Iraq: Third and Fourth Reviews Under the Stand-By Arrangement, Financing Assurances Review, and Requests for Extension of the Arrangement and for Waiver of Nonobservance of a Performance Criterion
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International Monetary Fund
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Publication Date:
22 Mar 2007
eISBN:
9781451819120
Language:
English
Keywords:
ISCR; CR; government; IMF arrangement; fuel product; government import; Iraq; government of Iraq; government fuel import; revolving government credit; commitment to the program; Oil; Budget planning and preparation
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This paper discusses key findings of the Third and Fourth Reviews Under the Stand-By Arrangement (SBA) for Iraq. Economic growth in 2006 was below target because oil production did not increase as projected. This reflected lower-than-planned investment and the lack of security. Inflation increased to 65 percent in 2006 to December 2006. This was mainly owing to shortages of key commodities, caused in part by the ongoing insurgency. The underlying rate of inflation has also remained high.

Abstract

This paper discusses key findings of the Third and Fourth Reviews Under the Stand-By Arrangement (SBA) for Iraq. Economic growth in 2006 was below target because oil production did not increase as projected. This reflected lower-than-planned investment and the lack of security. Inflation increased to 65 percent in 2006 to December 2006. This was mainly owing to shortages of key commodities, caused in part by the ongoing insurgency. The underlying rate of inflation has also remained high.

I. Introduction

1. The SBA for Iraq was approved in December 2005 in support of an economic program covering the period through March 22, 2007. The program aimed at maintaining macroeconomic stability, paving the way for sustainable growth, and achieving external debt sustainability. The last stage of the 2004 Paris Club debt reduction agreement, increasing the debt cancellation rate to 80 percent in net present value (NPV) terms, depends upon the conclusion of the final review of the third year of one or more successive upper credit tranche arrangements, expected by end-December 2008.1

2. The government has remained broadly stable since its formation in May 2006, but the security situation has deteriorated. The security problems continued to seriously hamper economic recovery, but program implementation has been broadly on track. The government and its Coalition partners have begun implementing a new security plan aimed at reducing the widespread violence, especially in and around Baghdad.

3. The Iraqi government, with the help of the United Nations, has initiated an International Compact for Iraq (ICI). The objective of the ICI is to develop, with support of the international community, a medium-term framework for comprehensive political, security and economic reform. The Fund’s main contribution to the ICI will be the macroeconomic framework of the program supported by the SBA.

II. Recent Economic Developments

4. Economic growth was lower than foreseen and inflation increased in 2006. Economic activity and investment continued to suffer from the prevailing violence. Outmigration of skilled labor continued. Real GDP growth is estimated at about 3 percent in 2006, lower than projected mainly because oil production remained unchanged from 2005 at 2 million barrels per day (mbpd). Annual consumer price inflation was almost 65 percent in December. The high rate of inflation owes much to shortages of key commodities (especially fuel with effects on transportation) and increasing security costs. The underlying rate of inflation (excluding fuel and transportation) has also remained high, in the range of 30–35 percent.

5. The fiscal outturn for 2006 is expected to show a substantial surplus compared to a budgeted deficit. While current expenditures were broadly in line with the budget, investment spending was much lower due to: (i) the ongoing violence; (ii) implementation capacity constraints; and (iii) problems of procuring oil-related investment goods in a tight world market. As a result of the surplus, the resources in the Development Fund for Iraq (DFI) and government deposits at the CBI increased considerably. The authorities are still working on providing information on the execution of Letters of Credit issued by the Trade Bank of Iraq in previous years, in order to determine the amount of spending in 2006 related to previous budgets.

6. The central bank has tightened monetary policy and allowed the dinar to appreciate, in order to contain inflation and counter dollarization. The growth of currency in circulation and reserve money over the first 11 months of 2006 was well below the inflation rate, reflecting the ongoing dollarization. Since late August, the CBI has started issuing its own securities, which currently yield a return of 21 percent per annum. It also raised its policy interest rate in two steps from 12 percent in early November to 20 percent as of early January. The exchange rate appreciated by some 12½ percent from mid-November, reaching ID 1,290 per U.S. dollar at end-January 2007. At the same time, gross international reserves increased to $15.7 billion at end-November.

7. Structural reforms have continued, although there have been delays in some areas. While important reforms (such as fuel price increases, fuel import liberalization and payment system modernization) were implemented, other measures, including the adoption of a new budget classification, amendment of the pension law, completion of a census of public service employees, and recapitalization of the CBI, are still underway.

III. Policy Discussions

8. Discussions on the third and fourth reviews focused on measures needed to keep the program on track. The authorities and staff agreed that the most urgent task was to bring inflation down by a combination of: (i) a tightened monetary policy stance and appropriate management of the exchange rate, including to counter dollarization; (ii) strict control of government current spending; and (iii) measures to alleviate commodity shortages (in particular by allowing private imports of petroleum products). The discussions also focused on the 2007 budget, on structural reform (especially regarding the domestic market for fuel products), and on progress in addressing concerns raised in the context of the audits of the CBI financial statements and in the IMF interim safeguards assessment report (ISAR).

9. The authorities remain strongly committed to the program supported by the SBA. In the attached second Supplementary Memorandum of Economic and Financial Policies (SMEFP-2), they outline their plans for the remainder of the program period.

A. Macroeconomic Outlook and Risks

10. Iraq’s economic prospects in 2007 and over the medium term are critically dependent on an improvement in the security situation. If the level of violence can be reduced, the government investment program, including in the oil sector, could be implemented and private sector activity begin to recover. On this basis, real GDP growth in 2007 is projected at about 10½ percent with oil production picking up to 2.3 mbpd. The non-oil economy is expected to continue to grow by 7½ percent. Strong policy actions on the inflation front could bring annual consumer price inflation down to about 30 percent by end-2007. A medium-term scenario is presented in the Appendix. If the security situation does not improve, however, government investment would likely be lower and commodity shortages would persist, with adverse effects on growth and inflation.

11. The economic outlook is subject to considerable risk. Persistent insecurity and the possibly resulting political instability would hamper economic growth, worsen commodity shortages and keep inflation high, and undermine implementation of the structural reform agenda. A further drop in international oil prices also represents a major risk for public finances and the balance of payments.

Iraq: Near-Term Outlook

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Baseline assumes no improvement in security, and no increase in oil production and government investment compared to the 2006 outturn.

