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Iraq: Staff Report for the 2017 Article IV Consultation, Second Review Under the Three-Year Stand-By Arrangement, and Requests for Waivers of Nonobservance and Applicability of Performance Criteria, and Modification of Performance Criteria

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
August 2017
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Background: Iraq is Facing Acute Fiscal and Balance of Payments Crisis

A. Background

1. Iraq is an oil-dependent and state-dominated fragile economy. Iraq is very well endowed with oil resources: it holds the fourth largest oil reserves in the world with among the lowest extraction costs (Figure 1). Despite volatile security conditions, oil production has tripled since 2003, but little progress has been made to diversify the economy as the non-oil sector was adversely affected by the lack of security and a difficult business environment. The growth of oil production financed a large expansion of public expenditure and civil service employment, which tripled between 2003 and 2014 (Figure 2). The composition of public expenditure is heavily tilted towards wages, pensions and transfers. Despite an oversized public sector, even relative to other oil-exporting countries, the quality of public services particularly health, education and electricity, where power outages are frequent, is sub-par. Violence and a very difficult business environment have stifled private sector and financial sector development (Figure 3). The lack of electricity, political instability, corruption, and the lack of access to finance were identified as the most significant constraints by the World Bank’s latest Investment Climate Assessment.

Figure 1.Iraq: An Oil Dependent Economy with Little Progress in Diversification

Note: AGO = Angola, AZE = Azerbaijan, BRN = Brunei Darussalam, BRZ = Brazil, CAN = Canada, CHN = China, COL = Colombia, DZA = Algeria, GNQ = Equatorial Guinea, IRN = Iran, IRQ = Iraq, KWT = Kuwait, KZH = Kazakhstan, LBY = Libya, MEX = Mexico, NGA = Nigeria, NOR = Norway, OMN = Oman, QAT = Qatar, RUS = Russia, SAU = Saudi Arabia, SSD = South Sudan, TTO = Trinidad and Tobago, UAE = United Arab Emirates, UK = United Kingdom, USA = United States of America, and VEN = Venezuela.

Figure 2.Iraq: A State-Dependent Economy with Sub-Par Public Service Delivery

Figure 3.Iraq: Violence and Weak Governance Deter Private Sector Development

Note: MENAP = Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank and Gaza, and Yemen.

UMIC = upper middle income countries = Albania, Algeria, Angola, Belarus, Belize, Bosnia, Botswana, Brazil, Bulgaria, China, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, Equatorial Guinea, Fiji, Gabon, Georgia, Grenada, Guyana, Iran, Iraq, Jamaica, Jordan, Kazakhstan, Lebanon, Libya, Macedonia, Malaysia, Maldives, Marshall Islands, Mauritius, Mexico, Montenegro, Namibia, Palau, Panama, Paraguay, Peru, Romania, Russia, Serbia, South Africa, St. Lucia, St. Vincent and the Grenadines, Suriname, Thailand, Turkey, and Venezuela.

2. Since 2014, Iraq has been hit hard by the conflict with ISIS and the fall in oil prices. The conflict with ISIS has caused the destruction of infrastructure and assets and boosted the number of internally displaced persons to 3.0 million and the number of people in need of humanitarian assistance to 11 million (29 percent of the population), including over 241,000 Syrian refugees. The oil price decline has resulted in a massive reduction in fiscal and export revenue, pushing the fiscal and balance of payments deficits to unsustainable levels (Figure 4). The authorities are responding to the crisis with large but necessary fiscal adjustment, which is being supported by significant official financing, including a Stand-By Arrangement (SBA) with the Fund,1 of which the Board completed the first review in December 2016.2

Figure 4.Iraq: Recent Economic Developments and Outlook, 2012–22

Sources: Iraqi authorities; Bloomberg; and IMF staff calculations.

3. The Iraqi security forces, with the help of international partners, have made notable progress in the fight against ISIS. They have recently liberated Mosul, Iraq’s second largest city and ISIS’s last stronghold in Iraq.

4. The political situation remains challenging. Since the SBA approval, the Interior Minister resigned in the aftermath of a terrorist attack that claimed the lives of more than 300 people and Parliament withdrew its confidence in the Defense and Finance Ministers. The Prime Minister is the acting Minister of Finance. In 2016, the federal government and the Kurdistan Regional Government (KRG) did not implement their budget sharing agreement under which the KRG transfers the revenue from the oil extracted in KRG and the federal government makes transfers to the KRG equivalent to 17 percent of non-sovereign spending in the federal budget,3 which was implemented for two months in 2014 and five months in 2015. The KRG is planning a referendum on independence in September. Parliamentary elections are scheduled in April 2018.

B. Recent Economic Developments

5. Real GDP increased by 11 percent in 2016 owing to a 25 percent increase in oil production, which was little affected by the conflict with ISIS (Text Table 1 and Tables 12). Non-oil real GDP contracted by 8 percent because of the ongoing fiscal consolidation and combat in the ISIS-occupied territories. Average consumer price inflation was only 0.4 percent in 2016 in the areas not occupied by ISIS (where 80 percent of the population lived before the ISIS occupation) and 1.0 percent in April 2017, year-on-year.

Text Table 1.Iraq: Selected Economic Indicators, 2013–22
2013201420152016201720182019202020212022
Prog. 1/Est.Prog. 1/Rev Proj.Prog. 1/Rev Proj.Prog. 1/Rev Proj.Prog. 1/Rev Proj.Prog. 1/Rev Proj.Proj.
Real GDP Growth (percent)7.60.74.810.211.01.1−0.40.72.91.11.71.42.01.52.12.1
Non-oil real GDP (percent)12.4−3.9−9.6−5.0−8.13.01.52.02.03.03.03.93.94.04.04.1
Inflation (eop, y-o-y)3.11.62.32.0−1.02.02.02.02.02.02.02.02.02.02.02.0
Oil production (mbpd)2.983.143.724.504.634.504.574.504.724.504.774.504.824.504.874.91
Oil exports (mbpd)2.392.623.353.803.793.803.753.803.893.803.933.803.983.804.034.08
Iraq oil export prices (US$ pb)102.996.545.935.535.642.045.345.745.447.044.948.845.250.245.947.1
Overall fiscal balance (percent of GDP)−5.8−5.4−12.3−8.2−14.1−7.0−5.0−5.3−4.7−1.7−1.60.1−0.51.10.72.0
Non-oil primary fiscal balance (percent of non-oil GDP)−67.6−56.1−45.1−43.1−44.6−45.4−47.8−41.2−43.4−37.6−39.6−33.6−35.4−30.4−32.0−28.9
Non-oil primary fiscal balance, accrual basis (ID Trillion)−100.0−83.8−63.1−59.9−59.8−67.8−67.8−65.5−65.5−64.1−64.1−62.1−62.1−60.9−60.9−59.6
Adjusted non-oil primary fiscal balance, accrual basis (excl. KRG, ID Trillion) 2/−84.1−81.3−60.6−51.9−59.8−57.0−56.6−54.7−54.5−53.3−53.3−51.4−51.6−50.2−50.2−48.7
Adjusted non-oil primary expenditure (excl. KRG, ID Trillion) 3/93.887.166.459.468.066.864.965.064.664.264.463.163.863.063.863.9
Adjusted non-oil primary expenditure (excl. KRG, annual real growth, percent) 2/0.2−9.2−24.9−12.22.010.2−6.4−4.7−2.5−3.0−2.2−3.6−2.9−2.2−2.0−1.8
Total government debt (percent of GDP) 3/31.232.055.161.366.961.963.863.165.361.364.257.361.452.657.351.9
Current account balance (percent of GDP)1.12.6−6.5−6.8−8.7−6.8−6.4−6.2−6.7−2.9−4.1−1.9−3.2−1.2−2.1−0.6
Gross international reserves (US$ billion)77.866.753.743.045.238.541.438.140.837.339.735.537.135.936.036.5
Gross international reserves (months of imports of goods and services)10.810.99.26.76.75.96.25.86.05.65.95.25.45.25.25.3
Financing gap (US$ billion) 4/0.00.00.00.00.00.00.06.55.00.62.10.00.00.00.00.0
Sensitivity of oil revenue per $1 of oil price change (in $ billion)0.00.00.00.00.01.41.41.41.41.41.41.41.51.41.51.5
Sources: Iraqi authorities; and Fund staff estimates.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Adjusted to exclude full year estimate of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Includes arrears. The debt stock includes legacy arrears to non-Paris Club creditors on which the authorities have requested (but not yet obtained) Paris-Club comparable relief. Implementing comparable terms will substantially reduce debt (e.g. by 17 percent of GDP in 2017).

Only unidentified financing.

Sources: Iraqi authorities; and Fund staff estimates.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Adjusted to exclude full year estimate of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Includes arrears. The debt stock includes legacy arrears to non-Paris Club creditors on which the authorities have requested (but not yet obtained) Paris-Club comparable relief. Implementing comparable terms will substantially reduce debt (e.g. by 17 percent of GDP in 2017).

Only unidentified financing.

Table 1.Iraq: Selected Economic and Financial Indicators, 2013–22(Quota: SDR 1,663.8 million)(Population: 37.5 million; 2016 est.)(Poverty rate: 23 percent, 2014)(Main export: Crude oil)
2013201420152016201720182019202020212022
Prog. 1/Est.Prog. 1/Rev. Prog.Proj.1/Prog.Proj.1/Rev. Proj.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj.
Economic growth and prices
Real GDP (percentage change)7.60.74.810.211.01.1−0.40.72.91.11.71.42.01.52.12.1
Non-oil real GDP (percentage change)12.4−3.9−9.6−5.0−8.13.01.52.02.03.03.03.93.94.04.04.1
GDP deflator (percentage change)0.0−0.7−26.9−11.5−12.99.712.96.42.34.72.95.43.85.04.44.7
GDP per capita (US$)7,0216,5174,8694,8184,5335,2004,9585,4345,0915,6085,1945,8435,3626,0735,5695,806
GDP (in ID trillion)273.6273.6209.7205.1202.7227.4227.7243.8239.9258.0251.0275.8265.8294.0283.1302.8
Non-oil GDP (in ID trillion)148.0149.5139.8139.0134.1149.3141.8158.8150.8170.6162.0184.9175.5200.6190.3206.6
GDP (in US$ billion)234.6234.7179.8173.8171.7192.4192.7206.2202.9218.3212.3233.3224.8248.7239.5256.2
Oil production (mbpd)3.03.13.74.54.64.54.64.54.74.54.84.54.84.54.94.9
Oil exports (mbpd)2.42.63.43.83.83.83.83.83.93.83.93.84.03.84.04.1
Iraq oil export prices (US$ pb) 2/102.996.545.935.535.642.045.345.745.447.044.948.845.250.245.947.1
Consumer price inflation (percentage change; end of period)3.11.62.32.0−1.02.02.02.02.02.02.02.02.02.02.02.0
Consumer price inflation (percentage change; average)1.92.21.42.00.42.02.02.02.02.02.02.02.02.02.02.0
(In percent of GDP)
National Accounts
Gross domestic investment26.925.724.417.420.620.219.118.718.818.218.317.417.917.117.917.8
Of which: public17.418.015.18.111.411.210.59.910.19.29.58.48.98.08.88.6
Gross domestic consumption69.569.981.689.387.886.687.085.085.484.585.684.084.683.783.682.4
Of which: public21.018.322.325.722.923.523.721.722.220.321.118.819.717.518.316.9
Gross national savings28.128.318.010.611.913.412.812.512.115.314.215.514.715.915.817.2
Of which: public11.613.03.0−0.1−2.34.46.04.55.97.78.58.48.79.19.710.9
Saving – Investment balance1.12.6−6.5−6.8−8.7−6.8−6.4−6.2−6.7−2.9−4.1−1.9−3.2−1.2−2.1−0.6
(In percent of GDP, unless otherwise indicated)
Public Finance
Government revenue and grants42.238.230.332.227.434.836.035.136.534.335.633.534.632.533.833.1
Government oil revenue38.636.027.528.323.230.131.830.631.729.730.628.929.427.928.327.5
Government non-oil revenue3.52.12.83.94.14.63.94.54.64.64.84.65.04.65.25.5
Expenditure, of which:48.043.542.640.441.541.841.040.441.236.037.333.435.031.433.131.1
Current expenditure30.625.527.532.330.130.630.530.631.126.827.825.026.123.424.322.6
Capital expenditure17.418.015.18.111.411.210.59.910.19.29.58.48.98.08.88.6
Overall fiscal balance (including grants)−5.8−5.4−12.3−8.2−14.1−7.0−5.0−5.3−4.7−1.7−1.60.1−0.51.10.72.0
Non-oil primary fiscal balance, accrual basis (percent of non-oil GDP)−67.6−56.1−45.1−43.1−44.6−45.4−47.8−41.2−43.4−37.6−39.6−33.6−35.4−30.4−32.0−28.9
Adjusted Non-oil primary fiscal balance, accrual basis (excl. KRG, percent of non-oil GDP) 3/−56.8−54.443.3−37.4−44.6−38.2−39.9−34.4−36.1−31.2−32.9−27.8−29.4−25.0−26.4−23.6
Adjusted non-oil primary expenditure (excl. KRG, percent of non-oil GDP) 4/63.458.347.542.850.744.845.840.942.837.739.834.136.431.433.530.9
Adjusted non-oil primary expenditure (excl. KRG, annual real growth, percent) 4/0.2−9.2−24.9−12.22.010.2−6.4−4.7−2.5−3.0−2.2−3.6−2.9−2.2−2.0−1.8
Memorandum items:
Total government debt (in percent of GDP) 5/31.232.055.161.366.961.963.863.165.361.364.257.361.452.657.351.9
Total government debt (in US$ billion) 5/73.175.298.0106.6114.6119.1122.9130.1132.4133.9136.2133.7138.0130.9137.1132.9
External government debt (in percent of GDP)25.324.836.837.839.338.238.140.340.738.740.234.736.730.732.627.7
External government debt (in US$ billion)59.358.166.165.767.573.573.483.282.684.585.380.982.576.478.171.0
(In percent, unless otherwise indicated)
Monetary indicators
Growth in reserve money12.6−9.6−12.62.27.1−0.22.17.23.56.84.95.55.65.55.65.8
Growth in broad money15.93.6−9.05.17.24.94.97.24.97.54.96.36.38.27.08.2
Policy interest rate (end of period)6.06.06.04.0
(In percent of GDP, unless otherwise indicated)
External sector
Current account1.12.6−6.5−6.8−8.7−6.8−6.4−6.2−6.7−2.9−4.1−1.9−3.2−1.2−2.1−0.6
Trade balance9.910.9−0.1−0.8−1.8−0.40.71.81.82.41.73.02.13.22.63.3
Exports of goods38.339.631.428.329.130.132.430.532.029.730.728.929.628.028.527.8
Imports of goods−28.4−28.7−31.5−29.0−30.9−30.5−31.7−28.8−30.2−27.3−29.0−25.9−27.4−24.8−26.0−24.5
Overall external balance−1.3−10.0−7.1−3.5−3.6−2.3−0.9−3.3−2.7−0.3−1.1−0.1−0.60.90.20.8
Gross reserves (in US$ billion) 6/77.866.753.743.045.238.541.438.140.837.339.735.537.135.936.036.5
In months of imports of goods and services10.810.99.26.76.75.96.25.86.05.65.95.25.45.25.25.3
Exchange rate (dinar per US$; period average)1,1661,1661,1671,180
Real effective exchange rate (percent change, end of period) 7/6.64.76.85.9
Financing gap (US$ billion) 8/0.00.00.00.00.00.00.06.55.00.62.10.00.00.00.00.0
Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Negative price differential of about $6 per barrel compared to the average petroleum spot price (average of Bent, West Texas and Dubai oil prices) in 2016-22.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude full year estimate of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Includes arrears. The debt stock includes legacy arrears to non-Paris Club creditors on which the authorities have requested (but not yet obtained) Paris-Club comparable relief. Implementing comparable terms will substantially reduce debt (e.g. by 17 percent of GDP in 2017).

See Table 8, footnote 3, for coverage.

Positive means appreciation.

Only unidentified financing.

Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Negative price differential of about $6 per barrel compared to the average petroleum spot price (average of Bent, West Texas and Dubai oil prices) in 2016-22.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude full year estimate of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Includes arrears. The debt stock includes legacy arrears to non-Paris Club creditors on which the authorities have requested (but not yet obtained) Paris-Club comparable relief. Implementing comparable terms will substantially reduce debt (e.g. by 17 percent of GDP in 2017).

See Table 8, footnote 3, for coverage.

Positive means appreciation.

Only unidentified financing.

Table 2.Iraq: National Accounts, 2013–22(In percent)
2013201420152016201720182019202020212022
Prog. 1/Est.Prog. 1/Rev. Prog.Proj. 1/Prog.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj.
GDP shareAnnual growth rates, constant prices
Agriculture, Hunting, Forestry, and Fishing4.3−2.0−49.3−20.559.60.00.07.07.07.07.07.07.07.07.07.0
Mining. crude oil and Quarrying49.76.317.120.424.40.0−1.40.03.40.01.00.01.00.01.01.0
Crude Oil49.45.418.420.424.60.0−1.50.03.40.01.00.01.00.01.01.0
Other mining0.3−34.60.7−15.0−54.52.02.02.02.02.02.02.02.02.02.02.0
Manufacturing1.5−22.2−25.7−10.05.90.00.00.00.00.00.00.00.00.00.00.0
Electricity and Water1.111.81.80.0−2.22.52.53.03.04.04.05.05.05.05.05.0
Construction8.7−4.6−34.4−25.0−40.36.06.06.06.06.06.07.07.07.07.07.0
Transport, Storage and Communications7.26.16.51.0−28.34.04.03.04.04.04.55.05.05.05.05.0
Wholesale and Retail Trade, Restaurants and Hotels8.5−0.50.3−3.00.00.50.50.5−1.04.04.85.05.55.05.55.5
Finance, Insurance, Real Estate and Business Services7.2−8.40.32.61.65.55.45.05.95.46.47.27.37.27.37.3
Finance and Insurance Services1.7−41.2−30.5−25.01.80.00.05.05.010.010.010.010.010.010.010.0
Real Estate5.51.95.96.01.66.06.05.06.05.06.07.07.07.07.07.0
Community, Social and Personal Services12.2−8.51.40.0−5.42.48−2.40−2.0−2.4−2.0−4.4−2.0−3.6−2.0−3.6−4.0
Producers of Government Services9.9−11.01.11.1−4.03.00−3.00−2.0−2.5−2.0−5.0−2.0−4.0−2.0−4.0−4.5
Personal services2.32.62.6−5.0−10.80.000.00−2.0−2.0−2.0−2.0−2.0−2.0−2.0−2.0−2.0
Gross Domestic Product at constant Factor cost100.00.74.810.211.01.1−0.40.72.91.11.71.42.01.52.12.1
Gross Domestic Product100.00.74.810.211.01.1−0.40.72.91.11.71.42.01.52.12.1
Oil GDP49.45.418.420.424.60.0−1.50.03.40.01.00.01.00.01.01.0
Non oil GDP50.6−3.9−9.6−5.0−8.13.01.52.02.03.03.03.93.94.04.04.1
Memorandum:
Gross Domestic Product (In ID Trillion)273.6273.6209.7205.1202.7227.4227.7243.8239.9258.0251.0275.8265.8294.0283.1302.8
Oil GDP125.6124.1269.966.168.678.185.984.989.087.489.090.990.393.492.896.1
Non oil GDP148.0149.48139.8139.0134.1149.3141.8158.8150.8170.6162.0184.9175.5200.6190.3206.6
Sources: Iraqi authorities; and IMF staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Sources: Iraqi authorities; and IMF staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

6. Further fiscal consolidation was achieved in 2016, but at a slower pace than programmed mainly because of the inability of the Ministry of Finance to reduce investment expenditure by as much as envisaged but also due to spending pressure stemming from the military campaign against ISIS (Tables 35). The non-oil primary balance, on an accrual basis,4 excluding KRG,5 contracted by 1 percent in nominal terms 6 in 2016, reflecting 2 percent real spending growth (following a 25 percent contraction the previous year) and tripling of non-oil revenue (albeit from a very low base). However, this contraction was less than programmed (ID 8.7 trillion, excluding KRG) because of spending overruns in mostly non-oil investment (ID 6.1 trillion), transfers (ID 2.6 trillion) and wages (ID 0.7 trillion), partly because the campaign against ISIS and partly because of weak control by the Ministry of Finance over investment expenditure by line ministries. In addition, the authorities paid about $2.5 billion less external arrears to international oil companies (IOCs) and other external creditors than programmed because of cash constraints. The overall budget deficit increased to 14 percent of GDP in 2016 mainly because of the 22 percent fall in oil prices. The budget deficit was mostly financed by indirect monetary financing from the Central Bank of Iraq (CBI) and donor support catalyzed by the SBA, but also by the accumulation of arrears, of which the total stock amounted to 5.5 percent of GDP at the end of 2016, out of which 68 percent were domestic (¶15). Indirect monetary financing from the CBI could not be avoided as the liquidity position of the state-dominated banking sector is uncertain in the absence of audited financial statements of the main state-owned banks (¶11).

