Journal Issue

IMF Executive Board Concludes 2007 Article IV Consultation with Iraq

International Monetary Fund
Published Date:
August 2007
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The last Article IV consultation with Iraq was the first one in 25 years and was concluded on August 1, 2005. A Stand-By Arrangement (SBA) was approved by the Executive Board on December 23, 2005 in support of an economic program covering through March 22, 2007, which was later extended through September 28, 2007. The SBA-supported program underscores the authorities’ commitment to stabilize macro-economic conditions in Iraq, while at the same time implement structural reforms to pave the way for sustainable economic growth. Under the program the authorities have taken measures needed to achieve macro-economic stability. Despite an unsettled political situation, capacity constraints, and the deterioration in security in 2006, progress has been made in implementing structural reforms, although much remains to be done.

Economic growth has been slower than expected at the time of the last Article IV consultation, mainly because the expected expansion of oil production has not materialized. Following a decline in oil production and real GDP in 2005, economic growth is estimated at 6¼ percent in 2006. Average annual crude oil production has remained at about 2 million barrels per day since 2004. Annual consumer price inflation increased to almost 65 percent at end-2006 from 31½ percent at end-2005 mainly due to supply bottlenecks, in particular of fuel products. Core inflation (excluding fuel and transportation) remained high at about 32 percent. Following policy efforts to bring inflation under control and some easing of fuel shortages, inflation has since then declined to 46 percent in June 2007, and core inflation has decreased to 19 percent.

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Since November 2006 the Central Bank of Iraq (CBI) has allowed the exchange rate of the Iraqi dinar to appreciate by 15 percent and raised its policy interest rates in two steps to 20 percent. In addition to reducing inflation, these policies have also had some success in de-dollarizing the economy and increasing the demand for dinars. The CBI gross international reserves increased to $18.7 billion at end-2006 (almost 6 months of import cover).

Following a fiscal surplus of 11 percent of GDP in 2005, the fiscal outturn for 2006 showed a surplus of almost 12 percent. This outcome is partly the result of underspending on investment reconstruction projects, including in the oil sector. The surpluses contributed to an accumulation of balances in the Development Fund of Iraq to a level of $8.6 billion at end-2006.

Progress in implementing the structural reforms has been made. Official fuel prices have been increased to levels in other oil-exporting countries in the region, and private sector importation of fuel products has been liberalized. Negotiations on a new legal framework for the oil sector are ongoing. An interim audit of the CBI’s 2006 financial statements and an audit of its net international reserves have been finalized. Progress has also been made in developing the financial system with the introduction of a payments clearing system and a Real Time Gross Settlement system. The process of restructuring Iraq’s two largest state-owned banks has started. The Ministry of Finance has adopted a new chart of accounts and budget classification, but completion of a census of all public service employees has proven more time-consuming than foreseen and is still underway.

The Paris Club agreed on November 21, 2004 to a debt reduction for Iraq, equivalent to 80 percent in net present value (NPV) terms, to be achieved in three stages. The first and second stages each comprised a 30 percent debt reduction in NPV terms and went into effect in November 2004 and in December 2005 (following approval of the SBA), respectively. The final stage will comprise an additional 20 percent debt reduction, and depends on completion by end-December 2008 of the final review of the third year of one or more upper credit tranche arrangements with the Fund. Iraq continues to make progress in resolving debt to official and private creditors.

Executive Board Assessment

Directors commended the Iraqi authorities for keeping their economic program on track by strengthening economic policies and making progress in structural reforms, despite an unsettled political situation and a very difficult security environment. They noted, however, that the expansion of oil production is lagging, and that inflation, while on a downward path, remains high, reflecting in large part continued shortages, notably of fuel products. Directors considered that Iraq’s economic prospects hinge critically on an improvement in the security situation.

Directors encouraged the authorities to take measures to speed up reconstruction and increase investment, especially in the oil sector. To that effect, they welcomed measures adopted by the authorities to increase the implementation rate of the public investment program, and urged them to take additional measures, if needed, and to strengthen the protection of oil installations.

Directors commended the government’s commitment to pursue a prudent fiscal policy by keeping current spending in 2007 within the budget limits and to maintain fiscal sustainability over the medium term. They supported the authorities’ decision to resist undue spending pressures and to strictly contain the wage and pension bill, as well as transfers. Directors encouraged the authorities to enact as soon as possible amendments to the new pension law to ensure the fiscal sustainability of the pension system.

Directors welcomed the increase in official fuel prices to regional levels. This will enable the government to continue avoiding direct subsidies on fuel products, except for kerosene. They were encouraged by the authorities’ intention to consider developing a rule–based mechanism for setting domestic fuel prices in the future, which would prevent the re-emergence of budgetary subsidies, help fight corruption, and free up resources for much needed investment spending.

