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Iraq: Staff Report for the 2015 Article IV Consultation and Request for Purchase Under the Rapid Financing Instrument—Informational Annex

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
August 2015
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Relations with the Fund

(As of May 31, 2015)

Membership Status:

Date of membership: December 27, 1945

Status: Article XIV

General Resources AccountSDR MillionPercent Quota
Quota1,188.40100.00
Fund Holdings of Currency1,284.70108.10
Reserve Tranche Position171.1014.40
SDR DepartmentSDR MillionPercent Allocation
Net cumulative allocation1,134.50100.00
Holdings306.1426.98
Outstanding Purchases and
LoansSDR MillionPercent of Quota
Stand-by Arrangements267.3922.50

Latest Financial Arrangements

Date ofExpiration DateAmount ApprovedAmount Drawn
TypeArrangement(SDR Million)(SDR Million)
Stand-byFeb 24, 2010Feb 23, 20132,376.801,069.56
Stand-byDec 19, 2007Mar 18, 2009475.360.00
Stand-byDec 23, 2005Dec 18, 2007475.360.00

Projected Payments to the Fund1

(SDR million; based on existing use of resources and present holdings of SDRs)

Forthcoming
20152016201720182019
Principal230.2537.14
Charges/Interest1.190.640.430.430.43
Total231.4437.780.430.430.43

Implementation of HIPC Initiative: Not Applicable

Safeguards Assessments

The most recent safeguards assessment of the Central Bank of Iraq (CBI) was completed in 2010 under the SBA that expired in February 2013. While the assessment concluded that significant safeguards risks remain, it noted that the CBI maintains important safeguards recommended by previous assessments, including annual external audits by reputable audit firms and publication of the CBI’s audited financial statements.

Exchange Arrangement

Iraq’s de jure and de facto exchange rate arrangements have been retroactively reclassified to a conventional peg arrangement, effective January 15, 2012. The Central Bank Law provides the Board of the CBI with power to formulate exchange rate policy, and the Board has maintained its policy to keep the official exchange rate at 1,166 per U.S. dollar since January 15, 2012. The CBI stands ready to provide foreign exchange at the official exchange rate plus commissions for permissible transactions through its daily auctions (allocations), establishing a peg. However, because certain transactions are excluded from the access to the CBI auctions, many transactions take place at parallel market exchange rates. The CBI publishes the daily volume of the auction allocation on its website.

Iraq continues to avail itself of the transitional arrangements under Article XIV, Section 2 but no longer maintains any exchange restrictions or multiple currency practices subject to Article XIV, Section 2, and currently maintains three exchange restrictions and one multiple currency practice (MCP) subject to Fund approval under Article VIII, Sections 2(a) and 3. Two of four exchange restrictions identified in 2009 have been removed, with two remaining. All exchange restrictions identified in 2012 have now been removed. Although the various measures limiting the availability of foreign exchange, which gave rise to the MCP identified in 2012, have evolved and changed over the last three years, the MCP remains in place. One new exchange restriction has been identified in 2015.

The foreign exchange system in Iraq has been constantly modified over the last few years. Until March 2009, Iraq maintained a generally open current and capital accounts. However, access to foreign exchange from the official auction organized by the Central Bank of Iraq (CBI) became subject to various limits starting in 2009. The limits were modified several times, in part reflecting the authorities’ efforts to liberalize the system while keeping speculative demand for foreign exchange cash under control, as well as volatile security conditions and pressure on official reserves from fluctuations in global oil prices.

In 2009, the Fund identified four exchange restrictions, two of which have now been removed. The two exchange restrictions that have been removed were based upon CBI circulars that have now been nullified. These restrictions arose from (i) the requirement to submit a tax certificate and a letter of nonobjection stating that the companies do not owe any taxes to the government before non-Iraqi companies may transfer proceeds of current international transactions out of the country; and (ii) the requirement that before non-Iraqis may transfer proceeds in excess of ID 15 million out of Iraq, the banks are required to give due consideration of legal obligations of these persons with respect to official entities, which must be settled before allowing any transfer. The exchange restrictions that remain in place arise from (i) the requirement to pay all obligations and debts to the government before proceeds of investments of investors, and salaries and other compensation of non-Iraqi employees may be transferred out of Iraq; and (ii) an Iraqi balance owed to Jordan under an inoperative bilateral payments agreement.

