Iraq
2007 Article IV Consultation, Fifth Review Under the Stand-By Arrangement, Financing Assurances Review, and Requests for Extension of the Arrangement, Waiver of Applicability, and Waivers for Nonobservance of Performance Criteria: Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Iraq
Author:
International Monetary Fund
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Publication Date:
31 Aug 2007
eISBN:
9781451819144
Language:
English
Keywords:
ISCR; CR; price; authority; CBI safeguards area; unlocking Iraq's oil wealth; government; Stand-By Arrangement; government import; investment program; financial support; debt forgiveness; banking sector; Inflation; current account
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This 2007 Article IV Consultation highlights that Iraq’s economic growth has been slower than expected at the time of the last Article IV Consultation, mainly because the expected expansion of oil production has not materialized. Following a decline in oil production and real GDP in 2005, economic growth is estimated at 6¼ percent in 2006. Progress in implementing the structural reforms has been made. Official fuel prices have been increased to levels in other oil-exporting countries in the region, and private sector importation of fuel products has been liberalized.

Abstract

This 2007 Article IV Consultation highlights that Iraq’s economic growth has been slower than expected at the time of the last Article IV Consultation, mainly because the expected expansion of oil production has not materialized. Following a decline in oil production and real GDP in 2005, economic growth is estimated at 6¼ percent in 2006. Progress in implementing the structural reforms has been made. Official fuel prices have been increased to levels in other oil-exporting countries in the region, and private sector importation of fuel products has been liberalized.

I. Introduction

1. Iraq’s last Article IV consultation was concluded on August 1, 2005, the first Article IV consultation in 25 years. The authorities indicated that they have drawn in their policy making on the Fund’s advice, in particular with regard to the need to containing inflation and phasing out government subsidies on petroleum products.

2. A Stand-By Arrangement (SBA) for Iraq was approved on December 23, 2005 in an amount equivalent to 40 percent of quota (SDR 475.4 million). The arrangement originally ran through March 22, 2007, but was extended on March 12, 2007 to September 28, 2007. The first and second reviews of the arrangement were completed on August 2, 2006, and the third and fourth reviews were concluded on March 12, 2007. The SBA supported a program aimed at maintaining macroeconomic stability, paving the way for sustainable growth, and achieving external debt sustainability. Iraq continues to treat the SBA as precautionary.

3. The Paris Club agreed on November 21, 2004 to a debt reduction for Iraq, equivalent to 80 percent in net present value (NPV) terms, to be achieved in three stages. The first and second stages each comprised a 30 percent debt reduction in NPV terms and went into effect in November 2004 and in December 2005 (following approval of the SBA), respectively. The final stage will comprise an additional 20 percent debt reduction, and depends on completion by end-December 2008 of the final review of the third year of one or more upper credit tranche arrangements with the Fund.

4. The International Compact with Iraq (ICI) was formally endorsed by the international community on May 3, 2007, in Sharm el-Sheikh, Egypt. The ICI aims to put in place a medium-term framework for political, security and economic reforms. The Fund’s main contribution to the ICI is through preparation of the medium-term macroeconomic framework of the SBA-supported program.

II. Background

A. Political and Security Environment

5. Iraq’s first constitutional government since the fall of the Saddam Hussein regime was approved by the Council of Representatives (COR) on May 20, 2006, following elections on December 15, 2005. While there have been political tensions within the coalition government, the prime minister and key ministers have kept their positions. The political consensus was, however, undermined by the resignation of six ministers from the Al-Sadr movement in April 2007.

6. The security situation deteriorated in 2006. Despite the implementation of a new security plan in 2007, Iraq continues to suffer serious security problems. This has further worsened living conditions, adversely affected economic activity, and induced the emigration of professionals and skilled labor.

Figure 1:
Figure 1:

Violence Indicators, June 2003–May 2007

(casualties and oil sector attacks per month)

Citation: IMF Staff Country Reports 2007, 301; 10.5089/9781451819144.002.A001

Source: Iraq Pipeline Watch and Iraq Body Count.

B. Social and Human Development

7. Living conditions in Iraq have further deteriorated in recent years. The 2004 United Nations Development Program survey of living conditions shows Iraq’s poor scores on the Millennium Development Goals, and reports widespread malnutrition, low primary school enrollment, and high child mortality. Although the survey has not since been updated, the results from the 2007 Iraq Poll provide indications of further deterioration in living conditions (Box 1).

8. Large numbers of people have been displaced. The United Nations’ refugee agency estimates that over 4 million Iraqis are displaced, including some 1.9 million inside Iraq and over 2 million in neighboring countries. The economic and social costs are significant, with many professionals leaving the country. 1 The large numbers of refugees are putting a strain on Iraq’s neighboring countries (Syria has 1.2 million refugees, and Jordan about 750,000 refugees), where the inflows are causing supply bottlenecks and rising real estate prices.

