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?
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?
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?
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?
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?
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?
IMF Survey: What are Iraq’s economic prospects for 2004?
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.
IMF Survey: What advice is the IMF giving to Iraq in terms of exchange rate policy?
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?
IMF Survey: Despite the security situation, do you see reason to be optimistic about the outlook for Iraq?
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.