All exchange restrictions identified in 2012 have now been removed. In 2012, the Fund identified five additional exchange restrictions and a multiple currency practice (MCP). In 2013, four of these five exchange restrictions were removed as the relevant circulars were nullified. These measures were: (i) the requirement to submit a tax clearance certificate that all taxes (even unrelated to the transaction) have been paid before foreign exchange for payment and transfer of certain current international transactions can be purchased in the auction; (ii) the limitation that corporates can purchase foreign exchange in the auction for import transactions only; (iii) a limit of US$75,000 a week on the availability of foreign exchange cash in the auction for money transfer companies (MTCs) and money exchange bureaus (MEBs); and (iv) a limit of US$4 million a week on the availability of foreign exchange cash in the auction for banks. In 2015, the final exchange restriction identified in 2012, arising from the limit on individual purchases of cash foreign exchange, was also removed. This exchange restriction originally arose from the US$5,000 limit on individual purchases of cash foreign exchange, imposed by Circular No. 19 of October 1, 2012. The CBI reports that this limit is now only indicative, due to the repeal of previous circulars, and therefore this measure no longer gives rise to an exchange restriction. However, this has been communicated to banks only by informal electronic message. Therefore, this measure no longer gives rise to an exchange restriction as the limit is now only indicative.10

The 2015 Article IV mission identified one new exchange restriction arising from weekly limits on purchases of cash by financial institutions from the CBI.11 Recently these limits have been raised to $300,000 per week for banks with capital of at least ID 250 billion, $150,000 per week for MTCs, and $50,000 per week for MEBs. Similar limits on the availability of foreign exchange in the CBI auction for banks, MTCs, and MEBs were originally imposed beginning in 2010 and found to give rise to exchange restrictions. Later these measures were removed, and thus the exchange restrictions were also removed).

The MCP was originally identified by the Fund in 2012 and continues to remain in place, even though the various measures limiting the availability of foreign exchange have evolved and changed. The MCP arises from the official action to limit the purchase of foreign exchange, with no mechanism to ensure that exchange rates in the official auction and in the market do not deviate from each other by more than two percent. The average spread between the official and market rates was around 10 percent in May 2015.

In addition, one exchange restriction maintained for security reasons should be notified to the IMF under the framework of Decision 144–(52/51).

Article IV Consultation

Iraq is on the standard 12-month consultation cycle. The last Article IV consultation was concluded on May 13, 2013. The staff report (IMF Country Report No. 13/217) was published on July 19, 2013, and is available on the internet at http://www.imf.org/external/pubs/cat/longres.aspx?sk=40802.0.

IRAQ: RECENT TECHNICAL ASSISTANCE, 2005–15
DepartmentDatePurpose
FADFebruary 2005Public Financial Management (Joint FAD-World Bank Mission)
FADApril 2005Budget Classification Reform
FADNovember 2006Financial Management Information System
FADDecember 2006Oil sector management and fiscal federalism
FADMay 2007Tax policy workshop
FADMarch 2008Public Financial Management
FADAugust 2008Oil sector—Pricing and Financial Flows
FADMarch 2008Oil sector—Taxation
FADOctober 2009Public Financial Management
FADMay 2010Public Financial Management
FADMarch 2012Public Financial Management
FADMay 2012Public Financial Management
FADDecember 2012Public Financial Management
LEGAugust 2008AML/CFT raising awareness workshop
LEGOctober 2008Article VIII acceptance
LEGFebruary 2009Workshop for financial intelligence unit and criminal justice
officials on AML/CFT measures
LEGApril 2010Phase One of the Three-Phase AML/CFT Capacity Enhancement and Sustainability Training Program
LEGJuly 2010Phase Two of the Three-Phase AML/CFT Capacity Enhancement and Sustainability Training Program
LEGOctober 2012Article VIII acceptance and AML/CFT assessment
MCMMarch 2007Banking restructuring
MCMMarch 2007Banking supervision
MCMSeptember 2007Banking restructuring
MCMMarch 2008Liquidity forecasting and management
MCMApril 2008Bank restructuring workshop
MCMJuly 2008Reserve management
MCMAugust 2008Bank restructuring workshop
MCMOctober 2008Article VIII acceptance
MCMDecember 2008Reserve management
MCMJanuary 2009Bank supervision workshop
MCMMarch 2009Banking supervision workshop
MCMJuly 2009TA coordination summit
MCMNovember 2009Reserve management
MCMNovember 2009Banking supervision workshop-reporting forms
MCMApril 2010Islamic banking workshop
MCMAugust 2010Reserve management
MCMAugust 2010Remote assistance on liquidity management and treasury market development
MCMDecember 2010Government Securities/Monetary Operations
MCMJanuary 2011Government Securities/Monetary Operations
MCMJanuary 2011Training on New Developed Regulations and Call Reports (METAC)
MCMJanuary 2011Training on Off-Site Supervision and Report Development (METAC)
MCMApril 2011Risk management workshop (stress testing)
MCMMay 2011Bank restructuring
MCMMay 2011Reserve management
MCMJuly 2011Reserve management
MCMSeptember 2011Reserve management workshop
MCMMarch 2012Bank restructuring
MCMOctober 2012Article VIII acceptance
MCMMarch 2014Assessment of Banking Needs (METAC)
MCMApril 2014Central Bank Reserve Management
MCMMay 2015Asset Management
STAJanuary 2006Balance of Payments Statistics
STAMarch 2006Monetary and Financial Statistics
STANovember 2006Balance of Payments Statistics
STAJanuary 2007Monetary and Financial Statistics
STAJanuary 2007Consumer Price Statistics
STAApril 2007Monetary and Financial Statistics
STAFebruary 2007National Accounts Statistics
STANovember 2007Consumer Price Statistics
STAFebruary 2008External Sector Statistics
STAFebruary 2008National Accounts Statistics
STAJanuary 2009External Sector Statistics
STANovember 2009National Accounts Statistics
STAApril 2010External Sector Statistics
STAJuly 2010Monetary and Financial Statistics
STAFebruary 2012External Sector Statistics
STAMarch 2012National Accounts Statistics
STAMay 2012Monetary and Financial Statistics
STAApril 2013National Accounts Statistics
STADecember 2013Balance of Payments Statistics
STADecember 2014Balance of Payments Statistics (METAC)
STAMarch 2015Government Finance Statistics (ArabStat)
STAMay 2015Government Finance Statistics
INSFebruary 2006Financial Programming and Policies
INSFebruary 2007External Sector Issues
INSMarch 2008Financial Programming and Policies
INSJanuary 2009Financial Programming and Policies
INSJanuary 2010Financial Programming and Policies

