IMF deems Iraq stable, grants $685 million loan

The International Monetary Fund yesterday approved a new $685 million loan for Iraq, saying the country has stabilized its economy despite continued violent conflict.

The loan, the second from the IMF after a $436 million emergency loan in 2004, reflects the lending agency’s judgment that Iraq’s government is doing its best to revive the war-torn economy. The loan clears the way for major debt relief from Western nations.

“The Iraqi authorities were successful in promoting macroeconomic stability in 2005, despite the extremely difficult security environment,” said IMF Deputy Managing Director Takatoshi Kato. He noted growth slowed in 2005 after a strong spurt in 2004.

“The medium-term outlook for Iraq is favorable, but subject to many risks,” he said.

The most pressing need is for greater security, he said. “Iraq remains vulnerable to shocks, particularly those relating to oil production development and oil export price movements.”

The IMF’s action is a victory for the Bush administration, which is counting on the IMF and World Bank to supply a significant portion of the funds needed for Iraq’s reconstruction.

“This arrangement will underpin economic stability and help lay the foundation for an open and prosperous economy in Iraq,” said U.S. Treasury Secretary John W. Snow.

The World Bank in July pledged to lend Iraq as much as $500 million over two years to rebuild schools, restore infrastructure and provide emergency health care, in its first loan to Iraq since 1973.

IMF loans normally are considered a green light for private investors to start doing business with a country. But Iraq continues to have trouble attracting investments from major Western companies, particularly in its critical oil sector.

Constant sabotage of Iraq’s oil pipelines and facilities — as well as questions about who actually controls Iraq’s oil wealth — have prevented the country from producing even the 2 million barrels a day of exports achieved before the U.S. invasion in 2003.

While Iraq has the world’s third-largest reserves of oil, without the investment and involvement of major Western oil companies, analysts say Iraq will not be able to rebuild and expand its production of oil.

The loan the IMF is providing in the next 15 months is to be used in part to finance plans for expanding oil production.

But to entice foreign companies to develop Iraq’s oil sector, the new government that forms as a result of last week’s parliamentary elections will have to tame the violence that has scared away investors, as well as determine who controls the country’s lucrative oil fields.

The constitutional debate over who controls the oil stems from Iraq’s political divisions. Most of Iraq’s oil is in the north of the country where Kurds reside and the south, where religious Shi’ites hold sway. The central part of the country, where most Sunnis reside, is largely without oil.

With Iraq’s religious Shi’ites apparently securing their control in the elections, increasing weight may be given to plans by Shi’ite groups in the south to form an autonomous state that would control the oil assets and profits generated there.

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