B. Fiscal Policy and Related Measures

12. The 2007 budget aims to make adequate allowance for an ambitious investment program, while preserving a sustainable fiscal stance overall (SMEFP-2,¶8–10). Because the appreciation of the exchange rate lowers the dinar value of oil revenues, this requires strict spending control. The non oil budget deficit projected for 2007 remains broadly unchanged compared to that in 2006. In view of its high import content, the increase in government investment should have only a limited impact on inflation. Current spending, including on wages and pensions, will increase moderately to provide room for significantly higher public investment and outlays on security and the social safety net. Progress is being made in streamlining the social safety net (SMEFP-2,¶16). The amendments to the new pension law have been submitted to the Council of Representatives (CoR; SMEFP-2,¶15). The amendments include a gradual reduction of replacement rates to fiscally sustainable levels and zero indexation in 2007 to ensure affordability in the short-term. Unfortunately, the amendments have not yet been enacted but the authorities are committed to push this through as soon as possible. The government aims to complete a census of public service employees by end-June 2007 (performance criterion). In the event that oil export revenues are substantially lower than budgeted, the government has indicated its readiness to prepare a supplementary budget to reduce government spending and keep the fiscal deficit on target.

13. The government is committed to further increasing domestic prices of fuel products (SMEFP-2,¶12). Although the authorities expressed concern about the possible adverse political fallout during the implementation of the security plan, they nevertheless intend to pursue their policies in this area. The government will no longer provide an explicit budget subsidy for fuel products (except for kerosene), although there will remain an implicit budget subsidy on domestically produced fuel products (mainly regular gasoline and diesel). Government fuel imports, which will remain sizeable in 2007, will be financed from domestic sales of fuel products. Continuing government imports was not envisaged under the original program but is considered necessary to avoid fuel shortages (thereby helping to reduce inflationary pressures).

A01fig01

Fuel prices in Iraq as a percentage of average fuel prices in other oil exporting countries in the Middle East and North Africa region, 2004–07 1/

Citation: IMF Staff Country Reports 2007, 115; 10.5089/9781451819120.002.A001

1/ Assumes no price increase in benchmark countries in 2007.

Revenue and Expenditure of Oil-Related State-Owned Enterprises, 2004–07

(In billion ID)

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Excluding government imports of oil derivative products for which a budget subsidy will nog longer be provided in 2007.

14. The government is also preparing to facilitate private importation of petroleum products. The law permitting private imports and resale at market prices of petroleum products was enacted by the CoR in September 2006, and implementing regulations were issued in October. The government has exited the domestic market for premium gasoline and will make storage facilities and pump stations available to the private sector.

15. The government will make the recently adopted chart of accounts and the budget classification fully consistent with the Fund’s Government Finance Statistics Manual (GSFM) 2001 by end-June 2007 (this was a missed performance criterion for end-December 2006; see SMEFP-2,¶14). The ministry of finance has started using the Financial Management Information System in January 2007.

C. Monetary and Exchange Rate Policy

16. Monetary policy will be tightened further in 2007, if needed to help contain inflationary pressures, and the CBI will continue to manage the exchange rate with a view of reducing inflation and reversing dollarization. The central bank is committed to letting the exchange rate appreciate further in the coming months in line with its November 2006 monetary policy statement, while keeping a close watch on the effectiveness of these policies.

17. The Ernst and Young (E&Y) audit of the CBI 2005 financial accounts highlighted serious weaknesses in internal controls and accounting procedures.2 These weaknesses have been underscored in the IMF’s ISAR, the final version of which was sent to the CBI in December 2006. The authorities have begun addressing these issues so that the improvements will be reflected in the audit of 2006 financial accounts. The CBI has retained E&Y to conduct the 2006 financial audit, and is committed to have an interim audit completed by end-May 2007 (performance criterion). The government has decided to recapitalize the CBI early in 2007.

D. Financial Sector Reform

18. Memoranda of Understanding (MoUs) between the CBI and the ministry of finance for the restructuring of the two main state-owned banks were signed in December. The MoUs call for an operational restructuring of Rasheed and Rafidain banks, and a financial restructuring of Rasheed bank. The financial restructuring of Rafidain bank will await the settlement of claims against its London branch. The authorities will appoint the auditor by end-April 2007 and aim for completion of the audits in 2007. Staff has encouraged the authorities to restructure the remaining four state-owned banks using a similar approach.

19. Great strides were made in modernizing the payment system. The real time gross settlement system and the automated clearing house started their operations ahead of the target dates (structural benchmarks for August and November 2006, respectively), and the CBI is in the process of expanding coverage to all commercial banks (from 12 currently).

E. Other Structural Issues

20. The authorities continue their efforts to establish a competitive legal framework for the hydrocarbon sector. Negotiations on a new hydrocarbon law are ongoing within the government. The authorities intend to reach agreement shortly on the major contentious issues, including the management of the sector, the right to issue contracts, and the regional sharing of revenues.

21. The authorities have committed to joining the Extractive Industries Transparency Initiative (EITI). To combat corruption, the government has cancelled some suspicious contracts related to the transportation of fuel products and rendered procurement procedures more transparent. Progress is being made with oil-metering.

22. The International Advisory and Monitoring Board (IAMB) mandate was extended through December 2007.3 The authorities plan to involve the newly established Iraqi Oversight Board (IOB) in the IAMB’s work to provide the IOB with adequate training prior to the eventual expiration of the IAMB mandate.

23. Iraq continues to work toward resolving outstanding external claims. Most Paris Club (PC) official creditors have signed bilateral agreements. Progress is slow, however, in resolving non-PC official claims, especially of the Gulf countries. The authorities continue the reconciliation process of unresolved private claims (about 4 percent of original claims; see SMEFP-2,¶25).

IV. Program Monitoring and Financing Assurances

24. All quantitative performance criteria set for end-September were met but one structural performance criterion was missed. The chart of accounts and budget classification were not adopted in line with the IMF’s GFSM 2001 on December 31, 2006. In light of the corrective actions being undertaken as specified in the SMEFP-2, the authorities are requesting a waiver for the missed structural performance criterion. Staff will inform the IMF Executive Board on the outcome for the end-December quantitative performance criteria before Board consideration of the third and fourth reviews under the SBA; preliminary information received thus far suggests that these are likely to be met.

25. The program will continue to be monitored through quarterly reviews. In light of the authorities’ request to extend the SBA by six months to September 2007, they also requested that the final (fifth) review, due originally by mid-February 2007, be rephased to mid-May 2007, and that the last purchase will be available upon observance of the end-June 2007 performance criteria, while leaving total access unchanged. In case there remain arrears to private creditors by the end of the program period, a financing assurances review will be undertaken.

26. Staff has recently finalized the ISAR of the CBI. The ISAR includes an action plan to assist the CBI in responding to the concerns and recommendations raised in the ISAR and the E&Y 2005 financial audit. The CBI has agreed on a timetable for corrective actions based on the ISAR and has requested Fund technical assistance in this area (SMEFP-2,¶19).