Table 3.Iraq: Central Government Fiscal Accounts, 2013–22(In trillions of ID; unless otherwise indicated)
2013201420152016201720182019202020212022
Prog. 1/Est.Prog. 1/Rev. Prog.Proj. 1/Prog.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj.
Revenues and grants115.4104.463.566.055.579.182.085.687.588.589.592.491.995.695.6100.3
Revenues115.4104.463.566.055.579.081.985.687.588.589.592.491.995.695.6100.3
Oil105.798.557.758.047.268.672.974.576.576.777.479.778.581.980.783.2
Crude oil export revenues104.197.157.257.646.668.071.873.975.476.076.379.077.481.279.682.5
o/w KRG11.62.53.17.80.010.210.110.610.110.910.011.310.111.610.310.8
net of KRG92.594.554.149.746.657.861.763.265.265.166.267.767.369.769.371.7
Transfers from oil-related public enterprises1.61.40.50.50.40.60.60.70.60.70.60.70.60.70.60.7
Tax on oil company profits0.30.50.50.50.50.50.5
Non-oil9.75.95.88.08.310.58.911.111.011.812.112.713.313.714.816.5
Tax revenues2.92.51.44.75.26.96.57.28.37.59.07.99.98.310.912.0
Direct taxes1.30.71.13.43.94.54.64.54.74.55.04.65.34.65.66.1
Indirect taxes1.61.80.41.31.32.41.92.73.63.04.03.34.63.75.26.0
o/w KRG0.00.50.00.80.70.80.90.81.00.91.10.91.21.3
net of KRG1.44.25.26.25.86.47.46.78.07.08.87.49.710.7
Non-tax revenues6.83.34.43.33.03.52.43.92.74.33.04.83.55.43.94.5
Grants0.10.00.00.00.00.10.10.00.00.00.00.00.00.00.00.0
Expenditures131.2119.089.382.884.195.093.498.698.892.993.592.293.192.393.794.3
o/w KRG2.58.50.011.612.011.611.911.611.711.611.611.611.912.2
net of KRG86.774.384.183.481.487.086.981.381.880.581.580.781.782.1
Current expenditures83.769.957.666.261.169.669.574.674.569.269.869.069.468.868.768.3
Salary and pension41.140.342.246.441.646.147.645.446.444.845.844.245.143.644.543.9
Salary32.531.833.136.132.335.836.335.135.134.534.533.933.933.333.232.6
Salary (Defense/Interior)8.114.214.415.915.216.417.116.216.615.916.315.616.015.315.715.4
Salary (others)24.517.618.720.217.219.319.219.018.618.718.218.317.918.017.617.3
o/w KRG2.04.50.03.83.83.73.73.73.63.63.53.53.53.4
net of KRG31.131.632.332.032.531.431.530.930.930.330.329.729.829.2
Pension8.68.49.010.39.310.311.310.311.310.311.310.311.310.311.311.3
o/w KRG0.41.10.02.21.62.21.62.21.62.21.62.21.61.6
net of KRG8.69.29.38.19.68.19.68.19.68.19.68.19.69.6
Goods and services16.39.74.76.34.87.36.47.56.77.67.37.87.37.97.27.3
o/w KRG0.00.40.00.80.90.81.00.81.00.81.00.81.01.1
net of KRG4.75.84.86.65.56.75.86.86.27.06.37.16.26.3
Transfers20.014.39.511.213.213.312.813.313.313.313.713.313.713.313.713.7
o/w KRG0.00.60.00.81.70.81.70.81.70.81.70.81.71.7
net of KRG9.410.613.212.511.112.511.612.511.912.511.912.511.911.9
Social safety net (including PDS)7.67.64.56.36.16.86.36.86.86.87.26.87.26.87.27.2
o/w KRG0.00.40.00.60.50.60.60.60.60.60.60.60.60.6
net of KRG4.45.96.16.25.86.26.26.26.66.26.66.26.66.6
Transfers to SOEs 2/1.91.52.42.22.71.92.21.92.21.92.21.92.21.92.22.2
o/w KRG0.00.10.00.10.10.10.10.10.10.10.10.10.10.1
net of KRG2.42.12.71.82.11.82.11.82.11.82.11.82.12.1
Other transfers10.55.22.62.74.44.74.34.74.34.74.34.74.34.74.34.3
o/w KRG0.00.10.00.21.00.21.00.21.00.21.00.21.01.0
net of KRG2.62.64.44.53.34.53.34.53.34.53.34.53.33.3
Interest payments1.00.71.32.31.42.92.82.92.73.43.13.73.34.03.33.4
War reparations 3/5.24.90.00.00.00.00.05.45.40.00.00.00.00.00.00.0
Investment expenditures47.649.231.616.623.125.423.924.024.323.823.723.223.823.525.026.0
Non-oil investment expenditures32.325.412.64.08.411.710.210.310.110.19.49.59.39.810.411.3
o/w KRG0.01.70.04.04.04.14.04.13.74.23.64.24.04.4
net of KRG12.52.38.47.76.26.26.25.95.75.35.75.56.36.9
Financed by project loans0.00.00.32.42.34.34.52.84.82.52.71.31.21.11.11.0
Other32.325.412.31.66.07.45.77.55.37.66.88.28.18.69.310.3
o/w KRG4.04.04.03.73.64.04.4
net of KRG3.41.71.43.14.55.35.9
Oil investment expenditures15.323.819.112.614.713.713.713.714.213.714.313.714.513.714.614.7
IOCs11.511.211.611.611.612.011.612.111.612.211.612.412.5
Fiscal balance−15.8−14.6−25.8−16.7−28.6−15.9−11.4−13.0−11.3−4.5−4.10.2−1.33.31.96.0
Statistical discrepancy−1.3−4.40.00.00.00.00.00.00.00.00.00.00.00.00.0
Financing17.219.025.816.728.615.911.413.011.34.54.1−0.21.3−3.3−1.9−6.0
External financing12.76.54.2−1.72.19.17.23.44.90.80.5−4.2−3.2−7.8−5.2−8.3
Budget Loans0.00.02.83.53.56.36.32.32.21.00.90.00.00.00.00.0
International Financial Institutions0.00.02.83.23.23.13.12.01.91.00.90.00.00.00.00.0
Bilateral0.00.00.00.30.30.80.80.40.30.00.00.00.00.00.00.0
Eurobond0.00.00.00.00.02.42.40.00.00.00.00.00.00.00.00.0
Project Loans0.00.00.32.42.34.34.52.84.82.52.71.31.21.11.11.0
Amortization−1.1−1.8−1.6−2.1−1.1−1.4−1.2−1.6−1.9−2.7−2.9−5.5−4.5−8.9−6.3−9.3
Assets held abroad13.8−0.10.00.00.00.00.00.00.00.00.00.00.00.00.00.0
SDR Holding0.00.02.20.00.00.00.00.00.00.00.00.00.00.00.00.0
Account payables0.07.94.8−0.2−0.30.00.2−0.10.10.00.00.00.00.00.00.0
Arrears0.65.3−5.3−2.30.0−2.60.0−0.20.0−0.20.00.00.00.00.0
Domestic financing4.512.521.618.426.56.84.22.00.52.91.14.04.54.43.32.4
Bank financing4.64.718.019.021.36.85.82.00.52.91.14.04.54.43.32.4
CBI4.23.510.112.616.75.54.51.90.41.91.11.92.41.90.80.2
Loans0.00.06.412.614.35.54.51.90.41.91.11.92.41.90.80.2
Deposits4.23.53.70.02.40.00.00.00.00.00.00.00.00.00.00.0
Commercial banks0.31.27.96.44.61.31.30.10.11.10.02.12.12.52.52.2
Loans0.31.27.90.00.00.90.90.10.11.10.02.12.12.52.52.2
Deposits6.44.60.40.40.00.00.00.00.00.00.00.00.0
Non-bank financing0.00.00.00.62.01.34.41.61.41.60.00.00.00.00.00.0
Account payables−0.1−0.11.80.0−1.80.00.00.00.00.00.00.00.00.0
Arrears0.01.83.7−1.21.5−1.34.2−1.6−1.4−1.60.00.00.00.00.00.0
Financing gap: 4/0.00.00.00.07.75.90.72.50.00.00.00.00.0
Memorandum items:
Security-related expenditure (military and police equipment and salaries)16.416.615.016.615.717.317.617.017.116.716.816.416.516.216.215.9
Revenue from KRG8.30.010.910.911.411.111.711.012.111.212.511.512.1
Oil export revenue from KRG11.62.53.17.80.010.210.110.610.110.910.011.310.111.610.310.8
Non-oil tax revenue from KRG0.50.00.80.70.80.90.81.00.91.10.91.21.3
Transfer to KRG15.92.52.58.50.011.612.011.611.911.611.711.611.611.611.912.2
Non-oil primary expenditure, accrual basis109.789.768.967.968.078.476.976.676.575.876.174.875.474.675.776.2
Adjusted non-oil primary expenditure, accrual basis (excluding KRG) 5/93.887.166.459.468.066.864.965.064.664.264.463.163.863.063.863.9
Adjusted non-oil primary expenditure, accrual (annual real growth, percent) 5/0.2−9.2−24.9−12.22.010.2−6.44.7−2.5−3.0−2.2−3.6−2.9−2.2−2.0−1.8
Non-oil primary fiscal balance, accrual basis−100.0−83.8−63.1−59.9−59.8−67.8−67.8−65.5−65.5−64.1−64.1−62.1−62.1−60.9−60.9−59.6
Adjusted non-oil primary fiscal balance, accrual basis (excluding KRG) 6/−84.1−81.3−60.6−51.9−59.8−57.0−56.6−54.7−54.5−53.3−53.3−51.4−51.6−50.2−50.2−48.7
Non-oil primary fiscal balance, cash basis 7/−100.0−82.0−58.5−61.9−58.1−69.1−73.8−67.1−67.2−65.7−64.3−62.1−62.1−60.9−60.9−59.6
Adjusted Non-oil primary fiscal balance, cash basis (excluding KRG) 6/,7/−84.1−79.5−56.0−54.0−58.1−58.3−62.5−56.3−56.1−54.9−53.5−51.4−51.6−50.2−50.2−48.7
Gross public debt85.287.6115.6125.9135.5140.8145.2153.8156.5158.3161.0158.0163.1154.7162.1157.1
Average Iraq oil export price (US$/bbl)102.996.545.935.535.642.045.345.745.447.044.948.845.250.245.947.1
Volume of oil exports2.42.63.43.83.83.83.83.83.93.83.93.84.03.84.04.1
CBI total financing of the budget deficit4.23.510.112.616.75.54.51.90.41.91.11.92.41.90.80.2
Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

For 2013–14, includes off-budget transfers to SOEs financed by Bank Rafidain.

Five percent of oil exports as mandated by U.N. Security Council Resolution 1483 to finance war reparations to Kuwait.

Includes unidentified financing only.

Adjusted to exclude full year estimates of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government.

The non-oil primary fiscal balance on cash basis adjusts the non-oil primary balance measured on accrual basis by subtracting the spending financed by arrears’ accumulation during that period, and adding the repayment of arrears from previous years.

Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

For 2013–14, includes off-budget transfers to SOEs financed by Bank Rafidain.

Five percent of oil exports as mandated by U.N. Security Council Resolution 1483 to finance war reparations to Kuwait.

Includes unidentified financing only.

Adjusted to exclude full year estimates of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government.

The non-oil primary fiscal balance on cash basis adjusts the non-oil primary balance measured on accrual basis by subtracting the spending financed by arrears’ accumulation during that period, and adding the repayment of arrears from previous years.

Table 4.Iraq: Central Government Fiscal Accounts, 2013–22(In percent of GDP)
2013201420152016201720182019202020212022
Prog. 1/Est.Prog. 1/Rev. Prog.Proj. 1/Prog.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj.
Revenues and grants42.238.230.332.227.434.836.035.136.534.335.633.534.632.533.833.1
Revenues42.238.230.332.227.434.736.035.136.534.335.633.534.632.533.833.1
Oil38.636.027.528.323.330.132.030.631.929.730.828.929.627.928.527.7
Crude oil export revenues38.035.527.328.123.029.931.530.331.429.530.428.729.127.628.127.3
Transfers from oil-related public enterprises0.60.50.20.20.20.30.30.30.30.30.20.30.20.20.20.2
Tax on oil company profits0.10.20.20.20.20.20.2
Non-oil3.52.12.83.94.14.63.94.54.64.64.84.65.04.65.25.5
Tax revenues1.10.90.72.32.63.02.92.93.52.93.62.93.72.83.84.0
Non-tax revenues2.51.22.11.61.51.61.11.61.11.71.21.71.31.81.41.5
Grants0.00.00.00.00.00.10.10.00.00.00.00.00.00.00.00.0
Expenditures48.043.542.640.441.541.841.040.441.236.037.333.435.031.433.131.1
o/w KRG1.24.10.05.15.34.85.04.54.74.24.43.94.24.0
net of KRG41.436.241.536.735.735.736.231.532.629.230.727.428.927.1
Current expenditures30.625.527.532.330.130.630.530.631.126.827.825.026.123.424.322.6
Salary and pension15.014.720.122.620.520.320.918.619.317.418.216.017.014.815.714.5
Salary11.911.615.817.616.015.715.914.414.613.413.712.312.711.311.710.8
Pension3.13.14.35.04.64.54.94.24.74.04.53.74.23.54.03.7
Goods and services6.03.62.23.12.43.22.83.12.82.92.92.82.82.72.62.4
Transfers7.35.24.55.56.55.95.65.55.55.25.44.85.14.54.84.5
Social safety net2.82.82.13.13.03.02.82.82.82.62.92.52.72.32.52.4
Transfers to SOEs 2/0.70.61.11.11.30.81.00.80.90.70.90.70.80.60.80.7
Other transfers3.81.91.21.32.22.11.91.91.81.81.71.71.61.61.51.4
Interest payments0.40.30.61.10.71.31.21.21.11.31.21.31.21.41.21.1
War reparations 3/1.91.80.00.00.00.00.02.22.30.00.00.00.00.00.00.0
Investment expenditures17.418.015.18.111.411.210.59.910.19.29.58.48.98.08.88.6
Non-oil investment expenditures11.89.36.01.94.15.14.54.24.23.93.83.43.53.33.73.7
Oil investment expenditures5.68.79.16.17.36.06.05.65.95.35.75.05.44.75.24.9
IOCs5.65.55.15.14.85.04.54.84.24.63.94.44.1
National oil companies0.51.70.90.90.90.90.80.90.80.80.70.80.7
Fiscal balance−5.8−5.4−12.3−8.2−14.1−7.0−5.0−5.3−4.7−1.7−1.60.1−0.51.10.72.0
Statistical discrepancy−0.5−1.60.0
Financing6.37.012.38.214.17.05.05.34.71.71.6−0.10.5−1.1−0.7−2.0
External financing4.62.42.0−0.81.04.03.21.42.10.30.2−1.5−1.2−2.6−1.8−2.7
Budget Loans0.00.01.41.71.72.82.80.90.90.40.40.00.00.00.00.0
International Financial Institutions0.00.01.41.61.61.41.30.80.80.40.40.00.00.00.00.0
Bilateral0.00.00.00.10.10.30.40.10.10.00.00.00.00.00.00.0
Eurobond0.00.00.00.00.01.01.00.00.00.00.00.00.00.00.00.0
Project Loans0.00.00.11.21.21.92.01.22.01.01.10.50.50.40.40.3
Amortization−0.4−0.7−0.8−1.0−0.5−0.6−0.5−0.7−0.8−1.0−1.2−2.0−1.7−3.0−2.2−3.1
Assets held abroad5.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.0
SDR Holding0.00.01.00.00.00.00.00.00.00.00.00.00.00.00.00.0
Account payables0.02.9−2.3−0.1−0.20.00.10.00.00.00.00.00.00.00.00.0
Arrears0.00.22.5−2.6−1.10.0−1.10.0−0.10.0−0.10.00.00.00.00.0
Domestic financing1.74.610.39.013.13.01.80.80.21.10.41.41.71.51.20.8
Bank financing1.71.78.69.310.53.02.50.80.21.10.41.41.71.51.20.8
CBI1.51.34.86.18.22.42.00.80.10.70.40.70.90.60.30.1
Loans0.00.03.06.27.02.42.00.80.10.70.40.70.90.60.30.1
Deposits1.51.31.80.01.20.00.00.00.00.00.00.00.00.00.00.0
Commercial banks0.10.43.83.12.30.60.60.00.00.40.00.70.80.90.90.7
Loans0.10.43.80.00.00.40.40.00.00.40.00.70.80.90.90.7
Deposits0.00.00.03.12.30.20.20.00.00.00.00.00.00.00.00.0
Non-bank financing0.00.00.00.31.00.61.90.70.60.60.00.00.00.00.00.0
Account payables0.00.0−0.10.00.90.0−0.80.00.00.00.00.00.00.00.00.0
Arrears0.00.71.8−0.60.7−0.6−1.9−0.7−0.6−0.60.00.00.00.00.00.0
Financing gap: 4/0.00.00.00.00.00.00.03.12.50.31.00.00.00.00.00.0
Memorandum items:
Security-related expenditure (military and police equipment and salaries)6.06.17.28.17.87.67.77.07.16.56.76.06.25.55.75.3
Revenue from KRG4.10.04.84.84.74.64.54.44.44.24.24.04.0
Oil export revenue from KRG4.20.91.53.80.04.54.54.44.24.24.04.13.83.93.63.6
Non-oil tax revenue from KRG0.30.00.30.30.30.40.30.40.30.40.30.40.4
Transfer to KRG5.80.91.24.10.05.15.34.85.04.54.74.24.43.94.24.0
Current expenditures (percent of GDP)30.625.527.532.330.130.630.530.631.126.827.825.026.123.424.322.6
Non-oil primary expenditure, accrual basis (percent of GDP)40.132.832.933.133.634.533.831.431.929.430.327.128.425.426.825.2
Adjusted non-oil primary expenditure, accrual basis (excl. KRG, percent of GDP) 5/34.331.831.729.033.629.428.526.626.924.925.722.924.021.422.521.1
Non-oil primary fiscal balance, accrual basis (percent of GDP)−36.5−30.6−30.1−29.2−29.5−29.8−29.8−26.9−27.3−24.8−25.5−22.5−23.4−20.7−21.5−19.7
Adjusted non-oil primary fiscal balance, accrual basis (excl. KRG, percent of GDP) 6/−30.7−29.7−28.9−25.3−29.5−25.1−24.8−22.4−22.7−20.7−21.3−18.6−19.4−17.1−17.7−16.1
Non-oil primary fiscal balance, cash basis (percent of GDP) 7/−36.5−30.0−27.9−30.2−28.7−30.4−32.4−27.5−28.0−25.5−25.6−22.5−23.4−20.7−21.5−19.7
Adjusted Non-oil primary fiscal balance, cash basis (excluding KRG, percent of GDP) 6,7/−30.7−29.0−26.7−26.3−28.7−25.6−27.4−23.1−23.4−21.3−21.3−18.6−19.4−17.1−17.7−16.1
Gross public debt (percent of GDP)31.232.055.161.466.961.963.863.165.361.364.257.361.452.657.351.9
CBI total financing of the budget deficit (percent of GDP)1.51.34.86.18.22.42.00.80.10.70.40.70.90.60.30.1
Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

For 2013–14, includes off-budget transfers to SOEs financed by Bank Rafidain.

Calculated as 5 percent of oil exports as per U.N. Security Council Resolution 1483 to finance war reparations to Kuwait.

Includes unidentified financing only.

Adjusted to exclude full year estimates of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government.

The non-oil primary fiscal balance on cash basis adjusts the non-oil primary balance measured on accrual basis by subtracting the spending financed by arrears’ accumulation during that period, and adding the repayment of arrears from previous years.

Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

For 2013–14, includes off-budget transfers to SOEs financed by Bank Rafidain.

Calculated as 5 percent of oil exports as per U.N. Security Council Resolution 1483 to finance war reparations to Kuwait.

Includes unidentified financing only.

Adjusted to exclude full year estimates of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government.

The non-oil primary fiscal balance on cash basis adjusts the non-oil primary balance measured on accrual basis by subtracting the spending financed by arrears’ accumulation during that period, and adding the repayment of arrears from previous years.

Table 5.Iraq: Central Government Fiscal Accounts, 2013–22(In percent of Non-Oil GDP)
2013201420152016201720182019202020212022
Prog. 1/Est.Prog. 1/Rev. Prog.Proj. 1/Prog.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj.
Revenues and grants78.069.845.447.541.453.057.853.958.051.955.250.052.447.750.248.5
Revenues77.969.845.447.541.452.957.753.958.051.955.250.052.447.750.248.5
Oil71.465.941.241.835.245.951.446.950.745.047.843.144.840.842.440.5
Crude oil export revenues70.364.940.941.434.845.550.646.550.044.647.142.744.140.541.839.9
Transfers from oil-related public enterprises1.11.00.30.30.30.40.40.40.40.40.40.40.40.40.30.3
Tax on oil company profits0.00.00.00.20.30.30.30.30.30.3
Non-oil6.53.94.15.86.27.06.37.07.36.97.46.87.66.87.88.0
Tax revenues1.91.71.03.43.94.64.64.55.54.45.64.35.64.15.75.8
Non-tax revenues4.62.23.12.42.32.41.72.41.82.51.92.62.02.72.12.2
Expenditures88.779.663.859.662.863.765.862.165.554.557.749.853.146.049.245.6
Current expenditures56.546.741.247.645.646.649.047.049.440.543.137.339.534.336.133.0
Salary and pension27.826.930.233.431.130.933.528.630.826.328.223.925.721.723.421.2
Salary22.021.323.726.024.124.025.622.123.320.221.318.319.316.617.515.8
Pension5.85.66.57.46.96.97.96.57.56.06.95.66.45.15.95.4
Goods and services11.06.53.34.53.64.94.54.74.54.54.54.24.23.93.83.6
Transfers13.59.66.88.19.98.99.08.48.87.88.47.27.86.67.26.6
Social safety net5.15.13.24.54.64.54.44.34.54.04.43.74.13.43.83.5
Transfers to SOEs 2/1.31.01.71.62.01.31.61.21.51.11.41.01.30.91.21.1
Other transfers7.13.51.92.03.33.13.02.92.82.72.62.52.42.32.22.1
Interest payments0.70.50.91.61.01.91.91.81.82.01.92.01.92.01.81.6
War reparations 3/3.53.30.00.00.00.00.03.43.60.00.00.00.00.00.00.0
Investment expenditures32.132.922.611.917.217.016.815.116.113.914.712.513.511.713.112.6
Non-oil investment expenditures21.817.09.02.96.27.87.26.56.75.95.85.15.34.95.45.5
Oil investment expenditures10.315.913.69.111.09.29.78.69.48.08.87.48.26.87.77.1
IOCs8.38.37.88.27.38.06.87.56.37.05.86.56.0
National oil companies0.82.61.41.51.31.41.21.41.11.31.01.21.1
Fiscal balance−10.7−9.8−18.5−12.0−21.4−10.6−8.0−8.2−7.5−2.6−2.50.1−0.71.71.02.9
Statistical discrepancy−0.9−2.90.0
Financing11.612.718.412.021.410.68.08.27.52.62.5−0.10.7−1.7−10−2.9
External financing8.54.33.0−1.21.66.15.12.13.30.50.3−2.3−18−3.9−2.74.0
Budget Loans0.00.02.02.52.64.24.41.51.40.60.60.00.00.00.00.0
International Financial Institutions0.00.02.02.32.42.12.21.21.20.60.60.00.00.00.00.0
Bilateral0.00.00.00.20.20.50.60.20.20.00.00.00.00.00.00.0
Eurobond0.00.00.00.00.01.61.70.00.00.00.00.00.00.00.00.0
Project Loans0.00.00.21.71.72.83.21.83.21.51.60.70.70.60.60.5
Amortization−0.8−1.2−1.1−1.5−0.8−0.9−0.8−1.0−1.3−1.6−1.8−3.0−2.5−4.4−3.34.5
Assets held abroad9.3−0.10.00.00.00.00.00.00.00.00.00.00.00.00.00.0
SDR Holding0.00.01.50.00.00.00.00.00.00.00.00.00.00.00.00.0
Account payables0.05.3−3.4−0.1−0.20.00.1−0.10.10.00.00.00.00.00.00.0
Arrears0.00.43.8−3.8−1.70.0−1.80.0−0.10.0−0.10.00.00.00.00.0
Domestic financing3.18.415.413.219.84.53.01.30.31.70.72.12.62.21.71.1
Bank financing3.13.112.913.715.94.54.11.30.31.70.72.12.62.21.71.1
CBI2.92.37.29.112.43.73.21.20.21.10.71.01.40.90.40.1
Loans0.00.04.69.110.63.73.21.20.21.10.71.01.40.90.40.1
Deposits2.92.32.70.01.80.00.00.00.00.00.00.00.00.00.00.0
Commercial banks0.20.85.64.63.40.90.90.10.10.60.01.11.21.31.31.1
Loans0.20.85.60.00.00.60.60.10.10.60.01.11.21.31.31.1
Deposits0.00.00.04.63.40.30.30.00.00.00.00.00.00.00.00.0
Non-bank financing0.00.00.00.51.50.93.11.01.00.90.00.00.00.00.00.0
Account payables0.00.0−0.10.01.30.0−1.30.00.00.00.00.00.00.00.00.0
Arrears0.01.22.6−0.91.1−0.9−3.0−1.0−1.0−0.90.00.00.00.00.00.0
Financing gap: 4/0.00.00.00.00.00.00.04.83.90.41.50.00.00.00.00.0
Memorandum items:
Security-related expenditure (military and police equipment and salaries)11.011.110.711.911.711.612.410.711.39.810.48.99.48.18.57.7
Revenue from KRG6.00.07.37.77.27.36.96.86.66.46.26.05.9
Oil export revenue from KRG7.81.72.25.60.06.87.26.76.76.46.26.15.75.85.45.2
Non-oil tax revenue from KRG0.40.00.50.50.50.60.50.60.50.60.50.60.6
Transfer to KRG10.71.71.86.10.07.88.57.37.96.87.26.36.65.86.35.9
Current expenditures (percent of non-oil GDP)56.546.741.247.645.646.649.047.049.440.543.137.339.534.336.133.0
Non-oil primary expenditure, accrual basis (percent of non-oil GDP)74.160.049.348.950.752.554.248.250.744.547.040.443.037.239.836.9
Adjusted non-oil primary expenditure, accrual basis (excl. KRG, percent of non-oil GDP) 5/63.458.347.542.850.744.845.840.942.837.739.834.136.431433.530.9
Non-oil primary fiscal balance, accrual basis (percent of non-oil GDP)−67.6−56.145.143.1−44.645.447.841.243.4−37.6−39.6−33.6−35.4−30.4−32.0−28.9
Adjusted non-oil primary fiscal balance, accrual basis (excl. KRG, percent of non-oil GDP) 6/−56.8−54.4−43.3−37.444.6−38.2−39.9−34.4−36.1−31.2−32.9−27.8−29.4−25.0−26.4−23.6
Non-oil primary fiscal balance, cash basis (percent of non-oil GDP) 7/−67.6−54.8−41.944.643.346.3−52.042.2−44.5−38.5−39.7−33.6−35.4−30.4−32.0−28.9
Adjusted Non-oil primary fiscal balance, cash basis (excl. KRG, percent of non-oil GDP) 6/,7/−56.8−53.2−40.1−38.843.3−39.0−44.1−35.4−37.2−32.2−33.1−27.8−29.4−25.0−26.4−23.6
Gross public debt (percent of non-oil GDP)57.658.682.790.6101.194.3102.496.8103.892.899.485.593.077.185.276.0
CBI total financing of the budget deficit (percent of non-oil GDP)2.92.37.29.112.43.73.21.20.21.10.71.01.40.90.40.1
Non-oil GDP (ID trillion)148.0149.5139.8139.0134.1149.3141.8158.8150.8170.6162.0184.9175.5200.6190.3206.6
Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

For 2013–14, includes off-budget transfers to SOEs financed by Bank Rafidain.

