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Interview with Lorenzo Perez, head of Iraq mission team: IMF may lend to Iraq by second half of 2004

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
February 2004
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The reconstruction of Iraq typically conjures up images of bridges, roads, and power plants, but revitalizing the country’s economic and financial infrastructure is just as important. After decades of neglect and internal conflict as well as three wars, the Iraqi authorities are faced with the momentous task of gathering reliable macroeconomic data, rebuilding a statistical database, and formulating a macroeconomic framework that can stabilize the economy and lay the groundwork for economic recovery. Since the end of hostilities in March 2003, the IMF has been assisting Iraq with all of these tasks (see box, page 18). Camilla Andersen of the IMF Survey spoke with Lorenzo Perez, the head of the Iraq mission team, about recent developments.

IMF Survey: The IMF’s Managing Director, Horst Köhler, indicated at a donors’ conference in Madrid in October that the IMF could provide loans ranging from $2.5 billion to $4.25 billion to Iraq over a three-year period. What is the likely timetable for IMF lending, and what form could it take?

Perez: Since Iraq is a country emerging from conflict, the IMF will probably start out by providing financial assistance under its Emergency Postconflict Assistance policy. This usually involves a first drawing of about 25 percent of a country’s quota for a period of one year, to be followed by another possible disbursement of 25 percent of quota. In Iraq’s case, disbursements under this policy could total $850 million. Postconflict assistance could then be used as a launching pad for a regular IMF program, such as a Stand-By Arrangement. It is difficult to be precise about timing, but there could be a first postconflict disbursement in the second half of 2004, to be followed by a regular loan in 2005.

IMF Survey: Iraq’s external debt has been estimated at some $120 billion, one of the largest in the world. What is the current state of play in the restructuring of this debt, and what is the role of the IMF?

Perez: The members of the Paris Club announced earlier this year that they do not expect their debt to be serviced until the end of 2004. That was a first step. The IMF, for its part, is carrying out a debt sustainability analysis. As part of this process, it has contacted some 50 countries that are not members of the Paris Club, requesting information about any outstanding debt and arrears owed to them by Iraq. Information generated in this way shows that debt to non-Paris Club creditors probably stands at $60-65 billion, compared with about $42 billion owed to Paris Club creditors. There is also about $15 billion that is owed to commercial creditors. IMF staff has no way of verifying this information, but the non-Paris Club information collected by IMF staff will help Iraq begin reconciling its debt with its creditors in the near future. Former U.S. Secretary of State and Secretary of the Treasury James Baker has been visiting Iraq’s major creditors to discuss debt forgiveness. Once these meetings have been completed, negotiations will be turned over to the Paris Club. The IMF’s debt sustainability analysis will be provided to the Paris Club in April.

IMF involvement in Iraq

• Economic policy advice%. Through its policy dialogue with the Coalition Provisional Authority, IMF staff is helping create a stable macroeconomic framework to underpin economic revival. Its macroeconomic assessment for 2003-04 was published on October 21 and is available on the IMF’s website.

• Technical assistance%. The IMF is providing technical expertise to help rebuild Iraq’s economic and financial infrastructure. For instance, it is helping the finance ministry set up a modern, unified budget and tax system; assisting the central bank in designing and conducting monetary policy and ensuring the proper functioning of the banking system; and advising the statistical office on how to rebuild Iraq’s statistical database. The IMF is also helping coordinate technical assistance from other agencies and countries.

• Debt sustainability analysis%. It is common practice for the Paris Club of creditors to ask the IMF to prepare a debt sustainability analysis before it undertakes a debt restructuring.

• Member of the International Advisory and Monitoring Board (IAMB)%. The IAMB oversees the work of the auditors of the Development Fund for Iraq (see box, page 19).

• Possible financial assistance%. The IMF will be able to provide financial assistance to Iraq once there is an internationally recognized government in place. Before lending can take place, however, the new government would have to clear Iraq’s arrears to the IMF.

IMF Survey: Do you foresee any obstacles to the debt restructuring?