Relations with the World Bank Group

(As of June 30, 2015)

TitleProductsProvisional and Actual Timing of MissionsExpected and Actual Delivery Date
A. Mutual Information on Relevant Work Program
The World Bank work program in the next 12 months1Economic Policy Analysis and Advice WB:

- Systematic Country Diagnostic (SCD)

- Iraq Public Expenditure Review, Wages and Subsidies

- (KRG-RAS) Growth Diagnostic Analysis
Sept. 2015 July 2015

Nov. 2014
July 2016 June 2016

June 2016
Technical Assistance
WB:
− Public Financial ManagementJuly 2015June 2016
− Social ProtectionJuly 2015June 2016 Dec.
− Extractive Industries Transparency InitiativeMarch 20152015
− Pension ReformJuly 2015June 2016
− Doing Business ReformsJuly 2015June 2017
− Poverty TAApril 2015June 2016
− (Baghdad RAS) Gas value chain in IraqJuly 2015Feb. 2017
− (KRG-RAS) Procurement reformNov. 2013June 2016
− (KRG-RAS) Social safety Nets and pensionNov. 2013Jan. 2016
− (KRG-RAS) Support to Choura CouncilNov. 2013Jan. 2016
Ongoing
IFC:
− Infrastructure PPPs
− Strengthening financial infrastructure
− Improving banks’ corporate governance and risk management systems
− Providing SME training under Business Edge, especially to women owned enterprises
The Fund work program in the next 12 monthsMacroeconomic Policy Analysis and Advice

- Staff visit

- Article IV consultation

- Continuous policy advice
Sept. 2013

March 2014
May 2014
Technical Assistance

- Statistical capacity: national accounts

- Public Financial Management

- Statistical capacity: CPI

- Reserves management

- FX new regulations

- AML/CFT
April 2013

Mayo

2013

Spring 2013

Continuous

Continuous
May 2013
B. Requests for Work Program Inputs
Fund request to Bank− Macroeconomic and financial data to be shared regularly

- Logistical support on missions to Iraq
Ongoing basis
Bank request to Fund− Fiscal data to be shared regularly

- Coordination on macroeconomic policy and management training

- Macroeconomic and financial data to be shared regularly, including any restriction on foreign exchange transactions

- Sector-specific data

- Consultations outcomes to be shared
Ongoing basis
C. Agreement on Joint Products and Missions
Joint products in the next 12 monthsn/a

Not including infrastructure investments.

Not including infrastructure investments.

