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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—Informational Annex

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
August 2017
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Relations with the Fund

(As of May 31, 2017)

Membership Status: Joined December 27, 1945; Article XIV

General Resources Account

SDR MillionPercent of Quota
Quota1,663.80100.00
Fund Holdings of Currency3,175.16190.84
Reserve Tranche Position289.9517.43

SDR Department

SDR MillionPercent of Allocation
Net Cumulative Allocation1,134.50100.00
Holdings0.940.08

Outstanding Purchases and Loans

SDR MillionPercent of Quota
Stand-By Arrangements910.0054.69
Emergency Assistance1891.3053.57

Emergency Assistance may include Emergency Assistance for Natural Disasters (ENDA), Emergency Post-Conflict Assistance (EPCA), and Rapid Financing Instrument (RFI).

Emergency Assistance may include Emergency Assistance for Natural Disasters (ENDA), Emergency Post-Conflict Assistance (EPCA), and Rapid Financing Instrument (RFI).

Latest Financial Arrangements

TypeDate of ArrangementExpiration DateAmount Approved (SDR Million)Amount Drawn (SDR Million)
Stand-ByJul 07, 2016Jul 06, 20193,831.00910.00
Stand-ByFeb 24, 2010Feb 23, 20132,376.801,069.56
Stand-ByDec 19, 2007Mar 18, 2009475.360.00

Overdue Obligations and Projected Payment to the Fund

(SDR Million; based on existing use of resources and present holdings of SDRs)1

Forthcoming
20172018201920202021
Principal111.41502.53789.24398.13
Charges/Interest17.1534.2429.8519.519.96
Total17.15145.65532.38808.75408.09

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

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

Implementation of HIPC Initiative: Not Applicable

Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable

Implementation of Catastrophe Containment and Relief (CCR): Not Applicable

As of February 4, 2015, the Post-Catastrophe Debt Relief Trust has been transformed to the Catastrophe Containment and Relief (CCR) Trust.

Safeguards Assessments

The most recent safeguards assessment of the Central Bank of Iraq (CBI) was completed in April 2016. It concluded that the CBI continues to face capacity constraints in its operations, as well as a difficult security situation on the ground. The loss of budget revenue from falling oil prices has made it necessary for the CBI to engage in indirect financing of the government to close the budget gap. Priority should be given to addressing the ongoing weaknesses in the current legal framework and the internal audit function. The authorities are about to amend the Law on the CBI and adopt a new charter for the audit committee (structural benchmarks). Progress on implementing other recommendations has been slow. A positive development was the substantial improvement in the quality of financial reporting, which was accomplished in part with the assistance of the external auditors.

Exchange Arrangement

Iraq’s de jure and de facto exchange rate arrangements are classified as a conventional peg arrangement. The Central Bank Law provides the Board of the CBI with power to formulate exchange rate policy. The CBI Board undertook a realignment of the peg from 1166 to 1182 dinar per USD on December 1, 2015, unifying the effective rates applicable to cash sales and transfers at 1190 including the central bank commission. The CBI stands ready to provide foreign exchange at the official exchange rate plus commissions for permissible transactions through its daily allocations, establishing a peg. However, because certain transactions are excluded from access to the CBI auctions, many transactions take place at parallel market exchange rates. Until March 2016, the CBI published the daily volume of the auction allocation on its website.

Iraq continues to avail itself of the transitional arrangements under Article XIV, Section 2 but no longer maintains any exchange restrictions or multiple currency practices subject to Article XIV, Section 2, and currently maintains one exchange restriction and one multiple currency practice (MCP) subject to Fund approval under Article VIII, Sections 2(a) and 3.

The exchange restriction arises from an Iraqi balance owed to Jordan under an inoperative bilateral payments agreement.

The MCP arises from the official action to limit the purchase of foreign exchange, with no mechanism to ensure that exchange rates in the official and parallel markets do not deviate from each other by more than 2 percent. The average spread between the official and market rates was around 6 percent in June 2017.