Calculated as 5 percent of oil exports as per U.N. Security Council Resolution 1483 to finance war reparations to Kuwait.

Includes unindentified financing only.

Adjusted to exclude full year estimate of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government.

The non-oil primary fiscal balance on cash basis adjusts the non-oil primary balance measured on accrual basis by subtracting the spending financed by arrears ' accumulation during that period, and adding the repayment of arrears from previous years.

Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

For 2013–14, includes off-budget transfers to SOEs financed by Bank Rafidain.

Calculated as 5 percent of oil exports as per U.N. Security Council Resolution 1483 to finance war reparations to Kuwait.

Includes unindentified financing only.

Adjusted to exclude full year estimate of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government.

The non-oil primary fiscal balance on cash basis adjusts the non-oil primary balance measured on accrual basis by subtracting the spending financed by arrears ' accumulation during that period, and adding the repayment of arrears from previous years.

7. Total public debt increased to 67 percent of GDP in 2016 (Table 1). The sharp fall in oil prices since 2013, when Iraq exported oil for $103 per barrel, has also prompted a sharp increase in the public debt, from 31 percent of GDP in 2013 to 67 percent in 2016. The issuance of debt guarantees, mostly for electricity sector projects, accounted for 2.3 percent of GDP at the end of 2016 (¶15). The yield on Iraqi dollar bonds maturing in 2028 has declined from about 14 percent in February 2016 to 8.5 percent in early July 2017, supported by the implementation of fiscal adjustment under the SBA and the moderate recovery in oil prices. (Figure 4).

8. The fall in oil prices prompted an increase in the balance of payments’ deficit (Table 6). Despite the ongoing fiscal consolidation, the current account deficit widened to 8.7 percent of GDP in 2016 because of the 22 percent drop in oil prices. The current account deficit was financed by external official loans and the use of official foreign exchange reserves, which declined from $53.7 billion at end-2015 to $45.2 billion (6.7 months of imports of goods and services) at end-2016. Donor support committed by the G7 in Japan in May 2016 is on track. In December, the World Bank Board approved a $1.44 billion budget support loan, of which $0.37 billion was guaranteed by the U.K. and $0.07 billion by Canada. In January, the authorities issued a $1 billion bond guaranteed by the U.S. government yielding 2.15 percent. Japan disbursed a $0.27 billion budget support loan in March. The authorities are negotiating a $0.45 billion budget support loan with France, project loan disbursements with Germany and Italy, and a grant for humanitarian assistance with the European Union.

Table 6.Iraq: Balance of Payments, 2013–22(In billions of U.S. dollars; unless otherwise indicated)
2013201420152016201720182019202020212022
Prog. 1/Est.Prog. 1/Rev. Prog.Proj. 1/Prog.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj.
Trade balance23.225.6−0.2−1.3−3.1−0.81.43.73.75.33.67.04.88.06.18.5
(In percent of GDP)9.910.9−0.1−0.8−1.8−0.40.71.81.82.41.73.02.13.22.63.3
Exports89.892.956.549.250.057.962.463.064.964.965.167.566.569.768.371.2
Crude oil89.492.556.148.849.757.562.062.564.464.364.566.965.668.767.670.2
Other exports0.40.40.40.40.40.40.40.50.50.60.60.70.81.00.81.0
Imports−66.5−67.3−56.7−50.5−53.1−58.7−61.0−59.3−61.3−59.6−61.5−60.5−61.7−61.7−62.2−62.7
Private sector imports−45.2−47.2−41.6−37.7−38.7−41.0−42.5−41.2−42.6−41.5−42.8−42.1−43.0−43.3−43.4−43.7
Government imports−21.3−20.0−15.1−12.8−14.4−17.7−18.5−18.1−18.7−18.1−18.7−18.3−18.7−18.4−18.8−18.9
Services, net−14.7−15.3−10.7−10.4−11.3−12.3−13.1−11.4−12.3−11.1−11.9−10.3−10.6−10.0−9.8−9.1
Receipts3.34.16.36.35.96.56.57.17.27.77.88.89.19.710.010.7
Payments−18.0−19.4−16.9−16.8−17.2−18.8−19.6−18.6−19.5−18.8−19.7−19.1−19.7−19.7−19.8−19.8
Income, net−1.0−1.1−1.3−0.9−1.1−1.2−1.8−1.4−2.1−1.4−2.0−1.4−1.9−1.1−1.8−1.5
Transfers, net−4.9−3.20.50.80.61.21.2−3.7−3.00.91.60.20.50.20.50.5
Private, net0.20.10.40.50.40.40.40.30.50.30.50.20.50.20.50.5
Official, net−5.0−3.30.10.30.20.80.8−4.0−3.50.61.10.00.00.00.00.0
Current account2.76.1−11.6−11.9−14.9−13.1−12.3−12.9−13.6−6.3−8.7−4.4−7.2−2.9−5.0−1.5
(In percent of GDP)1.12.6−6.5−6.8−8.7−6.8−6.4−6.2−6.7−2.9−4.1−1.9−3.2−1.2−2.1−0.6
Capital account0.00.00.00.00.00.00.00.00.00.00.00.00.00.00.00.0
Financial account1.6−2.58.45.98.98.610.56.18.25.66.44.15.85.15.33.7
Direct and portfolio investment (net) 2/5.74.12.8−1.21.80.51.82.02.23.03.15.05.35.96.06.5
Other capital, net−4.1−6.55.67.17.18.18.74.16.02.63.3−0.90.5−0.8−0.7−2.9
Official, net1.4−2.1−4.44.04.17.68.12.64.41.01.3−2.6−1.6−3.2−2.9−5.4
Assets−2.8−3.5−6.10.00.00.00.00.00.00.00.00.00.00.00.00.0
Liabilities4.21.41.74.04.17.68.12.64.41.01.3−2.6−1.6−3.2−2.9−5.4
Disbursements 3/2.30.12.85.04.98.99.14.25.93.03.01.11.01.00.90.8
Amortization−1.0−1.5−1.1−1.0−0.9−1.3−1.0−1.6−1.5−2.0−1.8−3.7−2.6−4.2−3.8−6.2
Private, net−5.6−4.410.03.03.00.40.61.51.61.62.01.72.12.42.22.5
Errors and omissions−7.4−27.1−9.40.0−0.20.00.00.00.00.00.00.00.00.00.00.0
Overall balance−3.1−23.4−12.7−6.0−6.2−4.5−1.8−6.8−5.4−0.7−2.3−0.3−1.42.20.42.1
(In percent of GDP)−1.3−10.0−7.1−3.5−3.6−2.3−0.9−3.3−2.7−0.3−1.1−0.1−0.60.90.20.8
Financing3.123.412.76.06.24.51.80.30.40.10.20.31.4−2.2−0.4−2.1
Development Fund for Iraq (increase -) 4/11.85.6−1.70.00.60.00.00.00.00.00.00.00.00.00.00.0
Gross International Reserves (increase -)−8.511.914.610.77.94.53.80.40.60.81.11.82.6−0.41.1−0.5
Fund credit (repayment)−0.2−0.8−0.6−0.1−0.10.00.0−0.2−0.2−0.7−0.7−1.5−1.2−1.8−1.5−1.7
Change in arrears (negative = decrease)4.5−4.5−1.90.0−2.20.0−0.20.0−0.20.00.00.00.00.0
Change in payables (negative = decrease)6.7−4.1−0.2−0.30.00.10.00.10.00.00.00.00.00.00.0
Financing gap (increase -) 5/0.00.00.00.00.00.06.55.00.62.10.00.00.00.00.0
Memorandum items:
GIR (end of period) 6/77.866.753.743.045.238.541.438.140.837.339.735.537.135.936.036.5
(in months of imports of goods and services)10.810.99.26.76.75.96.25.86.05.65.95.25.45.25.25.3
GDP234.6234.7179.8173.8171.7192.4192.7206.2202.9218.3212.3233.3224.8248.7239.5256.2
Of which: Non-oil GDP126.9128.2119.9117.8113.6126.3120.0134.4127.6144.3137.0156.4148.4169.7161.0174.8
Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Includes planned issuances of Eurobonds in 2016–18.

Includes prospective disbursements from the IMF, WB and other donors in 2016–19.

Reflects the transfer of the Development Fund for Iraq from the Federal Reserve Bank of New York to the CBI in May 2014.

Includes unidentified financing only.

See Table 8, footnote 3, for coverage.

Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Includes planned issuances of Eurobonds in 2016–18.

Includes prospective disbursements from the IMF, WB and other donors in 2016–19.

Reflects the transfer of the Development Fund for Iraq from the Federal Reserve Bank of New York to the CBI in May 2014.

Includes unidentified financing only.

See Table 8, footnote 3, for coverage.

9. Iraq’s external position in 2016 was substantially weaker than suggested by fundamentals and desirable medium-term policies (Annex II). The real and nominal effective exchange rates for Iraq appreciated by about 8 percent in 2016. This is a continuation of the real appreciation trend that the Iraqi Dinar has experienced since 2013 and mirrors the appreciation of the U.S. dollar to which the dinar is pegged. The current account deficit was about 8 percent of GDP weaker than warranted by fundamentals and desirable policy settings; the gap is projected to close over the medium term as the programmed fiscal adjustment is implemented (Annex II). The spread between the official and parallel exchange rates for US$ decreased from 11 percent in December to about 6 percent in June 2017 as the Central Bank of Iraq (CBI) simplified the documentation requirements for access to its foreign exchange window (Figure 4).

10. Broad money grew by 7.2 percent during 2016 reflecting the pickup of overall economic activity on the back of increased oil production and continued borrowing by the government, mostly from the central bank, while credit to the economy grew by 1.9 percent (Tables 78).

Table 7.Iraq: Monetary Survey, 2013–22(In billions of Iraqi dinars, unless otherwise indicated)
2013201420152016Mar-17201720182019202020212022
Prog. 1/Est.Prog. 1/Est.Prog. 1/Rev. Prog.Proj. 1/Prog.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj.
Net foreign assets109,239100,54174,79057,65060,47356,09161,74152,97355,15653,13054,48052,87053,13251,45850,17951,96848,77349,453
Of which: CBI88,54474,64760,35046,41649,23343,86351,22941,10144,60840,58843,96739,62542,61037,47439,64937,98438,23438,905
Net domestic assets−19,860−9,8209,48230,88429,86132,90928,42939,91739,59446,42144,88154,18451,06762,29060,58471,08169,77178,857
Domestic claims−5,150−25817,20238,88436,45042,61736,51449,11747,67955,72152,96663,58459,15271,79068,66980,68177,85686,942
Net claims on general government−27,021−24,576−8,34011,32210,42714,33010,27319,38120,45322,98022,26427,53023,34931,49427,83735,93731,16233,529
Claims on general government11,85615,89228,40541,69840,78844,70640,78249,34150,39852,94052,20957,49053,29361,45457,78265,89761,10763,473
less: Liabilities to general government−38,876−40,468−36,746−30,376−30,361−30,376−30,509−29,960−29,945−29960−29,945−29,960−29,945−29,960−29,945−29,960−29,945−29,945
Claims on other sectors21,87124,31825,54327,56326,02328,28726,24129,73627,22632,74130,70236,05435,80340,29540,83244,74446,69353,413
Other Item Net (OIN)−14,710−9,562−7,720−8,000−6,589−9,708−8,085−9,200−8,085−9,300−8,085−9,400−8,085−9,500−8,085−9,600−8,085−8,085
Broad money89,37992,63884,27288,53490,33489,00090,17092,89094,75099,55199,361107,054104,199113,748110,764123,050118,544128,310
Currency outside banks34,99536,07134,85535,63342,06534,12140,22533,20141,83535,58143,29235,38845,40137,32747,94539,37650,64953,608
Transferable deposits43,34241,34834,65937,10333,46938,49035,25341,86436,69044,86638,87750,26540,77053,59943,55758,68647,07751,796
Other deposits11,04115,21814,75715,79814,80116,38914,69117,82516,22519,10317,19221,40218,02922,82219,26224,98720,81822,905
Memorandum items
Broad money (percentage growth)15.93.6−9.05.17.22.74.94.97.24.97.54.96.36.38.27.08.2
Broad money (in percent of GDP)32.733.940.243.244.639.640.841.640.841.441.541.541.241.741.941.942.4
M2 velocity (based on non-oil GDP)1.71.61.71.61.51.61.61.51.61.51.61.61.61.61.61.61.6
Credit to the economy (percentage growth)14.711.25.07.91.93.27.94.610.112.810.116.611.814.011.014.414.4
Credit to the economy (in percent of non-oil GDP)14.816.318.319.819.418.519.919.220.620.421.122.121.823.322.324.525.8
Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Table 8.Iraq: Central Bank Balance Sheet, 2013–22(In billions of Iraqi dinars, unless otherwise indicated)
2013201420152016Mar-17201720182019202020212022
Est.Prog. 1/Est.Prog. 1/Rev. Prog.Prog. 1/Rev. Prog.Proj. 1/Prog.Proj. 1/Rev. Proj.Proj. 1/Proj.Proj. 1/Rev. Proj.Proj.
Net foreign assets88,54474,64760,35046,41649,23343,86351,22941,10144,60840,58843,96739,62542,61037,47439,64937,98438,23438,905
Foreign assets92,31479,27363,73351,24353,81148,68955,96145,92849,28345,41448,54544,45147,28642,30144,22742,81042,90943,483
Official reserve assets90,74277,72063,37450,87653,45748,32355,60045,56248,93045,04848,19144,08546,93241,93443,87342,44442,55543,129
Gold1,9024,0383,6263,9163,9573,9944,2424,2294,2734,5684,6154,9334,9845,3285,3835,7545,8136,278
Other86,72372,54559,35745,70148,83743,06950,88040,07344,17439,22143,09437,89241,46635,34738,00835,43136,25936,368
SDR holdings and reserve position in the Fund2,1171,1363911,2604821,2604791,2604821,2604821,2604821,2604821,260482482
Other foreign assets1,5721,553360366354366361366354366354366354366354366354354
Foreign liabilities−3,771−4,626−3,384−4,826−4,578−4,826−4,732−4,826−4,675−4,826−4,578−4,826−4,675−4,826−4,578−4,826−4,675−4,578
Net domestic assets−15,265−10,311−2,43812,76312,78214,7529,29717,96218,69922,71021,54628,00826,09333,86432,90437,27138,41242,219
Domestic assets8646002,92117,81015,69119,53013,33323,30521,58825,20321,85327,10022,93828,99725,32630,89426,10626,298
Net claims on general government7515132,82617,71515,58319,43513,22823,21021,48025,10821,74527,00522,83028,90225,21830,80025,99826,190
Loans to central government2,7562,4562,3562,7292,3562,7292,3562,7292,3562,7292,3562,7292,3562,7292,3562,7292,3562,356
Holdings of discounted treasury bills0316,22518,84717,17920,57217,17924,34721,71026,24521,97528,14223,06030,03925,44831,93726,22826,420
Domestic currency deposits−1,895−1,107−1,522−1,066−451−1,066−1,629−1,066−451−1,066−451−1,066−451−1,066−451−1,066−451−451
Foreign currency deposits−109−867−4,232−2,796−3,501−2,800−4,676−2,800−2,135−2,800−2,135−2,800−2,135−2,800−2,135−2,800−2,135−2,135
Monetary policy instruments 2/−10,797−6,567−6,455−6,759−6,704−6,490−7,203−7,055−6,683−4,204−4,102−804−6403,1553,7834,6648,51112,126
Other items net−5,331−4,3431,0961,7123,7951,7123,1681,7123,7951,7123,7951,7123,7951,7123,7951,7123,7953,795
Reserve money73,25966,23157,88859,17962,01558,61560,49759,06363,30763,29865,51367,63368,70371,33872,55375,25576,64581,124
Currency in circulation40,63039,88438,58542,54845,23241,68744,11841,41446,29745,00748,02948,18750,81051,17954,05754,00857,38760,845
Bank reserves32,62926,34719,30216,63116,78316,92816,37917,64917,01118,29117,48419,44617,89320,15918,49621,24719,25820,279
Other liquid liabilities2022240030
Memorandum items
Reserve money (annual growth, in percent)12.6−9.6−12.62.27.12.6−0.22.17.23.56.84.95.55.65.55.65.8
Currency in circulation (annual growth, in percent)14.43.1−3.310.317.28.5−2.72.48.73.77.15.86.26.45.56.26.0
Gross foreign exchange assets (in millions of U.S. dollars) 3/77,82366,65553,70743,04345,22640,88247,03938,54641,39638,11240,77137,29739,70535,47837,11735,90936,00336,488
Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

This mainly represents the ID standing overnight facilities, US$ deposits of commercial banks, domestic currency deposits, and CBI bills.

Starting 2014 reflects the balances of the Development Fund of Iraq were moved from the Federal Reserve Bank of New York to the CBI as a $ account ($ balances from oil revenues) in May 2014. Starting Q3 2015, SDRs and reserve position in the Fund are excluded from the definition per instruction from the Central Bank of Iraq. SDR and reserve position and all transactions with the Fund were reported on balance sheet in June 2016 temporarily and the issue is under review.

Sources: Iraqi authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

This mainly represents the ID standing overnight facilities, US$ deposits of commercial banks, domestic currency deposits, and CBI bills.

Starting 2014 reflects the balances of the Development Fund of Iraq were moved from the Federal Reserve Bank of New York to the CBI as a $ account ($ balances from oil revenues) in May 2014. Starting Q3 2015, SDRs and reserve position in the Fund are excluded from the definition per instruction from the Central Bank of Iraq. SDR and reserve position and all transactions with the Fund were reported on balance sheet in June 2016 temporarily and the issue is under review.

11. The banking sector needs repair. As with the rest of the economy, state dominance and inefficiency of the banking sector is evident as the two largest banks, Rafidain and Rasheed (R&R), which together hold about 71 percent of banks’ deposits (86 percent held by the seven state-owned banks) and extend 54 percent of credit (80 percent extended by the seven state-owned banks) and for which recent accounts audited per international standards are lacking, are most likely severely undercapitalized. State-owned banks, which dominate the banking sector, are capital deficient and weaknesses remain in their loan portfolio. Non-performing loans are high across public and private sector banks and on the rise (Table 13). The current fiscal and balance of payment crisis is increasing the exposure of R&R to sovereign risk. Financial depth remains much lower than in other economies (Figure 3). Iraq is still monitored by the Financial Action Task Force (FATF) due to serious shortcomings in its AML/CFT regime, and is at risk of being blacklisted absent sufficient progress, which would affect correspondent banking relationships.

Table 9.Iraq: Schedule of Reviews and Purchases Under the Stand-By Arrangement, 2016–19
Amount of PurchaseAvailability DateConditions
Millions of SDRPercent of QuotaMillions of USD
455.027.3636.2On or after June 29, 2016Executive Board approval of the SBA arrangement.
455.027.3636.2On or after September 15, 2016Observance of the continuous and end-June 2016 performance criteria, and completion of the first review under the arrangement.1/
584.235.1790.5On or after April 15, 2017Observance of the continuous and end-December 2016 performance criteria, and completion of the second review under the arrangement.2/
584.235.1790.5On or after October 15, 2017Observance of the continuous and end-June 2017 performance criteria, and completion of the third review under the arrangement.
584.235.1789.5On or after April 15, 2018Observance of the continuous and end-December 2017 performance criteria, and completion of the fourth review under the arrangement.
584.235.1789.5On or after October 15, 2018Observance of the continuous and end-June 2018 performance criteria, and completion of the fifth review under the arrangement.
584.235.1789.6On or after April 15, 2019Observance of the continuous and end-December 2018 performance criteria, and completion of the sixth review under the arrangement.
3,831.0230.35,221.9Total under the SBA arrangement
Source: Fund staff estimates.

Because of delay, first review was completed based on end-September 2016 performance criteria.

Because of delay, it is proposed to complete the second review based on end-June 2017 performance criteria.

Source: Fund staff estimates.

Because of delay, first review was completed based on end-September 2016 performance criteria.

Because of delay, it is proposed to complete the second review based on end-June 2017 performance criteria.

Table 10.Iraq: Indicators of Fund Credit, 2015–22(In millions of SDRs; unless otherwise indicated)
20152016201720182019202020212022
Disbursements of Fund credit (SBA and RFI)89191011681168584000
SBA, 200900000000
In percent of IMF quota (old)00000000
RFI, 20158910000000
In percent of IMF quota (old)750000000
SBA, 2016091011681168584000
In percent of IMF quota (current)055707035000
Obligations (SBA and RFI)432472517659393611751271
SBA, 2009 (total)42737000000
Repayments of SBA 1/42337000000
Total charges and interest30000000
RFI, 2015 (total)571012145333711
Repayments of RFI 1/00011144633400
Total charges and interest5710107211
SBA, 2016 (total)02155514059911751270
Repayments of SBA 1/00005752811281241
Total charges and interest02155583714629
In percent of IMF quota (current)0138367176
Total obligations, in percent of:
Exports of goods and services10001222
External public debt10001222
Gross reserves10012345
GDP00000111
IMF Quota (old)364215507999107
IMF Quota (current)311136567176
Outstanding Fund credit (SBA and RFI)928180129704027410832462118876
SBA, 2009370000000
RFI, 2015891891891780334000
SBA, 201691020783247377432462118876
Total outstanding Fund credit, in percent of
Exports of goods and services13589742
External public debt24577542
Gross reserves261013141283
GDP11233210
IMF Quota (old)7815225033934627317874
IMF Quota (current)10817824224719512753
Sources: IMF staff estimates and projections.

The SBA and RFI repayments are based on scheduled debt service obligations.

Sources: IMF staff estimates and projections.

The SBA and RFI repayments are based on scheduled debt service obligations.

Table 11.Iraq: Total Financing Requirements and Sources, 2016–19(In billions of U.S. dollars)
2016201720182019
1. Total financing requirements−24.3−9.6−9.6−3.4
2. Total available financing24.39.64.61.4
Domestic22.53.50.40.9
T-bills and bonds12.68.11.60.9
o/w CBI purchases12.13.80.30.9
Other 1/9.9−4.6−1.20.0
External1.86.14.20.5
Budget loans2.95.31.80.8
International Financial Institutions2.72.61.60.8
International Monetary Fund (SBA)1.31.61.60.8
World Bank1.01.00.00.0
Canada, UK0.40.00.00.0
Bilateral0.20.70.20.0
Japan0.20.30.20.0
France0.00.50.00.0
Eurobond (with and without U.S. Guarantee)0.02.00.00.0
Project loans 2/2.03.84.12.3
U.S.1.30.90.00.0
Other0.62.94.12.3
Other 3/−3.1−3.0−1.7−2.6
3. Financing gap0.00.05.02.1
Memorandum Items:
Gross International Reserves
Billions of U.S. dollars45.241.440.839.7
Months of imports6.76.26.05.9
Exchange rate, average1180118211821182
Source: IMF staff estimates and projections.