Directors were encouraged by the reduction in inflation. They generally supported the policy of the CBI to continue allowing the gradual appreciation of the dinar through end-2007. This would contribute to further reducing inflation and de-dollarizing the economy. Directors called on the CBI to stand ready to accelerate the pace of appreciation and tighten monetary conditions further if inflation deviates from its downward path and dollarization is not reduced as expected. Key to fighting inflation would be to continue restraining public spending pressures and stepping up efforts to reduce shortages, especially by actively supporting private sector fuel imports.

Directors stressed the need to implement priority structural reforms as expeditiously as circumstances permit. They encouraged the authorities to broaden the coverage of the Financial Management Information System, modernize and streamline the tax system with a view to expanding the tax base and improving incentives for economic activity, and to press ahead with the restructuring of the banking system so as to increase financial intermediation, especially for the private sector. Directors also welcomed the government’s efforts to rehabilitate viable public enterprises on a commercial basis, while underscoring that any government financial support should be efficient and fully reflected in the budget.

Directors urged the authorities to improve the transparency and accountability of public financial management and step up their fight against corruption. They were encouraged by the authorities’ intention to join the Extractive Industries Transparency Initiative and implement a comprehensive oil metering system as soon as possible.

Directors underscored the need to put in place a new legislative framework for the hydrocarbon sector as soon as possible, which, along with an improvement in the security situation, would help strengthen the investment environment to significantly increase oil production.

Directors welcomed the steps taken in strengthening financial safeguards at the central bank. They urged the CBI to step up its efforts to address all the recommendations of the Fund’s interim safeguards assessment report, as well as the Ernst & Young interim 2006 audit report.

Directors commended the authorities’ intention to maintain an open trade regime. They supported the authorities’ efforts to secure World Trade Organization accession. While keeping the present low import tariff, Directors stressed the importance of increasing revenues by scaling down exemptions and strengthening the customs administration.

Directors commended the authorities for the new investment law, which provides an important framework for attracting much-needed foreign investment. They encouraged the authorities to establish the National Investment Commission as soon as possible.

Directors welcomed the authorities’ efforts to conclude debt agreements with the remaining official and private creditors. They urged the government and those official creditors still to provide debt relief to conclude debt agreements expeditiously.

Directors stressed the critical need to further improve the statistical database.

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Iraq: Selected Macroeconomic Indicators, 2004–07


Oil and gas sector
Total exports of oil and gas (in billions of U.S. dollars)17.319.227.728.6
Average crude oil export price (in U.S. dollars/barrel)31.643.955.750.6
Crude oil production (in millions of barrels/day)
(Annual percentage change)
Output and prices
Real GDP46.
Non-oil real GDP14.912.07.55.0
Consumer price inflation (end-of-period)31.731.664.830.0
(In percent of GDP)
Investment and Saving
Gross domestic investment27.731.616.320.0
Of which: non-government5.512.33.34.2
Gross national savings-9.831.227.714.7
Of which: non-government29.
(In percent of GDP, unless otherwise indicated)
Public Finances (cash basis)
Government revenue (including grants)79.6107.480.562.3
Of which: Oil revenue69.276.765.251.1
Of which: Current98.677.255.556.1
Of which: Capital22.219.413.015.8
Budget balance (including grants)-41.210.912.0-9.7
Primary fiscal balance-
Non-oil primary fiscal balance-88.6-49.3-41.2-52.5
Total government debt (in billions of U.S. dollars)97.668.954.756.4
(Annual percentaje change unless otherwise indicated)
Monetary Sector
Base money116.912.029.038.9
Currency issued74.927.916.241.7
(In percent of GDP, unless otherwise indicated)
External Sector
Non-oil exports of goods (in U.S. dollars, percentage change)30.322.223.2
Imports of goods (in U.S. dollars, percentage change)216.7-3.112.442.6
Trade balance-8.43.314.0-2.3
Current account excluding official transfers-43.3-18.92.9-11.5
Current account including official transfers-37.63.912.3-5.5
Overall external balance6.611.215.14.3
Foreign Direct Investment0.
Total external debt378.9219.5110.690.4
Central banks gross reserves (in billions of U.S. dollars)7.912.018.721.3
In months of imports of goods and services3.
Memorandum Items
Nominal GDP (in billions of U.S. dollars)25.831.449.562.4
Unemployment rate 1/10.518.5
Local currency per U.S. dollar (period average) 2/1,4531,4691,4671,275
Real exchange rate (Jan. 2004 = 100) 3/145.5183.4311.9341.8
Sources: IMF staff estimates and projections.

Iraq Living conditions survey 2004, UNDP.

For 2007, January–June.

Calculated as the nominal exchange rate adjusted for the inflation differantial between Iraq and the United States. Increase in the index denotes appreciation. For 2007, as of May.

Sources: IMF staff estimates and projections.

Iraq Living conditions survey 2004, UNDP.

For 2007, January–June.

Calculated as the nominal exchange rate adjusted for the inflation differantial between Iraq and the United States. Increase in the index denotes appreciation. For 2007, as of May.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.

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