Perez: The international community is predisposed to help Iraq. People realize that although Iraq has very large oil resources, its capacity to produce oil just isn’t sufficient to pay for both reconstruction and debt servicing. If Iraq is to grow again and reintegrate itself with the international community, there is a need for debt relief. I think negotiations with Paris Club and non-Paris Club creditors will be moving along fairly well and in parallel.

IMF Survey: The bombing of the United Nations headquarters in Baghdad in August killed 23 people and wounded many more, including you and five other IMF staff. Since then, the IMF has had no physical presence in Iraq. How do you and your colleagues carry out your work in those circumstances?

Perez: Not being able to visit Baghdad is a drawback. But the real problem is that there are so few data available on Iraq’s economic situation. The Iraqis are starting to produce basic economic statistics, but the capability of the national statistical office and the central bank was severely disrupted because of the damage caused by the war and the looting that ensued.

Until we can return safely to Baghdad, we have designed a strategy to meet outside Iraq. We have had, so far, two meetings in Amman, Jordan, with Iraqi officials. Technical assistance is also being provided from outside Baghdad, mostly from Amman. This isn’t ideal, but much of our work can be done outside Iraq as long as we have access to the relevant information and as long as Iraqi officials are willing to meet with us. We hope that as the security situation improves, it will be possible to travel to Iraq again.

Photo credits: Denio Zara, Michael Spilotro, and Eugene Salazar for the IMF, pages 18, 20, 22-24, 26, and 27; Karim Sahib for AFP, pages 17 and 19; and DC Photography Studio, pages 30-32. Illustration: Massoud Etemadi for the IMF, pages 28 and 29.

IMF Survey: Could you give us some idea of the division of labor among institutions such as the World Bank, the United Nations, and the IMF?

Perez: The World Bank and the UN carried out a needs assessment prior to the donors’ conference in Madrid. They analyzed 10-12 key sectors, including health, education, and infrastructure, and came up with estimates for Iraq’s global reconstruction needs. The IMF contributed by carrying out a macroeconomic assessment. As a result of this work, two trust funds were created to channel economic assistance provided by donor countries. The trust funds are managed separately by the World Bank and the UN. The idea was to give a choice to donor countries. Those countries wishing to emphasize community development and education, for example, would channel their funds through the World Bank, whereas countries wishing to emphasize health projects would choose the UN.

IMF Survey: The IMF is a member of the International Advisory and Monitoring Board (IAMB) (see box this page). Is it normal to establish such a board, or was there a need for extra checks and balances in the case of Iraq, to remove any doubt about the use of Iraq’s oil resources?

Perez: The IAMB oversees the work of the auditors of the Development Fund for Iraq, which replaced the UN’s Oil-for-Food Program (see box, this page). The decision to establish the IAMB was part of the UN resolution that created the Development Fund for Iraq. It was seen as an additional means of ensuring that oil export revenues would be used exclusively for the benefit of the people of Iraq. The IAMB, for example, makes suggestions about the terms of reference for hiring auditors and the type of information that should be provided to them. The IMF has been involved from the start in setting up the Board and agreeing on its terms of reference. The Board has already met twice.

IMF Survey: What are Iraq’s economic prospects for 2004?

Perez: Economic prospects depend crucially on the recovery of oil output. Current estimates see oil production rising over 10 years from about 2½ million barrels a day to twice that amount. Efforts are also being made to encourage investments and, in particular, revive the financial sector, crucial for the recovery of the non-oil economy.

The budget for 2004 is well financed because of unspent funds from the Oil-for-Food Program and significant grants from the United States and other countries. In the future, increasing oil production will be key to maintaining a sustainable fiscal position. But Iraq cannot rely simply on oil revenues; it must also create an efficient tax administration and maintain a prudent level of government expenditures while making the necessary investments in infrastructure. This is what makes our work particularly important and interesting: trying to come up with proposals that could result in a sustainable fiscal and external position over the medium and long term.

