May 29, 2008 | By Liam Stack | Correspondent of The Christian Science Monitor

At a United Nations conference in Sweden Thursday, Iraq appealed for debt forgiveness to boost development.

Sharm el-Sheik, Egypt - Before the rule of Saddam Hussein, Iraq was the most highly developed country in the Arab world. During his brutal reign, the country was the recipient of vast sums of money from the United States and the Persian Gulf Arab states, eager to finance a rival to Iran.

But five years after the overthrow of "the Lion of the Arabs," and his replacement by a Shiite and Kurdish-led democracy wracked by violence, Iraq remains an outcast in the Arab world. It owes between $56 billion and $80 billion in foreign debt – mostly to neighboring countries – which Prime Minister Nouri al-Maliki entreated them to forgive at a UN conference on Iraq in Sweden Thursday.

Most Sunni Arab governments say they are still too concerned about Iraq's security environment to open embassies in Baghdad or invest there.

"The region has got to wake up to the reality that there was a real, fundamental change in Iraq," insisted Adil Abd Al Mahdi, vice president of Iraq, at the World Economic Forum of the Middle East earlier this month. "This is not going to go away. Everyone had better deal with it now."

Arab states have steered clear of devoting resources or personnel to Iraq since a car bomb attack on the Jordanian Embassy in 2003 killed 17 people. The kidnapping and murder of the Egyptian ambassador in 2005 reinforced that position.

Since then, the US troop surge and establishment of the Sunni Awakening Movement have made significant progress in reducing insurgent attacks. But Arab officials say they are still uncertain about the staying power of the new Iraqi government.

"The Arab states have been waiting," says Hoshyar Zebari, foreign minister of Iraq. "For a long time, they were not convinced that Iraq was going to come out of this turmoil, but we have stood our ground."

Gulf Arab states, which helped fund the 1980-88 Iran-Iraq war, hold about half the country's remaining outstanding foreign debt. About $66.5 billion of debt has already been forgiven, according to US State Department estimates, most of that from members of the Paris Club, a group of the world's 19 wealthiest nations.

Debt relief negotiations have been ongoing for months, but Iraq's Arab creditors show little enthusiasm for a complete write-off.

"They have not demanded that we repay them," says Mr. Zebari, "but the issue of debt is still there."

The disinterest in Iraq is in marked contrast to the economic surge elsewhere in the Middle East. Money is pouring into other Arab states from record-high oil prices and Arab countries, on average, are experiencing a 6 percent annual economic growth rate. Cities from Dubai to Cairo are being transformed by a boom in real estate and construction, although rising inflation has caused great hardship for the masses of Middle Eastern poor.

A few corporate titans have begun working in Iraq, such as Orascom Telecom, an Egyptian company, but many Arab investors are keeping their distance. Experts say this is unlikely to change any time soon.

"People in the [Persian] Gulf would be more than happy to invest in Iraq, but if we go there then there are no guarantees on anything," says Hani Al Hamly, secretary general of the Dubai Economic Council.

"There is not sufficient infrastructure for investment: There are not enough roads, there are no good government institutions," he adds. "If the environment were different ... everyone would be excited to go."

Yasser Saeed Hareb, who works for the Mohamed Bin Rashed Al Makhtoum Foundation, a development organization in Dubai, United Arab Emirates, agrees.

"People in the Gulf absolutely want to have a relationship with Iraq," he says. "They are a part of the Gulf and we have a long history with them, but I don't think anyone wants to take the risk of dealing with Iraq now."

But now that decades of Sunni rule has given way to Shiite dominance, some say there is worry in the Sunni Arab world that Iraq is no longer part of the club.

"The Arab states need to do more, they can't just keep acting like Iraq is not there," says Khaled Abdulla-Jannahi, chairman of Bahrain's Ithmaar Bank, a major financial institution.

"But the problems between the Sunnis and the Shia inside Iraq are scaring people," he adds. "It has become a problem for the whole region now."