Includes commercial bank loans, drawdown of deposits, amortization, and arrears.

Includes Italian, German, and other project loans.

Includes amortization, accounts payable and arrears.

Source: IMF staff estimates and projections.

Includes commercial bank loans, drawdown of deposits, amortization, and arrears.

Includes Italian, German, and other project loans.

Includes amortization, accounts payable and arrears.

Table 12.Iraq: Reserve Adequacy Indicators, 2014–22
201420152016201720182019202020212022
Prog. 1/Est.Prog. 1/Rev. Prog.Proj. 1/Prog.Proj. 1/Rev. Proj.Proj. 1/Rev. Proj.Proj.Proj.
Reserves in USD billion 2/66.753.743.045.238.541.438.140.837.339.735.537.136.036.5
Reserves in months of imports of goods and services10.99.26.76.75.96.25.86.05.65.95.25.45.25.3
Reserves in percent of external debt service coming due3,5333,6069342,4546961,4095871,047419767376566400405
Reserves in percent of reserve money117.3108.285.886.177.177.371.273.665.268.358.860.555.553.2
Reserves in percent of broad money83.974.357.459.149.051.645.348.541.245.036.939.635.933.6
Reserves in percent of the IMF RA metric 3/4/217203160173137148129141119133109119112110
Reserves in percent of the augmented IMF RA metric 5/142173119120112110104113951039796
Sources: Iraq authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Starting 2014 includes US$ account balances from oil revenues.

Reserves within 100–150 percent of the Reserve Adequacy (RA) metric are considered adequate. The RA metric is a weighted sum of export revenues, broad money, short term debt and the stock of other liabilities.

The stock of other liabilities is held constant at its 2012 level due to the unavailability of international investment position data for Iraq in subsequent years. This may introduce inaccuracies especially in outer years.

Reserves within 100–150 percent of the augmented RA metric are considered adequate. The augmented RA metric adds a term to account for the possibility of lower than projected oil prices.

Sources: Iraq authorities; and Fund staff estimates and projections.

IMF Country Report No. 16/379. Iraq: Staff Report for the First Review of the Three-Year Stand-By Arrangement.

Starting 2014 includes US$ account balances from oil revenues.

Reserves within 100–150 percent of the Reserve Adequacy (RA) metric are considered adequate. The RA metric is a weighted sum of export revenues, broad money, short term debt and the stock of other liabilities.

The stock of other liabilities is held constant at its 2012 level due to the unavailability of international investment position data for Iraq in subsequent years. This may introduce inaccuracies especially in outer years.

Reserves within 100–150 percent of the augmented RA metric are considered adequate. The augmented RA metric adds a term to account for the possibility of lower than projected oil prices.

Table 13.Iraq: Financial Soundness Indicators, 2015–161/(In percent)
2015Q32015Q42016Q12016Q22016Q32016Q4
State-owned Commercial Banks 2/
Regulatory Tier 1 capital to risk-weighted assets 3/6.36.27.98.06.419.6
Regulatory Tier 1 capital to (non-risk weighted) assets1.91.91.92.02.02.0
Nonperforming loans net of provisions to capital14.118.023.226.525.617.3
Nonperforming loans to total gross loans7.48.110.110.19.910.0
Return on assets0.30.40.30.30.30.4
Liquid assets to short-term liabilities76.776.575.576.576.075.8
Net open foreign exchange position to capital−76.2−70.8−73.6−65.2−58.8−51.5
Private Commercial Banks 4/
Regulatory Tier 1 capital to risk-weighted assets65.558.466.172.174.893.5
Regulatory Tier 1 capital to (non-risk weighted) assets42.142.243.744.245.848.5
Nonperforming loans net of provisions to capital0.72.87.98.49.99.1
Nonperforming loans to total gross loans7.511.219.520.624.423.7
Return on assets3.62.41.31.71.31.6
Liquid assets to short-term liabilities74.479.391.990.393.0101.5
Net open foreign exchange position to capital10.210.27.49.98.311.4
Source: Central Bank of Iraq.

FSIs are compiled following an STA technical assistance mission in March 2017. Work is underway to check and improve data quality.

Six state banks are included.

The increase in the ratio in Q4 2016 is explained by a significant drop of risk-weighted asset.

Thirty-three private banks are included.

Source: Central Bank of Iraq.

FSIs are compiled following an STA technical assistance mission in March 2017. Work is underway to check and improve data quality.

Six state banks are included.

The increase in the ratio in Q4 2016 is explained by a significant drop of risk-weighted asset.

Thirty-three private banks are included.

Box 1.Implementation of Key Recommendations from 2015 Article IV Consultation

RecommendationStatus
Maintain the exchange rate peg and step up the liberalization of the foreign exchange marketMostly done. The authorities have removed most exchange rate restrictions subject to Article VIII, Section 2 (a).
Ensure fiscal sustainability, rebuild fiscal buffers to address volatility in oil revenues, and alter the composition of spending by cutting current spending while protecting social spendingOngoing. The authorities have embarked on a fiscal consolidation path under the three-year Stand-by Arrangement (SBA) with the aim of attaining debt sustainability and external stability. However, the brunt of the adjustment has been achieved so far through cuts in non-oil investment while maintaining wages and pensions to preserve social stability.
Accelerate diversification of government revenues through non-oil tax instrumentsLimited progress. The government expanded the flat tax rate on wages and salaries. A technical assistance mission by the IMF Fiscal Affairs Department conducted a diagnostic to design and implement a strategy to raise non-oil tax revenue in February 2017.
Strengthen public financial management (PFM)Ongoing. The authorities have committed to several measures to strengthen public financial management under the SBA. They have made progress on fiscal reporting per GFSM standards, have conducted surveys of arrears, and have taken steps to strengthen commitment control to prevent accumulation of new arrears.
Press ahead with restructuring of Rasheed and Rafidain banksOngoing. An external audit of the financial statements of these banks is expected by end-August 2017.
Bring AML/CFT and anti-corruption frameworks in line with international standardsOngoing. Under the SBA the authorities are implementing measures to strengthen the AML/CFT and anti-corruption legislation per international standards.
Accelerate structural reform to promote private sector growthLimited progress. Private sector growth prospects are also hampered by the security situation.
Sources: IMF staff; and Iraqi authorities.
Sources: IMF staff; and Iraqi authorities.

C. Outlook and Risks

12. The fiscal and the external positions will remain sustainable if the authorities implement the fiscal consolidation planned under the SBA (Text Table 1 and Tables 18).

  • Oil production is expected to contract by 1.5 percent in 2017 owing to the OPEC+ agreement to reduce oil production until the first quarter of 2018, to bounce back by 3.4 percent in 2018, and to increase by 1 percent a year thereafter. Putting oil production and export on a steeper upward trend would require significantly higher oil investment that the authorities cannot finance with the present oil price outlook.

  • Iraqi oil export prices7 are expected to recover to about $45 per barrel in 2017 and then to slightly increase to about $47 per barrel by 2022, in sync with benchmark international oil prices.

  • The non-oil primary balance is projected to decline gradually to the level aligned with sustained public spending under the permanent income hypothesis (PIH; −35 percent of non-oil GDP; Box 2) by roughly flat public spending in nominal terms over the next five years and some increase in non-oil revenue. The public debt will peak at 65 percent of GDP in 2018.

  • Non-oil growth is projected to gradually return to half of its pre-2014 trend in the medium term, as progress is made in the war against ISIS. Inflation is projected to remain around 2 percent.

Box 2.Non-Oil Primary Balance Achieving the PIH Level1

Iraq’s oil dependence has induced a high volatility in public expenditure and the non-oil economy. Making up more than 90 percent of total government revenues and contributing to the bulk of foreign currency reserves, oil exports in Iraq dominate macroeconomic developments. The government’s expenditure entirely depends on it, and has moved in line with oil revenue. Between 2004 and 2013, public expenditure almost tripled in nominal terms, as oil revenue grew. Since end-2013, oil prices have fallen 50 percent, reducing government revenue by 42 percent and prompting a reduction in expenditure by 47 percent.

A prudent medium-term fiscal framework anchored on the Permanent Income Hypothesis (PIH), with a focus on the non-oil primary balance, can reduce expenditure volatility, ensure fiscal sustainability and achieve inter-generational equity. Under the PIH, the government runs a fiscal policy with the specific aim of smoothing the consumption of oil revenue between present and future generations and shielding public expenditure from the volatility of oil prices. More specifically, fiscal policy is anchored on keeping the non-oil primary balance (NOPB, the difference between non-oil revenue and non-oil expenditure excluding interest payments) at a level that would permit the accumulation of sufficient savings during the exploitation of oil resources such that the financial yield from the savings could finance a constant level of expenditures after oil resources are exhausted.2

Calibration of the PIH for Iraq over the next 35 years yields a NOPB of about −35 percent of non-oil GDP, a level achievable by 2020 if the fiscal consolidation the under the SBA is implemented. Under the baseline scenario, and assuming fiscal consolidation remains on track, the NOPB (-44 percent of non-oil GDP in 2016) is estimated to initially increase in 2017 before embarking on a gradual declining trend over the medium-term to a projected −35 percent of non-oil GDP by 2020 (see figure). Since Iraq’s oil resources are not expected to be depleted before another 100 years or more,3 it can be argued that the NOPB achieving the PIH is much lower than the one calculated over a 35-year horizon. Considering the many uncertainties about the future of the oil industry, the latter is nonetheless a conservative and useful anchor.

Iraq: Assumptions Underlying Calculations of the Sustainable NOPB Under the PIH(In percent, unless otherwise noted)
Real non-oil GDP growth5.0
Nominal non-oil GDP growth7.1
Inflation2.0
Real interest rate3.0
Nominal interest rate5.1
Real GDP growth4.0
Non-oil revenue, excluding grants (percent of non-resource GDP)6.3
Length of annuity (years)35
Oil Price: L-term increase (percent, 2024–50)2.0
Oil export volume (mbpd, plateau level)6.5

Iraq: PIH-Sustainable NOPB and Projected NOPB

(In percent of non-oil GDP)

Source: Iraqi authorities and IMF staff calculations.

1 Prepared by Amgad Hegazy.2 Consumption out of oil wealth is maintained constant relative to non-oil GDP. Oil exports are used to calculate the annuity.3 Per OPEC’s Annual Statistical Bulletin (2016), Iraq’s proven crude oil reserves are estimated at 142,503 million barrels, and with average crude oil production levels of 3.7 mbpd, the oil reserve horizon is estimated at 105 years.
  • The fiscal consolidation and the pickup in oil revenue are expected to almost eliminate the current account deficit by 2022. The current account deficit will be financed mostly by official loans support catalyzed by the SBA and the use of gross international reserves that will bottom out at $36.0 billion (5.2 months of imports of goods and services) in 2021 (Table 12).

  • There is a financing gap of $7.1 billion (same as the 1st Review SR), of which $5 billion is in the last quarter of 2018 and $2.1 billion in 2019. Financing assurances for the 2018 financing gap need to be identified before the completion of the 3rd SBA review, scheduled in December 2017 (Table 9). The authorities have approached the Kuwaiti authorities to request a (third) postponement of the war reparation payment of $4.6 billion due in 2018. They will approach other donors (including China, U.S., other G7, and Iran) in the coming months.

  • Broad money should grow at about the same pace as non-oil GDP, as the expansionary impact of budget financing will be compensated by the contractionary impact of the gross international reserves drawdown. The programmed fiscal consolidation should leave room for growth of credit to the economy to increase to 14 percent per year over the medium term.

13. Provided the recommended fiscal adjustment is implemented, public debt is projected to remain sustainable over the medium run (Annex III). Under the oil price outlook, public debt would peak at 65 percent of GDP in 2018 declining to 52 percent of GDP in 2022. The implementation of fiscal adjustment plans and the gross financing needs remain sensitive to macro shocks and oil price prospects. The risks are partly mitigated by the fact that one third of the gross financing needs is rollover of short-term debt by state-owned banks that will be getting credit from the central bank, which limits the risk of non-rollover. Risks are also reduced by the fact that a bit more than one third of the total debt (two thirds of the external debt) consists of legacy arrears still to be restructured on Paris Club terms.8

14. This outlook is subject mainly to downside risks (Annex I). Setbacks in security, or pre-electoral weaknesses in spending discipline could weaken growth, public finances and/or the balance of payments. A decline in oil revenue or a shortfall in projected financing would widen the financing gap in 2018–19. Moreover, the projections do not include spending for reconstruction in areas liberated from ISIS, which has not yet been assessed and will require additional donor support.9 On the other hand, every sustained increase in oil prices by $1 per barrel would increase annual oil revenue by $1.4–1.5 billion (Text Table 1).

D. Performance Under the Stand-By Arrangement

15. Program performance has been frail but understandings on sufficient corrective actions have been reached to keep the program on track (Memorandum of Economic and Financial Policies—MEFP, Tables 12 and ¶¶16–19). As the review is being conducted after the end-June 2017 test date, the end-June 2017 performance criteria (PCs) have become the controlling PCs for the second SBA review. However, since information on end-June 2017 PCs is limited at this stage, end-December 2016 data are the basis for staff’s assessment:

  • Based on preliminary information, it appears that the PC on obligations outstanding to international oil companies (IOCs) for more than three months at end-June 2017 will not be met because the authorities are facing technical obstacles (explained below) preventing them from reducing these to zero.10 Therefore the authorities request a waiver for the non-observance of this PC (¶¶35, and MEFP, ¶¶16 and 46).

  • There is no clear evidence that the other quantitative end-June PCs will not be met. Since information to fully assess these PCs is not available, the authorities request waivers of applicability for them.

  • The continuous ceiling on new external arrears was missed because the authorities accumulated $2.5 million of temporary arrears on external debt for a couple of weeks in early 2017 and $157 million for a several days at the beginning of July 2017 because of recurring organizational problems at the Ministry of Finance. The government will expedite the implementation of the Cash Flow Management Unit and Cash Flow Management Committee at the Ministry of Finance to solve the organizational problems that led to these payment delays (MEFP, ¶¶16 and 38). As this deviation was temporary and the arrears were settled within, respectively, weeks and days, and considering the measures taken to improve cash management, the government requests a waiver for the non-observance of this PC.

  • The application of relevant adjustors (for non-implementation of the budget sharing agreement with KRG and shortfalls in arrears repayments) meant that the related performance criteria (PCs) at end-December 2016 were missed:

    • The non-oil primary deficit on a cash basis,11 excluding transfers to the KRG, was ID 4.1 trillion (4.5 percent of non-oil GDP) higher than programmed.

    • The floor on gross international reserves and the ceiling on net domestic assets were missed after application of adjustors for payment of external arrears to international oil companies (IOCs) and other external creditors by, respectively, $1.4 billion and ID 2.1 trillion. This mainly reflected higher than programmed imports, including security-related equipment.

    • The ceiling on total public debt was missed by ID 5.0 trillion because the budget deficit was higher than programmed and the authorities issued debt guarantees in an amount of ID 4.8 trillion ($4.0 billion; see below) for investment in the electricity sector, military purchases, direct lending by state-owned banks for private sector infrastructure and agriculture projects, and repair of the Mosul dam.

    • Obligations to IOCs outstanding for more than three months continued to be reduced significantly, but not as rapidly as envisaged because of cash constraints. The program ceiling of zero by end-2016 was missed, but these obligations were further reduced from $2.1 billion in September to $1.2 billion in December 2016 and $0.5 billion in March 2017. Since IOCs are paid in kind, i.e. oil, the minimal size of oil shipments is one million barrels, and the size of the quarterly bills to several IOCs is less than the value of one million barrels at the projected oil prices, it will be difficult to reduce the obligations to IOCs due for more than three months below $500 million. Therefore, the authorities request to increase the level of that ceiling to $500 million starting in September 2017 (MEFP, ¶16).

  • One out of two indicative targets (ITs) at end-December 2016 was met. Social spending exceeded its floor by a significant margin (10 percent). However, the stock of outstanding domestic arrears on non-oil investment exceeded its ceiling (by 5 percent) because the survey of arrears (see below) identified additional unpaid bills.

  • Three of the ITs at end-March 2017 for which information is available were met.

  • Most structural benchmarks (SB) for the second review have been met and others are in progress:

    • The authorities have completed the long-awaited inventory of arrears: at end-December 2016, the Ministry of Finance identified arrears in an amount of ID 11.1 trillion ($9.4 billion, or 5.5 percent of GDP), out of which ID 7.5 trillion are owed to domestic creditors and ID 3.6 trillion ($3.0 billion) to foreign creditors.12 Such arrears were accumulated during 2014-16 when oil prices collapsed, oil revenue was much lower than budgeted, and the Ministry of Finance did not have the tools to monitor expenditure commitments by line ministries. The latter is being fixed with one prior action and two SBs requiring spending units to report expenditure commitments enabling the Ministry of Finance to monitor them (MEFP, Table 2).

    • The Board of Supreme Audit (BSA) has audited all the arrears on non-oil investment identified so far by the Ministry of Planning and all the arrears on wheat and rice purchases identified by the Ministry of Trade. Out of ID 4.7 trillion of non-oil investment domestic arrears, the BSA has validated claims worth ID 1.4 trillion, and, out of ID 2.5 trillion of arrears on wheat and rice purchases, it has validated ID 2.0 trillion.

    • The Debt Directorate of the Ministry of Finance completed a survey of all guarantees issued by the central government. At end-April 2017, the value of the 11 state guarantees on foreign currency-denominated service payments or debt amounted to $36.0 billion (ID 42.6 trillion, or 21 percent of GDP), out of which $32.4 billion are guarantees of service payments to independent power producers (IPPs) in the electricity sector for the full length of the contracts (about 14 years) and $3.6 billion are debt guarantees. In addition, the value of the guarantee of one local currency-denominated debt amounted to ID 0.5 trillion. Council of Minister’s approval of procedures for approval of state guarantees is a prior action (MEFP, Table 2 and ¶38).

    • The authorities had the CBI’s gross international reserves and net domestic assets and the public debt at end-December 2016 audited by an external auditor.

    • The Minister of Finance sent a circular elaborated with the Ministry of Planning and the BSA requiring all spending units to record all existing commitments on current and capital expenditures.

    • The Ministry of Finance posted the financial statements of the Development Fund for Iraq and Successor Account on December 31, 2015 audited per international standards on its external website.

    • Three SBs that concern the CBI should be met soon: the adoption of a new charter for the Audit Committee prohibiting CBI executive representation on the committee; the introduction to Parliament of amendments to the Law on the CBI to strengthen its governance and internal control framework; and the removal of the limitation on transfer of investment proceeds that gives rise to an exchange restriction.

    • Two SBs are more time consuming to implement than anticipated and the authorities propose to postpone them to future reviews: the Council of Minister’s approval of draft amendments to the 2011 law establishing the Integrity Commission to strengthen its governance, accountability, oversight, and independence (postponed to the third review); and a report of all current and investment commitments (postponed to the fourth review), for which the spending units need training that the IMF Middle East Technical Assistance Center (METAC) will provide.

Economic Policies to Address the Crisis

A. Managing External Pressures

16. The peg to the U.S. dollar has provided a key nominal anchor in a highly uncertain environment with policy capacity weakened by the conflict with ISIS. Per the latest External Sector Assessment, the current account deficit was about 8 percent of GDP weaker than warranted by fundamentals and desirable policy settings but that gap is projected to close over the medium term as the programmed fiscal adjustment is implemented (¶9). However, the persisting, though narrowing, spread between the official and parallel market exchange rates creates profit opportunities for banks that crowd out credit to the economy.

Staff’s advice

17. Maintain the peg with the U.S. dollar. Accommodating external shocks through more exchange rate flexibility is not advisable. While devaluation could aid fiscal adjustment—provided the government could resist subsequent pressures to raise wages and other budget allocations in dinar terms—it would risk exacerbating social tensions as it would trigger a spike in inflation since most food and consumer items are imported. Moreover, devaluation would have little impact on exports, which are almost exclusively oil and oil-related products. Therefore, fiscal consolidation is the most appropriate tool to manage external pressure.

18. Simplify procedures to allocate foreign exchange. While, over the past years, authorities have introduced more documentation requirements for access to the CBI foreign exchange window mentioning concerns about anti-money laundering and countering the financing of terrorism (AML/CFT), these measures have generated sizable parallel market premium that has fueled speculative activity among banks and money exchange operators (¶9). Simplifying these procedures, while properly implementing the AML/CFT standards, and gradually eliminating the remaining exchange restriction to move towards acceptance of the obligations under Article VIII of the IMF’s Articles of Agreement would help reduce the spread between the official and parallel market exchange rates.

Authorities’ views

19. The authorities agreed with staff’s advice. They agreed that fiscal consolidation was the preferred way to address the balance of payment crisis. They also pointed to the numerous measures that the CBI has been taking to simplify access to its foreign exchange window over the past year and their positive impact on the spread between the official and parallel market exchange rates (MEFP, ¶25; and SB, MEFP, Table 2). They requested additional technical assistance from the Fund’s Legal and Monetary and Capital Markets departments to further reduce the spread.

B. Implementing Fiscal Consolidation to Achieve Debt Sustainability

Staff’s advice

20. The government needs to continue to implement fiscal adjustment to bring spending to a sustainable level given the much lower level of oil revenue (than in 2013–14). It will also bring the non-oil primary balance closer to the level aligned with sustainable public spending under the permanent income hypothesis (Box 2).

21. For 2017, Parliament should approve a supplementary budget that will keep the non-oil primary balance on an accrual basis at first review level (prior action, MEFP, Table 2), thereby keeping the fiscal consolidation on track. Grounding the 2017 revised program in a supplementary budget should increase the leverage of the Ministry of Finance with line ministries to keep the non-oil primary balance within the program target. That should help prevent a recurrence of the slippage experienced in 2016, when tighter-than-budgeted allocations were undertaken based on a budget execution report rather than a supplementary budget. To mitigate the risk this time, Parliamentary approval of the supplementary budget is a prior action. The supplementary budget is expected to:

  • Implement a new tax on internet services, which should yield ID 0.2 trillion in 2017.

  • Reshuffle the composition of spending, with cuts in transfers (ID 0.6 trillion), non-oil investment (ID 1.5 trillion), and goods and services (ID 0.9 trillion) needed to compensate the upwards revision of pensions (ID 0.9 trillion) and wages (ID 0.5 trillion) and the downward revision of non-oil revenue (ID 1.6 trillion) considering the outcome in 2016 (¶6) and the approval of a lower tax rate on wages and pensions (3.8 percent) in the 2017 budget adopted by Parliament than the one proposed by the government (4.8 percent). The guidelines for implementing the supplementary budget will include a list of all projects by ministry that will comprise the total for non-oil investment in 2017. In addition, the Ministry of Planning will be tasked with monthly monitoring of non-oil investment execution.

  • Increase credits for the payment of arrears to ID 7.4 trillion, out of which ID 3.2 trillion will be for arrears to IOCs and other foreign suppliers, and ID 4.2 trillion for arrears on mostly non-oil investment and agricultural supply to domestic suppliers validated by the Board of Supreme Audit (¶15).

  • Update the level of oil prices ($45.3 rather than $42.0 per barrel) and decrease the amount of indirect monetary financing of the budget by the Central Bank of Iraq from ID 5.5 trillion to ID 4.5 trillion.

  • Increase the $500 million ceiling on state guarantees to $688 million, based on the existence of underlying projects in the electricity sector. In the meantime, commit to keep the value of guarantees contracted in 2017 below $500 million until Parliament approves a new ceiling in the supplementary budget. The government will also inform Parliament about the amount of service payment and debt guarantees contracted by the government (¶15).

