Iraq: Supplementary Information for First and Second Reviews Under the Stand-By Arrangement, Financing Assurances Review, and Request for Waivers of Nonobservance and Applicability of Performance Criteria

The government of Iraq is committed to reform the pension law before it goes into effect. Good progress has been made in setting up a payments system. The Central Bank of Iraq (CBI) and ministry of finance are coordinating their strategy toward restructuring the state-owned banks. The government expects to initiate negotiations on resolving non-Paris Club official claims very soon. Iraq’s medium-term economic prospects look reasonably favorable, but are subject to considerable risk. The new government has taken important and decisive measures to bring the program back on track.

Abstract

The government of Iraq is committed to reform the pension law before it goes into effect. Good progress has been made in setting up a payments system. The Central Bank of Iraq (CBI) and ministry of finance are coordinating their strategy toward restructuring the state-owned banks. The government expects to initiate negotiations on resolving non-Paris Club official claims very soon. Iraq’s medium-term economic prospects look reasonably favorable, but are subject to considerable risk. The new government has taken important and decisive measures to bring the program back on track.

1. This supplement provides an update on developments since the issuance of the staff report. The thrust of the staff appraisal remains unchanged.

2. Inflation remains high. Consumer prices increased by 0.7 percent in June, bringing the cumulative increase in prices since the beginning of the year to 22.5 percent, while the 12 month inflation rate was 52.5 percent.1 This does not significantly alter the inflation outlook described in the staff report. Consumer prices for most goods and services increased by between 1 to 5 percent in June, with the exception of transportation and communication services (which increased by 24.6 percent) and fuel and electricity prices (which declined by 11.3 percent).

3. The Central Bank of Iraq (CBI) raised its interest rates again on July 14. The CBI increased its policy interest rate from 10 to 12 percent on July 14, and raised deposit rates by similar amounts. This follows the increase in the policy rate from 8 to 10 percent on July 4. Including the catch up with the April increase in the policy rate, deposit rates have been increased by 5 percentage points since the beginning of July. This is in line with the policy described in the staff report.

4. The prior action on submission of amendments to the draft law for liberalization of private imports of gasoline has been fulfilled. The amended law was approved by cabinet and submitted to the office of the Council of Representatives on June 25, 2006, with articles 7 and 8 removed to eliminate price controls on resale of private imports of gasoline. A parliamentary select committee has reviewed the amended law, and is expected to soon table the law for a first reading by the Council of Representatives.

5. Crude oil production and exports continue to climb. Oil production in June increased to 2.36 million barrel per day (mbpd), the highest level since the invasion in 2003. Exports increased to 1.68 mbpd in June and benefited from the sale of oil that had been stored in Turkey from the northern fields. Crude oil sales from the north have continued in July on a sporadic basis. For the time being, the staff are maintaining the projection of an average of 1.5 mbpd of crude oil exports in 2006.

6. Coverage of the new social safety net system continues to expand. As of mid-July, some 550,000 families were covered, in line with the target coverage of one million families by year-end.

7. Bilateral debt agreements with all Paris Club Creditors except Russia have now been signed. Russia has concluded a bilateral agreement with Iraq, and is expected to sign the agreement in September. The new Iraqi government has also made contact with the Saudi Arabian authorities and with China (two of the biggest non-Paris Club creditors) to start negotiations on a debt agreement.

8. Through July 31, 2006 Iraq had settled about 96 percent of commercial claims through the debt and cash exchanges, including the arbitration process. The total amount of claims settled (including those under arbitration) has risen to $19.7 billion. The total amount of claims subject to settlement has been revised to $20.5 billion.

1

The CPI increase for May was revised down by 3.3 percentage points to 1.2 percent, and the year on year increase was reduced from 58.0 percent to 53.0 percent.