C. Institutional and Administrative Capacity

9. Iraq has made progress with data provision, but weaknesses remain. The data on the oil sector is generally adequate and timely, but there is little information on non-oil economic activity and on the balance of payments. The CBI balance sheet and consumer price data are available with relatively short lags but do not cover the Kurdish region. Recently, the CBI started producing a monetary survey, which also excludes the Kurdish region. Incomplete data on letters of credit issued by the Trade Bank of Iraq to finance government imports hampers the assessment of the fiscal stance.

Quality of Life

The quality of life in Iraq has deteriorated in the last two years. When asked to indicate “how things are going in their lives these days?” 60 percent of respondents in the 2007 Iraq Poll answered “very bad” or “quite bad”, compared to 29 percent in 2004 and 2005 1. More than three quarters of Iraqis say that jobs are hard to find, which supports the official under-employment estimates ranging from 30 to 50 percent. The availability of clean water, medical care, and basic goods and services have, after some improvement in 2005, all deteriorated. Three out of five Iraqis consider the conditions of local schools to be bad, more than twice as many as in 2004.

The worsening security situation is perceived as the driving factor behind the deteriorating living conditions. When asked about the “biggest single problem facing Iraq” more than half of the respondents to the 2007 Iraq Poll mentioned security, followed by political and military issues (26 percent), social issues (12 percent), and economic issues (9 percent).

uA01bx01fig01

Quality of Life Indicators in Iraq, 2004-05, and 2007

(Percentage of respondents indicating the availability or condition was “very bad” or “quite bad”)

Citation: IMF Staff Country Reports 2007, 301; 10.5089/9781451819144.002.A001

Source: Iraq Poll 2007, BBC News.
1/ The 2007 survey was commissioned by a consortium of international media outlets and 2,000 people across all 18 provinces in Iraq were questioned in February/March 2007 by an independent opinion research company. The same survey was conducted in 2004 and 2005.

10. The International Advisory and Monitoring Board (IAMB) mandate to audit and oversee the Development Fund for Iraq (DFI; Box 2) was extended through December 2007.2 Meanwhile, the Council of Ministers approved the establishment of the Committee of Financial Experts (COFE) in October 2006, to be chaired by the president of the Board of Supreme Audit. The newly established COFE is working in parallel with the IAMB to smooth the transition of responsibilities from the IAMB to COFE once the IAMB’s mandate expires.

The Development Fund for Iraq

The DFI was established in May 2003 pursuant to UN Security Council Resolution 1483. The DFI was tasked with holding the proceeds of Iraq’s oil exports, as well as the remaining balances from the UN Oil-for-Food Program and other frozen Iraqi funds. Disbursements from the DFI must be used for the benefit of the Iraqi people. The DFI consists of bank accounts held at the Federal Reserve Bank of New York and the CBI. On May 18, 2007, the U.S. President continued for one year the protections against claims available to the DFI in the U.S..

According to UN Security Council Resolution 1483, the IAMB is to act as an audit and oversight body for the DFI. UN Security Council Resolution 1723 extended the IAMB mandate until end-December 2007. The formal transfer of functions from the IAMB to the COFE is expected to take place at UN headquarters in December 2007.

Oil exports receipts are the main inflow in the DFI (over 95 percent of total). Other amounts accruing to the DFI are from returned Letters of Credit and interest earned on overnight deposits and U.S. T- Bill holdings, as well as surplus funds from the UN Oil For Food Program and transfers by UN member states of previously frozen funds of the Iraqi government.

The DFI is the main source for budgetary financing. For import financing, revenues from the DFI are channeled through the Trade Bank of Iraq. To finance domestic spending, the Ministry of Finance credits the CBI’s dollar account from the DFI (thereby increasing the CBI’s gross reserves), while receiving dinars in its account at the CBI in Baghdad.

11. Despite the adverse security situation, progress was made in the delivery of technical assistance (TA). In the monetary and banking area, Fund TA has resulted in: (i) the production of a monetary survey; (ii) replacing an obsolete paper-based system with modern electronic payment systems; (iii) improving banking supervision; and (iv) initiating the restructuring of the two largest state-owned banks. On the fiscal side, Fund TA has helped to design a Chart of Accounts and implement the financial management information system (FMIS). Fund TA in statistics, mostly in the form of training, has significantly improved the quality and coverage of fiscal, monetary and balance of payments data.

