The Chinese firm will pay for a full year's worth of crude prior to loading shipments
[You must be registered and logged in to see this image.] Oil tankers load crude oil at Iraq's Al-Basra Offshore Terminal. The Chinese firm will pay for a full year's worth of crude before loading shipments. AP
Iraq signed a $2 billion agreement on Sunday with a Chinese buyer who has agreed to prepay for crude exports as the cash-strapped producer looks for ways to raise funds.
Alaa Al Yasiri, general manager of the State Organisation for Marketing of Oil, said a mechanism "that does not affect Iraq" has been set up, providing greater flexibility over the marketing of its crude.
"Several offers have been made by the companies and there was intense competition between two European and Chinese companies, and the Chinese company won," Mr Al Yasiri told the Iraq News Agency.
He did not disclose the name of the company but said that the Iraqi state will receive "$2bn at zero interest" through the sale. Media reports last month said Iraq had entered into a supply agreement with ZhenHua Oil, a subsidiary of China's largest state-owned defence contractor.
Under the agreement, the Chinese firm will pay for a full year's worth of crude before loading shipments. Usually, payments are made 30 days after crude exports are loaded.
"The flexibility that Iraq has granted to companies is the freedom to determine the day of loading the shipments, the export destination, the possibility of resale and a set of marketing benefits in return," Mr Al Yasiri said.
His comments come as Iraq navigates a debilitating economic crisis compounded by falling oil prices in 2020 caused by the Covid-19 pandemic, as well as an ongoing health crisis.
Baghdad last month devalued its currency by around 23 per cent against the US dollar, the first adjustment in the currency peg since 2015.
Under the country’s provisional budget, an allocation of 150 trillion dinars ($103bn) was earmarked for spending, against expected revenue of 92tn dinars, leaving the government with a gaping deficit.
Opec’s second-largest producer depends on oil revenue to meet 90 per cent of government expenditure, including $5bn spent on monthly salaries for public servants.
Iraq's sovereign debt is rated as B- by Fitch Ratings, six notches below investment grade. The country has almost exhausted its borrowing options and is looking for prepayment for oil exports as an immediate and cost-effective way to help plug its budget deficit.
Monetary support from the Central Bank of Iraq increased to 28.5tn dinars by the end of August, from 14.1tn dinars at the end of May, Fitch said in a note in December.
Borrowing has plateaued because the government requires parliament’s approval to sanction more spending.
The Iraqi government is also considering wide-ranging reforms, which including halving the share of wage bills in spending. Currently, about a quarter of government spending goes on paying civil servants.
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