IMF Survey: What does the IMF’s new financial aid mean for Iraq?
Perez: It’s a start, a first step. The IMF’s Emergency Post-Conflict Assistance is a window that allows us to help countries that have gone through conflict and have very limited capacity to implement economic programs. In Iraq, we have seen a willingness and a capacity by the interim government to implement policy and put together a program of economic policies and proposals for structural reform that can be supported by the IMF.
The support will assist Iraq in promoting macroeconomic stability by financing expenditure through petroleum or other available resources, maintaining a stable exchange rate, and keeping inflation under control. The program also looks to the future, with work beginning on the design of an ambitious set of structural reforms. There is, for example, interesting work on the budget, where efforts will be made to begin to eliminate domestic price subsidies on oil products.
Security continues to be a problem. We will have to assess, as we go along, how much of a problem there is in formulating and implementing policies.
IMF Survey: The IMF has lent in tenuous situations before, but Iraq is a large and extraordinarily volatile country right now. How does the IMF assess prospects and priorities, and to what extent can its financial and technical assistance really help?
Bennett: This is an unusually difficult situation, even by the standard of post-conflict countries. Since August of last year, we have not been able to go to Iraq, but we have been able to hold very fruitful and regular discussions with senior officials and government ministers in locations outside of Iraq, and we have been able to provide technical assistance in a similar fashion. We also have counterparts—from the Australian, U.K., and U.S. governments—in the field who have been able to facilitate the dialogue.
Perez: We have been involved in a number of projects that have been key to economic restructuring and that have been carried out very well. One example is the currency exchange launched during the last quarter of 2003 until January 2004. We also helped, along with the Bank of England and the U.S. officials, Iraq’s central bank carry out auctions of foreign exchange and treasury bills. And we’ve been able to have discussions with the Ministry of Finance officials and agree on a fiscal program for 2005 that we hope will be implemented successfully. Within this chaos and uncertainty there has been solid proof that certain actions can be taken.
Within this chaos and uncertainty there has been solid proof that certain actions can be taken.
IMF Survey: The staff report (see box) projects a steady expansion of oil production over the next few years, with an estimated 3.3 million barrels of oil a day produced by 2009. But the report also underscores the need for significantly more investment in infrastructure and much greater efficiency in that sector. Where do you see this boost in investment coming from?
Perez: First, let me say that the projections in the staff report are more in the order of a scenario. It is very difficult to make a rigorous projection about what will happen in Iraq by the year 2009. We have put together a macroeconomic framework for the medium term that looks reasonable and makes sense, but by no means are we saying that this is our projection for that year.
As for investment, in the early years we see a reliance on Iraqi resources. We have talked to experts about how much it would take to maintain the capacity of existing oil wells; how much it would take to start new ones; and how many resources are needed to invest in, or just repair, the refineries. This is, to the best of our knowledge, a sensible scenario but one subject to a lot of uncertainty.
Oil sector holds key to Iraq recovery
Iraq is expected to see GDP growth increase by about 50 percent in 2004, according to the recently released IMF staff report on the economy. This rebound from a near-total halt in economic activity during the war in 2003 reflects a pickup in activity in the critically important oil sector. Also aiding in the rebound are reconstruction, a partial revival in agriculture, and brisk retail activity. Unemployment remains high, however, and widespread security problems continue to severely hamper economic recovery efforts.
Going forward, oil production is expected to remain the key driver in the Iraqi economy. At present, Iraq produces an estimated 2.1 million barrels of oil a day. In its economic assumptions, the report sees the average daily production improving to 2.4 million barrels a day in 2005 and continuing to climb to an estimated 3.3 million barrels a day in 2009.
IMF Survey: The IMF has not taken a stand on the degree of debt reduction that Iraq will need, but how does it factor oil wealth into projections about debt sustainability?
Bennett: To assess a country’s debt-service capacity, one has to take account of its likely income over the medium and long terms. The key measure is how much income is available to service debt. It is not particularly important whether that income derives from exports of oil, another commodity, services, or manufactured goods. At the end of the day, the question is whether the country can service its debt with its projected flow of income.