III. Recent Economic Developments

12. The economy has not grown as fast as was expected at the time of the last Article IV consultation, although progress has been made in strengthening macroeconomic management and in implementing structural reforms. The prevailing insecurity has seriously hampered reconstruction and investment, which resulted in lower-than-foreseen oil production and hence slower economic growth. 3 It has also worsened shortages of key commodities, contributing to rising inflation in 2006. The low implementation rate of the government’s investment program resulted in large fiscal and external surpluses, with the balance in the DFI standing at $8.6 billion at end-2006. The CBI gross international reserves increased to $18.7 billion at end-2006 (almost 6 months of import cover).

13. Following a decline in oil production and real GDP in 2005, economic growth is estimated at 6¼ percent in 2006. Oil production increased slightly to 2 million barrels per day (mbpd) in 2006, but remained well below the 2.3 mbpd target for the year. Although crude oil production recovered to 2.1 mbpd in March/April 2007, it averaged only 1.9 mbpd during the first four months of the year. Based on indicators for cement, fertilizers, and electricity production, real non-oil GDP is estimated to have increased by 7½ percent in 2006. Non-oil investment is also being adversely affected by the prevailing security situation.

Figure 2:
Figure 2:

Crude Oil Production, January 2005–March 2007

(In million barrels per day)

Citation: IMF Staff Country Reports 2007, 301; 10.5089/9781451819144.002.A001

Source: Iraqi authorities.

14. Inflation reached worrisome levels in 2006, but came down markedly during February through June. Annual consumer price inflation increased to 66½ percent in January 2007 from 31½ percent at end-2005, reflecting shortages of key commodities, primarily fuel. Core inflation (excluding fuel and transportation) remained high at about 32 percent. The growth of the dinar money supply (currency in circulation) was, however, well below the rate of inflation in 2006. The increase in inflation appears instead to have been accommodated by the pervasive cash dollarization. Following an intensified policy effort to bring inflation under control, the annual inflation rate declined to 38 percent in May 2007; core inflation decreased to 21 percent in May. Fuel shortages reportedly declined somewhat in the first months of the year, contributing to the narrowing of the gap between headline and core inflation. In June, however, fuel shortages worsened again and headline inflation increased to 46 percent; core inflation continued to decline to 19 percent.

Figure 3:
Figure 3:

Annual Consumer Price Inflation, August 2004–June 2007

(In percent)

Citation: IMF Staff Country Reports 2007, 301; 10.5089/9781451819144.002.A001

Source: Iraqi authorities.

15. Between mid-November 2006 and end-January 2007, the CBI raised its policy interest rate in two steps to 20 percent and allowed the exchange rate to appreciate by 12½ percent. The exchange rate has since continued to appreciate gradually by a further 2½ percent through end-June. The objective was to counter dollarization and enhance the CBI’s control over monetary conditions, as well as to reduce imported inflation. These policies have had some success in lowering inflation, de-dollarizing the economy, and increasing the demand for dinars. Dinar currency in circulation expanded by 20½ percent between November 2006 and April 2007, while the CPI increased by only 13 percent over the same period. Also, cash sales of dollars at the foreign exchange auction dropped considerably in December, and have remained well below 2006 levels since then. 4

Figure 4:
Figure 4:

Daily Forex Sales and Nominal Exchange Rate May 2006–June 2007

(In thousands of U.S. dollars and ID/$)

Citation: IMF Staff Country Reports 2007, 301; 10.5089/9781451819144.002.A001

Sources: Iraqi authoritiesand Fund staff

16. Following a fiscal surplus of 11 percent of GDP in 2005, the fiscal outturn for 2006 showed yet another sizable surplus of almost 12 percent of GDP, largely due to underspending. 5 The surplus resulted in an accumulation of balances in the DFI of $2.4 billion and of government deposits at the CBI of ID 755 billion, while almost ID 950 billion of outstanding Treasury bills were redeemed. Preliminary information for the first quarter of 2007 indicates continued underspending resulting in a fiscal surplus, due to a shortfall in investment and partly also to the late adoption of the budget. However, budget execution is reported to have accelerated in April/May.

Figure 5:
Figure 5:

Fiscal Developments, 2004–07

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 301; 10.5089/9781451819144.002.A001

Sources: Iraqi authorities; and Fund staff estimates.

17. Progress in structural reforms has been made, despite the lack of security and capacity constraints:

  • Important steps have been taken toward reducing subsidies, with several rounds of price increases for domestic petroleum products bringing these prices in line with those in other oil-exporting countries in the region. A recently promulgated law permitting the private importation of fuel products is expected to improve the domestic supply of these products and help reduce black market fuel prices. However, negotiations are still ongoing on a new legal framework for the oil sector.

  • The government is also working to modernize public financial management, and the chart of accounts and budget classification are being brought in line with the GFSM 2001 within a cash accounting framework. On the other hand, the new pension law has yet to be amended in order to make it fiscally sustainable. The census of public service employees has started but will likely not be completed by the end of the year.

