Thread by @AzarsTweets

1/ I'd surprised if this was the full fuel sale and purchase agreement between the Iraqi and Lebanese governments. It looks more like a term sheet/summary of terms that would've been fleshed out in a full agreement. It contains almost no details, very unusual. A few other things:

https://twitter.com/Nazeerida/status/1433046641175638019

2/ Leb is buying the fuel at the market price in dollars, which may be converted to LBP at approximately the parallel market rate. Iraq isn't taking exchange rate risk. The payment is deferred for one year with interest. It looks less like a gift and more like a $ loan from Iraq.

3/ Interesting that the Iraqis want a standby letter of credit to guarantee payment for the fuel. That's not unusual, but it's usually done because Seller doesn't want to take the risk that Buyer doesn't pay (and so a third-party guarantees payment, in this case BDL).

4/ The Agmt says Iraq will spend the funds "pursuant to a mechanism to be agreed". What is this mechanism? What goods & services?

It seems clear that Iraq will spend the money in Leb but the Agmt also exempts the funds from capital controls. This needs clarification.

5/ Let's assume Iraq can only spend the funds in Leb. Since the Govt is bankrupt and running deficits & electricity is not sold at cost, the source of the funds is BDL printing (BDL losses). That will be inflationary. The Govt must raise taxes to avoid inflation (will they?)

6/ Will Leb businesses accept bank transfers for which they may not be able to access the money in the form of cash? Will they be forced to? Will they, therefore, be forced to sell at an effective loss? Or will they not agree to sell anything to the Iraqis under this mechanism?

7/ Let's say businesses can access the cash in some way. Leb is an import-heavy economy. That means the additional money pumped into the economy to pay for Iraqi fuel will increase demand for $ (e.g., restock goods inventory, consumer spending, etc) so may lead to LBP devaluation

8/ Unless, again, the Govt raises taxes or the EDL tariff to suck LBP back out of the economy (i.e., reducing consumption/demand for dollars from some taxpayers/consumers to offset the increased demand for dollars resulting from the Iraq fuel deal).

9/ I see this as a dollar loan from the Iraqi Govt. It looks a lot more like that than a gift. Question is who will be repaying that loan? Taxpayers via higher taxes? Holders of LBP (via inflation/devaluation)? Depositors (via higher discount on bank deposits)? Leb businesses?

10/ The Leb Government owes the public to publish the full agreement and the supplemental mechanism referenced above. It also owes the public an explanation for how they plan to repay this loan. Of course, we're also owes a permanent solution...

11/ The only way this can be considered a gift is that the Iraqis are lending a bankrupt government dollars (so its almost by definition a concessional loan). Or if the Iraqi's overpay for services/goods or just don't spend the money (and stop receiving interest on it).

12/ If these 3 pages are really the full agreement, there could very well be major disputes between the two sides in the future.

In the meantime, enjoy the few extra hours of electricity. It's not a permanent solution, but a temporary reprieve which we are paying for. A loan.

13/ It's interesting that the Govt and BDL insisted they couldn't disburse the World Bank social safety net funds at the parallel market rate because they couldn't officially acknowledge that rate. But in this Iraq fuel deal, they do acknowledge it very clearly.

** Fuel sales & purchase agmts I've worked have been anywhere from 15 pages (for parties who have worked together extensively in the past and have a clear understanding of their obligations and mutual trust) to 200+ pages. That's why I suspect the 3 pages aren't the whole thing.