• High interest rates so far barring Iraq from tapping market
  • Rate could fall to as low as 4% with stand-by IMF deal

High interest rates are preventing Iraq from tapping the international bond market to plug its budget deficit, with the government hoping a deal with the International Monetary Fund would significantly cut its borrowing costs.

The war-torn oil producer is having “big problems” selling foreign bonds because lenders are asking for an interest rate of 11.5 percent, Deputy Finance Minister Fadhel Nabi said in an interview in Erbil. The rate would fall to as low as 4 percent if Iraq reaches a stand-by agreement with the IMF, or if the U.S. agreed to back the bond sale.

Iraq aims to sell Eurobonds in the second half of this year, while the IMF has said it hopes to conclude an agreement with authorities in Baghdad in May.

Iraq’s oil revenue has dropped as crude prices plummeted, a problem compounded by the government’s expensive war against Islamic State militants who have taken over some major Iraqi cities.

Nabi said he expects the price of oil to rise to $50 per barrel by the end of 2016, and $60-$65 next year. Iraq may draft its 2017 budget based on an oil price of $32 per barrel “to be on the safe-side,” he said.

The conflict with Islamic State, which captured swaths of northern Iraq in the summer of 2014, has destroyed economic infrastructure, disrupted trade and discouraged investment. The country is facing the “double shock” of war as well as the crude-oil price drop, and has “urgent” balance-of-payment and budget needs, the IMF said in January.

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