Iraq on track for a much-needed IMF loan

Iraq could secure a loan from the IMF before the end of the year.

The International Monetary Fund (IMF) completed the first review of its staff-monitored programme with Iraq last week. The programme is an agreement to monitor the implementation of the Iraqi government’s economic agenda and does not involve any financial assistance. But four reasons suggest that it may well be converted to a full-fledged loan even before it expires at the end of this year.

1. Iraq has large financing needs. The fall in oil prices has reduced the government’s revenue leading to a large budget deficit, forecast by the IMF to be 10% of GDP in 2016. Lower oil prices have also reduced export revenue, leading to a large external deficit of around 6% of GDP in 2016 (see chart).

2. Iraq has limited options for financing. The attempt to borrow from financial markets last year fell through due to weak investor appetite.  Reserves can finance the external deficit for roughly three years, but at the risk of depletion and potential devaluation. Indeed, the central bank has been using its reserves to finance nearly half of the deficit. This left the government with little choice but to accumulate significant arrears to finance some of the other half.

3. Iraq is making some progress in meeting the IMF’s targets. The review has shown that three out of the five quantitative targets were met, with a fourth narrowly missed. The only failure was the inability of the government to avoid arrears. The programme had also structural targets related to surveying and measuring the exact size of accumulated arrears and to look into the financial health of state-owned banks. Good progress has been made on these targets according to the IMF, although only one of them was met.

4. The IMF is likely to be lenient with Iraq. Any decision may well involve a bias to help Iraq at this difficult moment, especially given its war with the Islamic State in Iraq and Syria (ISIS). 

So a full-fledged IMF programme involving a loan may materialise before the end of the year, perhaps even as early as June, barring a complete political collapse in Iraq. The programme could mobilise as much as $15bn over three years from the IMF as well as other institutions and governments. In return, it would require the government to cut spending further, which may prove painful. But it could also help the country avoid devaluation, given that the IMF still views the exchange rate peg to the dollar as the only constant in an otherwise messy and highly uncertain environment.