Text Table 2.Iraq: Proposed List of Fiscal Policy Measures in 2017–18
20172018
ID trillionPercent of non-oil GDPID trillionPercent of non-oil GDP
Revenue measures:0.20.11.00.6
Raise indirect taxes on internet services (usage); five-months impact0.20.10.50.3
Raise indirect taxes on few goods or services, e.g. telecom, hotel services, private vehicles, sugar-sweetened drinks, cigarettes and tobacco, alcoholic beverages, etc.0.50.3
Expenditure measures (+ = saving):1.51.12.11.4
Increase allocations for wages and salaries−0.5−0.4
Increase allocations for pensions−0.9−0.7
Reduce allocations for transfers0.60.4
Reduce allocations for goods and services0.90.6
Reduce allocations for non-oil investment1.51.1
Reduce budgetary transfers to the electricity sector (e.g. through improving tariff revenue collection, raising tariff rates, or other means)1.00.7
Cap non-wage remuneration (allowances and supplements, etc.) at ID 350,000 a month for all civilian civil servants0.50.4
Replace one in five retiring civil servants (natural attrition)0.60.4
Net impact of proposed set of measures1.71.23.12.1
Source: IMF Staff estimates.
Source: IMF Staff estimates.

22. Staff considers that the program’s unchanged nominal non-oil primary balance anchor for the 2017 budget to be appropriate in striking the balance between consolidation needs and the recent decline in economic activity (Tables 35). The sharp contraction in non-oil GDP means that the program nominal anchor for 2017 would corresponds to a 2 percent of non-oil GDP relaxation in the deficit target, which is appropriate considering the weak economic activity and uncertainty surrounding the national accounts (non-oil GDP). Because of this change, the total fiscal adjustment under the program remains ambitious at the top tenth percentile, but less so than originally envisaged (based on earlier projections for non-oil GDP). The combination of lower oil windfall in 2016 and the higher non-oil primary deficits (in percent of non-oil GDP) result in public debt peaking slightly at 67 percent of GDP in 2016.

23. For 2018, the authorities should prepare measures to reduce the non-oil primary deficit on an accrual basis by ID 2.3 trillion and tilt the fiscal consolidation towards non-oil revenue and current expenditure. Mobilizing non-oil revenue and reining in current expenditure will create fiscal pace for growth-enhancing investment expenditure. The authorities should start preparing the following measures, for finalization during the third review, in time for inclusion in the 2018 budget:

  • Levy low ad-valorem or specific taxes on a few additional products or services (proposed SB, MEFP, Table 2), as recommended by an FAD technical assistance mission in February 2017 (¶29), with a view to increasing indirect taxes by ID 1 trillion in 2018 (including the full year effect of measures to be taken in mid-2017).

  • Reform the corporate income tax by eliminating some tax holidays and introducing a minimum tax on turnover.

  • Decrease budgetary transfers to the electricity sector by ID 1 trillion in 2018; this could be achieved by taking specific measures to improve the collection rate or increasing tariffs.

  • Cap non-wage remuneration (allowances, supplements, etc.) at ID 350,000 (about $300) a month for all civilian civil servants, which could yield savings of about ID 0.5 trillion, or about 3 percent of the civilian wage bill, and would be shouldered by about the best paid quarter of the civil servants.

  • Replace only one in five retiring civil servants, which should yield savings of ID 0.6 trillion in 2018.

  • Stop allocating non-contributory pensions, or finance them within the budget allocation for pensions paid by the budget in 2017.

Authorities’ views

24. The authorities underscored their commitment to fiscal consolidation but acknowledged that implementation would be challenging considering the current security, political and social situation. The authorities agreed that the oil price outlook left no other choice but to contain spending to maintain fiscal and external sustainability. The adjustment process will need to be designed and implemented in a way that considers the spending pressures flowing from the war against ISIS, the internally displaced population, the vast investment needs of the country, and the parliamentary elections in 2018.

C. Monitoring Financial Risks to Preserve Financial Sector Stability

25. Iraq’s banking sector is shallow, a drag on growth and in need of repair. State-owned banks, which dominate the banking sector, are capital deficient and weaknesses remain in their loan portfolio (¶11). Credit provision by private banks is low as making money out of the spread between the official and parallel exchange rates is much more profitable (¶16). Therefore, the banking sector is shallow. Per the FATF, the AML/CFT framework needs strengthening. The CBI has attempted to stimulate credit to the economy by providing lines of credit to state-owned and commercial banks for lending to small-and medium sized enterprises and agriculture and infrastructure projects, with state guarantee, but has allowed only minimal use of these facilities so far (ID 0.6 trillion out of 6 trillion ID, or 3 percent of GDP). The CBI plans to cap its disbursement at ID 1.3 trillion in 2017 and to assess the need for its continuation by year-end, considering the fiscal risks for the government.

26. Efforts to strengthen the CBI’s legal framework in line with the 2016 safeguards assessment are underway. Amendments to the Law on the CBI to strengthen CBI governance are to be enacted soon, and the central bank is about to adopt a revised audit committee charter prohibiting CBI executive representation on the committee. Both recommendations are structural benchmarks (see MEFP, Table 2). In addition, the external auditors of the CBI continue to audit program monetary data at test dates. Progress on other recommendations has been slow, but staff will continue to monitor developments and follow up with the authorities.

Staff’s advice

27. The authorities should prioritize the restructuring of the two largest state-owned banks, enhance their prudential and AML/CFT framework, and strengthen the governance of the CBI. The authorities should complete the audits of the latest financial statements of R&R per international standards and design and implement a strategy to restructure R&R, based on the results of those audits. To strengthen financial stability, they should compile financial stability indicators, in line with international standards, for which IMF Statistics Department (STA) has been providing technical assistance. They should continue to upgrade their prudential laws and regulations in line with international standards, for which the IMF Middle East Technical Assistance Center (METAC) and the World Bank have been providing technical assistance. They should tighten banking supervision. They should implement the IMF safeguards assessment’s recommendations (¶26 and SBs, MEFP, Table 2). They should continue to enhance the AML/CFT regime, with technical assistance of the IMF Legal Department (LEG) and the World Bank. They should ensure that the CBI’s direct credit lending facilities remain of manageable size and narrowly targeted to collateral backed housing loans.

Authorities’ views

28. The authorities agreed with staff’s advice. They announced that external audit of R&R would be completed by end-August and highlighted the commitments under the SBA to advance reforms in all these areas (MEFP; ¶¶40–45).

Structural Reforms for Diversified and Inclusive Growth

Staff’s advice

To promote growth, staff proposed the following strategy. First, maintain macroeconomic stability by implementing the macroeconomic policies under the SBA (¶¶17–18 and 20–22). Second, create additional fiscal space, which should be used to enhance the human capital and rebuild the physical capital of the country. Third, strengthen the business environment, which, together with the reduction of the role of the state in the economy connected with the fiscal consolidation under the SBA, should improve the incentives for private sector development, especially as reconstruction gets underway. Lastly, reform and restructure the financial sector (¶¶25) to enhance its ability to support the private sector over the medium term during reconstruction.

A. Create Fiscal Space for More Inclusive Growth

Increase non-oil revenue

29. Exploit the large room to increase non-oil tax revenue by broadening the tax base and modernizing tax and customs administration (Box 3). A recent technical assistance mission by the Fiscal Affairs Department (FAD) identified dependence on oil revenue, overreliance on direct taxes, widespread tax exemptions, complicated tax and customs codes, and sub-par administrative capacity as key factors behind weak tax collection. It also recommended priority measures that could be implemented immediately while the administrative capacity of the tax and customs administrations is strengthened.

Rein in expenditure

30. Seize the opportunity of the current crisis to reduce the size and improve the quality of public expenditure. This will require the implementation of the following measures:13

  • Identify and cancel payments to ghost workers and ghost pensioners, considering the results of the audit of the Board of Supreme Audit (BSA) of the wage and pension recipients’ payrolls (SB, MEFP, Table 2).

  • Implement a staff reduction plan through natural attrition and the elimination of vacated positions. The government’s newly introduced voluntary, paid administrative leave program is unlikely to permanently reduce the payroll. The program, at best, will achieve a temporary reduction in the wage bill and could even increase the payroll if the positions temporarily vacated are filled.

  • Design a robust merit-based and needs assessment-based centralized human resource management system.

  • Ensure the financial sustainability of the contributory and non-contributory pension systems, and unify them with the more prudent private sector pension system, as recommended by the World Bank

  • Improve the targeting of social transfers. The main shortcoming of the Public Food Distribution System, which covers the entire population and cost 1.8 percent of GDP in 2016, is its lack of targeting, which leads to unnecessary high outlays.

  • Eliminate gradually fuel subsidies by increasing prices above cost and implementing a formula smoothing the evolution of retail oil prices to international prices, while implementing compensation measures to protect low-income households. Per staff estimates, the explicit (on budget) and implicit (opportunity) costs of low energy prices amounted to 1.7 percent of GDP in 2016.

  • Eliminate gradually electricity subsidies by increasing collection and reducing cost and implementing a formula smoothing the evolution of prices to cost recovery levels. The deficit of the electricity sector, with all inputs valued at market price, is projected to reach 5.2 percent of GDP in 2017. Tariff collection will cover only about 11 percent of the cost. Substituting imported gas and fuel by captured gas associated with oil production offers the potential to substantially decrease the production cost for power generation.

  • Continue to contain domestically financed non-oil investment expenditure at much lower levels than in the past, until a proper public investment management framework is in place by prioritizing projects already started and focusing on the most crucial new ones, and delaying other projects to outer years. While the level of non-oil capital spending will be low in comparison with 2013–14, greater selectivity of projects may be beneficial because the quality of such spending is weak owing to severe deficiencies in public financial management, per the last World Bank Expenditure Review,14 which will take time to fix.

Box 3.Priority Measures to Increase Non-Oil Tax Revenue

Non-oil tax revenue in Iraq is very low. With a tax revenue-to-GDP ratio of 1.0 percent in 2015, revenue mobilization in the Republic of Iraq is lagging far behind both the regional average (11 percent) and a group of comparator economies (16 percent).1

Sales Tax

Personal Income Tax

(Percent of GDP)

Corporate Income Tax

Priority measures to increase non-oil tax revenue:

  • Levy low ad-valorem or specific taxes on a few products or services relatively easy to tax such as telecom and hotel services, private vehicles, sugar-sweetened drinks, cigarettes and other tobacco products, and alcoholic beverages, and enshrine these taxes in a new excise tax law (SB; MEFP, Table 2) rather than ad-hoc measures in annual budget laws.

  • Reduce the number of tariffs in the Customs Code from currently more than 10 (ranging from 0 to 80 percent) to a maximum of 3 positive rates not exceeding 30 percent (SB, MEFP, Table 2).

  • Discontinue the provision of corporate income tax (CIT) holidays.

  • Consider the application of a minimum tax of 1 to 2 percent on the turnover of corporations, creditable against the CIT.

  • Subject retirement income to personal income tax.

  • Limit the power of ministers to change customs tariffs or provide exemptions through decrees or other forms of orders.

  • Implement a Large Tax Payers Office, for large taxpayers (including “high wealth individuals”) that will administer all national-level domestic taxes.

  • Revamp (or implement new) IT systems to support revenue operations.

Source: Republic of Iraq: Tax and Customs Policy and Administration—Reform Priorities, Selected Issues Paper (forthcoming).1 Kazakhstan, Malaysia, Peru, and Vietnam, selected based on population and size of the economy (real and nominal).

Strengthen public financial management

31. Continue to improve public expenditure control, cash and public investment management. The fiscal pressures have amplified underlying weaknesses in the public finance management system in Iraq a lack of effective commitment controls, which led to the accumulation of large arrears (¶15), and weaknesses in cash management. Priority measures to improve public financial management are:

  • Undertake regular inventories of arrears and pay them after validation by the BSA, in line with the government’s financing capacity.

  • Design and implement an expenditure commitment control system for budget execution to prevent the accumulation of new arears, in line with IMF technical assistance recommendations (prior action and SBs, MEFP, Table 2).15

  • Take steps to move to a Treasury Single Account and improve cash management.

  • Design and implement an Integrated Financial Management Information System (IFMIS) with the assistance of the World Bank.

  • Implement Public Investment Management reform with the assistance of the World Bank to improve the quality of future investment.

B. Strengthen the Business Environment

32. Improving security and political stability, reforming the electricity and banking sectors, and addressing corruption is crucial (Figure 3). Restoring control over the territories liberated from ISIS should improve security. As recommended by the World Bank in its draft country strategy for 2018–23, design and implementation of gradual fiscal decentralization, while beefing up public financial management at the decentralized level should strengthen political stability. The electricity sector should be reformed to make it financially self-sustainable (¶30). The reform of R&R (¶27) should be used to increase the role of the private sector in the economy. Finally, implementation of strong legislation to fight against corruption, including an amended law establishing the Integrity Commission (SB, MEFP, Table 2), is needed to address the high level of perceived corruption.

Authorities’ views

33. While agreeing with staff’s advice, the authorities underscored the implementation difficulties considering the current fragility of the country. They emphasized the need to proceed in a gradual but sustained manner, highlighting the challenge of reducing the size of the public-sector payroll because of lack of alternatives to public sector employment for the young and fast growing population.

Program Modalities and Risks

34. The program is fully financed through the next twelve months, but there is a financing gap of $7.1 billion in late 2018 and 2019. The authorities have contacted one donor to fill the 2018–19 financing gap, for which there is good prospect (¶12).

35. To strengthen performance under the program, the authorities have committed to three prior actions and several additional structural benchmarks, and are requesting modifications to some of the program’s modalities (MEFP, Table 2 and ¶46). The prior actions for the completion of the second review are the approval by Parliament of a supplementary 2017 budget in line with ¶¶29-34 of the MEFP, the update of the Financial and Accounting Manual to require all spending units to report expenditure commitments, and the approval by the Council of Ministers of procedures for approval of state guarantees as described in ¶38 of the MEFP. The authorities propose six additional SBs in areas that are essential for the success of the program, i.e., arrears’ monitoring, non-oil tax revenue mobilization, current expenditure control, and monetary and debt reporting. Considering the difficulty to reduce obligations due for more than three months to IOCs to zero because of the minimum size of oil shipments, it is proposed to raise the ceiling on such obligations to $500 million, starting in September 2017(¶15). Considering the uncertainty about whether these obligations constitute arrears (¶15), it is also proposed to make this ceiling an IT rather than a PC16 Considering the revised macroeconomic framework, the authorities support staff’s proposal for a revision of all ITs at end-September 2017 and the PCs at end-December 2017 and to set PCs and ITs in 2018. Since their implementation requires more time than anticipated, the authorities request the postponement of two SBs for the second review (amendments to the law establishing the Integrity Commission, report on expenditure commitments) to, respectively, the third and fourth reviews (¶14) and one SB (audit of the pensioner payroll) from the third to the fourth review.

36. The risks remain very high. Setbacks in security or post-ISIS sectarian tensions could weaken growth, public finances and the balance of payments. A decline in oil revenue or a shortfall in projected financing would widen the financing gap in 2018–19. If additional donor financing does not materialize and projections for oil prices remain at their current levels or decline, the program framework may need to be fundamentally reconsidered. Implementation and data reporting risks also remain high. Moreover, the absence of a full-time Finance Minister since September 2016 hinders the authorities’ ability to implement the program. On the other hand, higher oil prices would improve the macroeconomic outlook (¶14 and Text Table 1). The program mitigates the risks related to the authorities’ commitment and capacity by proposing prior actions in the areas of fiscal policy and public financial management (¶31). The risks on implementation and data reporting will continue to be mitigated by technical assistance and the use of data audited by external auditors to assess PCs on gross international reserves, net domestic assets and public debt (SBs, MEFP, Table 2).

Text Table 1.Iraq: Reserve Adequacy Indicators, 2016—22
2016201720182019202020212022
ProjProjProjProjProjProj
Reserves in USD billion 1/45.241.440.839.737.136.036.5
Reserves in months of imports of goods and services6.76.26.05.95.45.25.3
Reserves in percent of external debt service coming due2,4541,4091,047767566400405
Reserves in percent of reserve money86.177.373.668.360.555.553.2
Reserves in percent of broad money59.151.648.545.039.635.933.6
Reserves in percent of the IMF RA metric 2/173148141133119112110
Reserves in percent of the augmented IMF RA metric 2/3/1731201101131039796
Sources: Iraq authorities; and Fund staff estimates and projections.

Starting 2014 includes US$ account balances from oil revenues.

Reserves within 100–150 percent of the Reserve Adequacy (RA) metric are considered adequate.

The augmented RA metric adds a term to account for the possibility of lower than projected oil prices.

Sources: Iraq authorities; and Fund staff estimates and projections.

Starting 2014 includes US$ account balances from oil revenues.

Reserves within 100–150 percent of the Reserve Adequacy (RA) metric are considered adequate.

The augmented RA metric adds a term to account for the possibility of lower than projected oil prices.

37. Iraq’s capacity to repay the Fund should remain adequate. The total outstanding Fund credit would peak at 14 percent of gross official reserves, 9 percent of exports of goods and services, and 7 percent of external public debt (Table 10).

Staff Appraisal

38. The program should help growth to return in 2018 and gradually increase but risks are very high. This year, economic activity is expected to remain muted owing to Iraq’s implementation of the OPEC+ agreement to reduce oil production and a modest recovery in the non-oil sector. Medium-term growth prospects are positive, with moderate increase in oil production and the rebound in non-oil growth supported by the expected improvement in security and implementation of structural reforms. The moderate increase in oil revenue and the ongoing ambitious but necessary fiscal adjustment should suffice to restore fiscal and external balance by 2021. Risks remain very high, however, arising primarily from oil price volatility, unstable security, political tensions, and feeble administrative capacity.

39. The policies put in place by the Iraqi authorities to deal with the severe shocks—ISIS attacks and the plunge in oil prices—are appropriate. In the fiscal area, the authorities are addressing the precipitous fall in revenues with fiscal adjustment, mostly through inefficient capital expenditure retrenchment while protecting social spending, supported by bilateral and multilateral financing to more gradual adjustment than would otherwise be inevitable. In the external area, the authorities are appropriately maintaining the peg to the U.S. dollar, which provides a key anchor to the economy.

40. Performance under the SBA has been frail but understandings on sufficient corrective actions, including three prior actions, have been reached to keep the program on track. Further fiscal consolidation was achieved in 2016, but at a slower pace than programmed because of weak control of investment expenditure and spending pressure stemming from the military campaign against ISIS and humanitarian assistance to IDPs, causing the related PCs at end-December to be missed. Based on information available, they are likely to miss the PC on arrears to IOCs at end-June 2017. They also missed the continuous PC on new external arrears, which they have since paid. Therefore, they request a waiver of nonobservance for the missed PC at end-June 2017 and the continuous PC. The authorities also request waivers of applicability for four end-June 2017 PCs since information to assess them is not yet available. Parliamentary approval of a supplementary budget in 2017, Council of Ministers’ adoption of procedures for approval of state guarantees, and Ministry of Finance’s update of the Financial and Accounting Manual to require all spending units to report expenditure commitments are prior actions. As staff is satisfied that adequate corrective measures and additional commitments are in place to indicate that the program will be successfully implemented, and based upon the authorities’ representation that the data to assess four end-June PCs is not available and as there is no clear evidence that they will not be met, staff supports these requests. Moreover, staff propose changes to the level of the PCs on the gross international reserves of the CBI, the net domestic assets of the CBI, the non-oil primary balance, and the gross public debt at end-December 2017 to take account of the revised macroeconomic framework.

41. A supplementary budget in 2017 and further fiscal consolidation measures in the 2018 budget are needed to keep the program on track. Considering the tax cut introduced by Parliament in the 2017 budget and spending slippages in 2016, the supplementary budget needs to cut total spending by 2 percent and reshuffle the composition of spending to fully account for their spending commitments on wages and pensions. The supplementary budget also needs to increase the allocation for the payment of arrears accumulated in previous years and for debt guarantees for investment projects in the electricity sector. Finally, the supplementary budget needs to inform Parliament about the large amount of state guarantees issued by the government over the past two years for service payments to independent power producers in the electricity sector. The 2018 budget will need to include measures to increase non-oil tax revenue and reduce the wage bill and the transfers to the electricity sector to create fiscal space for growth-enhancing investment expenditure.

42. Indirect central bank financing is unavoidable at this juncture given the limited access to capital markets. While this form of budget financing is not ideal, the large financing needs make it necessary given the lack of alternative financing and the difficulty to implement an even larger fiscal adjustment.

43. The budget-sharing agreement between the federal government and the KRG should be implemented. Agreeing on modalities to implement the agreement would put both the federal government and the KRG in a better position to address the ISIS attacks and the oil-price shock.

44. The state-owned banks that dominate the banking system need to be restructured. The audits of the financial statements of the two state-owned banks Rasheed and Rafidain per international standards should be expedited and followed by the design and implementation of plans to restructure these banks.

45. Steps to strengthen the legal framework of the CBI, remove one remaining exchange restriction and implement AML/CFT measures need to be accelerated. Iraq currently maintains one exchange restriction and one multiple currency practice (see Informational Annex) for which staff is not recommending approval. Removal of these, and implementation of AML/CFT measures, will help to improve the integration of the domestic financial system into the global economy.

46. Fiscal space needs to be found to enhance the human capital and rebuild the physical capital of the country. The very low level of non-oil tax revenue and very high level of public consumption constitute a substantial reservoir of fiscal space that needs to be tapped. This fiscal space then needs to be used to finance much needed high-quality expenditure on human and physical capital.

47. Electricity, state-owned enterprise and anti-corruption reforms should be stepped up to improve the business environment. Bringing tariff collection above cost recovery levels is indispensable to create the conditions for a thriving electricity sector. Amending the law establishing the Integrity Commission to strengthen its independence is overdue.

48. Staff recommends completion of the second review under the SBA and modification of the PCs. Staff believes that the performance under the SBA and the policies laid out in the MEFP are adequate to deal with the urgent balance of payments and budget needs triggered by the conflict with ISIS and the collapse of oil prices, and to maintain debt sustainability.

49. The next Article IV consultation with Iraq is expected to take place within 24 months, in accordance with Decision No. 14747-(10/96), as amended, on consultation cycles.

Annex I. Iraq: Risk Assessment Matrix1 Potential Deviations from Baseline
Source of RisksRelative LikelihoodEconomic Impact and Time HorizonPolicies to Minimize Impact
  • Retreat from cross-border integration. A fraying consensus about the benefits of globalization could lead to protectionism and economic isolationism, leading to reduced global and regional policy collaboration with negative consequences for trade, capital and labor flows, sentiment, and growth.

HighMedium

Short to Medium-Term

Lower oil prices
Implement fiscal consolidation to create fiscal space for spending increasing human and physical capital and boosting trend growth.
Policy and geopolitical uncertainties:
  • Heightened risk of fragmentation/security dislocation in part of the Middle East, Africa, and Europe, leading to a sharp rise in migrant flows, with negative global spillovers.