V. Staff Appraisal

27. Iraq is entering a crucial period in its economic stabilization and recovery. Progress was made in strengthening economic policies in 2006, but the deterioration in the security situation is exacting a heavy toll on the economy. Improved security conditions will be essential for the successful implementation of the economic program supported by the SBA.

28. The authorities are committed to maintaining fiscal sustainability. Staff welcomes the containment of current spending, especially on wages and pensions, and the significant reduction in explicit fuel subsidies envisaged in the 2007 budget. It is crucial that the pension law be amended to make the pension system fiscally sustainable and that the census of public service employees be completed as planned. The increase in and ongoing rationalization of poverty-reducing spending are encouraging.

29. The authorities’ decision to continue raising domestic fuel prices in the current volatile political environment is a strong signal of their commitment to the program. Increased efforts by the government to facilitate private sector imports of petroleum products will be key to reducing supply bottlenecks and limiting destabilizing price hikes in the black market.

30. Staff welcomes the strengthening of the dinar and the recent increases in the CBI policy interest rate. Inflation has reached a worrisome level, and the CBI may need to tighten monetary conditions further if inflation remains high and dollarization does not come down. Fiscal policy can help by keeping current spending in line with the absorptive capacity of Iraq’s small non-oil economy.

31. The structural reform momentum should be stepped up in 2007. The hydrocarbon law should be enacted as soon as possible in view of Iraq’s large investment needs in this sector to increase oil production over the medium-term. Building on the progress made in improving the payment system, it is also important to move ahead with the restructuring of the banking system. Staff welcomes the authorities’ commitment to address delays in the modernization of the chart of accounts and the budget classification.

32. corruption, especially in the hydrocarbon sector, is hurting the economy and damaging the credibility of the government’s economic program. The decision to join the EITI is an important step towards greater transparency and good governance.

33. Staff urges the CBI to follow through on its commitment to address all recommendations of the ISAR and the E&Y audit report. Satisfactory progress in this area will be a key consideration for a future arrangement.

34. Staff recommends that the third and fourth reviews under the SBA be completed. In view of the government’s commitment to the program, and the policies and measures described in the second SMEFP, staff supports the authorities’ requests for: (i) a waiver for the nonobservance of the end-December structural performance criterion; (ii) an extension of the SBA through September 28, 2007; and (iii) the establishment of quantitative performance criteria for end-March and end-June 2007. Staff believes that Iraq is making best efforts to reach bilateral agreements on its arrears to official non-Paris Club creditors and that the authorities have been negotiating in good faith to resolve the remaining arrears to private creditors, consistent with the Fund’s policy on lending into arrears, and supports the completion of the financing assurances review.

Table 1.

Iraq: Selected Economic and Financial Indicators, 2004–07

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Sources: Iraqi authorities and Fund staff estimates and projections.

For 2007, as of January 31.

For 2007, as of January 7.

Table 2.

Iraq: Fiscal and Oil Sector Accounts, 2005–07

(In billions of Iraqi dinars; unless otherwise indicated)

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2007 projections assume WEO crude oil price less the quality differencial of $8.9/barrel.

2007 number excludes revenues from sales of imported oil derivatives.

Overhead costs associated with donor-financed reconstruction.

Other goods and services financed by donors include security spending associated with the implementation of reconstruction projects.

2006 data includes ID270 billion allocated toward government’s share of capital in new regional commercial banks. ID I,500 formerly recorded under this item were re-classified as non-oil investment expenditures in 2006 budget presentation. Finally, ID265 billion were re-classified as debt repayment.

Calculated as 5 percent of oil exports as per UN Security Council Resolution 1483 to finance war reparations to Kuwait.

LCs in the Trade Bank of Iraq, for which 100 percent down-payment is customarily required.

Includes balances on the DFI sub-account (PCO).

Table 3.

Iraq: Fiscal and Oil Sector Accounts, 2005–07

(In percent of GDP)

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2007 projections assume WEO crude oil price less the quality differencial of $8.9/barrel.

2007 number excludes revenues from sales of imported oil derivatives.

Overhead costs associated with donor-financed reconstruction.

Other goods and services financed by donors include security spending associated with the implementation of reconstruction projects.

2006 data includes ID270 billion allocated toward government’s share of capital in new regional commercial banks. ID I,500 formerly recorded under this item were re-classified as non-oil investment expenditures in 2006 budget presentation. Finally, ID265 billion were re-classified as debt repayment.

Calculated as 5 percent of oil exports as per UN Security Council Resolution 1483 to finance war reparations to Kuwait.

LCs in the Trade Bank of Iraq, for which 100 percent down-payment is customarily required.

Table 4.

Iraq: Central Bank Survey, 2003–07

(In billions of Iraqi dinars, unless otherwise indicated)

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Sources: Iraqi authorities, and Fund staff estimates and projections.

Valued at market exchange rates.

For 2005, valued at market prices.

This mainly represents the ID and US$ overnight standing deposit facilities.

The balance sheet is valued using the program exchange rate; memorandum items are valued using the end-of-period exchange rate.

Table 5.

Iraq: Depository Corporations (Monetary) Survey, 2004–06

(In billions of Iraqi dinars)

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Source: Central Bank of Iraq

October 2006 data is preliminary.

Table 6.

Iraq: Balance of Payments, 2004–07 1/

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Iraqi authorities and Fund staff estimates and projections.

Excludes U.S. military spending in Iraq.

EPCA figures for imports of do not fully account for the cost of freight and insurance, which have been added under services for other estimates and projections.

Includes interest accrued, deferred, and capitalized.

Includes the use/accumulation of the DFI ressources and the UN Oil for Food letters of credit.

Includes the estimates of cash payments to settle the debt owed to small private creditors through cash exchange offer.

Based on Paris Club agreement, the payments of principal and most interest during 2005–10 are deferred and capitalized.

Reflects advance transfers for the execution of letter of credit (L/C).

Estimates of accrued interest on existing stock of debt prior to Paris Club agreement.

Includes debt forgiveness and clearance of arrears on multilateral debt and arrears related to fuel imports from Turkey.

The notional debt forgiveness reflects: (i) the first stage of debt reduction (30 percent) at end 2004; (ii) the second stage reduction (30 percent) at end-2005; and (iii) the settlement of debt owed to private creditors through cash and debt exchanges. Assumes debt reduction comparable to the Paris Club agreement on other debt to official creditors.

Table 7.

Iraq: Indicative Quantitative Benchmarks Under the Stand-By Arrangement

(In Iraqi dinars per liter, unless otherwise indicated)

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Starting 2007, premium gasoline is to be sold only by the private sector at unregulated prices.

Table 8.

Iraq: Quantitative Performance Criteria and Indicative Targets Under the Stand-By Arrangement, 2005–07 1/

(In billions of Iraqi dinars, unless otherwise indicated)

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See Technical Memorandum of Understanding for precise definitions of all performance variables.