In addition, to the extent the authorities maintain exchange restrictions imposed for security reasons, these should be notified to the IMF under the framework of Decision 144-(52/51).

Article IV Consultation

Upon the approval of the new 36-month Stand-By Arrangement on July 7, 2016, Iraq was placed on the 24-month consultation cycle. The last Article IV consultation was concluded on July 29, 2015, along with a request for purchase under the Rapid Financing Instrument. The staff report (IMF Country Report No. 15/235) was published on August 18, 2015, and is available on the internet.

Technical Assistance, 2012–17

DepartmentDatePurpose
FADMarch 2012Public financial management (METAC)
May 2012Public financial management (METAC)
December 2012Public financial management (METAC)
May 2013Budget functional classification workshop (METAC)
March 2014Budget classification (METAC)
June 2015Status of public financial management reforms (METAC)
November 2015Public financial management law, budget execution, and program-based budgeting
March 2016Public financial management law
February 2017Revenue administration: tax policy
February 2017PFM-commitment control, cash management, treasury single account (METAC)
LEGOctober 2012Article VIII acceptance and AML/CFT technical assistance
December 2012AML/CFT legislative drafting
May 2015Desk review of the draft AML/CFT Law
June 2015Article VIII acceptance
September 2015Desk review of the draft AML/CFT Law
January 2016Anti-money laundering activities
March 2016Cross-border financial flows
MCMMarch 2012Bank restructuring
October 2012Article VIII acceptance
March 2014Assessment of banking needs (METAC)
April 2014Central bank reserve management
May 2015Asset management
November 2015Banking supervision (METAC)
November 2015Prudential regulations: review and assessment (METAC)
March 2016Seminar on foreign exchange regimes and controls (Joint LEG/MCM)
September 2016Reserve management workshop
November 2016Regulations on capital adequacy and liquidity (METAC)
March 2017Regulations on credit risk (METAC)
March 2017Banking supervision: upgrade CBI prudential regulations (METAC)
April 2017Banking supervision (METAC)
STAFebruary 2012External sector statistics
March 2012National accounts statistics
May 2012Monetary and financial statistics
April 2013National accounts statistics
December 2013Balance of payments statistics
December 2014Balance of payments statistics (METAC)
March 2015Government finance statistics (ArabStat)
May 2015Government finance statistics
November 2015Consumer price index (METAC)
January 2016National accounts statistics (METAC)
March 2016Government finance statistics
March 2016External sector statistics
April 2016Financial stability indicators
January 2017National accounts (METAC)
January 2017External sector statistics (METAC)
February 2017Price statistics (METAC)

Relations with the World Bank Group

(As of May 31, 2017)

TitleProductsProvisional and Actual Timing of MissionsExpected and Actual Delivery Date
A. Mutual Information on Relevant Work Program
The World Bank work program in the next 12 months1Economic Policy Analysis and Advice, World Bank
Iraq energy subsidies and tariff reforms (both Iraq and Kurdistan Regional Government—KRG)July/October/December 2016June 2017
Iraq energy sector programmatic technical assistance- IraqOctober/December 2016October 2017
Country Partnership Framework (CPF)December 2016October 2017
Technical Assistance, World Bank
Modernization of public financial management system project with 3 main components:

1) Federal MOF: public financial management;

2) public investment management and public procurement at the federal level; and

3) public investment management and public procurement at the KRG level
December 2016–December 2021Ongoing
Social protection support program TA: phase I and phase IINovember 2015–April 30, 2017 (Phase I); May 1, 2017–June 2018 (Phase II)June 2017/June 2018
Iraq flaring reduction: deliverable gas-to-power action plan/gas processing contract/regulations on:

1) gas pricing;

2) gas transport; and

3) gas marketing
October/December 2016October 2017
Programmatic poverty work (rapid monitoring survey, technical assistance to CSO and KRG CSO on poverty measurement, analytical support to operations)September 2016–18Ongoing
Gas value chain in IraqJune 2016/May 2017June 2017/June 2018
KRG: procurement reformJune 2016–May 2017June 2017
KRG: social safety nets and pensionJune 2016–May 2017June 2017
KRG: social protectionJuly 2016–June 2018Ongoing
KRG: support to Shura CouncilJune 2016–May 2017Ongoing
Central Bank payment systemJanuary/March 2017May 2017
Anti-money launderingApril 2017December 2017
Banking supervisionOctober 2016December 2017
Advice, International Finance Corporation
  • Bank restructuring