The role of the International Advisory and Monitoring Board (IAMB)

After the end of hostilities in Iraq, the UN Security Council decided to lift sanctions imposed on the country following the first Gulf War and to terminate the Oil-for-Food Program, which had been in place since 1995. On May 22, 2003 it passed Resolution 1483, setting up the Development Fund for Iraq. The fund, which is held by the central bank of Iraq and managed by the Coalition Provisional Authority, administers all proceeds from export sales of petroleum, petroleum products, and natural gas.

To ensure transparency, the UN Security Council also decided that all export sales of petroleum, petroleum products, and natural gas from Iraq would “be audited by independent public accountants reporting to the International Advisory and Monitoring Board.”

The members of the IAMB are representatives of the Arab Fund for Social and Economic Development, the IMF, the UN, and the World Bank. The Board last met on December 22 and announced it would soon establish a website to disseminate documentation and information related to its operations.

More information is available at http://www.un.org and http://www.imf.org.

IMF Survey: What advice is the IMF giving to Iraq in terms of exchange rate policy?

Perez: There has been a lot of discussion about what type of exchange rate regime Iraq should adopt. The central bank is pursuing a flexible exchange rate policy and carries out daily foreign exchange auctions for market participants—mostly commercial banks representing themselves and their customers. The IMF agrees that a flexible exchange rate is the most appropriate policy for Iraq right now because it allows the exchange rate to help absorb economic shocks, such as changes in oil prices.

The currency was subject to volatility right before the currency exchange—it depreciated to about 2,000 dinars per U.S. dollar in early October. However, it has appreciated since it became evident that the currency exchange was going to be successful. Replacing the currency was very important. The old currency has been replaced by new bank notes that have more security features to thwart counterfeiting and more denominations to facilitate transactions.

IMF Survey: Are there any precedents, such as the IMF’s involvement in Afghanistan, that you can look to when shaping your policy advice?

Perez: Iraq’s economy can be characterized as a mix between the centrally planned economies of the former Soviet Union and countries emerging from conflict. The IMF has a lot of experience working with both types of countries. IMF staff was very involved in helping former centrally planned economies make the transition to market economies, and we have gathered experience from countries that have recently emerged from conflict such as Bosnia, East Timor, and Afghanistan. The IMF’s Iraq team is seeking to learn from all those cases.

IMF Survey: Despite the security situation, do you see reason to be optimistic about the outlook for Iraq?

Perez: Iraq has suffered a lot; it was for decades subject to a very damaging dictatorship and to international sanctions. The people of Iraq want to be free, run their own affairs, and get on with their lives. It is a rich country not only in terms of natural resources but also in terms of culture and human capital. Those factors give me reason to be optimistic. But it is going to take some time—years rather than months. What we are witnessing is the birth of a new nation.

Iraq’s external debt

The Paris Club is an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties experienced by debtor nations. Paris Club creditors agree to reschedule debts due to them. Rescheduling is a means of providing a country with debt relief through a postponement and, in the case of concessional rescheduling, a reduction in debt-service obligations. There are 19 permanent members of the Paris Club: Austria, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, the Russian Federation, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Other official creditors can also participate in rescheduling sessions, subject to the agreement of permanent members and of the debtor country.

Estimates of Iraq’s debt (excluding war reparations) are around $120 billion, of which Paris Club creditors account for $42 billion. A substantial part of the remaining debt is owed to countries that are not members of the Paris Club. Former U.S. Secretary of State and Secretary of the Treasury James Baker has been asked by the U.S. President to help forge an international consensus in favor of restructuring Iraq’s debt. As part of his mission, he has visited China, France, Germany, Italy, Japan, Kuwait, Qatar, the Russian Federation, Saudi Arabia, and the United Arab Emirates.

There are also claims for war reparations for the Iraq-Kuwait war. These claims are adjudicated and awarded by the UN Compensation Commission. Claims that have been awarded but await payment amounted to about $29 billion in December 2003, and there remains about $96 billion of claims that still need to be processed and awarded. Based on earlier awards, it is likely that a significant part of these claims will not be awarded.

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