LONDON, May 24 (UPI) -- Though a loan agreement with the IMF should help, Iraq will continue to face economic headwinds because of issues in the oil sector, Moody's said.
The Iraqi government and the International Monetary Fund agreed last week on the terms of a $5.4 billion loan arrangement with low interest rates. Moody's Investors Service said in an emailed report the agreement is a net win for Iraq, which is burdened economically by conflict and lower crude oil prices.
"Fiscal consolidation will remain a challenge," the report from Moody's said. "The government's plan to increase oil output is jeopardized by the tight fiscal situation, which led to the buildup of arrears to international oil companies."
Iraq called on international oil companies from BP to Exxon Mobil to cut their investment plans for the country in order to clear debt. This has a spillover affect, however, as it reduces oil-generated revenue in the Iraqi budget, which in turn starves the country of the funds needed to support military operations against the terrorist group calling itself the Islamic State. This week, Iraqi and coalition forces started an offensive on the restive western city of Fallujah in order to recapture it from Islamic State control.
According to the IMF, real gross domestic product in Iraq shrank by 2.1 percent last year in large part because of internal conflicts, which has eroded investor confidence in the country. IMF Mission Chief for Iraq Christian Josz said in a statement the conflict has strained the economy as the country works to cope with the estimated 4 million people affected by regional terrorism.
"The other key challenge is the steep fall in oil prices, causing a large external shock to the balance of payments and budget revenue, which depend predominantly on oil export receipts," he said.
Nevertheless, Moody's finds the overall terms of the agreement to help Iraq manage its finances. Spending pressures could be further alleviated, the report said, if Iraq follows the IMF recommendations to revisit the terms of the contracts it awards to international oil companies.