  • Construction reform project

  • Dairy sector development

  • Small and medium enterprises training

  • Corporate governance

  • Financial markets infrastructure

  • Risk management for banks

  • Small and medium enterprises banking

  • Public private partnerships: prioritization and regulatory framework

The Fund work program in the next 12 monthsMacroeconomic Policy Analysis and Advice
Third review of the Stand-By ArrangementSeptember 2017December 2017
Fourth review of the Stand-By ArrangementMarch 2018June 2018

Not including infrastructure investments.

Not including infrastructure investments.

Statistical Issues

(As of July 5, 2017)

I. Assessment of Data Adequacy for Surveillance
General

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

The CSO compiles annual and quarterly GDP at current and constant (2007) prices from the production approach, and in current prices from the expenditure approach. The national accounts mainly follow the 1968 System of National Accounts (SNA). Poor and lack of regular comprehensive source data for some industries and for GDP by expenditure have a negative impact on the quality of the national accounts. Volume estimates of GDP suffer from some shortcomings and delays in source data that affect the timelines of the annual estimates. Reduced regional coverage of source data due to the conflicts in four provinces has further weakened the GDP measures. Ongoing TA from METAC is helping the CSO to gradually move to the concepts of the 2008 SNA and to improve the compilation methodology and coverage of GDP. Access to administrative data could be a very significant data input for national accounts estimates, but it would require strong ministerial support and proactive collaboration with other government institutions.
Price Statistics

The CSO compiles and disseminates a monthly CPI for all-Iraq (including Kurdistan) and for each governorate. The index was rebased in 2016, based on the 2012 Household Social and Economic Survey. However, the CPI only covers the urban areas in all governorates and resources are insufficient to expand coverage. Starting June 2014 official data on CPI do not include the four conflict-affected governorates. A quarterly PPI for manufacturing is also compiled on a 2012 base. A recent STA/METAC TA mission provided advice on further improvements to the CSO’s price statistics.
Government Finance Statistics

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

In March 2015, an STA mission—overlapping with the Article IV mission—discussed a work plan aimed at improving the frequency and timeliness of fiscal reporting data and setting a migration plan to improve fiscal statistics based on Government Finance Statistics Manual 2014 (GFSM 2014). In March 2016, August 2016, and January 2017, follow-up STA missions assisted in setting up a reporting tool on quarterly statement of government operations for the budgetary central government. Iraq resumed reporting government finance statistics for publication in the Government Finance Statistics Yearbook (GFSY). Currently there are no fiscal statistics published by the government beyond the summary estimates and outturn for the budgetary central government.
Monetary and Financial Statistics

The CBI reports monetary statistics for the central bank and other depository corporations (ODCs) for publication in the IMF’s International Financial Statistics (IFS), using the standardized report forms (SRFs). However, the quality and timeliness of the data continue to be hampered by the lack of staff capacity, particularly at the commercial bank level and source data quality. There are major inconsistencies between financial soundness indicators for deposit takers (state-owned and private banks combined) and SRF 2SR for ODCs, which are an indication of data quality problems. Per the CBI officials, all foreign-owned companies operating in Iraq are classified as nonresidents—a deviation from international standards regarding the application of the residence concept. In addition, monetary statistics do not cover the northern region (Kurdistan) due to problems with data collection. The publication of SRF data in IFS has been delayed, while the reporting of Fund accounts in the relevant statistics is still pending the authorities’ confirmation. A monetary and financial statistics mission is planned for FY17 to improve the compilation practice with focus on the account classification and the reporting of Fund accounts.
Financial Sector Surveillance

