The Japan Bank for International Cooperation and the country's two leading commercial banks are preparing to make Japan's first loan to Iraq in 31 years.
The government-owned bank will join hands with Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking to support an Iraqi government power project that includes purchasing power-related equipment from Japanese companies.
The cofinancing deal is worth 53 billion yen ($471.7 million), sources said.
The deal marks the start of a process to shift the leading role in Japan's Iraqi reconstruction support to the private sector. As such, the JBIC part of the loan does not come from Japan's official development assistance program.
The JBIC stopped all fresh lending to Iraq in 1986, when the Iran-Iraq War grew more tense. Fighting began in 1980, when the bank was still in its previous carnation as the Export-Import Bank of Japan.
Although Iran and Iraq agreed to a ceasefire in 1988, the bank has not had a chance to restart lending to Iraq, a country long beset by armed conflicts and political unrest. During this period, Iraq invaded Kuwait, the Gulf War erupted, the U.S. militarily attacked Iraq and the Islamic State group emerged.
Now the JBIC has decided that peace and order have been sufficiently restored in Iraq. The decision comes despite fierce battles raging in northern parts of the country as Iraqi and U.S.-led forces try to reclaim Mosul, the Islamic State group's biggest stronghold.
In the JBIC's view, relatively stable peace and order have returned in Iraq's south.
Another factor behind the resumption is a new account that the JBIC created in October to enable it to offer loans for infrastructure projects that carry relatively high default risks.
The JBIC can dip into the account as long as the account itself remains in the black. Before this, the JBIC had to ensure all of its deals would lead to stable revenue streams.
The bank will reach into this account for the first time as part of the Iraq package.
Loans to Iraq carry a high risk of becoming irrecoverable, considering the country relies heavily on oil revenue. This can make for unstable growth and has presented a hurdle to Japanese companies wishing to sell infrastructure and energy projects to the country.
As for the breakthrough package, the JBIC will offer about 32 billion yen ($285 million), while BTMU and SMBC will jointly provide about 21 billion yen ($187 million). Government-affiliated Nippon Export and Investment Insurance will guarantee the loans.
The Iraqi government will use the money to fund a power project under a deal with general trading company Toyota Tsusho. The project is to construct 16 substations to alleviate chronic power shortages that have slowed the country's economic growth.
Essentially, the funds will go toward purchasing equipment and constructing the substations. Japan's Toshiba and Meidensha will deliver the equipment.