Iraq and the IMF agreed a stand-by arrangement (SBA) in July 2016, which entails USD5.34bn of funding over three years. The funding is front-loaded, providing USD1.9bn between July and end-2016. Performance criteria under the SBA seem broadly realistic, but implementing earmarked structural reforms is likely to prove more difficult. Risks attached to the programme are high, but the Iraqi government has a strong incentive to adhere to the SBA.
In 2016 the IMF programmes for a deficit of IQD26trn (USD22bn) for Iraq. The majority of financing, USD17bn, will come from T-bills and bonds, USD10.7bn of which will be refinanced by the CBI and USD4bn is from government deposits in the banks. The banking sector itself is not strong enough to be a source of much financing. External financing from the IMF, World Bank, US loans and other bilateral loans will make up most of the remainder.
Government debt is rising sharply on the back of these deficits and we forecast it will average 73% of GDP in 2015-17. However, this includes USD41bn of debt lent to Iraq by GCC countries during the 1980-1988 Iran-Iraq war, which the authorities do not face any pressure to repay or service. If this debt were restructured on the same terms as Paris Club debt was restructured, government debt/GDP would average 52% in 2015-17, closer to the 'B' median of 41%.
International reserves are declining, but remain large and support Iraq's currency peg. Fitch forecasts an average current account deficit of close to 9% of GDP in 2016-17 because of low oil prices. This will contribute to further declines in international reserves, which we project to slip to USD45bn this year and USD41bn at end-2017 from USD54bn at end-2015. This would still equate to almost eight months of current external payments (CXP) in 2017. We assume the authorities will maintain the dinar's peg to the US dollar, although this could come under pressure.
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