Following a mission on financial soundness indicators (FSIs) in April 2016, the CBI has compiled and reported the 12 core FSIs and 7 of the 13 additional FSIs for state banks and a similar set of FSIs for private banks beginning with the first quarter of 2015 on a quarterly basis. However, there are data issues that need to be addressed before FSIs can be used for publication and surveillance. In this connection, a follow-up FSI mission was conducted in March 2017 to focus on improving data quality.
External Sector Statistics

Balance of Payments and IIP Statistics

The CBI compiles and reports annual as well as quarterly balance of payments data in the format of the IMF’s Balance of Payments Manual, sixth edition (BPM6) to the IMF. The CBI also compiles and disseminates an annual international investment position (IIP) statement. The latest TA mission on external sector statistics (ESS) was conducted in January 2017 and was informed that following incorporation of some of the 2016 mission’s recommendations, the preliminary balance of payments now show a substantial decline of the net errors and omissions. The mission noted that, (i) data related to the oil sector are now included in the balance of payments, (ii) import data should improve especially imports from Kurdistan should be estimated, and (iii) the CBI should accelerate the process of introducing the enhanced international transactions reporting system. The current data sources to compile the ESS are not comprehensive. The paucity of data exists particularly in the areas of external trade in goods and services and foreign direct investment. Considering these findings, the mission has made several recommendations to improve the ESS. International reserves are compiled consistent with international methodologies and published in the IFS since end-2006.

External Trade Statistics

External trade data have serious problems of timeliness and are of poor quality, given the absence of reliable customs data. A new customs form for imports is available but it is not being used at the customs border due to the security situation and the lack of Customs Department resources at the border outlets. The compilation of external trade statics has been hampered by lack of interinstitutional coordination among key data providers.

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

Export data from the oil sector are received from the Balance of Payments Statistics Division at the CBI. The data on non-oil exports, which amount to the equivalent of 3–5 percent of total exports, are derived from information on the customs export form. Non-oil export data are provided to the CBI monthly for crosschecking purposes.
Transactions related to oil exploration, extraction, and development payments to international oil companies has recently been included in the balance of payments.
II. Data Standards and Quality
The country is an e-GDDS participant. The metadata, some of which have been updated in early 2016, for key macroeconomic indicators are available on the country page on the IMF’s Dissemination Standards Bulletin Board.No data ROSC is available.
Iraq: Table of Common Indicators Required for Surveillance(As of June 30, 2017)
Date of Latest Observation (For all dates in table dd/mm/yy)Date ReceivedFrequency of Data7Frequency of Reporting7Frequency of Publication7Memo Items8
Data Quality–Methodological Soundness9Data Quality–Accuracy and Reliability
Exchange rates12/201603/20/2017DDD
International reserve assets and reserve liabilities of the monetary authorities112/201603/20/2017MMM, 4–6-week lag
Reserve/Base money05/201607/06/2016MMM, 4–6-week lag
Broad money06/201610/31/2016MMM, 4–6-week lag
Central bank balance sheet05/201606/30/2016MMM, 4–6-week lag
Consolidated balance sheet of the banking system04/201610/06/2016MMQ, 4–6-week lag
Interest rates201/201702/03/2017MMM, 4–6-week lag
Consumer price index03/31/201605/2016MMM, 3-week lag
Revenue, expenditure, balance and composition of financing3—general government406/201609/2016MMN/A
Revenue, expenditure, balance and composition of financing3—central government06/201609/2016MMN/A
Stocks of central government and central government-guaranteed debt512/201503/2016N/AN/AN/A
External current account balanceQ4/201604/2017QQQ, 9-month lag
Exports and imports of goods and services201503/2017QQQ, 9-month lag
GDP/GNP03/201604/2016QQQ, 3-month lag
Gross external debt12/201503/2016N/AN/AN/A
International investment position612/201412/6/2016QQQ, 9-month lag

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

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

Foreign, domestic bank, and domestic non-bank financing.

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

Including currency and maturity composition.

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

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

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

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

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

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

Foreign, domestic bank, and domestic non-bank financing.

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

Including currency and maturity composition.

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

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

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

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

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