Estimated.

Rolling over t-bills does not constitute new lending.

Flows for 12/31/05 are cumulative for 2005. Flows for 2006 and 2007 are cumulative starting 1/1/2006 and 1/1/2007, respectively.

Starting in 2007, the budget deficit will be monitored from below the line (i.e., from the financing side).

Excluding salaries paid by ministries of defense and interior (see Technical Memorandum of Understanding for precise definition).

This ceiling excludes loans with a grant element of 35 percent or more of up to Yen 350 billion for reconstruction projects to be contracted with the government of Japan in 2007.

This will be monitored on a continuous basis.

Starting in 2007, this no longer comprises all imports of petroleum products made directly by the government of Iraq but instead comprise of imports of petroleum products financed from the budget.

Table 9.

Iraq: Prior Actions, Structural Performance Criteria, and Structural Benchmarks Under the Stand-By Arrangement

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The budget classification and chart of accounts will be deemed in line with the IMF GFSM 2001 if it is consistent with the methodology and high level classification defined in the technical assistance report of the IMF’s Fiscal Affairs Department entitled “Iraq Budget Classification Reform” (July 2005).

The following issues should be addressed: (i) the lack of reconciliations of local bank’s current accounts; (ii) unreconciled suspension accounts and interbranch accounts; (iii) unreconciled differences on accounts managed on behalf of the Ministry of Finance, including the DFI; and (iv) insufficient information to support amounts, and to ensure the completeness and valuation of off-balance sheet commitments.

Table 10.

Iraq: Proposed Availability of Purchases Under the Stand-by Arrangement, 2005–07

(In millions of SDRs, unless otherwise indicated)

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Source: Fund staff projections.
Table 11.

Iraq: Indicators of Fund Credit, 2004–12 1/

(In millions of SDRs, unless otherwise indicated)

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Sources: Fund staff estimates and projections.

Including the hypothetical purchases under the precautionary SBA, not shown in the balance of payments projections.

The prospective SBA repayments are on an expectation basis.

1

The first and second stages of the agreement involved 30 percent debt reduction in NPV terms each, and became effective in November 2004 and December 2005, respectively.

2

At the time of the first and second reviews on August 2, 2006, staff informed the Board that the audit had been finalized. There was, however, a misunderstanding between staff and the CBI on what exactly constituted a finalized audit. While the information necessary for staff to proceed with the safeguards assessment was provided to staff by August 2, it subsequently learned that the audit was not formally finalized until October 1, 2006. The misunderstanding does not affect the accuracy of information provided by the authorities in this regard, as they correctly reported that the “CBI approved the Ernst & Young audit of the CBI’s 2005 financial statements on July 13, 2006.”

3

UN Security Council Resolution 1723 (November 28, 2006).

Appendix: Iraq: Medium-Term Prospects and External Debt Outlook

1. Since the Stand-By Arrangement (SBA) was approved in December 2005, Iraq’s medium term prospects remain favorable mainly on account of higher oil prices (see Appendix, Table 1-4). Staff projections suggest that, based on current WEO forecasts for oil prices, Iraq should be able to meet its first major amortization payment (in 2011) on its rescheduled debt without difficulty. Nevertheless, the simulations below show that Iraq remains vulnerable to further downward shocks to oil prices and/or to a continued stalling of oil production. This suggests that Iraq has little room for fiscal expansion beyond what is projected in these scenarios, and that the government would be wise to retain positive precautionary balances in the Development Fund for Iraq (or its successor). Staff projections for key security-related expenditures in the medium term are on the cautious side reflecting the current situation and future security needs of Iraq, as well as gradual shifts in these expenditures from Coalition forces to the Iraqi budget.

Table 1.

Iraq: Selected Economic and Financial Indicators, 2004–12

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Sources: Iraqi authorities and Fund staff estimates and projections.

For 2007, as of January 31.

For 2007, as of January 7.

Table 2.

Iraq: Fiscal and Oil Sector Accounts, 2005–12

(In billions of ID; unless otherwise indicated)

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Sources: Iraqi authorities, and Fund staff estimates and projections.

Projections for 2007–2012 assume that the private sector will start importing petroleum products, thereby increasing substantially the base for import duties.

Include goods and services financed by donors, including overhead costs for reconstruction projects.

Overhead costs associated with donor-financed reconstruction.

Other goods and services financed by donors include security spending associated with the implementation of reconstruction projects.

2006 data ncludes ID270 billion allocated toward government’s share of capital in new regional commercial banks. ID I,500 formerly recorded under this item were re-classified as non-oil investment expenditures in 2006 budget presentation. Finally, ID265 billion were re-classified as debt repayment.

Calculated as 5 percent of oil exports as per UN Security Council Resolution 1483 to finance war reparations to Kuwait.

LCs in the Trade Bank of Iraq, for which 100 percent down-payment is customarily required.

Includes financing from LCs previously issued under the UN oil-for-food program.

Table 3.

Iraq: Fiscal and Oil Sector Accounts, 2005–12

(In percent of GDP)

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Sources: Iraqi authorities and staff estimates and projections.

Projections for 2007–2012 assume that the private sector will start importing petroleum products, thereby increasing substantially the base for

Include goods and services financed by donors, including overhead costs for reconstruction projects.

Overhead costs associated with donor-financed reconstruction.

Other goods and services financed by donors include security spending associated with the implementation of reconstruction projects.

2006 data ncludes ID270 billion allocated toward government’s share of capital in new regional commercial banks. ID I,500 formerly recorded under this item were re-classified as non-oil investment expenditures in 2006 budget presentation. Finally, ID265 billion were re-classified as debt repayment.

Calculated as 5 percent of oil exports as per UN Security Council Resolution 1483 to finance war reparations to Kuwait.

LCs in the Trade Bank of Iraq, for which 100 percent down-payment is customarily required.

Includes financing from LCs previously issued under the UN oil-for-food program.

Table 4.

Iraq: Balance of Payments, 2004–12 1/

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Iraqi authorities and Fund staff estimates and projections.

Excludes U.S. military spending in Iraq.

EPCA figures for imports of do not fully account for the cost of freight and insurance, which have been added under services for other estimates and projections.

Includes interest accrued, deferred, and capitalized.

Includes the use/accumulation of the DFI ressources and the UN Oil for Food letters of credit.

Includes the estimates of cash payments to settle the debt owed to small private creditors through cash exchange offer.

Based on Paris Club agreement, the payments of principal and most interest during 2005–10 are deferred and capitalized.

Reflects advance transfers for the execution of letter of credit (L/C).

Estimates of accrued interest on existing stock of debt prior to Paris Club agreement.