Perez: Iraq has oil resources, and we hope that it finds more oil resources. But people looking at Iraq should keep in mind that the country has become very poor, and its oil production capacity has deteriorated. There is a tremendous need for investment, and while we project a steady increase in the production and export of oil products, we also recognize that substantial resources will be needed to make that happen. In the short run, Iraq does have a very limited capacity to service its debt.
IMF Survey: What is the IMF’s role in the ongoing Paris Club debt negotiations, and where do we go from here?
Perez: Negotiations between the Paris Club creditors and Iraq are scheduled to begin in mid-November in Paris. As is customary, IMF staff will be invited to make a presentation to the creditors and answer questions about both the debt sustainability analysis it prepares for the Paris Club and the program being supported by the IMF’s Emergency Post-Conflict Assistance. Given the complexity of these negotiations, it may take more than one Paris Club meeting.
Bennett: In a broader sense, our main role is with the Iraqis—to work with them to continue to formulate and implement needed policies. We intend to maintain a close dialogue over the next 6 to 9 months to monitor progress, ensure things don’t fall through the cracks, and help them build their capacity to implement a more ambitious program. When Iraq is in a position to implement a more ambitious program—perhaps in the second half of 2005—a Stand-By Arrangement could be an appropriate step to take.
IMF Survey: The staff report makes considerable mention of the risk to the IMF in lending to Iraq at this point. It also mentions that assurances were sought from Iraq’s creditors before the assistance was granted. Is this unprecedented?
Bennett: Not unprecedented, but this is the first time it has been done in the case of emergency assistance. We are lending in an unusually difficult situation, and we have not yet had a resolution of Iraq’s debt burden. Because of this, we felt we needed to garner additional assurances, and the precedent we followed was that of the Systemic Transformation Facility, which was created to enable the IMF to provide early financing to countries of the former Soviet Union in 1993. That situation was also highly uncertain—both in terms of Russia’s debt and with regard to the likelihood of policy implementation in a chaotic situation.
Photo credits: Saeed Khan for AFP, page 297; Henrik Gschwindt De Gyor, Eugene Salazar, and Michael Spilotro for the IMF, pages 298–99, 300, 301, 303, 305, 306, 309, and 311; and Issouf Sanogo for AFP, page 312.
For Iraq, we obtained two things from the Paris Club and from a critical mass of other creditors. First, the creditors agreed to defer debt service on existing obligations through the end of 2005—the period of the program supported by emergency financing—so that we could be confident that the program was fully financed. And, second, they affirmed our preferred creditor status during the repayment period of IMF resources, so that we would have first call on available resources when the time comes for repayment.
IMF Survey: Emergency Post-Conflict Assistance is designed to have a catalytic effect and boost international support for the recovery effort. Will it be able to do this?
Perez: Where the program will have a strong catalytic effect is in the debt relief negotiations. Such a program is a necessary part of the Paris Club negotiations, and tied to the Paris Club are the non-Paris Club creditors, notably, for example, Saudi Arabia, Kuwait, and the United Arab Emirates.
Unsustainable debt is a major barrier to foreign investment, since it leaves potential investors without a clear picture of whether a country can service its debt or maintain an open capital and current account. Our experience has been that foreign donors feel more comfortable if a country has a program with the IMF; this tends to guarantee a macroeconomic framework that is sustainable and reliable.
Bennett: There have been complaints of a shortage of donor funds, but the real problem is that security must improve to allow project implementation to accelerate. If this happens, resources already on the table can be used more quickly, and when the fruits of these investments become more evident, the flow of donor financing could improve considerably.
When Iraq is in a position to implement a more ambitious program—perhaps in the second half of 2005—a Stand-By Arrangement could be an appropriate step to take.
Perez: I’d also like to add that the press seems to focus on the activities of the United States and the other large donors or on the IMF, World Bank, or the United Nations when discussing Iraq’s reconstruction efforts. What I want to remind readers of the IMF Survey is that there are quite a number of very committed Iraqis working in Baghdad and other parts of Iraq, many times risking their lives to go to work. We in the IMF see this all the time, and it is something that encourages us about the future of Iraq.
The complete text of the staff report, as well as Iraq’s Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, is available on the IMF’s website (www.imf.org).