IMF deal puts Iraq on road to markets

As US troops celebrated Christmas in Baghdad, the IMF came up with a present for the Iraqi economy. Picture / Reuters

WASHINGTON - Iraq has won a crucial loan agreement with the International Monetary Fund and a US$14 billion ($20.78 billion) debt swap with private lenders, taking key steps towards a wider debt deal and access to world financial markets.

The US$685 million IMF standby credit arrangement is the fund's first with Iraq and is designed to support the nation's economic programme over the next 15 months.

"The Iraqi authorities were successful in promoting macroeconomic stability in 2005, despite the extremely difficult security environment," said IMF deputy managing director Takatoshi Kato.

An insurgency in parts of the country and almost daily suicide bombings in and around Baghdad, the capital, has hindered economic rebuilding since the United States invasion in 2003.

But Washington says progress is being made and the IMF agreement is crucial for Iraq's ability to borrow money overseas and necessary to trigger a full debt reduction deal approved by the Paris Club of creditors a year ago.

Iraq's Deputy Prime Minister, Ahmad Chalabi, who is in charge of economic policy, said he was pleased with the agreement because it translated into an actual reduction of Iraq's debt stock.

"Iraq has already taken steps to cut subsidies while introducing a safety net for the poor. The challenge in front of the new Government is to fight unemployment and proceed with price reforms," Chalabi said.

An IMF stamp of approval was not only necessary to secure the Paris Club's 80 per cent reduction of some of Iraq's foreign debt, but will also be an important vote of confidence as Iraq prepares to seek additional aid from donors.

Broader international support for the economic reconstruction of Iraq is a key part of President George W. Bush's strategy to reduce the country's reliance on American support and begin withdrawing US troops.

The IMF voiced guarded optimism for the future but made it plain that delivering security was essential.

"The medium-term outlook for Iraq is favourable, but subject to many risks," Kato said.

"A strengthening of the security situation will help the authorities to implement the programme. Moreover, Iraq remains vulnerable to shocks, particularly those relating to oil."

Ernst & Young, Iraq's debt reconciliation agent, said the country had also concluded a debt-for-debt exchange offer with the largest claimants against the former regime, worth about US$14 billion.

This represents about 60 per cent of all the commercial claims registered with the firm. Under the offer, Iraq grants anyone with a claim of US$35 million or more the chance to swap for either privately placed notes or an interest in a multi-currency loan.

Claimants swap at a rate of 20 per cent of the value of their original holding. The new notes mature in 2028 and carry a 5.8 per cent fixed coupon.

"This will allow the country, the Government and the private sector, to begin the process of reintegrating itself into the international financial markets," said Bill Rhodes, senior vice-chairman of Citigroup, one of the arranging banks.

- REUTERS