Statistical Issues

(As of June 30, 2015)

I. Assessment of Data Adequacy for Surveillance
General

Data provided to the Fund have serious shortcomings that significantly hamper surveillance. Macroeconomic statistics have suffered from years of neglect and recent turmoil has added to the difficulties. While the Central Statistics Organization (CSO) remained in place, it lacks adequate technical expertise and resources to address the requirements for a modern statistical system. At the Central Bank of Iraq (CBI), statistical capacity is slightly better, but issues of interagency data sharing and data collection responsibilities are hampering progress on external sector statistics.

Since 2003, the Statistics Department (STA) has provided considerable technical assistance (TA) in all major datasets, including on dissemination standards.
National Accounts

CSO compiles annual and quarterly national accounts at current and constant (2007) prices. Annual data of GDP by activity are available on the website of CSO for 2003–13, and quarterly GDP data up to the third quarter of 2014.

The national accounts follow the 1968 System of National Accounts (SNA), however, with technical assistance from STA, CSO is moving towards implementing the concepts of the 1993 SNA. The quality of the national accounts compiled is poor due to the lack of comprehensive source data for estimating value added by activity and for GDP by expenditure. A Household Budget Survey (HBS) was conducted during 2007 and the results have been incorporated. CSO still includes the Kurdistan Territory’s contribution to GDP by economic activities as percentages for each activity based on results obtained from previous estimates dating back to 1990. Other activities that started in the Kurdistan Territory after 1990 are not included. There are limited price and volume data for deriving volume measures of GDP. The base year was recently updated to 2007

There is a shortage of quarterly and monthly indicators of economic activity and a lack of timely data for services. Quarterly GDP estimates are based on a limited number of indicators—crude oil output, electricity, rent of dwellings, and government expenditure.

Price Statistics

Based on the HBS 2007, CSO compiles and disseminates a monthly CPI for all-Iraq (including Kurdistan) and for each governorate. However, the CPI only covers the urban areas in all governorates and resources are insufficient to expand coverage. Starting June 2014 official data on CPI do not include the four conflict-affected provinces. A quarterly PPI is also compiled and disseminated within two months of the reference quarter. The index is based in 2007 which needs to be updated, and capacity building is needed to implement improvements to methodology.
Government Finance Statistics

Despite the difficult security situation, which has a direct impact on data compilation and analysis, the provision of fiscal data for program monitoring purposes has been satisfactory. Infrequent submission delays occur, and coverage of the Kurdish region remains sketchy. However, the authorities are taking measures to address these shortcomings.

In March 2015, an STA mission—overlapped with the Article IV mission—discussed a work plan aimed at improving the frequency and timeliness of fiscal reporting data and setting a migration plan to improve fiscal statistics based on Government Finance Statistics Manual 2014 (GFSM 2014). Iraq resumed reporting government finance statistics for publication in the Government Finance Statistics Yearbook (GFSY). Currently there are no fiscal statistics published by the government beyond the summary of central government budgetary estimates and outturn.
Monetary and Financial Statistics

Notable progress has been made in developing the components and structure for compiling a depository corporations survey, but the quality and timeliness of the data continue to be hampered by the lack of staff capacity, particularly at the commercial bank level. While most banks, including state-owned banks are using the new report forms, which were developed based on the IMF’s Monetary and Financial Statistics Manual, some banks continue to have data reporting problems (e.g., missing data, reporting errors, and reporting delay). Therefore, the old report forms are still used to compile data for other depository corporations (ODCs). Monetary statistics does not cover the northern region (Kurdistan) due to problems with data collection from that region. As a result, the CBI reports data for publication in the IMF’s International Financial Statistics with a lag of more than three months and the latest reported data for ODCs are marked “preliminary,” indicating that there are problems with their data collection and compilation.
Financial sector surveillance

Iraq has not yet compiled financial soundness indicators (FSIs) as set out in the IMF’s FSI Compilation Guide. Following a discussion with the IMF (STA) during the 2015 Spring Meetings in Washington, D.C., the CBI requested technical assistance in compiling FSIs. STA will decide on the tasks, dates, and alternative location for a technical assistance mission upon receiving adequate information, including source data for commercial banks from the CBI.

External Sector Statistics

Balance of Payments and IIP Statistics

Balance of payments statistics are available to the Fund for 2005–2013 in the IMF’s Balance of Payments Manual, sixth edition (BPM6) format. The CBI also compiles and disseminates an annual international investment position (IIP) statement. The quality of the information for recent years has marginally improved but timeliness remains a key concern. Further, the presentation is still limited due to coverage problems and some deviations from the internationally acceptable methodologies. Issues regarding the full recording of external debt data continue to impact the coverage and timeliness of balance of payments and IIP statistics. International reserves are compiled consistent with international methodologies and published in the IFS since end-2006.
The quality of the information remains hampered by the lack of data submission to the CBI from other government institutions and the private sector, which is evidenced by large and growing errors and omissions with persistent negative sign. The paucity of data exists particularly in the areas of external trade in goods and services and foreign direct investment. To help address these and other issues, a February 2012 mission proposed several recommendations, including improved interagency cooperation on direct investment statistics.