Includes debt forgiveness and clearance of arrears on multilateral debt and arrears related to fuel imports from Turkey.

The notional debt forgiveness reflects: (i) the first stage of debt reduction (30 percent) at end 2004; (ii) the second stage reduction (30 percent) at end-2005; and (iii) the settlement of debt owed to private creditors through cash and debt exchanges. Assumes debt reduction comparable to the Paris Club agreement on other debt to official creditors.

2. Iraq has resolved most of the claims of Paris Club and private creditors. All bilateral agreements with the Paris Club members except Russia have been signed. By end-July 2006, Iraq had settled about $19 billion (or 96 percent) of private claims through debt and cash exchange offers, including the arbitration process. The reconciliation process of the remaining outstanding claims is ongoing.

3. Despite the substantial debt reduction received from Paris Club and private creditors, the amount of external debt remains large. By assuming that debt reduction comparable to the Paris Club agreement is applied to non-Paris Club official creditors’ claims, the latest estimates of external debt indicate that the stock of debt was $68 billion (203 percent of GDP) at end-2005 and $55 billion (108 percent of GDP) at end-2006. Without the third stage of debt reduction, external debt would increase to about $62 billion (about 51 percent of GDP) by 2012. The third stage reduction (expected in 2008) would further reduce Iraq’s external debt to about $36 billion (30 percent of GDP) by 2012 (see Appendix, Table 5).4

Table 5.

Iraq: Estimated External Debt Stock, 2004–12 1/

(In billions of US$)

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Sources: The Paris Club and Fund staff estimates.

The assumptions made in this table are for purposes of illustration and discussion only. While the process of Iraq’s debt reconciliation is ongoing, the IMF has had to base its analysis on information that may include as yet unreconciled data. Such use of data by the IMF does not amount to a recognition or denial of any particular claims. The estimates of the debt stock are different from those in IMF Country Report No. 06/301 to incorporate the latest results of debt reconciliation and settlement.

Assumes debt reduction comparable to the Paris Club agreement in 2004.

Assumes that by end 2007 all debt to private creditors would be settled by debt and/or cash exchanges.

Includes new debt and arrears related to fuel imports from Turkey in 2006. The projections assume that new debt disbursement is mostly from multilateral creditors and Japan.

Debt service is actual amount paid, including repayment of arrears to Turkey.

Assumes precautionary SBA during 2005–08.

4. Iraq’s external debt also remains vulnerable to a negative oil shock, particularly in 2011 when Iraq will start repaying the debt to official creditors. Based on the Paris Club agreement in 2004, the repayment of the remaining debt stock would start in 2011, while the interest payments accrued during 2005–10 are mostly capitalized. The debt service would be relatively small before it increases to about 11 percent of exports in 2011. Simulations for two oil shocks (a production shock that keeps oil production constant at 2.6 mbpd over 2008–12, and a price shock that lowers the oil export price by $4.5 per barrel (equivalent to one standard deviation) during 2008–12) show that Iraq would require significant borrowing from the international markets to close the financing gaps (see Appendix, Table 6).

Table 6.

Iraq: External Debt Sustainability Framework, 2004–12

(In percent of GDP, unless otherwise indicated)

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Includes net FDI, other net private sector inflows (all assumed to be equity), and use of official assets held abroad.

Derived as [r - g - r(1+ g) + ea(1+r)]/(1+g + r + gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation. (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [ -r (1 +g) + e a(1+r)]/(1+g+r+gr) times previous period debt stock, and r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

Debt service is total accrued amount.

Balance that stabilizes the debt ratio at its previous year’s level, given assumptions on real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP.

Assumes that oil production reaches its peak by 2008 at 2.6 mbpd.

Assumes that oil price in 2008–12 is US$4.5 lower than in the baseline, equivalent to one standard-deviation shock.

Notes

1

The third stage of debt reduction would be contingent on Iraq completing the final review of the third year of upper credit tranche arrangements.

Attachment I

Baghdad, February 23, 2007

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. de Rato:

1. The Executive Board of the IMF approved a request for a Stand-By Arrangement (SBA) for Iraq on December 23, 2005, in support of our economic program for 2006. The first and second reviews under the SBA were completed on August 2, 2006. Notwithstanding the very difficult security and political situation, we have continued to make progress in implementing this program. Inflation, however, has persisted at a very high rate and achieving macroeconomic stability remains a challenge. We have already taken a number of corrective measures as described in the attached second Supplementary Memorandum of Economic and Financial Policies (SMEFP). To allow more time to reach the objectives and complete the reforms under the SBA, we request an extension of the current SBA by six months to September 28, 2007. We intend to continue to treat the SBA as precautionary (i.e., we do not intend to make the purchases under the SBA that will become available after observance of its performance criteria and completion of its reviews).

2. Iraq has met all quantitative performance criteria set for end-September 2006. The structural performance criterion for December 31, 2006 on adopting a budget classification and chart of accounts in line with the IMF’s Government Finance Statistics Manuel 2001 was, however, not met.

3. On the basis of corrective actions being undertaken as specified in the second SMEFP, we would like to request a waiver for the nonobservance of the performance criterion noted in paragraph 2, and completion of the third and fourth reviews under the SBA. We also request establishment of the quantitative performance criteria proposed in the second SMEFP for end-March and end-June 2007, as well as of the structural performance criteria for end-May and end-June 2007.

4. In the period ahead, we shall strive to lower inflation, maintain a prudent fiscal stance, and undertake reforms that will enable Iraq to move toward a path of high and sustainable growth. A key element of our economic program continues to be the elimination of explicit subsidies on fuel products. We will raise the domestic prices of fuel products in early March as specified in the second SMEFP, as a prior action for completion of the third and fourth reviews, and will continue our policy of gradual price adjustments during the remainder of the program period. We will make every effort to have the amendments to the pension law, as agreed with Fund staff, passed by the Council of Representatives as soon as possible.

5. We believe that the policies and measures set forth in the attached memorandum will allow to achieve the objectives under the SBA. However, we stand ready to take any additional measures that may be needed to ensure that the program remains on track. We will consult with the Fund staff on adoption of such measures in advance of revisions to the policies contained in the second SMEFP, in accordance with the Fund’s policies on such consultation. We will provide the Fund with such information as it requests on policy implementation and achievement of program objectives.

6. We consent to the publication of this letter, the second SMEFP, the attached Addendum to the Technical Memorandum of Understanding, and the staff report on the third and fourth reviews under the SBA.

Sincerely yours,

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Attachment II: Iraq: Second Supplementary Memorandum of Economic and Financial Policies for 2007

February 23, 2007

I. Introduction

1. This memorandum supplements the Memorandum of Economic and Financial Policies for 2005–06 (MEFP) and the first supplement thereto, annexed to our letters dated December 6, 2005, and July 15, 2006, respectively. It describes additional economic objectives and policies agreed in the context of the third and fourth reviews under the Stand By Arrangement (SBA). Policies and unfulfilled commitments specified in the original MEFP and the first supplement continue to be part of the program.

