Iraq’s Sovereign Guarantees for the Private Industrial & Agricultural Sectors
Corporate Commercial / Iraq
Mohammed NorriPartner, Head of Office - BaghdadCorporate Commercial
Nawar Al-AmeriTrainee Lawyer,Corporate Commercial
The Federal Iraq and Kurdistan Regional Government ("Iraq") is working to encourage and boost the investment ecosystem and opportunities in Iraq. Therefore, the Council of Ministers is looking to introduce Sovereign Guarantees as part of their strategic priority towards development and economic progress.
The Government of Iraq (“GoI”) has recently been encouraging and facilitating the process of investment, most prominently by providing guarantees. The latest addition to the GoI’s guarantees is sovereign guarantees intended to cover any default on behalf of the sectorial party, specifically tailored for the agricultural and industrial private sectors (the “Sovereign Guarantee(s)”).
The introduction of the Sovereign Guarantee is perceived as one of the most sustainable and enhanced incentives for the business environment in Iraq. It is predicted to satisfy strategic priorities and remove obstacles hindering development and economic progress. The Sovereign Guarantees granted by the GoI to the different contracting parties express the GoI’s guarantee that the obligation of payment will be fulfilled in case any of the main debtor’s default (i.e., the sectorial parties). The GoI will be the strategic beneficiary of the investment projects, and the Sovereign Guarantee could cover all the obligations and pledges.
Sovereign Guarantees are not a foreign or new concept to Iraq; they have frequently been granted in various investments to make them more lucrative, especially in the energy sector. However, this time the GoI is providing Sovereign Guarantees for investments in the private sector.
Pursuant to Article 3(2) of the Federal Budget Law for (2023-2024-2025) (the “Federal Budget Law”), the Council of Ministers may issue Sovereign Guarantees necessary to support the private agricultural and industrial sectors to establish projects funded by foreign entities at a rate of no less than 85 percent of the value of each project, with the maximum amount not exceeding one trillion Iraqi Dinars.
On July 18, 2023, the GoI resorted to the use of tailored Sovereign Guarantees, whereby the GoI will provide this guarantee to investments in the private sector that are funded by foreign entities, unlike in the past where the GoI used to issue Sovereign Guarantees only to investments in the public sector. The full allocation for Sovereign Guarantees is estimated at one trillion Iraqi Dinars, allocated for investments in the agricultural and industrial private sectors, covering up to 85 percent of the total cost of the project.
The Government of Iraq has approved a regulation to facilitate the mechanism of granting sovereign guarantees for investments funded by foreign entities in the private agricultural and industrial sectors.
The Council of Ministers has approved a mechanism for obtaining Sovereign Guarantees, where the beneficiaries of this guarantee are only foreign entities. To obtain a Sovereign Guarantee, the application must go through a governmental bank. To qualify for a Sovereign Guarantee, the following must be provided, inter alia:
A financial feasibility study, approved by an auditor or the Ministry of Planning;
A draft of the contract, or a signed initial contract, between the local party and the manufacturer of the production line or machinery and equipment;
A brief on the financing contract between the investor (the manufacturer of industrial equipment and machinery and agricultural equipment for the agricultural project) and the financing entity;
A schedule of payment instalments, secured obligations, loan duration, and grace period; and
An undertaking by the applicant to fulfil their obligations.
The execution of the sovereign guarantee’s requirements and procedures, after obtaining the approval of the Minister of Finance and the Council of Ministers and before giving the guarantee, are:
Completion survey of the project’s civil works (provided that the project’s completion percentage is no less than 30 per cent);
The beneficiary of the guarantee must provide proof of contracting with an Iraqi-licensed insurance company for fire and theft;
Mortgaging the real estates of the projects for the benefit of the Ministry of Finance and allocating the land for the project;
An undertaking to mortgage the assets (production line), in whole, for the Ministry of Finance; and
Assigning the bill(s) of lading for the benefit of Trade Bank of Iraq (“TBI”) in order for them to issue a letter of credit.
The GoI stipulated a number of obligations and restrictions on the applicant for a Sovereign Guarantee, such as:
The applicant must deposit 15 percent of the value of the production line;
The applicant must deposit of 1 percent (maximum) of the amount of the requested guarantee (fees of issuance);
The applicant may not sign another contract with a third-party that includes the guarantee before obtaining the necessary approvals for the guarantee;
The applicant may not assign the rights of the guarantee, in whole or in part, to the debtors or the financiers; and
The applicant may not stipulate specific timeframe in the guarantee, nor consider an assignment of the guarantee valid after a period of sending notice to the Ministry of Finance.
The GoI’s support for investments has significantly increased in the past couple of years. This initiative to support the private sector by making Sovereign Guarantees available for both the industrial and agricultural sectors is a continuation of the GoI’s commitment towards rebuilding the infrastructure.
For further information,please contact Mohammed Norri and Nawar Al-Ameri.
Published in June - July 2024