External Trade Statistics

External trade data have serious problems of timeliness and are of poor quality. A new customs form for imports is available but it is not being used at the customs border due to the security situation and the lack of Customs Department resources at the border outlets.

Coverage of private sector imports is constrained by data sources. Only goods that are paid for through the Iraqi banking system are captured. Thus goods that are imported under external payments arrangements (for example, imports for direct investment projects) are not recorded in the balance of payments. The coverage of the external trade statistics excludes the northern region of the country (Kurdistan), and no estimates for smuggling are made.

Export data from the oil sector are received from the BOPSD at the CBI. The nonoil export data, which amounts to the equivalent of 3–5 percent of total exports, are compiled based on information from the customs export form. Nonoil export data are provided to the CBI on a monthly basis for crosschecking purposes.
II. Data Standards and Quality
The country is a GDDS participant. However, most of its metadata, with the exception of the real sector and socio-demographic metadata, have not been updated since October 2002. At the authorities’ request, STA has conducted an SDDS assessment, providing a draft action plan that could lead to SDDS subscription.No data ROSC is available.
Appendix I. Table of Common Indicators Required for Surveillance

(As of June 2015)

Date of latest observation (For all dates in table) dd/mm/yy)Date receivedFrequency of Data7Frequency of Reporting7Frequency of Publication7Memo Items:8
Data Quality–Methodological soundness9Data Quality–Accuracy and reliability
Exchange Rates24/6/201424/6/2015DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities123/4/20144/2015MMM, 4–6 week lag
Reserve/Base Money31/12/20144/2015MMM, 4–6 week lag
Broad Money31/12/20144/2015MMM, 4–6 week lag
Central Bank Balance Sheet31/12/20144/2015MMM, 4–6 week lag
Consolidated Balance Sheet of the Banking System31/12/20141/4/2015MMQ 4–6 week lag
Interest Rates223/4/20144/2015MMM, 4–6 week lag
Consumer Price Index30/4/201429/5/2015MMM, 3 week lag
Revenue, Expenditure, Balance and Composition of Financing3 – General Government403/201526/5/2015MMN/A
Revenue, Expenditure, Balance and Composition of Financing3– Central Government03/201526/5/2015MMN/A
Stocks of Central Government and Central Government-Guaranteed Debt512/20141/6/2015N/AN/AN/A
External Current Account Balance12/20141/6/2015QQQ 9 month lag
Exports and Imports of Goods and Services12/20141/6/2015QQQ 9 month lag
GDP/GNP3/20145/2014QQQ 3 month lag
Gross External Debt12/20141/6/2015N/AN/AN/A
International Investment Position612/20146/1/2015QQQ 9 month lag

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

These columns should only be included for countries for which Data ROSC (or a Substantive Update) has been published.

Iraq has not had the data ROSC or the Substantive Update.

Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

These columns should only be included for countries for which Data ROSC (or a Substantive Update) has been published.

Iraq has not had the data ROSC or the Substantive Update.

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

The advance deposit requirement for purchase of foreign exchange, originally identified in 2014, no longer gives rise to an exchange restriction given that the authorities assert that it is for purposes of assessing the bona fide of exchange transactions within the now “normal” 5-day limit. This measure was originally imposed by Circular No. 2/24 (Jan. 25, 2014); however, most provisions of this circular were nullified by Circular No. 9/3/26 of February 2015. The advance deposit requirement continues in force by virtue of paragraphs b (wire sales) and h (cash sales) of the February 2015 circular. The original requirement was that banks wishing to purchase foreign exchange must deposit with the CBI the Iraqi dinar equivalent of the amount requested for purchase “one week prior to the date of actual purchase.” The period was subsequently changed to 15 days by the February 2015 circular, then to 10 days on May 25, 2015 by a verbal instruction of the CBI, and to five days in June 2015.

The mission also discussed another new exchange restriction arising from a requirement for importers to pay a portion of custom duties and income tax that will be due on imports at the time of purchase of foreign exchange necessary for such imports. The requirement was cancelled in June 2015, and hence the exchange restriction was also removed.

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