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IBRD Loan to the Government of Iraq

Volume 616: debated on Tuesday 25 October 2016

I have today laid a departmental minute outlining details of a contingent liability of the US dollar equivalent of £360 million which DFID has undertaken, in respect of the World Bank Group.

The twin shocks of the Daesh insurgency and the 40% decline in Government revenue following the fall in oil prices since 2014 have threatened Iraq’s stability. At the G7 in May, the IMF, World Bank and G7 partners pledged to provide a $12 billion package of assistance to the Government of Iraq. The World Bank’s share of the package comprises three $1 billion development policy loans from the International Bank for Reconstruction and Development (IBRD) arm of the World Bank, with the first to be disbursed this year. Provision of the IBRD loans will be conditional on Iraq committing to, and implementing, reforms in the areas of public expenditure, energy efficiency, and transparency of state-owned enterprises. These reforms complement the package of reforms already agreed between the Government of Iraq and the IMF in July of this year, and will support Iraq’s economic development.

The IBRD’s internal rules on loan exposure to any one country constrain the extent to which it can increase its lending to Iraq. This proposed UK guarantee will allow the IBRD to increase the size of its 2016 loan by the US dollar equivalent of £300 million. This will support fiscal stability in Iraq, and will underline the UK’s commitment to supporting a key ally in the fight against Daesh.

DFID’s contingent liability under this agreement is expected to be the US dollar equivalent of £360 million, covering the equivalent of £300 million of loan principal, plus the equivalent of around £60 million of interest payments. The agreement would be in place for the expected 15 year life of the IBRD loan. France and Canada are also currently considering using the same guarantee instrument to guarantee further additional IBRD lending to Iraq.

For the guarantee to be triggered, the Government of Iraq would have to be in arrears with the IBRD for over 180 days. The risk of Iraq defaulting, and the UK guarantee being called upon, is the same as the risk of Iraq defaulting on other IBRD lending. There is a strong incentive for Iraq avoiding a default, as this would prevent the IBRD from providing any further funding to Iraq. But in the event that the Government of Iraq do default on a loan repayment to the IBRD, and the liability is called, the UK will provide a payment to the World Bank, in proportion to the UK’s guaranteed share of the overall IBRD loan. The payment will prevent the loss on the loan from impacting on the World Bank’s other lending activities. If the liability is called, provision for any payment will be sought through the normal Supply procedure.

If the Government of Iraq subsequently provide a payment to reduce its arrears, the World Bank will transfer the UK’s share of the payment into a UK-controlled trust fund held at the Bank, to be used towards other World Bank activity as the UK sees fit.