II. Recent Developments Under the Stand-By Arrangement

2. Achieving macroeconomic stability remained a challenge in 2006, in particular in view of the very difficult security situation. The Government of Iraq (GoI) has been able to resist unwarranted spending pressures and the Central Bank of Iraq (CBI) has maintained stable monetary conditions. Inflation, however, has risen to an unacceptable level. Annual consumer price inflation peaked at a rate of almost 77 percent in August, fell back to around 52 percent in September-November, and increased again to almost 65 percent in December. The underlying rate of inflation (excluding fuel and transportation) has been stable, in the range of 30–35 percent.

3. Real GDP growth is estimated at about 3 percent in 2006. This is lower than the 10½¶ percent projected at the outset of the program, because oil production has not increased as expected. Oil exports have been hampered by technical problems, as well as security and other difficulties in undertaking the necessary investments. Real non-oil GDP growth also lagged expectations and, on the basis of available output indicators, is estimated at 7½ percent compared to 8 percent originally projected.

4. Fiscal policy was restrained in 2006. The GoI has run a surplus through September, mainly because of underspending in investment. Current expenditure was broadly in line with the budget. Oil revenue was slightly above target, with lower-than-expected production volumes more than compensated by higher-than-expected prices. Non-oil revenue was higher than foreseen on account of overperformance in nontax revenue and interest earnings.

5. We have tightened our exchange rate and monetary policies to fight inflation. The exchange rate of the Iraqi dinar was pegged to the U.S. dollar through most of the year at a rate close to ID 1,477 per U.S. dollar. From mid-November this policy has been adjusted to permit a gradual appreciation of the dinar; the daily auction-rate declined to ID 1,325 per U.S. dollar at end-December and reached ID 1,290 per U.S. dollar by end-January. Net international reserves continued to grow and reached a level of $15.3 billion at end-November 2006. The CBI also raised its policy interest rate to 16 percent on November 12, 2006, and further to 20 percent as of January 7, 2007.

6. All quantitative performance criteria set for end-September were met (Table 1). The structural performance criterion for end-December 2006 on adopting a budget classification and chart of accounts in line with the IMF’s Government Finance Statistics Manual 2001 (GFSM 2001) was, however, not met (Table 2).

III. Economic and Financial Policies in 2007

7. For 2007, the GoI’s main macroeconomic policy objectives will be to maintain fiscal sustainability, significantly reduce inflation and continue reforms that help unlock Iraq’s potential oil wealth and put the economy on a path to sustainable growth.

8. The 2007 budget is designed to accommodate the exchange rate appreciation, while preserving a solid investment program. Oil revenues are projected on the basis of increasing oil exports to 1.7 million barrels per day (mbpd) from 1.44 mbpd in 2006. The envisaged increase in the reconstruction (import) levy from 5 to 10 percent will be postponed until 2008.

9. The GoI intends to keep spending under control in 2007. The budget makes provision for the (amended) pension system, and allows for a large increase in the allocation for the social protection program, as well as for security. Other current expenditures, including on wages, will rise moderately while the daily hardship allowance for military personnel will be revised to limit the costs. We will freeze hiring in 2007 and resist unbudgeted bonuses. Budgetary support for imports of fuel products will be restricted to $300 million (for kerosene) and all other imports of fuel products by the Ministry of Oil (MoO) will be financed from the revenues of the MoO. There will remain an implicit subsidy on domestically produced fuel products (mainly regular gasoline and diesel). Budget allocations for oil- and non-oil investment spending are more than double the expected 2006 outturn, which was much lower than foreseen largely due to the prevailing insecurity. The GoI has set up a committee under the supervision of the office of the prime minister to oversee the implementation of large investment projects with the aim to increase the rate of implementation. To improve transparency and program monitoring, the GoI is also investigating the composition of the stock of outstanding letters of credit at the Trade Bank of Iraq and will provide more frequent and better quality data to IMF staff.

10. These policies, and taking account of an envisaged further appreciation of the exchange rate (see below), should contain the consolidated government budget deficit to ID 10.2 trillion. In the event that oil revenues are substantially lower than foreseen, we intend to submit a supplementary budget to the Council of Representatives (CoR), in order to adjust government spending and keep the overall deficit in line with the level targeted in the 2007 budget. By the end of 2007, we aim to hold the equivalent of at least ID 3 trillion in assets in the Development Fund for Iraq (DFI). To keep the option of domestic financing of the deficit open and maintain a benchmark for market interest rates, we will step up the bi-weekly issuance of treasury bills to ID 150–200 billion.

11. To help curb inflation the CBI will continue its tight monetary policy stance and allow the exchange rate to appreciate gradually, assuming the inflationary situation warrants a continuation of this policy. The CBI also stands ready to further increase its policy interest rate, if needed and effective to bring inflation down.

12. We have raised the domestic prices of fuel products and will continue to gradually increase these prices in the period ahead (Table 3; indicative quantitative benchmarks). The government has exited the domestic market for premium gasoline. Regular gasoline (all of which is produced domestically) will be priced at ID 300 per liter by March 5, 2007, and at ID 350 per liter by end-June 2007. Government imports of premium gasoline will be blended with regular gasoline at a ratio not exceeding 50 percent. We will increase the price of blended gasoline to ID 400 per liter by March 5, 2007, and to ID 450 per liter by end-June. The price of diesel was increased to ID 300 per liter as of January 13, 2007, and will be further raised to ID 350 per liter by March 5, 2007. The price of LPG was increased to ID 2,000 per canister as of January 13, 2007, and will be set at ID 3,000 per canister by March 5, 2007. Kerosene will be priced at ID 150 per liter by March 5, 2007, and at ID 200 per liter by end-June 2007. We will review the price increases planned for end-June in light of the then prevailing security situation. To help the State Oil Marketing Organization (SOMO) import some of the petroleum products without having recourse to the proceeds generated from the sales of these products, the GoI has provided SOMO with a revolving credit, not to exceed a ceiling of ID 300 billion at any point in time (indicative target).

13. The GoI is committed to facilitate private sector imports of petroleum products, which is now permitted under the law liberalizing private gasoline imports (structural benchmark for September 30, 2006). We will make available to the private sector storage facilities and pump stations. We also plan to organize a conference to promote the import of petroleum products by local and international companies.

