Iraq-IMF loan talks hit snag

03/10/2009 | Gareth Smyth

Iraq and the IMF are facing serious difficulties in negotiations over a loan to ease the country’s growing fiscal problems.

Mudher Salih Kassim, senior advisor to the Iraqi central bank, told Emerging Markets yesterday from Baghdad he was “not sure” that Iraq could meet IMF conditions for a $5.5 billion loan, adding it would “take a long time” for any agreement to be reached.

An IMF spokesman in Washington said “discussions are continuing” and that the Fund did not comment on specifics in such circumstances.

But despite a 2009 budget that is $19 billion in deficit, the Iraqi government on Wednesday proposed a 14% increase in spending for 2010, taking the budget to $66.7 billion.

Around 95% of government revenues come from oil sales, meaning the budget has been squeezed since crude prices fell from the highs of mid 2008.

Only last month the IMF said it was in broad agreement with Iraq on a new Fund programme to replace the $744 million Stand By Agreement (SBA) that expired in March. That had followed an SBA in 2005 and an Emergency Post-Conflict Assistance programme in 2004.

The IMF is pressing Iraq over public sector finance, private sector and banking reform, limiting the deficit, and targeting universal food rations to the needy.

Despite an IMF-projected growth rate of 4.3% for 2009 and 5.8% in 2010 and oil exports of 2 million barrels per day, Iraq is struggling with political instability.

“Iraq is still in transition,” Kassim said. “The security situation sometimes turns upside down. So it is difficult to decide these things [meeting the IMF conditions].”

But there is a chicken-and-egg relationship between fiscal balance and security. American officials have expressed concern over the Iraqi military’s ability to buy US equipment, including tanks and helicopters, as it assumes greater security responsibilities before the departure of US troops by August 2010.

Prime minister Nouri al-Maliki announced on Thursday he will lead a new coalition, based on “nationalist principles”, into nationwide provincial elections in January.

Iraq’s most pressing political tensions lie between the central government and the Kurdish administration in the north over oil resources.

The deputy Iraqi oil minister said on Wednesday he would ban Sinopec (China Petroleum & Chemical Corporation) from bidding for oil and gas deals, because it had not abandoned an oil contract with the Kurds.

The Baghdad government argues that contracts with the Kurdish administration are invalid unless it endorses them.

A debate on Kirkuk province, a potential flashpoint between the sides, began this week among Iraqi parliamentary deputies.

A UN report in April suggested “special status” for the province, which contains 13% of the country’s oil reserves and is disputed between Baghdad and the Kurds.

Electoral officials have raised the possibility of special rules for January’s provincial elections. On current rules, which do not require power-sharing, Kurdish parties could win control of Kirkuk, which is ethnically mixed between Kurds, Arabs and Turkmen.

In a visit to Iraq last month, US vice president Joe Biden noted that the stalemate over Kirkuk was delaying new laws on foreign investment in the oil sector.

Although the Iraqi private sector is still struggling to find its feet, Iraq and the US will jointly host a two-day Washington conference intended to portray an Iraq that is, six years after the US-led invasion, open for business.

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