HighHigh

Short to Medium-Term Increased security risk
Increase non-oil revenue, seek further financial support from international community, and protect social spending.
Financial conditions:

Significant further strengthening of the U.S. dollar and/or higher rates. As investors reassess policy fundamentals, as term premia decompress, or if there is a more rapid Fed normalization, leveraged firms, lower-rated sovereigns and those with un-hedged dollar exposures could come under stress. Could also result in capital account pressures for some economies.
HighMedium

Short-Term Limited exposure to global markets
Implement fiscal consolidation and economic reforms supported by the IMF and the World Bank.
Reduced financial services by global/regional banks ("de-risking"): Further loss of correspondent banking services (CBS) significantly curtails cross-border payments, trade finance, and remittances in emerging and developing economies.HighMedium

Short to Medium-Term Shallow banking sector
Implement AML/CFT measures supported by the IMF and the World Bank to avoid blacklisting and negative impact on CBS.
Lower energy prices, Production cuts by OPEC and other major producers may not materialize as agreed while other sources of supply could increase production. May also be triggered by supply factors demand factors, i.e., weaker-than-expected global growth.Low/MediumHigh

Short to Medium-Term Very high oil dependency
Implement fiscal consolidation and reforms to facilitate more inclusive and diversified growth.
Protracted Conflict, the baseline assumes the resolution of the conflict with ISIS in the near term, but the stalemate could continue or morph into another form of sectarian conflict.HighHigh

Short to Medium-Term
Implement fiscal consolidation to create fiscal space for security spending.
Political fragmentation, the current relative political unity may be undermined by a spike in internal tensions, including on the relationship with the Kurdistan Regional Government (KRG).HighHigh

Short to Medium-Term
Implement budget sharing agreement with KRG and fiscal decentralization.
Poor policy implementation and corruptionHighHigh

Short to Medium-Term
Implement Public Financial Management Reforms, including at the decentralized level to pave the way for fiscal decentralization.
Annex II. External Sector Assessment1

Staff’s assessment is that the external position in 2016 was substantially weaker than suggested by fundamentals and desirable medium-term policy settings. The substantial fiscal adjustment programmed under the Stand-By Arrangement over the medium-term will bring the current account back in line with fundamentals and support the exchange rate peg. As long as credible fiscal adjustment is in place, the exchange rate peg remains the best option for Iraq.

1. Iraq’s current account deficit is expected to gradually fall due to tight fiscal policy in the background of slow oil price recovery. Due to the decline in oil prices, Iraq’s current account deficit increased to 8.7 percent of GDP in 2016 from 6.5 percent in 2015 despite significant fiscal consolidation. In 2017, the deficit is expected to slightly fall to 6.3 percent of GDP, helped by oil prices recovery and a moderate increase in oil production.2 In the medium term, the current account deficit is expected to improve slowly, reaching 2.2 percent of GDP in 2021, under the combined effect of a small increase in oil exports volume, a gradual oil price recovery, and fiscal policy tightening. The real and nominal effective exchange rates for Iraq appreciated by about 8 percent in 2016. This is a continuation of the real appreciation trend that the Iraqi dinar has experienced since 2013 (Text Figure 1) and mirrors the appreciation of the U.S. dollar to which the Iraqi dinar is pegged.

Text Figure 1.Iraq: Real and Nominal Effective Exchange Rate

(Index: 2012 = 100)

Source: IMF’s Information Notice System (INS).

2. Iraq’s ample reserve buffers will decline in the medium term, given weak oil price prospects and growing external debt amortization, but remain adequate. The large contraction in the 2016 stock of reserves (by 15 percent y-o-y), owing the protracted oil-price slump, will moderate in 2017, with a −8.5 percent decline to a still adequate level of $41.4 billion. Over 2017–22, oil exports are expected to contribute little to reserves accumulation, as oil prices are projected to increase by less than $2. The projected further decline in reserves during 2019–21 is expected to be mainly driven by increased external debt amortization, from less than 1 percent of GDP in 2016 to 3 percent of GDP in 2022.3 Nevertheless, reserves are projected to exhibit a small recovery starting from 2022, in line with oil prices. Given the overall sluggish oil price recovery prospects, the stock of foreign reserves is expected to fall substantially but remain close to the 100 percent threshold of the IMF RA and adjusted RA metrics, if the fiscal consolidation strategy agreed under the SBA is implemented (Text Figure 2 and Table 1).

Text Figure 2.Current Account, Reserves and Debt Amortization, 2015—22

(Percent of GDP)

Source: IMF staff calculations.

Table 1.Iraq: Public Debt Sustainability Analysis—Baseline Scenario(In percent of GDP, unless otherwise indicated)
Debt, Economic and Market Indicators 1/
ActualProjectionsAs of June 09, 2017
2006–2014 2/20152016201720182019202020212022
Nominal gross public debt70.455.166.963.865.364.261.457.351.9Sovereign Spreads 3/550
Public gross financing needs1.611.613.620.317.314.013.112.413.45Y CDS (bp)490
Real GDP growth (in percent)6.24.811.0−0.42.91.72.02.12.1RatingsForeignLocal
Inflation (GDP deflator, in percent)10.2−26.9−12.912.92.32.93.84.44.7Moody’sn.a.n.a.
Nominal GDP growth (in percent)17.0−23.4−3.412.45.34.65.96.56.9S&PsB-B-
Effective interest rate (in percent) 4/0.81.51.21.11.92.02.12.12.2FitchB-n.a.
Contribution to Changes in Public Debt
ActualProjections
2006–201420152016201720182019202020212022cumulativedebt-stabilizing primary balance 10/
Change in gross public sector debt−12.723.111.7−3.11.5−1.1−2.8−4.1−5.4−15.0
Identified debt-creating flows−6.322.516.1−3.11.5−1.1−2.7−4.1−5.3−14.8
Primary deficit2.511.713.43.83.60.4−0.8−1.8−3.12.1−2.3
Primary (noninterest) revenue and grants46.130.327.436.036.535.634.633.833.1209.6
Primary (noninterest) expenditure48.741.940.839.840.136.033.831.930.0211.7
Automatic debt dynamics 5/−8.810.82.7−6.7−2.1−1.6−2.3−2.5−2.6−17.8
Interest rate/growth differential 6/−8.010.42.6−6.7−2.1−1.6−2.3−2.5−2.6−17.8
Of which: real interest rate−4.412.48.9−6.9−0.3−0.6−1.1−1.4−1.4−11.7
Of which: real GDP growth−3.6−2.0−6.30.3−1.8−1.0−1.2−1.2−1.1−6.1
Exchange rate depreciation 7/−0.80.40.1
Other identified debt-creating flows 8/0.00.00.0−0.20.00.20.30.30.30.9
Other flows (+ reduces financing needs) (negative)0.00.00.0−0.20.00.00.00.00.0−0.2
Contingent liabilities0.00.00.00.00.00.20.30.30.31.1
Residual, including asset changes 9/−6.40.7−4.40.00.00.00.00.00.0−0.2
Source: IMF staff.

Public sector is defined as general government and includes public guarantees, defined as Public debt guarantee.

Based on available data.

EMBIG (bp).

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

Derived as [r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ) times previous period debt ratio, with r = effective nominal interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

Other flows consist of drawdown of government deposits in the banking system.

Includes changes in the stock of guarantees, asset changes, and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Source: IMF staff.

Public sector is defined as general government and includes public guarantees, defined as Public debt guarantee.

Based on available data.

EMBIG (bp).

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

Derived as [r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ) times previous period debt ratio, with r = effective nominal interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

Other flows consist of drawdown of government deposits in the banking system.

Includes changes in the stock of guarantees, asset changes, and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

3. With data quality caveats, the External Balance Assessment (EBA)-Lite methodology suggests that Iraq’s current account is substantially weaker than warranted by fundamentals and desirable policies. Based on the current account approach of the EBA-lite methodology, the current account (CA) was substantially weaker than warranted by fundamentals and desirable policies, with a CA gap estimated at −7.6 percent of GDP (Table 2). This external balance assessment comes with a wide confidence interval, due to three factors: (i) weaknesses in Iraq’s external sector statistics, implying uncertainty around fitted values of Iraq’s current account; (ii) the fact that the EBA-lite methodology4 does not fully account for oil-exporting countries characteristics; and (iii) the inherent difficulties in estimating the cyclically adjusted variable in oil-exporting countries, given the volatility of oil prices. Considering these uncertainties, staff judges the ranges for the CA gap to be between −5.6 and −9.6 percent of GDP and the ranges for the REER overvaluation to be between 15–25 percent. These gap and overvaluation are expected to be gradually eliminated over the medium-term by the fiscal consolidation programmed under the SBA.

Table 2.Iraq: External Debt Sustainability Framework, 2011–21(In percent of GDP; unless otherwise indicated)
ActualProjections
20112012201320142015201620172018201920202021Debt-stabilizing non-interest current account 6/
1Baseline: External debt32.827.725.324.836.839.338.140.740.236.732.6−4.1
2Change in external debt−11.1−5.1−2.4−0.512.02.6−1.22.6−0.6−3.5−4.1
3Identified external debt-creating flows (4+8+9)−23.1−11.3−5.6−4.312.53.45.64.62.00.1−1.2
4Current account deficit, excluding interest payments−11.2−5.4−1.4−2.96.28.35.96.13.42.61.6
5Deficit in balance of goods and services−12.2−6.9−3.6−4.46.08.46.14.23.92.61.5
6Exports44.444.539.741.334.932.635.835.534.333.632.7
7Imports32.237.636.036.940.941.041.839.838.236.234.2
8Net non-debt creating capital inflows (negative)−1.0−1.3−2.4−1.7−1.6−1.1−0.9−1.1−1.5−2.3−2.5
9Automatic debt dynamics 1/−10.8−4.6−1.70.27.8−3.90.6−0.40.0−0.1−0.2
10Contribution from nominal interest rate0.40.30.30.30.30.30.40.60.70.60.5
11Contribution from real GDP growth−2.5−3.9−2.0−0.2−1.6−4.20.2−1.1−0.7−0.8−0.7
12Contribution from price and exchange rate changes 2/−8.7−1.00.00.29.1
13Residual, incl. change in gross foreign assets (2–3) 3/12.06.23.13.8−0.5−0.8−6.8−2.0−2.5−3.6−2.9
External debt-to-exports ratio (in percent)73.962.263.759.9105.4120.7106.6114.6117.0109.299.7
Gross external financing need (in billions of US dollars) 4/−19.8−10.2−1.7−4.513.015.813.315.311.111.010.3
in percent of GDP−10.6−4.7−0.7−1.97.210-Year10-Year9.26.97.55.34.94.3
Scenario with key variables at their historical averages 5/39.328.720.813.97.42.4−1.6
Key Macroeconomic Assumptions Underlying BaselineHistorical AverageStandard Deviation
Real GDP growth (in percent)7.513.97.60.74.86.03.711.0−0.42.91.72.02.1
GDP deflator in US dollars (change in percent)24.73.00.0−0.7−26.99.321.4−14.012.72.32.93.84.4
Nominal external interest rate (in percent)1.11.11.01.00.90.60.40.91.31.81.81.61.5
Growth of exports (US dollar terms, in percent)52.017.7−4.14.3−35.315.333.5−10.823.14.71.03.73.6
Growth of imports (US dollar terms, in percent)8.736.93.22.5−15.113.917.5−4.514.60.10.60.20.8
Current account balance, excluding interest payments11.25.41.42.9−6.21.87.4−8.3−5.9−6.1−3.4−2.6−1.6
Net non-debt creating capital inflows1.01.32.41.71.61.30.61.10.91.11.52.32.5
Sources: International Monetary Fund; country desk data; and staff estimates.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium-and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Sources: International Monetary Fund; country desk data; and staff estimates.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S. dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium-and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Text Table 2.Iraq: EBA-Lite Results, 2016(In percent of GDP)
CA Approach
Current account (CA) results
Current account balance(1)−8.7
Fitted CA(2)−2.1
Policy Gap(3)−1.1
Current account norm(4) = (2 - 3)−1.1
Current account gap(5) = (1 - 4)−7.6
Source: IMF staff estimates
Source: IMF staff estimates

4. The Iraqi dinar peg with the U.S. dollar remains appropriate as a nominal anchor for macroeconomic policies. The misalignment of the REER is expected to be corrected by the ongoing fiscal consolidation that will continue to lower the current account deficit over the medium-term. The relatively high initial stock of reserves is also a key aspect on which external sustainability hinges. Going forward, structural policies to improve competitiveness and achieve export diversification are needed to support Iraq’s external position.

Annex III. Iraq—Public and External Debt Sustainability Analysis1

The debt outlook under the baseline scenario has worsened slightly since the first review of the Stand-By Arrangement (SBA), mostly owing to lower-than-expected oil prices and recently contracted debt guarantees.2 Compared with the first SBA review, lower fiscal revenues from weaker oil price prospects and broadly unchanged fiscal consolidation stance over 2017–21 are expected to increase Iraq’s financing needs and reliance on the Central Bank of Iraq (CBI)’s indirect monetary financing. Thus, the total public debt path will rise by an average of 3 percent of GDP over 2017–21, equally driven by the expected increase in nominal debt—from widening fiscal deficit and newly issued debt guarantees—and lower-than-programmed nominal GDP growth. Staff assesses that Iraq’s debt is sustainable and would remain so over the medium run if the recommended fiscal adjustment is implemented. Public debt is expected to peak at 65 percent of GDP in 2018, before embarking on a downward path and reaching 52 percent of GDP in 2022.3 The implementation of fiscal adjustment plans and the gross financing needs remain sensitive to macro shocks and oil price prospects. These risks are partly mitigated since about one-third of domestic debt consists of short-term debt held by the central bank and about 60 percent of external debt consists of legacy arrears still to be restructured on Paris Club terms.

A. Public Debt Sustainability Analysis

1. The medium-term debt path under the baseline scenario is projected to increase by 3 percent of GDP compared with the first review of the SBA,4 due lower-than-expected oil revenue 2018–21 the recently contracted debt guarantees.5 In 2016, the $7.3 billion upward revision to nominal domestic debt led to an increase of the debt ratio to 67 percent of GDP from 61 percent previously estimates. The fiscal consolidation stance envisaged under the SBA would broadly be maintained over 2017–21, with an average budget deficit projected to be only $0.5 billion larger than the first SBA review level. Therefore, the shortfall in the government’s oil revenue is expected to translate in a somewhat higher reliance on domestic borrowing that will increase the domestic nominal debt path by about $3 billion over 2017–21.6 The nominal debt path will further shift upward by a $3.6 billion worth of debt guarantees starting from end-2016. Thus, and considering recent revisions to the stock of external debt,7 the nominal debt path is expected to be worse by an average of $4.1 billion over 2017–21, relative to its level during the first SBA review. Nominal GDP was revised downward, mostly owing to a downward revision of the non-oil GDP deflator in 2016, which is expected to reduce non-oil GDP over the projected period. Because of the nominal debt and GDP trends, total public debt-to-GDP is expected to peak at 65 percent of GDP in 2018—1.9 percent of GDP larger than in the previous DSA—and to decline to 52 percent of GDP in 2022. The worsening in the debt profile is explained by the increase of the nominal debt path—expected to increase the debt ratio by an average 1.8 percent of GDP—coupled with a fall in the nominal GDP path—which would deteriorate the debt-to-GDP path by about 1.4 percent of GDP.

2. Gross financing needs have increased since the first SBA review and remain above the high-risk threshold in the near term. The need to finance the government deficit through domestic borrowing will continue to remain high, in line with deteriorating oil prospects. However, government short-term debt mostly consists of T-bills purchased by state-owned banks and discounted at the Central Bank of Iraq, which mitigates rollover risk. On average, the expected gross financing needs (GFS) over 2017–18 are estimated at 19 percent of GDP, higher than previously projected (16 percent of GDP) and substantially above the high-risk threshold of 15 percent of GDP (Text Figure 2).

Text Figure 1.Iraq: Total Public Debt Public Debt, 2015—22

(Percent of GDP)

Source: IMF staff calculations.

Text Figure 2.Iraq: Gross Financing Needs (GFN), 2017—20

(Percent of GDP)

Source: IMF staff calculations.

3. Iraq debt composition features a high and increasing share of domestic debt over the medium term. Compared to the first SBA review, the domestic debt financed by the CBI’s indirect monetary financing is expected to high. The share of domestic debt will slightly rise from 40 percent of total debt in 2017 to 43 percent of total debt in 2021, as the country gets lower oil revenue to finance an unchanged level of spending and external debt is amortized (Text Figure 1). The $41 billion external arrears accumulated before 2003 and under negotiation remain included in the stock of external debt, and have yet to be settled in line with the 2004 Paris Club meeting agreement terms.8 In addition, the DSA maintains the conservative assumption that these arrears will not be settled during the projection period. If external arrears were reduced in line with Paris Club creditors’ debt, the debt-to-GDP ratio would fall from 64 to 47 percent in 2017, peak at 49 percent in 2018, and decline to about 40 percent in 2022 (Text Figure 3).

Text Figure 3.Iraq: Total Public Debt after Arrears Restructuring, 2017—22

(Percent of GDP)

Source: IMF staff calculations.

4. Iraq debt sustainability is substantially exposed to contingent liabilities arising from government guarantees. Starting in 2016, the Ministry of Finance (MoF) has issued $36 billion worth of guarantees covering the next 14 years. Over 2017–22, these guarantees consist of $3.6 billion of debt guarantees (see ¶1 and Text Figure 2) and $7 billion of service payments guarantees of the Ministry of Electricity’s (MoE) purchase of electricity from independent power producers (IPPs).9 The signed service payments guarantees expose the government to contingent liabilities to the extent that MoE is unable to pay its electricity purchase bill. Accordingly, we assume the central government contingent liability to be captured by the gap between projected electricity purchases and tariff collections, which is equivalent to $2.6 billion over 2018–22. Hence, service payments guarantees appear to pose relatively limited risk to Iraq’s overall debt sustainability. Indeed, the contingent liabilities’ cumulative contribution to public debt amounts to 1.1 percent of GDP over the medium term (Table 1). In the worst-case scenario, the full electricity purchase bill is paid by the Ministry of Finance (MoF) over 2018–22 and contingent liabilities’ contribution to total public debt increases to 3 percent of GDP.

5. Risks to debt sustainability hinges on the implementation of the fiscal consolidation agreed under the SBA. Any deviation from the agreed fiscal consolidation under the SBA would increase the debt path and compromise public debt sustainability. Iraq’s ability to achieve this debt path is mostly driven by its budget constraint—which relies heavily on oil revenue—and its commitment to contain spending and raise additional non-oil revenue. In 2016, Iraq’s ratio of external debt-to-total public debt was 59 percent, above the 45 percent high-risk threshold (heat map, Figure 4). However, this risk is moderate because of the legacy arrears to non-Paris Club creditors (see ¶3). Also, Iraq’s spread over the EMBIG index, which averaged 565 basis points (bps) over the last 3 months, has fallen to 550 bps as of June 2017, below the high-risk threshold (600bps), partly driven by increased investors’ confidence stemming from the successful completion of the first SBA review and the issuance of a $1 billion U.S.-guaranteed bond.

Text Figure 4.Iraq: Contigent Liabilities and Service Payments to IPPs, 2017—22

(US$ Million)

Source: Iraqi Authorities and IMF staff computations

6. Stress tests confirm that Iraq’s total debt is particularly vulnerable to growth and real exchange rate shocks.

  • Growth shock: If projected real GDP rates are lowered by one standard deviation (implying lower real growth by 4 percentage points) in 2018 and 2019, the debt ratio would peak at 76 percent of GDP in 2019 before gradually declining to 63 percent in 2022.

  • Primary balance shock: This scenario assumes a worsening of the primary balance by 3 percentage points of GDP in 2018 and 2019. The larger deficit would make the debt ratio peak at 71 percent in 2019 and fall to 58 percent in 2022.

  • Real interest rate shock: A one-time real interest rates increase by 10 percentage points in 2018 would make the debt ratio peak at 65 percent of GDP in 2019 and fall to 57 percent in 2022.10

  • Real exchange rate shock: A one-time real depreciation of 30 percent in 2018 would make total public debt peak at 75 percent of GDP in 2018 and fall to 61 percent in 2022.

  • Combined shock: A combination of these shocks would make debt peak at 91 percent of GDP in 2019. Thereafter, public debt would decline to 82 percent of GDP at the end of the forecast horizon.

B. External Debt Sustainability Analysis

7. Excluding legacy arrears, Iraq external debt is highy concessional and mostly consists of official loans. Official loans accounted for 70 percent of total debt in 2016, mostly on a concessional basis (Text Figure 5). Thus, the effective interest rate of external debt is low (3 percent in 2017).11 In 2016, the average time to maturity (8.5 years) and the effective maturity of external debt (30 years) were relatively high, also reflecting a high concessionality and low refinancing risk. In the baseline scenario, external debt excluding legacy arrears is expected to reach its peak in 2019 and decline afterward, mostly driven by multilateral and bilateral debt amortization. Finally, Iraq’s stock of unidentified financing, which finances the financing gap, is expected to peak at $7.1 billion in 2019 and be amortized starting from 2021.

Text Figure 5.Iraq: External Debt Composition, 2016—22

(US$ Billion)

Source: IMF staff calculations.

8. Stress tests confirm that external debt sustainability is particularly sensitive to current account and real depreciation shocks (Figure 5).

  • Non-interest current account shock: An increase in the current account excluding interest payments by half a standard deviation in each year from 2017 onwards would make external debt peak at 50 percent of GDP in 2019 and 2020 before edging down to 47 percent of GDP in 2022.

  • Real exchange rate shock: A one-time real depreciation of 30 percent in 2017 would make external debt peak at 50 percent of GDP in 2018 and decline to 34 percent of GDP by 2022.

  • Combined shock: A one quarter standard deviation shock to the real interest rate, the growth rate and the current account would raise the external debt ratio to 46 percent in 2019 and 39 percent at the end of the projection period.

Figure 1.Iraq: Public Debt Sustainability Analysis—Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Figure 2.Iraq: Public Debt Sustainability Analysis—Realism of Baseline Assumptions

Source: IMF Staff.

1/ Plotted distribution includes all countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Iraq, as it meets neither the positive output gap criterion nor the private credit growth criterion.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Figure 3.Iraq: Public Sector Debt Sustainability Analysis (DSA)—Stress Tests

Source: IMF staff.

Figure 4.Iraq: Public Sector Debt Sustainability Analysis (DSA)—Risk Assessment

Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ EMBIG (bp), an average over the last 3 months, 11-Mar-17 through 09-Jun-17.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Figure 5.Iraq: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund; country desk data; and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2017.

Appendix I. Letter from the Prime Minister

Baghdad, 23 July 2017

Ms. Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, DC 20431, USA

Dear Ms. Lagarde,

As you may be aware, after recapturing the city of Mosul, our brave forces have entered into the last chapter of our fight again the terrorist gangs of Daesh. However these achievements on the military front have come at a very costly price to our economy, which has only been worsened by the drastic fall in oil prices since the 2nd half of 2014. In response to this double shock, the government has taken bold but necessary steps to put its public finances on a sustainable footing and welcomed support of the international community including your $5.3 billion Stand-By Arrangement (SBA) for three years with the IMF as well as a sizable support from donors.

We are committed to the economic reforms outlined in the SBA and are striving to ensure lasting economic sustainability beyond the war against terrorism and for a better future for all Iraqi citizens. This is further shown in the letter of intent signed by the Governor of the Central Bank of Iraq and the Deputy Minister of Finance, as well as the memorandum on economic and financial policies and the technical memorandum of understanding.

We thank you for the continued support you have shown to Iraq and look forward to continue working with you.

Yours sincerely,

/s/
Dr. Haider Al-Abadi
Prime Minister of the Republic of Iraq
Acting Minister of Finance
Appendix II. Letter of Intent

Baghdad, July 23, 2017

Ms. Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, DC 20431, USA

Dear Ms. Lagarde:

1. As you know, the Iraqi economy continues to suffer under the ISIS attack and oil price shock that hit the economy in mid-2014. In response to this double shock, the government has taken bold but necessary steps to put its public finances on a sustainable footing and welcomed support of the international community including our SDR 3.831 billion (about $5.3 billion) Stand-By Arrangement (SBA) for three years with the IMF as well as sizable support from donors.

2. As explained in the attached Memorandum of Economic and Financial Policies (MEFP, ¶¶15-17), all performance criteria (PCs) at end-December 2016 and one continuous PC were missed, and one PC at end-June 2017 was likely missed. The government missed these PCs because of the spending pressure flowing from the war against ISIS and the ensuing humanitarian crisis at a time when oil prices fell precipitously. This forced us to spend more in 2016 and pay less external arrears than programmed. The breach of the continuous PC related to the accumulation of external arrears in amounts of $2.5 million for almost two months at the beginning of 2017 and $157 million for several days at the beginning of July 2017, all of which were paid. Considering the temporary nature of these arrears, and the steps described in the MEFP to put the program back on track and improve cash management, the government requests waivers for the non-observance of the continuous PC and one PC at end-June 2017. We also request waivers of applicability for the four PCs at end-June 2017 for which complete information is not available yet.