14. The GoI has adopted a new transitional chart of accounts (CoA) and started using the automated Financial Management Information System (FMIS). The newly adopted CoA is not fully consistent with the Fund’s GFSM 2001, but we are committed to correct any shortcomings in this regard and identify which accounts in the CoA form part of the budget classification by end-June 2007 (structural performance criterion). An assessment of the FreeBalance software (which was supposed to be completed by end-December) is also behind schedule. The Ministry of Finance (MoF) has started using the FMIS from January 2007. The aggregated monthly reports generated by the FMIS will be reviewed and compared with the corresponding consolidated reports generated by the existing legacy system for the budget as a whole. We will also increase our efforts to make sure that all spending units, including small independent accounting units, submit their transaction data to the relevant ministry, which should submit consolidated data to the MoF. For spending units where this is not possible in the near future, the MoF will enter their trial balances in the FMIS.

15. We will make every effort to have the amendments to the new pension law passed by the CoR as soon as possible. The main elements of the reform include a gradual reduction of replacement rates to fiscally sustainable levels, and zero indexation in 2007 to ensure affordability in the short-term. The reforms also involve the creation of an extrabudgetary fund, which will receive all pension contributions but would only pay out to new pensioners. The budget will continue to be responsible for paying existing pensioners, resulting in a direct budgetary cost of about ID 1.2 trillion in 2007, which will decline over time. We are committed to managing the extrabudgetary pension fund in a transparent manner, in line with international best practices, and seek technical assistance from the IMF and the World Bank in this area.

16. The GoI is proceeding with its new social protection program. In 2006, we have identified about one million poor families who each received up to $80 per month from this program. This year, we intend to further expand coverage. At the same time, we are committed to rationalizing the Public Distribution System (PDS). As a start, we have cancelled eligibility for support under the PDS of some of the most well-off individuals (ministers, members of the CoR, and others). Eligibility for the PDS will be limited further in the course of 2007.

17. We intend to complete the census for public service employees (structural performance criterion for end-June 2007). The census, which was a structural benchmark for end-December 2006, could not yet be finalized due to the prevailing security situation. Preparatory work, involving several concerned ministries, has already started. We will invest all our efforts to have it completed by end-June.

18. The CBI has re-appointed Ernst and Young (E&Y) to conduct (i) an audit of the net international reserves data reported to the Fund as of December 31, 2006 (including a full count by the auditor of gold and foreign exchange holdings at the CBI) and (ii) the audit of the 2006 CBI financial statements in accordance with International Standards on Auditing. The former audit is expected to be finalized by May 31, 2007 (structural performance criterion), while an interim report of the latter is expected to be completed by May 31, 2007 (structural performance criterion).

19. We have received the finalized interim safeguard assessment report (ISAR) that was recently completed by IMF staff. We welcome the inclusion in the ISAR of an action plan to assist the CBI in addressing the concerns and recommendations raised in the ISAR and the E&Y 2005 audit. The CBI is committed to implementing corrective actions based on the recommendation of the ISAR and the E&Y report, including (i) adopting by the CBI Board of a timetable for the full implementation of the IFRS as the CBI’s financial reporting framework (structural benchmark for March 31, 2007); (ii) addressing the lack of proper accounting records maintained by the CBI, one of the major issues giving rise to E&Y’s disclaimed audit opinion for 2005 (structural benchmark for June 30, 2007)1; and (iii) establishing adequate control procedures for reserves management, including developing a reserves management policy and investment guidelines (structural benchmark for June 30, 2007). In order to help us in implementing this action plan, we have requested technical assistance from the Fund.

20. Due to delays in completing the 2005 CBI audit, the GoI was not able to recapitalize the central bank to the stipulated ID 100 billion (structural benchmark for end-December 2006). We are committed to doing so in 2007 and the MoF has already sent a letter to the CBI reflecting our commitment.

21. We have made significant progress in modernizing the payment system. The real time gross settlement (RTGS) payment system and the automated clearing house (ACH) started their operations ahead of time (structural benchmarks for August and November 2006, respectively). Currently eight commercial bank headquarters are connected to the CBI and we are in the process to expand the coverage to the remaining commercial banks.

22. The CBI and MoF have signed a memorandum of understanding for an operational restructuring of the state-owned Rafidain and Rasheed banks, and a financial restructuring of Rasheed bank.2 The GoI is committed to implement in full all measures included in the memorandum of understanding. We will appoint an internationally reputable audit firm to conduct an operational and financial audit of these two banks based on their 2006 financial accounts (structural benchmark for April 30, 2007). During the second half of 2007, the MOF will also initiate the restructuring of the other four smaller state-owned banks in line with the approach adopted with regard to Rasheed and Rafidain banks, in consultation with the IMF and the World Bank.

23. The GoI remains committed to developing a competitive and transparent hydrocarbon sector. We will continue our efforts to reach agreement within the government on a new hydrocarbon law. The MoO is working with international oil companies to implement an integrated system of oil metering for upstream and downstream activities. Clamp-on meters at the Basra export terminal have been installed. We are committed to joining the Extractive Industries Transparency Initiative. As part of this process the MoO will start publishing on its website all available information on production, export, and processing of crude oil.

24. We are taking concerted actions to implement an anti-corruption strategy, especially in the oil sector. The MoO has already cancelled many suspicious contracts related to the import of fuel products and is reviewing its procurement practices to bring them in line with international best practice with World Bank technical assistance.

25. We will continue to work toward resolving outstanding external claims. Negotiations with China are underway, and contacts have been made with key creditor countries from the Gulf region. A number of non-Paris Club bilateral creditors have indicated a desire to securitize their claims. We will facilitate the development of a Special Purpose Vehicle (SPV), in order to encourage the conclusion of bilateral agreements with non-Paris Club creditors, according to the terms and conditions of the Paris Club agreement, and to avoid the emergence of a multiplicity of different securitizations. In this regard, we will keep the Paris Club fully informed. Most of the remaining unresolved private claims (which are only 4 percent of the original claims) are in the process of reconciliation with claims that are being settled as part of the liquidation of the London branch of Rafidain bank.

26. The GOI has established an Iraqi Oversight Board (IOB; structural benchmark for end-September 2006), which was expected to continue the work of the International Advisory and Monitoring Board (IAMB) upon its dissolution at end-2006. Given that a UN Security Council Resolution extended on November 28, 2006 the IAMB mandate for an additional year, we look forward for closely involving the newly-established IOB in the IAMB’s work. This would provide the IOB with relevant training prior to the eventual expiration of the IAMB mandate at the end of 2007.

27. The GoI, with the help of the United States, has launched an new initiative toward an International Compact for Iraq (ICI). The objective of the ICI is to allow us to develop, with the support of the international community, a medium-term framework for comprehensive political, security and economic reform. We are committed to ensure that the economic component of the ICI is fully in line with the program under the SBA.

