Article

With new IMF loan, Iraq moves closer to wider debt reduction

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2006
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On December 23, 2005, the IMF’s Executive Board approved the first-ever Stand-By Arrangement for Iraq, which is designed to support the conflicttorn country’s economic program over the next 15 months. The program envisages a boost in economic growth to 10 percent in 2006, as well as improved governance, and further steps toward a market economy. The Iraqi authorities are treating the $685 million arrangement as precautionary; they will not draw upon the resources unless they are needed.

In September 2004, Iraq received a $436 million loan through the IMF’s Emergency Post-Conflict Assistance (EPCA) facility. This initial credit was designed to facilitate Iraq’s negotiations with its Paris Club creditors over a debt-restructuring agreement that is now in place and to support the nation’s economic programs through 2005. A condition for the second stage of debt reduction agreed with the country’s Paris Club creditors was for Iraq to secure the Stand-By Arrangement.

IMF Deputy Managing Director Takatoshi Kato said that the Iraqi authorities had been “successful in promoting macroeconomic stability in 2005, despite the extremely difficult security environment.” Economic growth, at an estimated 2.6 percent, was modest in 2005, following a rebound of almost 50 percent in 2004. Inflationary pressures moderated, although prices remained volatile, and the projected fiscal deficit was much smaller than expected under the EPCA-supported program, mainly owing to higher-than-projected export prices for crude oil. On the other hand, security concerns and capacity constraints resulted in a slower implementation of structural benchmarks than was envisaged.

Expanding the oil sector is a priority under Iraq’s 2006 economic program.
Iraq200420052006
EPCA1ActualEPCA1Est.Proj.2
(billion U.S. dollars)
Exports of oil and gas16.517.817.622.828.7
(annual percent change)
Real GDP51.746.516.72.610.4
Consumer price inflation (end of period)732152015
(percent of GDP)
Primary fiscal balance-41.9-39.6-27.3-10.8-8.2
Overall external balance-4.86.1-14.94.24.0
Total external debt3588.2308.6541.3154.3125.2
Current account-17.8-36.8-18.2-14.4-2.7
(months of imports of goods and services)
Gross reserves2.63.23.73.13.6

EPCA = Emergency Post-Conflict Assistance.

tentative projection, based on Stand-By Arrangement medium-term framework.

Data for EPCA are prior to Paris Club agreement of November 21, 2004.

Data: IMF staff estimates and projections.

EPCA = Emergency Post-Conflict Assistance.

tentative projection, based on Stand-By Arrangement medium-term framework.

Data for EPCA are prior to Paris Club agreement of November 21, 2004.

Data: IMF staff estimates and projections.

The authorities’ 2006 program aims to allocate resources toward the planned oil sector expansion, redirect expenditures away from general subsidies toward better public services, and strengthen administrative capacity. The country’s fiscal stance in the near term will be driven by reconstruction needs. Kato noted that “a critical component of the overall strategy is to contain expenditures within revenues and available financing by prioritizing expenditures toward reconstruction, controlling the wage and pensions bill, reducing subsidies on petroleum products, and expanding the participation of the private sector in the domestic market for petroleum products, while strengthening the social safety net.”

The authorities have recently increased prices of refined petroleum products and will need to press ahead with other structural reforms, including measures to enhance the efficiency and transparency of public financial management and the development of a comprehensive restructuring strategy for the state-owned banks, Kato said. At the same time, the Central Bank of Iraq aims to establish a modern payment system, implement modern supervisory frameworks, facilitate the proper functioning of foreign exchange and money markets, and conduct a monetary policy geared toward ensuring financial stability.

Kato added that “the medium-term outlook for Iraq is favorable, but subject to many risks. A strengthening of the security situation will help the authorities implement the program. Moreover, Iraq remains vulnerable to shocks, particularly those relating to oil production development and oil export price movements.”

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