3. The government has made good progress in meeting the structural benchmarks (SBs) for the second review of the SBA (MEFP, ¶20). In particular, we have completed the following SBs: the survey of arrears of the central government; the audit of arrears on non-oil investment and on wheat purchases by the Board of Supreme Audit; the survey of guarantees issued by the central government; the external audit of the gross international reserves and the net domestic assets of the Central Bank of Iraq (CBI); the external audit of the total public debt; the circular sent by the Ministry of Finance requiring all spending units to record all existing commitments on current and capital expenditures; the posting on the Ministry of Finance’s external website of the financial statements of the Development Fund for Iraq and Successor Account according to international standards; the adoption by the Governing Council of the CBI of a new charter for the Audit Committee prohibiting CBI executive representation on the committee; the introduction to Parliament of amendments to the Law on the CBI to strengthen CBI governance and the internal control framework; and the issuance by the CBI of clarifying implementing regulations to remove the limitation on transfer of investment proceeds that gave rise to an exchange restriction. We have also made progress in the two other SBs—amendments to the 2011 law establishing the Integrity Commission, and report of all current and investment commitments by the Ministry of Finance—but need more time to complete them. We therefore propose to postpone them to, respectively, the third and fourth reviews.

4. In view of the difficulty in reducing the obligations outstanding for more than three months to IOCs to zero because of the lumpy size of oil shipments, the government proposes to raise the floor on these obligations to $500 million, starting in September 2017. The government also supports staff’s proposal to set the stock of these obligations as an indicative target rather than a PC starting in September 2017. The government also supports staff’s proposal of changing end-December 2017 PCs for the fourth review in line with the revised macroeconomic framework, and setting PCs for end-June and end-December 2018. The program would continue to have indicative targets on all the variables serving as PCs at the end of the first and third quarters of the year, which should ensure continued monitoring of program performance on a quarterly frequency and help ensure program performance remains on track.

5. Against this background, the government requests completion of the second review under the SBA and requests purchase of the third tranche of SDR 584.2 million (35.1 percent of our quota). The government commits to implement the economic and financial policies during 2017–19 described in the attached MEFP to gradually bring expenditure down to a level consistent with the lower level of oil revenues to achieve debt sustainability while maintaining the exchange rate peg, strengthening public financial management and banking supervision, and fighting money laundering, the financing of terrorism, and corruption. The government will protect social spending and commits to maintain such spending above a floor during the SBA.

6. The government believes that the measures and policies set out in the attached MEFP are appropriate for attaining the objectives of this program and will take any further steps that might be necessary to that end. It will consult with the IMF staff on the adoption of such measures prior to any revision of the policies described in the attached MEFP.

7. The government will provide IMF staff with any relevant information referred to in the attached TMU concerning progress made under the program.

8. The government intends to make public the content of the IMF staff report, including this letter, the attached MEFP, the TMU, and the informational annex of the staff report. It authorizes the IMF staff to publish these documents on its website once the Executive Board has approved this review.

Sincerely yours,

/s//s/
Dr. Maher H. JohanAli Mohsen Ismail Al Allaq
Acting Deputy Minister of FinanceActing Governor of the Central
Ministry of FinanceBank of Iraq

Attachments:

I. Memorandum on Economic and Financial Policies

II. Technical Memorandum of Understanding

Attachment I. Memorandum on Economic and Financial Policies

1. This Memorandum on Economic and Financial Policies (MEFP) presents economic developments in 2016 and early 2017, outlook and economic and financial policies in 2017–19 regarding Iraq’s Stand-By Arrangement (SBA) with the International Monetary Fund (IMF).1

Background, Recent Economic Developments, and Performance Under the Stand-By Arrangement

A. Background

2. We have achieved great progress in the fight against the so-called Islamic State in Iraq and Syria (ISIS). The Iraqi security forces have liberated Mosul, ISIS’s stronghold in Iraq, with the help of our international partners.

3. The conflict with ISIS has caused the destruction of infrastructure and assets and boosted the number of internally displaced persons to 3 million and the number of people in need of humanitarian assistance to 11 million (29 percent of the population). With over 241,000 Syrian refugees, Iraq is the fourth largest hosting country in the region for people fleeing Syria. Refugees—60 percent of whom are women and children—mostly reside in the north, including in the Kurdistan Region where they have been granted residency status including the right to work. This refugee inflow is adding to the already difficult internal humanitarian situation faced by the Iraqi government.

4. As a continuation of its economic and political reform agenda, the government of Iraq adopted a comprehensive plan, building on the reforms announced by the Prime Minister in August 2015. The plan focuses on six key pillars, namely: security, stabilization and reconstruction; integrity and transparency; executive actions; legislation; selection of senior administration employees and appointment of employees; and activation of lending for housing, manufacturing, and agricultural projects. The plan aims at improving the budget and increasing revenues by ID 20–33 trillion annually in the medium and long-term. The initial steps, started before July 2016, include administrative reforms (not requiring changes in laws), amendments to existing transfer regulations and implementation of new taxes. The plan also calls for strengthening the role of the Commission on Integrity.

B. Recent Economic Developments

5. Real GDP increased by 11 percent in 2016 owing to a 25 percent increase in oil production, which was little affected by the conflict with ISIS. While overall real GDP growth in 2016 was in line with the previous projection, the composition of growth was tilted towards higher oil output growth (25 percent rather than 20 percent in the SBA First Review Staff Report) and a larger contraction of non-oil GDP (−8 percent versus −5 percent). Average consumer price inflation was only 0.4 percent in 2016 in the areas not occupied by ISIS (where 80 percent of the population lived before the ISIS occupation). In April, CPI inflation was 1.0 percent year-on-year.

6. Further fiscal consolidation was achieved in 2016, but at a slower pace than programmed mainly because of the inability of the government to control investment expenditure by as much as envisaged but also due to spending pressure stemming from the military campaign against ISIS and humanitarian assistance to IDPs. The non-oil primary balance, on an accrual basis2, excluding KRG3, contracted by 1 percent in nominal terms in 2016, reflecting 2 percent real spending growth (following a 25 percent contraction the previous year) and tripling of non-oil revenue (albeit from a very low base). However, this contraction was less than programmed (ID 7.9 trillion, excluding KRG) because of spending overruns in mostly non-oil investment (ID 6.1 trillion), transfers (ID 2.6 trillion) and wages (ID 0.7 trillion), partly because the campaign against ISIS and humanitarian assistance to IDPs and partly because of weak control of investment expenditure by line ministries. In addition, the authorities paid about $2.5 billion less external arrears to international oil companies (IOCs) and other external creditors than programmed because of cash constraints.

7. Preliminary estimates indicate that the fiscal consolidation was on track during the first quarter of 2017. Non-oil primary expenditure, excluding KRG, was less than programmed by ID 2.9 trillion (or 17 percent) while non-oil revenue, excluding KRG, was lower than programmed by a smaller magnitude of ID 0.6 trillion. Therefore, the non-oil primary balance exceeded its programmed floor excluding KRG by 16 percent.

8. In 2016, the current account deficit widened to 8.7 percent of GDP mostly because of the 22 percent fall in oil prices. The deficit was financed by external official loans and the use of official foreign exchange reserves, which fell from $53.7 billion at end-2015 to $45.2 billion (6.7 months of imports of goods and services) at end-2016.

9. In 2016, broad money grew by 7.2 percent as the government continued to borrow from banks while credit to the economy grew by 1.9 percent.

10. State-owned banks, which dominate the banking sector, have weaknesses in their capital and loan portfolio, and private banks’ non-performing loans seem to be on the rise, per the CBI’s financial soundness indicators (FSIs).

11. The spread between the official and parallel exchange rates vis-à-vis the U.S. dollar decreased from 9 percent on average at the end of 2016 to below 6 percent in June 2017 as the Central Bank of Iraq (CBI) streamlined the documentation requirements for access to its foreign exchange window.

12. The yield on Iraqi dollar bonds maturing in 2028 has declined from about 14 percent in February 2016 to 8.5 percent in early July 2017, in sync with the increase in oil prices and the SBA implementation.

13. Donor disbursements to fill the financing gap identified in the SBA have been coming slightly later than programmed but remain broadly on track. The external financing gap of $12 billion for 2016–17 identified at the outset of the SBA has been closed with $3 billion from the Fund; $2 billion from the World Bank; an additional $2.5 billion from the G7 and the European Union; and deferral of $4.6 billion war reparation payment from Kuwait until 2018. U.K. and Canada have guaranteed $0.444 billion of the $1.444 budget support loan of the World Bank in December 2016. The $1 billion U.S.-guaranteed bond, previously envisaged for late 2016, was issued in January 2017. France is preparing a $0.45 billion budget loan to be disbursed during the third quarter of 2017.

14. On 5 January 2017, the Council of Ministers decreased the electricity tariffs for corporations by 18 percent on average, to help non-oil entrepreneurs.

C. Performance Under the Stand-By Arrangement

15. While not currently implemented, the budget sharing agreement between the federal government in Baghdad and the Kurdistan Regional Government (KRG) is still valid.4 In the meantime, the performance criterion on the non-oil primary balance (¶16) for the Federal Government will continue to have an adjustor in case the budget sharing agreement with the KRG is not implemented (Technical Memorandum of Understanding—TMU, ¶14). In addition, in August 2016, the federal government and the KRG agreed to resume oil exports by the North Oil Company in Kirkuk through the pipeline linking the KRG to Turkey in an amount of 0.15 million barrels per day (mbpd) and to equally split the export revenue.

16. The application of relevant adjustors (for non-implementation of the budget sharing agreement with KRG and shortfalls in arrears repayments) meant that the related performance criteria (PCs) at end-December 2016 were missed (Table 1):

  • The stock of gross reserves of the CBI dipped below the adjusted programmed floor by $1.4 billion because the authorities paid significantly less external arrears than programmed and therefore the program floor was raised accordingly.5

  • The net domestic assets of the CBI exceeded the adjusted programmed ceiling by the amount of ID 2.1 trillion for the same reason.6

  • The non-oil primary balance missed the adjusted programmed floor by ID 4.2 trillion (3.1 percent of non-oil GDP) because of spending overages mostly in non-oil investment (¶6). The program floor was adjusted because of the non-implementation of the budget sharing agreement with KRG (¶15).7

  • The gross public debt missed the adjusted programmed ceiling by ID 5.0 trillion, because the overall deficit was higher than programmed (¶6), and because the government paid less arrears than programmed and signed debt guarantees for spending with deferred payment in the military and electricity sectors.

  • The government missed all these PCs because of the spending pressure flowing from the war against ISIS and the ensuing humanitarian crisis at a time when oil prices fell precipitously. This forced the government to spend more in 2016 and pay less external arrears than programmed.

  • The continuous PC on no new external arrears on existing rescheduled debt and new borrowing was missed temporarily because of payment delays on a debt service payment of JPY 294 million ($2.5 million) from January 7 until February 28, 2017 and several debt service payments for a total value of $157 million during a few days at the beginning of July 2017 because of organizational problems at the Ministry of Finance. As these deviations were temporary and the arrears were settled within, respectively, several weeks and days, the government requests a waiver for the non-observance of this PC. The government will also expedite the implementation of the Cash Flow Management Unit and Cash Flow Management Committee at the Ministry of Finance (¶38) to solve the organizational problems that led to these payment delays.

  • The stock of outstanding obligations to International Oil Companies for more than three months (IOCs) was higher ($1,227 million) than programmed (zero). The government could not reduce the stock of obligations outstanding to IOCs for more than three months as fast as programmed as it faced high spending pressures from the fight against ISIS and the resulting increase in IDPs (¶3). The government also wants to note that it is difficult to bring these obligations below $500 million for technical reasons. Indeed, payments to IOCs are made through shipments of crude oil of at least 1 million barrels each. About 37 percent of the obligations outstanding to IOCs for more than three months at end-2016 and 85 percent at end-March 2017 are due to smaller claims by IOCs that need to be aggregated to meet the minimum size of the shipment. Thus, the government proposes to raise this ceiling to $500 million starting in September 2017 (Table 1 and ¶46).

Table 1.Iraq: Performance Criteria and Indicative Targets Under the Stand-By Arrangement, 2016–18 1/(In billions of Iraqi dinars, unless otherwise indicated)
201620172018
SepDecMarJunSepDecMarJunSepDec
Prog. 2/Adj. TargetPrel. Est.StatusProg. 3/Adj. TargetEst.StatusProg. 3/Adj. TargetEst.StatusProg. 3/Est.StatusProg. 3/Rev. Prog.Prog. 3/Rev. Prog.Prog.Prog.Prog.Prog.
Performance Criteria4/
Gross international reserves of the CBI (floor; eop stock, in millions of U.S. dollars)34,91038,63647,805Met43,04346,59045,226Not Met40,88239,88247,039Met38,53236,56039,82938,54641,39638,62837,16036,02640,771
Net domestic assets of the CBI (ceiling; eop stock)17,20012,8036,238Met11,0516,8658,987Not Met13,04014,2207,444Met15,96118,53417,67116,25016,89720,61723,04324,96119,743
Central government non-oil primary balance (floor) 5/(49,145)(42,345)(35,617)Met(61,944)(53,918)(58,077)Not Met(17,095)(12,719)(12,091)Met(34,716)(51,602)(51,343)(69,131)(73,778)(16,538)(33,076)(49,393)(67,157)
Gross public debt (domestic and foreign) (in billions of ID; ceiling; eop stock)142,208135,408127,940Met130,639130,483135,475Not Met135,571135,229135,931Not Met140,364143,891145,182147,809149,887151,130154,544156,633159,788
New external arrears on existing / rescheduled debt and new borrowing (in millions of U.S. dollars; ceiling) 5/6/00.5Not Met00Met02.5Not Met0157.0Not Met00000000
Stock of outstanding arrears to international oil companies (in millions of U.S. dollars; ceiling)02,138Not Met01,227Not Met0447Not Met0500Not Met00
Indicative Target
Social spending (floor) 5/7/12,61910,954Not Met18,22820,093Met4,4938,98613,48015,63517,97320,8465,21210,42315,63520,846
Stock of outstanding domestic arrears (ceiling) 8/7,5004,4914,723Not Met4,4914,723Not Met4,4914,4913,5574,4911,4461,4461,4461,446(0)
Stock of outstanding obligations to international oil companies (in millions of U.S. dollars; ceiling)500500500500500500
Memorandum item:
Transfer of the central government to the Kurdistan Regional Government 5/6,84108,48002,89805,7988,7028,56911,60611,9932,9845,9718,95911,945
Total revenue from KRG8,32402,55502,8183,0617,9843,28510,8552,7445,5088,28811,056
oil export revenue through SOMO7,80802,36602,4402,4947,4502,52910,1432,5165,0527,60310,143
non-oil revenue transfers to Federal government51601890378567534756712228456685913
Total foreign financing and international contributions to fill the financing gap(4,152)246(1,653)2,5331,9242202,7763,6773,8099,1237,181(50)1,1112,55310,847
External Financing 5/(5,660)(504)(4,875)(673)1,392(962)1,0391,9408444,0432,090(50)(100)1,3422,783
International contributions to fill the financing gap 5/1,5087493,2223,2065321,1821,7371,7382,9655,0805,0911,2111,2118,064
Iraq oil export price (US$ / barrel, average for the quarter)37.533.64 5.343.140.446.341.742.645.143.245.545.745.545.345.1
Oil export revenue 5/36,04132,96157,55744,67116,13015,35732,94950,32552,76167,95071,83318,69837,54356,50275,380
Expenditure financed by project loans 5/4433122,3982,3361,7462671,7463,0002,6894,2544,5044579142,8634,811
Source: Iraqi Authorities, and Fund Staff estimates and projections

The attached Technical Memorandum of Understanding (TMU) provides definitions.

IMF Country Report number 16/225: Iraq Staff Report for the Three-year Stand-by Arrangement Request.

IMF Country Report number 16/379: Iraq Staff Report for the First Review of the Stand-by Arrangement.

The test dates for performance criteria are end-June and end-December 2017 and end-June and December 2018; all variables for other test dates are indicative targets.

Cumulative from January 1.

Continuous.

See Table 3 for more details.

The scope of this indicative target is limited to domestic arrears on non-oil investment monitored by the Ministry of Planning until June 2017. Starting in July 2017, it includes all domestic arrears.

Source: Iraqi Authorities, and Fund Staff estimates and projections

The attached Technical Memorandum of Understanding (TMU) provides definitions.

IMF Country Report number 16/225: Iraq Staff Report for the Three-year Stand-by Arrangement Request.

IMF Country Report number 16/379: Iraq Staff Report for the First Review of the Stand-by Arrangement.

The test dates for performance criteria are end-June and end-December 2017 and end-June and December 2018; all variables for other test dates are indicative targets.

Cumulative from January 1.

Continuous.

See Table 3 for more details.

The scope of this indicative target is limited to domestic arrears on non-oil investment monitored by the Ministry of Planning until June 2017. Starting in July 2017, it includes all domestic arrears.

17. The floor on social spending (indicative target—IT) at end-December 2016 was met (Table 1). However, a second IT was missed:

  • Social spending (ID 20.0 trillion) exceeded its floor (ID 18.2 trillion).

  • The inventory of arrears (¶18) reveals that the stock of outstanding domestic arrears on non-oil investment (ID 4.723 trillion) exceeded its ceiling (ID 4.491 trillion) because the inventory of arrears uncovered additional ones.

18. Three of the ITs at end-March 2017 for which information is available were met (Table 1):

  • The stock of gross reserves of the CBI exceeded the adjusted programmed floor by about $7.0 billion.

  • The net domestic assets of the CBI were ID 6.8 trillion below the adjusted programmed ceiling.

  • The non-oil primary balance remained above its adjusted programmed floor (¶7).

  • The gross public debt exceeded its adjusted programmed ceiling despite the lower budget deficit than programmed because of the overrun of the stock at the end of 2016 (¶16).

  • The stock of outstanding arrears to IOCs was higher ($447 million) than programmed (zero) for technical reasons (¶16, last bullet).

  • The stock of outstanding domestic arrears on non-oil investment breached the programmed ceiling by about ID 230 billion because of an upward revision of the stock at end-2016.

19. Based on the information available at this time, it is likely that the PC on the stock of outstanding obligations for more than three months to IOCs at end-June 2017 was not met. For reasons explained above (¶16), we expect about $500 million of obligations outstanding to IOCs for more than three months at that date. Considering the progress made since June 2016 when overdue obligations to IOCs amounted to $3,679 million and the commitment to reduce them to no more than $500 million from September 2017 on, the government requests a waiver for the non-observance of this PC.

20. Most structural benchmarks (SB) for the second review have been met and others are in progress (Table 2):

  • The Ministry of Finance completed a survey of all arrears of the central government. At end-December 2016, the Ministry of Finance identified arrears in an amount of ID 11.1 trillion ($9.4 billion, or 5.5 percent of GDP), out of which ID 4.3 trillion on current expenditure and ID 6.8 trillion on investment expenditure (Tables 5 and 6).

  • The Board of Supreme Audit (BSA) has audited all the arrears on non-oil investment identified so far by the Ministry of Planning and all the arrears on food purchases identified by the Ministry of Trade as listed in ¶21 of the MEFP for the first SBA review. Out of the 7,023 claims amounting to of ID 4.7 trillion of non-oil investment domestic arrears, the BSA validated 1,855 claims worth ID 1.363 trillion. The Ministry of Planning has reached out to line ministries to provide comments or feedback or missing information for non-compliant claims. The value of legitimate arrears could therefore rise once documentation is completed and clarifications received. Out of the stock of outstanding arrears of ID 2.5 trillion of the Ministry of Trade for purchases of wheat and rice, the BSA verified ID 2.0 trillion.

  • The Debt Directorate of the Ministry of Finance completed a survey of all guarantees issued by the central government. At end-May 2017, the value of the 11 state guarantees on foreign currency-denominated service payment or debt amounted to $36.0 billion (ID 42.6 trillion, or 21 percent of GDP), out of which $32.4 billion are guarantees of service payments to independent power producers (IPPs) in the electricity sector for the full length of the contracts (about 14 years) and $3.6 billion are debt guarantees. In addition, the value of the guarantee of one local currency-denominated debt amounted to ID 0.5 trillion. The government will inform parliament of these guarantees (¶31).

  • The external auditor provided its audit of the gross international reserves and the net domestic assets of the CBI at end-December 2016 as defined in ¶¶6–7 of the TMU.

  • The external auditor provided its audit of the total public debt at end-December 2016 as defined in ¶11 of the TMU.

  • On March 6, 2017, the Minister of Finance sent a circular elaborated with the Ministry of Planning and the BSA requiring all spending units to record all existing commitments on current and capital expenditures.

  • The Ministry of Finance posted the financial statements of the Development Fund for Iraq and Successor Account on December 31, 2015 audited per international standards on its external website.8

  • The Governing Council of the CBI adopted a new charter for the Audit Committee prohibiting CBI executive representation on the committee.

  • The Council of Ministers has not yet approved draft amendments to the 2011 law establishing the Integrity Commission to strengthen its governance, accountability and oversight, and independence, and provide it with powers in line with the United Nations Convention against Corruption, as specified in ¶26 of the MEFP of June 19, 2016. The government needs more time to consult with all stakeholders and proposes to postpone this SB to the third SBA review.

  • The Ministry of Finance could not produce a report on all current and investment commitments in coordination with the Ministry of Planning, since it issued the circular to the spending units only on March 6. The 663 spending units need training to implement the circular, with the assistance of 24 auditors that the BSA trained in March 2017. Therefore, the government proposes to postpone this SB to the third SBA review.

  • The Council of Ministers approved and sent to Parliament amendments to the Law on the CBI to strengthen its governance and the internal control framework, in line with the IMF safeguards assessment’s recommendations, as specified in ¶29 of the MEFP of June 19, 2016.

  • The Central Bank of Iraq issued clarifying implementing regulations to remove the limitation on transfer of investment proceeds that gives rise to an exchange restriction.

