Iraq has reached a $5.4 billion, three-year loan agreement with the International Monetary Fund to help OPEC’s second-biggest producer repair public finances damaged by the plunge in oil prices and war with Islamic State militants.

The agreement will help Iraq “get more from other financing entities,” Finance Minister Hoshyar Zebari told a news conference in Amman on Thursday. He said Iraq is facing “a very tough economic and financial crisis and this program will reduce the burden on us.”

The accord, subject to the approval of the IMF Executive Board, will make Iraq the first major oil exporter to sign a financing program with the Washington-based lender. Central bank chief Ali al-Allaq said the interest rate on the loan won’t exceed 1.5 percent.

Oil producers from Venezuela to Riyadh have slashed spending to counter the plunge in crude prices. For Iraq, the challenge was compounded by a costly war against the Islamic State group, which captured swathes of the country’s territory to set up a so-called Islamic caliphate. Prime Minister Haidar al-Abadi is struggling to assert his authority amid a series of major city bombings and sectarian rifts. His plans to install a government of technocrats have been delayed by rebellions in parliament.

Spending, Taxes

Iraq expects to receive around $15 billion in aid this year and next from the IMF, the World Bank and possibly the Group of Seven meeting in Japan this month, the central bank governor said in an interview last week.

While the IMF loan is relatively small compared to Iraq’s external financing and a probable current-account deficit of over $21 billion this year, the program will boost confidence in “Iraq’s macro framework,” said Raza Agha, chief economist for the Middle East and Africa at VTB Capital in London.

Iraq’s $2.7 billion Eurobonds due in 2028 rose after the announcement, sending the yield down 17 basis points to 10.14 percent as of 3:17 p.m. in London, according to data compiled by Bloomberg.

The government plans to issue a $2 billion bond before the end of 2016 to address growing financing needs, Zebari said in an interview in Amman. The sale was canceled last year due to a “very high” interest rate.

To get the IMF assistance, Iraq will have to cut spending, raise tax revenues as well as fight corruption and money laundering activities, the lender’s mission chief for Iraq, Christian Josz, said.

“The volume of the program will increase based on the funding that Iraq will also get from other international partners,” he said.

Source:
courtesy of BLOOMBERG

by Mohammad Tayseer and Dana Khraiche

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