-Iraq war. In addition, they undermined Operation Staunch, an effort the US began in 1983 to hinder the flow of arms to Iran from other countries. Operation Staunch has often been credited with helping prevent Iranian offensives from achieving key breakthroughs.

Military analysts are less concerned with the impact of the arms Washington transferred to Iran than with the ``green light'' effect it may have had, and may still have, on other arms suppliers.

In the past year, China has emerged as a major supplier of weapons to Iran. The main concern, however, is Israel. Iran affairs specialist Gary Sick estimates that Israel and the US may have shipped between $500 million and $1 billion worth of weapons to Iran this year before the arms scandal broke. This figure dwarfs the $12 million estimate provided by the Reagan administration and, according to Mr. Sick, suggests that Iran's military strength has been enhanced significantly.

But both Sick and Brookings Institution analyst Tom McNaugher suggest these weapons alone are unlikely to give Iran the capability to make a decisive breakthrough against Iraq on the ground. Mr. McNaugher believes Iran will wait to absorb the weaponry it has received and launch its long-awaited offensive early next year, but with only a marginally greater effect than previous offensives. Psychological impact of arms deal

The greater concern, analysts say, is that the more disturbing impact of the arms crisis could be on the psychological/political balance in the war.

Recent developments convey the impression of emerging Iranian ascendancy in the Gulf. In addition to Iran's military victories, many analysts view Saudi Arabia's changing positions within OPEC in this light. In August and October, Saudi King Fahd intervened to produce surprising accommodations with Iranian cutback proposals. And the firing of Saudi Oil Minister Ahmad Zaki Yamani was seen as a signal that the Saudis intend to cooperate more closely with Iran on oil matters.

But Iraq's response to this shift in events has not been characterized by desperation. Its bombing campaign against Iranian economic and oil installations is as effective as ever. On Nov. 25, Iraqi jets attacked Larak Island, a major Iranian oil facility, some 800 miles from Iraq. Besides damaging Iran's efforts to expand oil exports, the Larak raid achieved two major psychological objectives:

It symbolically ended Iran's monopoly on violence in the Strait of Hormuz, a key choke-point for free-world oil supplies, and extended the perceived reach of Iraqi military prowess to the entire Gulf.

Because it is believed that the attacking jets had to refuel in Saudi Arabia on their return flight, the raid helped renew the image of Saudi support for Iraq. Iraq treads gently with US

Iraq's diplomatic response to the US has also been measured and deliberate.

While generally aware that Washington sought an opening with Iran, Iraq reportedly expressed no opposition until it was revealed that a transfer of arms was involved. But Iraqi officials have, for the most part, kept angry criticism of the US to private exchanges. This suggests that Baghdad ascribes long-term value to the still fledgling US-Iraqi relationship.

Iraq was gratified by a US State Department statement Dec. 4 declaring: ``We actively discourage shipment of arms from any source to Iran, which remains the intransigent party in the war.''

Another potentially significant element has surfaced in recent reports that a Washington-based defense firm, BDM International, had earlier received informal US approval to discuss possible provision of technical assistance to Iraq. While such a transfer for purely military purposes would be prohibited under US policy, BDM might be allowed to help Iraq develop computer-based management technology with dual civilian and military uses. More effective management of Iraq's superior military resources would add a significant dimension to the war.

Frederick W. Axelgard is a fellow in Middle East Studies at Georgetown University's Center for Strategic and International Studies in Washington.