Table 2.Iraq: Prior Actions and Structural Benchmarks Under the Stand-By Arrangement, 2017
MeasuresScheduled review by which the measure will be completedMacroeconomic justificationStatus
Prior action
Approval by Parliament of a supplementary 2017 budget in line with ¶¶29-32 of the MEFP for the SBA 2nd review.Maintain macroeconomic stability.Met
Ministry of Finance to update the Financial and Accounting Manual to require all spending units to: i) capture all invoices into an accounting ledger (“journal”), after adequate verification by the internal audit unit; and ii) to report monthly on the payables to the Accounting Department as part of the trial balance report.Strengthen expenditure control.Met
Approval by the Council of Ministers of procedures for approval of state guarantees in line with ¶38 of the MEFP for the 2nd SBA review.Strengthen fiscal discipline.Met
Structural benchmarks
Completion of a survey of all arrears of the central government, i.e. payment due for more than 90 days, until at least end-September 2016, including: (i) current spending (salaries, pensions, goods and services and capital purchases), managed by the Ministry of Finance; (ii) non-oil investments managed by the Ministry of Planning; and (iii) spending managed by the Ministry of Oil. The Ministry of Finance will elaborate a consolidated table on all these arrears for the included ministries.2nd reviewImprove fiscal transparency.Met
Audit by the Board of Supreme Audit of all the arrears on non-oil investment identified so far by the Ministry of Planning and on wheat purchases identified by the Ministry of Trade as listed in ¶21 of the MEFP for the 1st SBA review.2nd reviewStrengthen governance.Met
Survey by the Debt Directorate of the Minister of Finance of all guarantees issued by the central government, comprising the amount of the guarantee, its maturity, the identity of the signatory of the guarantee, and the identity of the beneficiary of the guarantee.2nd reviewStrengthen debt management.Met
External audit of the gross international reserves and the net domestic assets of the Central Bank of Iraq at end-December 2016 as defined in ¶¶6-7 of the TMU.2nd reviewStrengthen safeguards assessment.Met
External audit of the total public debt at end-December 2016 as defined in ¶11 of the TMU, excluding arrears and external debt from the pre-2003 regime for which only partial documentation is available.2nd reviewStrengthen debt management.Met
Decisions by the Minister of Finance and the Minister of Planning requiring all spending units to record all existing commitments.2nd reviewImprove cash management.Met
Posting by the Ministry of Finance on its external website of the financial statements of the Development Fund for Iraq and Successor Account on December 31, 2015 audited according to international standards.2nd reviewImprove fiscal transparency.Met
Approval by the Governing Council of the Central Bank of Iraq of a new charter for the Audit Committee prohibiting Central Bank of Iraq executive representation on the committee.2nd reviewStrengthen governance of the central bank.Met
Structural benchmarks
Approval by the Council of Ministers and introduction to parliament of draft amendments to the 2011 law establishing the Integrity Commission in order to strengthen its governance, accountability and oversight, and independence, and provide it with powers in line with the United Nations Convention against Corruption, as specified in ¶26 of the MEFP of June 19, 2016.2nd reviewCombat corruption.Not met. Postponed to the 3rd review.
Ministry of Finance to produce a report of all recurrent and investment commitments (by project) in coordination with the Ministry of Planning.2nd reviewImprove cash management.Not met. Postponed to the 4th review.
Approval by the Council of Ministers and introduction to Parliament of amendments to the Law on the Central bank of Iraq to strengthen CBI governance and the internal control framework, in line with the IMF safeguards assessment’s recommendations, as specified in ¶29 of the MEFP of June 19, 2016.2nd reviewStrengthen governance of the central bank.Met
Approval by the Council of Ministers and introduction to Parliament of an amendment of the Investment Law, or issuance of clarifying implementing regulations by the Central Bank of Iraq, to remove the limitation on transfer of investment proceeds that gives rise to an exchange restriction.2nd reviewImprove the business environment by eliminating restrictions for current international transactions.Met
Completion by the Board of Supreme Audit of an audit of the central government wage earner payroll to identify ghost wage earners, i.e. people who perceive wages without legal or regulatory justification.3rd reviewDecrease current expenditure.
Completion by the Board of Supreme Audit of an audit of the government pensioner payroll to identify ghost pensioners, i.e. people who perceive pensions without legal or regulatory justification.3rd reviewDecrease current expenditure.Postponed to 4th review
Proposed additional structural benchmarks
Completion of a survey of all arrears of the central government, i.e. payment due for more than 90 days, until at least end-June 2017, including: (i) current spending (salaries, pensions, goods and services and capital purchases), managed by the Ministry of Finance; (ii) non-oil investments (projects and any associated penalties), managed by the Ministry of Planning; and (iii) spending managed by the Ministry of Oil. The Ministry of Finance will elaborate a consolidated report on all these arrears for the included ministries.3rd reviewImprove fiscal transparency.
External audit of the gross international reserves and the net domestic assets of the Central Bank of Iraq at end-July 2017 as defined in ¶¶6–7 of the TMU.3rd reviewStrengthen safeguards assessment.
External audit of the total public debt at end-July 2017 as defined in ¶11 of the TMU, excluding arrears and external debt from the pre-2003 regime for which only partial documentation is available.3rd reviewStrengthen debt management.
Approval by the Council of Ministers and introduction to parliament of a sales and excise tax law in line with ¶36. second bullet of the MEFP.3rd reviewIncrease non-oil revenue.
Approval by the Council of Ministers of amendments to the Customs Code in line with ¶36. second bullet of the MEFP.3rd reviewIncrease non-oil revenue.
Study by the Ministry of Finance of potential legislative changes to reduce spending on wages, non-contributory pensions and transfers.4th re viewDecrease current expenditure.
Source: Iraqi authorities.
Source: Iraqi authorities.
Table 3.Iraq: Social Spending1/(In billions of Iraqi dinars, cumulative from the beginning of the year)
201620172018
Dec-16Mar-17Jun-17Sep-17Dec-17Mar-18Jun-18Sep-18Dec-18
Prog. 2/Est.Prog. 2/Prog. 2/Prog. 2/Rev. Prog.Prog. 2/Rev. Prog.Prog.Prog.Prog.Prog.
Total Social spending (floor)18,22820,0934,4938,98613,48015,63517,97320,8465,21210,42315,63520,846
Social Safety Net1,8001,0694949881,4821,6451,9762,1945481,0971,6452,194
Public Distribution System (PDS - food subsidies)1,4851,2043817621,1431,2701,5241,6934238471,2701,693
Wheat and rice subsidy1,0802,8033426841,0271,1411,3691,5213807611,1411,521
Assistance and subsidy to Iraqi refugees0027837093185278370
Assistance and subsidy to internally displaced persons9006083086179255901,234787197394590787
Farmer subsidies405462110221331367441489122245367489
Reconstruction cost15220251101152202
Health Ministry and Environment Ministry- wages2,5202,8466151,2301,8452,0492,4602,7326831,3662,0492,732
Higher Education Ministry - wages2,0702,1484929841,4761,6401,9682,1875471,0941,6402,187
Lower Education Ministry - wages6,3007,3041,4562,9124,3694,8535,8256,4711,6183,2364,8536,471
Health Ministry and Environment Ministry- goods and services1,3501,402222445667688889917229459688917
Higher Education Ministry - goods and services99671734521866924762124186247
Lower Education Ministry - goods and services219180561091647772191,0362595187771,036
Sources: Iraqi authorities; and Fund Staff estimates and projections.

The attached Technical Memorandum of Understanding (TMU) provides definitions.

IMF Country Report number 16/379: Iraq Staff Report for the First Review of the Stand-by Arrangement.

Sources: Iraqi authorities; and Fund Staff estimates and projections.

The attached Technical Memorandum of Understanding (TMU) provides definitions.

IMF Country Report number 16/379: Iraq Staff Report for the First Review of the Stand-by Arrangement.

Table 4.Iraq: Revenue and Expenditure of the Ministry of Electricity (MoE)(In billions of Iraqi dinars)
2017
MoE budgetTransfer from Ministry of Finance (MoF)
Initial BudgetSupplementary Budget (additional allocation)
Electricity tariff collection1,506750
Expenditure13,2492,370
Wages1,015403
Goods and services1 0,358980
Cost of fuel and other (cash)2,410980
Basra Gas Company (BGC) - Gas1,030980
Gas from Iran339
Imported fuel250
Imported electricity614
Independent Power Producers fees177
Fuel from Ministry of Oil (MoO, non-cash: value of in-kind subsidy)7,948
Maintenance361144
Other goods and services1
Investment expenditure1,514843671
o/w financed by project loans951402550
o/w financed by other means563441122
Total transfer from MoF to MoE3,120671
Balance (accrual)−11,743
Balance (cash)−3,795
Financing11,743
Contribution from MoF5,503
Fuel subsidy7,948
Arrears−1,7121,020692
Financing gap (+)/surplus (-)4
Memorandum items
Production (MWh)96,360,000
Tariff (ID/KW; a)72
Tariff collected (ID/KW; b) 1/16
Tariff collection rate (a/b)22%
Operational cost with fuel from MoO at market price (ID/KW)122
Operational cost with fuel from MoO for free (ID/KW)39
Source: Iraqi authorities.

Tariff collection divided by production.

Source: Iraqi authorities.

Tariff collection divided by production.

Table 5.Arrears on Current Spending 1/(In Iraqi dinar, unless otherwise indicated)
Spending Unit20162017
StockPayment
Ministry of Trade2,509,814,327,3542,509,814,327,354
Ministry of Electricity (external arrear)1,535,000,000,0001,535,000,000,000
Ministry of Education132,319,000,000132,319,000,000
Ministry of Agriculture106,103,734,314106,103,734,314
Council of Representatives588,000,000588,000,000
Ministry of Water resources452,000,000452,000,000
Ownership Claims Office327,000,000327,000,000
National Security69,000,0006 9,000,000
Ministry of Labor2,932,0002,932,000
Total4,284,675,993,6684,284,675,993,668
Domestic arrears2,749,675,993,6682,749,675,993,668
External arrears1,535,000,000,0001,535,000,000,000
Source: Iraqi authorities.

Domestic arrears, unless otherwise indicated.

Source: Iraqi authorities.

Domestic arrears, unless otherwise indicated.

Table 6.Iraq: Arrears on Investment Expenditure 1/(In Iraqi dinar, unless otherwise indicated)
Spending Unit2016201720182019
StockPayment 2/
Ministry of Oil2,534,398,241,613
domestic arrears1,084,101,289,173
external arrears (IOCs and BCG)1,450,296,952,4401,450,296,952,440
Regional Development Program1,605,713,034,739
Ministry of Electricity829,099,150,396
domestic arrears229,825,150,396
external arrears (Shanghai)599,274,000,000177,300,000,000210,987,000,000210,987,000,000
National Investment Committee468,580,003,543
Ministry of Housing340,089,877,917
Ministry of Public Works188,046,742,732
Ministry of Water Resources175,277,423,750
Shiite Waqf135,820,611,925
Ministry of Health130,034,335,840
Ministry of Youth85,425,304,343
Ministry of Higher Eduction81,609,105,949
Ministry of Industry80,089,327,545
Ministry of Transport26,161,495,530
Ministry of Justice19,987,540,327
Ministry of Communication17,377,854,249
Ministry of Trade9,987,581,294
Ministry of Agriculture7,043,916,467
Christian Waqf6,183,970,434
Martyrs Corporation5,375,966,263
Ministry of Education3,900,316,627
Ministry of Planning3,529,238,008
Ministry of Interior3,249,694,000
National Security Council2,578,000,000
Ministry of Science and Tech2,094,360,000
Iraqi News Network1,909,225,408
Ministry of Immigrants1,824,613,325
Other1,528,357,000
Ministry of Culture1,506,197,708
Higher Judicial Council1,289,962,084
Ministry of Human Rights1,088,368,488
Ministry of Labor708,168,869
Ministry of Finance344,902,000
COM SEC328,243,000
Prisoners Corporation288,888,955
Securities Commission240,771,000
Committee238,197,945
Elections Higher Council66,200,000
Science Council44,388,000
Ministry of Defense
Sunni Waqf
Total6,773,059,577,2734,904,961,952,4401,657,110,624,833210,987,000,000
Domestic arrears4,723,488,624,8333,277,365,000,0001,446,123,624,833
External arrears2,049,570,952,4401,627,596,952,440210,987,000,000210,987,000,000
Source: Iraqi authorities.

Domestic arrears, unless otherwise indicated.

All arrears at end 2016 are expected to be paid over three years, even though this table only shows the repayment schedule for external arrears.

Source: Iraqi authorities.

Domestic arrears, unless otherwise indicated.

All arrears at end 2016 are expected to be paid over three years, even though this table only shows the repayment schedule for external arrears.

Economic and Financial Policies for 2017–19

21. Hit by the fall in oil prices and the ISIS attack, the government has started to implement a program of fiscal consolidation to maintain debt and external sustainability. The sharp decline in Iraqi oil prices from $103 per barrel in 2013 to $36 in 2016 has caused a sharp increase of the budget deficit from 6 percent of GDP in 2013 to 14 percent of GDP in 2016 and of the public debt from 31 percent of GDP in 2013 to 67 percent of GDP in 2016. It has also caused a deterioration of the current account of the balance of payments from a surplus of 1.1 percent of GDP in 2013 to a deficit of 8.7 percent of GDP in 2016, which was partly financed by a decrease of official gross foreign exchange reserves from $77.8 billion (10.8 months of imports of goods and services) in 2013 to $45.2 billion (6.7 months of imports of goods and services) in 2016. In 2017, a recovery in oil prices is expected, with Iraqi oil prices expected to average $45.3 per barrel.9 This drop in oil prices seems of a permanent nature as prices on future oil markets currently indicate a flattening of Iraqi oil prices to about $46 per barrel at the 2021 horizon. Therefore, the government has started to implement a program of fiscal consolidation to contain and eventually reverse the increase in total public debt and the decline of gross foreign exchange reserves. Under this program, for the implementation of which the government has received commitment of financial support of about $12.0 billion, out of which $5.3 billion under the SBA with the IMF, the total public debt would decrease to 65 percent of GDP in 2018 and 57 percent of GDP in 2021; and the official gross foreign exchange reserves would bottom out at $36 billion, 5.2 months of imports of goods and services in 2021.

22. With the current oil price projections and the implementation of the fiscal consolidation under the SBA, the fiscal and current account deficits should be eliminated or substantially reduced by 2022. In 2017, no growth is expected in real GDP because the 1.5 percent contraction in real oil GDP, as a consequence of the production cut agreed by Iraq at the meeting of the Organization of Petroleum Exporting Countries (OPEC) on November 30, 2016, should compensate the 1.5 percent growth of non-oil real GDP expected as the conflict with ISIS subsides (¶2). Over the whole year of 2017, Iraq, including KRG, is expected to produce 4.566 million barrels per day (mbpd) on average in this MEFP, or 0.21 mbpd less than its production level in October 2016 based on Iraqi sources. In April 2018, oil production is projected to revert to 4.776 mbpd until year-end and increase by 1 percent per year over the projection period from 2019, as the level of oil revenue currently projected would not provide sufficient financing for investment necessary to put the level of oil production on a sharper increasing trajectory. Non-oil real GDP growth should gradually recover to half of its pre-2014 trend as the economy recovers from the conflict with ISIS. The projected level of oil revenue and the ongoing fiscal consolidation should gradually reduce the fiscal deficit from 14 percent of GDP in 2016 to zero in 2021 and the current account deficit of the balance of payments from 8.7 percent of GDP in 2016 to less than 1 percent of GDP in 2022. There remains a financing gap of $7.1 billion in 2018–19 ($5.0 billion in the last quarter of 2018, and $2.1 billion in 2019), starting during the last quarter of 2018. This financing gap does not include Iraq’s post-ISIS reconstruction needs, which have not yet been assessed and are therefore not included in the SBA projections.

23. To close the financing gap for 2018–19, the government has started to contact potential donors. The authorities have also contacted the Kuwaiti Development Fund and the World Bank to assist them in assessing the post-ISIS reconstruction needs.

D. Foreign Exchange Policy

24. The government is committed to maintaining the peg with the U.S. dollar. The peg provides a key nominal anchor in a highly uncertain environment with policy capacity weakened by the conflict with ISIS. To address concerns that foreign exchange sales by the CBI would finance terrorism or money laundering of illegal activities, the CBI has been strengthening its procedures to allocate foreign exchange with the technical assistance of the U.S. Treasury and the Federal Reserve Board and with recourse to external auditors. The CBI has also requested the technical assistance of the IMF Legal and Monetary and Capital Markets Department to analyze the reasons behind the rise of the exchange rate spread between the official rate of the CBI foreign exchange sales and the parallel market rate since the end of 2015, and to make recommendations to reduce the spread. In the meantime, the CBI has simplified the procedures for access to its foreign exchange window, which has narrowed the spread.

25. The government will gradually remove remaining exchange restrictions and a multiple currency practice (MCP) with a view to eliminating exchange rate distortions. Such a move towards acceptance of the obligations under Article VIII of the IMF’s Articles of Agreement will send a positive signal to the investor community that Iraq is committed to maintain an exchange system that is free of MCPs and restrictions for current international transactions and thus facilitate creation of a favorable business climate. As a first step, on October 16, 2016, the CBI made the weekly limits on the purchase of banknotes at the foreign currency auctions indicative, in the sense that any bank requiring additional cash for their clients’ legitimate travel expenses can obtain the required amount above these limits based on appropriate documentation. As a second step, the CBI issued clarifying implementing regulations, to remove the limitation on transfer of investment proceeds that gives rise to an exchange restriction (SB, Table 2).

E. Fiscal Policy

26. To maintain macroeconomic stability and achieve debt sustainability, the government commits to pursue its fiscal consolidation efforts to bring spending in line with available resources in 2017–19. This will require: (i) a sizable reduction in the adjusted non-oil primary balance (PC, Table 1), of about 12 percent of non-oil GDP over 2016–19; and (ii) a large increase in mostly domestic but also external financing over the short run that will remain compatible with debt sustainability in the medium-run. The financing will permit fiscal adjustment to proceed at a more gradual pace than would otherwise be necessitated by the drop in oil revenues.

27. To minimize the impact of the fiscal consolidation on the population, the government will continue to protect social spending, i.e., spending on health, education, reconstruction and transfers in support of the social safety net, the internally displaced and the refugees (IT, Table 1).

28. To strengthen debt sustainability, the government will continue discussions with Iraq’s non-Paris Club creditors towards which it still has unresolved external arrears in an amount of $41 billion that were accumulated under the pre-2003 regime. Those arrears make up almost two-thirds of the $67.5 billion of total external debt stock at end-2016. Negotiations with these creditors will continue to seek implementation of debt relief on the same terms as with the Paris Club creditors, i.e., an 89.75 percent net-present-value reduction.

Fiscal Program in 2017

29. The government will adopt a supplementary budget in 2017, of which parliamentary approval will be a prior action (Table 1). The supplementary budget will slightly reduce total spending (by 2 percent), aimed at offsetting the budgetary impact of revenue measures that had been proposed by the Council of Ministers in the draft 2017 budget but subsequently removed during Parliamentary deliberations. In addition, the supplementary budget will introduce a credit allocation for repaying arrears incurred during previous years. The revised budget will also value oil revenue at $45.3 rather than $42.0 per barrel and remain based on oil export of 3.75 mbpd.

30. In 2017, the government commits to contain the non-oil primary deficit to no more than ID 67.8 trillion on an accrual basis, the same level as at the first SBA review. This fiscal program will be achieved through the implementation of the following measures:

  • collect at least ID 8.9 trillion (6.3 percent of non-oil GDP) in non-oil revenue, compared to ID 10.5 trillion (7.0 percent of non-oil GDP) in the 2017 fiscal program at the first SBA review based on the draft 2017 budget sent to parliament; the downward revision of the non-oil revenue is due to Parliament’s decision to impose a lower 3.8 percent levy on salary and pensions to finance the war effort and humanitarian assistance to the internally displaced population than the 4.8 percent proposed by the government, and the downward revision of non-tax revenue by Parliament from ID 3.5 to 2.3 trillion. To counter the fall in non-oil revenue compared to the objective at the first review, the government will implement a new tax on internet services, which should yield ID 0.2 trillion in 2017.

  • reduce non-oil primary expenditure to ID 76.9 trillion (54.2 percent of non-oil GDP) compared to ID 78.4 trillion (52.5 percent of non-oil GDP) in the 2017 fiscal program at the first SBA review based on the draft 2017 budget sent to parliament; this reduction will be achieved mostly by the following measures:

    • increase the wage bill to ID 36.3 trillion, slightly higher than ID 35.8 trillion in the 2017 budget in light of the higher-than-budgeted outcome in 2016; to reduce the pressure on the wage bill, the government will implement natural attrition: it will only replace one in five staff retiring, thereby setting the total number of civil servants and military personnel (approximately 2.9 million of whom about 900,000 are military and security personnel at end-2016) on an annual reduction path by 50,000 staff or close to 2 percent.

    • increase pension payments paid by the Ministry of Finance to ID 11.3 trillion (ID 10.3 trillion in the 2017 budget) considering the higher-than-budgeted outcome in 2016; in the medium term, the government will cap them at that level by natural attrition10 and the enforcement of the existing rules preventing collection of multiple pensions or collecting pensions without minimum contribution period or below legal pensionable age.

    • reduce goods and services to ID 6.4 trillion (ID 7.3 trillion in the 2017 budget); this envelope will include a credit of ID 1.0 trillion for the purchase of gas from the Basra Gas Company (BGC, ¶37); this still leaves a sizeable increase for goods and services compared to the level executed in 2016, adjusted for KRG (ID 5.5 trillion).

    • reduce transfers to ID 12.8 trillion (ID 13.3 trillion in the 2017 budget); this will require a decrease compared to the level executed in 2016 (ID 13.2 trillion) but will still allow an increase in transfers to IDPs, the food distribution system and the social safety net compared to 2016.

    • reduce non-oil investment expenditure to ID 10.2 trillion (ID 11.7 trillion in the 2017 budget), out of which ID 4.5 trillion financed by project loans. This amount will include ID 0.2 trillion to finance investment by the BGC (¶37) and ID 1.5 trillion for the Ministry of Electricity, out of which ID 1.0 trillion will be financed by project loans. Since this amount is significantly lower than the country’s needs, it will need to be allocated in priority to projects already started. The instructions to implement the supplementary budget will include the list of all investment projects corresponding to the total number and amount proposed in the supplementary budget; they will be sent to spending units soon after parliamentary approval of the supplementary budget.

31. The 2017 supplementary draft budget will also:

  • slightly increase the transfer to KRG from ID 11.6 to 12.0 trillion, in line with the revised non-sovereign expenditure in the supplementary budget;

  • keep oil investment expenditure at ID 13.7 trillion, out of which ID 11.6 trillion ($9.8 billion) is for the IOCs;

  • include an allocation of ID 7.4 trillion for the repayment of arrears, out of which ID 3.2 trillion is for external arrears, and ID 4.2 trillion for domestic arrears (Tables 5 and 6, ¶20).

  • increase the ceiling on all state guarantees by $0.188 million (0.2 trillion). The government will inform parliament of the ID 42.6 trillion debt and (mostly) service-payment guarantees that it issued in previous years (¶20) and will request authorization for an additional ceiling of $0.188 million for debt guarantees, in addition to the $0.5 billion already authorized in the 2017 budget. In the meantime, the government will keep the total value of guarantees contracted since February 23, 2017 below $0.5 billion, until Parliament approves the 2017 supplementary budget.

32. To finance the non-oil primary fiscal deficit (ID 67.8 trillion), interest payments (ID 2.8 trillion) and oil investment expenditure (ID 13.7 trillion), the government will have recourse to oil revenue (ID 72.9 trillion), external financing (ID 7.2 trillion), and domestic financing (ID 4.2 trillion):

  • The external financing will be covered by loans from the IMF under the SBA ($1.6 billion), the World Bank under a Development Policy Loan to be disbursed in December 2017 ($1.0 billion), a U.S. guaranteed bond ($1.0 billion, issued in January 2017, ¶13), a Eurobond issuance ($1 billion), a budget support loan by Japanese International Cooperation Agency (JICA, $267 million), a budget loan from France ($450 million) and a budget support grant by the European Commission ($100 million). The external financing will also be covered by project loans from the United States ($883 million), China ($833 million), Export Credit Agencies ($755 million), JICA ($380 million), the World Bank ($205 million), Germany ($190 million), Italy ($134 million), United Kingdom Exim Bank ($100 million), the Islamic Development Bank ($50 million), and Japan Bank for International Cooperation (JBIC, $50 million).

  • The domestic financing will be covered mainly by the issuance of Treasury bills that will be refinanced by commercial banks at the discount window of the CBI (ID 4.5 trillion).

33. While the supplementary budget is being prepared, the Prime Minister, as Acting Finance Minister, has issued a budget circular to preemptively limit all spending units’ budgetary envelope in line with the draft supplementary budget to be introduced to Parliament and reduce the monthly release of funds by the Ministry of Finance to spending units accordingly. The Economic Reform Unit in the Prime Minister’s Office together with the BSA will monitor budget execution monthly and report to the Council of Ministers about it with the same frequency.

34. The government will not resort to the accumulation of arrears to finance the deficit. It commits to a zero ceiling on new external arrears to its external creditors and a gradual reduction of the existing stock of outstanding arrears to IOCs to $500 million starting in September 2017 (¶16). It will conduct regular inventories of domestic arrears to ensure that new domestic arrears do not accumulate. It will steadily pay down existing domestic arrears after proper audit and at a pace compatible with the country’s financing capacity (¶38, second bullet).

Fiscal Program in 2018

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