End July, the IMF approved 1.2 bn USD in financial assistance under the Rapid Financing Instrument (RFI) to Iraq. This programme is designed to address the country's balance-of-payments and fiscal crisis. Iraq is facing a double shock, which puts its economy under extreme stress. Firstly, the oil price decline since mid-2014 has an impact on the country because it is highly dependent on oil for its fiscal budget and export revenues. Iraq already felt the impact in 2014 but the effect will fully unfold in 2015. Secondly, the country is hurt by the insurgency of jihadist group Islamic State in Iraq and Syria (Isis). The conflict is damaging the economy through the destruction of infrastructure and assets, disruptions in trade, and deterioration of investor confidence.

Impact on country risk

IMF support will help the Iraqi economy in the short term. However, the budget and current account balances will remain under pressure in the coming years. This is due to expected low oil prices in the medium-term outlook and the likely continued fight against Isis. In addition, the relation with the Kurdistan Regional Government (KRG), which is seeking full autonomy, is an important factor for the Iraqi economy. Currently, the relations between the KRG and the Iraqi government are rather poor. Oil exports from northern Iraq are governed by an oil-revenue-sharing agreement - reached in December 2014 - with the KRG, which controls the export pipeline. This deal appears to have come under strain since the KRG has sold the majority of its oil independently in the last months, rather than via Baghdad as per the agreement. As such, reaching a long-standing agreement between Baghdad and the KRG would be beneficial for Iraq and its economy. Analyst: Jolyn Debuysscher, j.debuysscher@credendogroup.com