IV. Program Monitoring

28. In light of our request to extend the current SBA by six months, we would also like the final (fifth) review, due originally by mid-February 2007, to be rephased to mid-May 2007, and that the last purchase will be available upon observance of the end-June 2007 performance criteria.

29. Macroeconomic policy performance will continue to be monitored through quarterly quantitative performance criteria and indicative targets. The quantitative performance criteria under the original program will remain unchanged, and additional quantitative performance criteria have been set for end-March and end-June 2007, as specified in Table 1. To improve the timeliness and accuracy of program monitoring, the budget deficit in 2007 will be monitored from below the line (performance criterion; see attached addendum to the TMU). Prior actions for completing the third and fourth reviews have also been set (Table 2). Progress in structural reform will be monitored through structural performance criteria and benchmarks. For this matter, a new structural performance criterion has been set and another one has been rescheduled, while four new structural benchmarks have been set, as specified in Table 2.

Table 1.

Iraq: Quantitative Performance Criteria and Indicative Targets Under the Stand-By Arrangement, 2005–07 1/

(In billions of Iraqi dinars, unless otherwise indicated)

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See Technical Memorandum of Understanding for precise definitions of all performance variables.

Estimated.

Rolling over t-bills does not constitute new lending.

Flows for 12/31/05 are cumulative for 2005. Flows for 2006 and 2007 are cumulative starting 1/1/2006 and 1/1/2007, respectively.

Starting in 2007, the budget deficit will be monitored from below the line (i.e., from the financing side).

Excluding salaries paid by ministries of defense and interior (see Technical Memorandum of Understanding for precise definition).

This ceiling excludes loans with a grant element of 35 percent or more of up to Yen 350 billion for reconstruction projects to be contracted with the government of Japan in 2007.

This will be monitored on a continuous basis.

Starting 2007 this no longer comprises all imports of petroleum products made directly by the government of Iraq but instead comprise of imports of petroleum products financed from the budget.

Table 2.

Iraq: Prior Actions, Structural Performance Criteria, and Structural Benchmarks

Under the Stand-By Arrangement

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The budget classification and chart of accounts will be deemed in line with the IMF GFSM 2001 if it is consistent with the methodology and high level classification defined in the technical assistance report of the IMF’s Fiscal Affairs Department entitled “Iraq Budget Classification Reform” (July 2005).

The following issues should be addressed: (i) the lack of reconciliations of local bank’s current accounts; (ii) unreconciled suspense accounts and interbranch accounts; (iii) unreconciled differences on accounts managed on behalf of the Ministry of Finance, including the DFI; and (iv) insufficient information to support amounts, and to ensure the completeness and valuation of off-balance sheet commitments.

30. The Technical Memorandum of Understanding is modified in the manner described in the attached addendum.

Table 3.

Iraq: Indicative Quantitative Benchmarks Under the Stand-By Arrangement

(In Iraqi dinars per liter, unless otherwise indicated)

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Starting 2007, premium gasoline is to be sold only by the private sector at unregulated prices.

Attachment III: Iraq: Addendum to the Technical Memorandum of Understanding

February 23, 2007

1. All aspects of the Technical Memorandum of Understanding (TMU) of December 6, 2005 and the addendum thereto of July 15, 2006 remain in effect, except for the changes described below.

2. The quantitative performance criteria will be extended for end-March and end-June 2007.

3. To improve the timeliness and accuracy of program monitoring, the budget deficit in 2007 will be monitored from below the line. Hence, for end-March and end-June 2007 the performance criterion on the primary fiscal deficit will be replaced by a new performance criterion on the central government total financing calculated as the sum of external financing and domestic financing of the central government balance. Domestic financing includes any form of resident financing of the consolidated budget from (i) the central bank; (ii) commercial banks; (iii) non-bank financial institutions; (iv) non-financial enterprises; (v) privatization proceeds; (vi) changes in arrears; (vii) households; and (viii) all other domestic financing not elsewhere classified.

4. The new performance criterion on the central government total financing will be monitored using end-month data on the accounts of the Development Fund of Iraq and the consolidated balance sheet of depository corporations, which will be provided to Fund staff with a time lag not to exceed four weeks.

5. The performance criterion on revenues from oil-related state owned enterprises will be changed to reflect that fuel imports are no longer financed from the budget. Revenues of oil-related state owned enterprises now comprise all revenues of the companies listed in paragraph 10 of the original TMU minus the total imports of petroleum products (including LPG, gasoline, kerosene, and diesel) made directly by the government of Iraq or by oil enterprises on its behalf. To monitor this performance criterion the GoI will provide the Fund with the amount of total imports of petroleum products on a quarterly basis starting with the first quarter of 2007. These data should be reported no later than eight weeks after the end of the reference quarter.

6. The indicative target on government imports of petroleum products shall no longer comprise all imports of these products made directly by the government of Iraq but instead comprise imports of petroleum products financed from the budget.

7. The quarterly ceilings for 2007 for central government total financing; the government wage and pension bill; and new medium- and long-term nonconcessional external debt (with original maturities of one year or more) contracted or guaranteed by the government will be measured on a cumulative basis from January 1, 2007. The quarterly floor for 2007 for revenue of oil-related enterprises, including those remitted to the budget, will be also measured on a cumulative basis from January 1, 2007.

8. A new indicative target for the “revolving government credit to the State Oil Marketing Organization (SOMO)” is added. The revolving government credit to SOMO shall comprise all credits provided by the Ministry of Finance to the Ministry of Oil and/or directly to SOMO for the purpose of importing fuel derivatives. The indicative ceiling shall apply for end-March and end-June 2007, and will be measured on a cumulative basis from January 1, 2007.
1

The following issues will be addressed: (i) the lack of reconciliations of local bank’s current accounts; (ii) unreconciled suspense accounts and interbranch accounts; (iii) unreconciled differences on accounts managed on behalf of the Ministry of Finance including the DFI; and (iv) insufficient information to support amounts, and to ensure the completeness and valuation of off-balance sheet commitments.

2

Financial restructuring (involving a recapitalization) of Rafidain bank will await the settlement of claims lodged against its London branch.

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Cover IMF Staff Country Reports
Iraq: Third and Fourth Reviews Under the Stand-By Arrangement, Financing Assurances Review, and Requests for Extension of the Arrangement and for Waiver of Nonobservance of a Performance Criterion
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 115
Publisher:
International Monetary Fund
ISBN:
9781451819120
ISSN:
1934-7685
Pages:
55
DOI:
https://doi.org/10.5089/9781451819120.002
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    Fuel prices in Iraq as a percentage of average fuel prices in other oil exporting countries in the Middle East and North Africa region, 2004–07 1/

Fuel prices in Iraq as a percentage of average fuel prices in other oil exporting countries in the Middle East and North Africa region, 2004–07 1/