  • The CBI is now using a modern real time gross settlement system and an automatic clearing house. Preparations for the restructuring of the two largest state-owned banks are underway. An audit of the CBI end-2006 net international reserves and the interim audit report of its 2006 financial statements have been completed. Also, the CBI’s capital was raised to the statutory level.

18. Iraq has resolved most of its debt to Paris Club creditors, but progress in resolving debt to non-Paris Club official creditors has been limited. The authorities have signed bilateral agreements with all Paris Club creditors, except Russia, and nine (out of more than 30) non-Paris Club creditors. Six of these nine creditors (Czech Republic, Hungary, Indonesia, Malaysia, Romania, and South Africa) provided debt reduction comparable to the terms of the Paris Club agreement, while three others (Cyprus, Malta, and Slovak Republic) provided 100 percent reduction. 6 In addition, the authorities have received confirmations from 20 countries that they do not have any claims on Iraq.

19. A Special Purpose Vehicle (SPV) was established in March 2007 to provide single securitization of restructured debt to official creditors. The SPV would issue U.S. dollar-denominated notes in exchange for, and secured by, rights under bilateral agreements between one or more sovereign creditors and Iraq. The Paris Club has indicated that the establishment of the SPV does not raise any issue in terms of comparability of treatment among creditors. The scheme of the SPV does not preclude individual Paris Club member countries to participate as long as the Paris Club concurs.

20. Iraq has resolved most private creditors’ claims through debt and cash exchanges. By mid-2007, Iraq had settled more than $19.7 billion claims submitted by private creditors. Almost two-third of the remaining claims were withdrawn or cancelled during the process of reconciliation and settlement. Most of the unresolved claims (about 4 percent of total claims) are being reconciled with claims that are being settled as part of the liquidation of the London branch of Rafidain Bank.

IV. Policy Discussions

21. The discussions were characterized by broad agreement between the authorities and staff on the key economic challenges facing Iraq and the policies needed to address them. The authorities agreed that decisive actions are required to: (i) increase investment, especially in the oil sector; (ii) bring inflation down further; and (iii) move ahead with priority structural reforms.

22. The authorities remain strongly committed to the program supported by the SBA. In the attached third Supplementary Memorandum of Economic and Financial Policies (SMEFP-3) they outline their plans for the remainder of the program period.

A. Macroeconomic Outlook and Risks

23. Iraq’s economic prospects for 2007 and beyond depend critically on the security situation. The authorities acknowledged that present circumstances constrain their ability to increase the rate of implementation of their investment program, including importantly in the oil sector. As a result, oil production would increase only gradually over the next few years. For 2007, oil production could reach close to 2.1 mbpd. With non-oil output continuing to grow moderately, real GDP growth is projected at about 6 percent in 2007. Over the medium term, output growth is projected to average some 6¾ percent in 2008–09; assuming progress is made in resolving the security problems, economic growth could increase to about 10 percent thereafter. Inflation is targeted to come down to about 30 percent by end-2007, reflecting the combined effects of the policy actions taken by the CBI, the strict control of government current spending, and the start of private imports of fuel products. The increase in government investments should only have a limited impact on inflation, given its high import content. From 2009 on, inflation is expected to gradually fall to single digit levels.

Iraq: Medium Term Outlook

article image
Sources: Iraqi authorities and Fund staff projections.

24. The fiscal situation remains vulnerable to declines in oil prices. With the current favorable world oil price outlook and assuming a gradual increase in oil production and export volumes, the overall fiscal position would be sustainable. The government will need to continue to restrain current spending in order to allow for sufficient investment and security outlays, especially in view of the expected reduction in foreign grants starting in 2008 and sizable amortization payments of the rescheduled debt beginning in 2011. The balance of the DFI is projected to fall to a very low level during 2007–11 to absorb the projected fiscal deficits, leaving no room for fiscal slippage.

25. Iraq’s medium-term balance of payments and debt outlook remain heavily dependent on crude oil exports. The current account balance is expected to deteriorate in 2007 and remain in sizable deficit through 2009, as oil exports would increase only slightly, and because of somewhat higher investment-related imports and lower inflows of foreign grants. With more rapidly increasing oil exports from 2010, the external current account balance would improve again over the medium term. Gross international reserves are expected to gradually increase to a level equivalent to eight months of import cover.

Figure 6.
Figure 6.

Current Account Balance, External Debt and International Reserves, 2004–12

Citation: IMF Staff Country Reports 2007, 301; 10.5089/9781451819144.002.A001

26. The unsettled security situation and possible terms of trade shocks continue to pose serious risks to the outlook. The economy remains extremely vulnerable to the country’s security problems, which impede investment, inhibit private economic activity, and hamper implementation of the structural reform agenda. In the event that investment and production in the oil sector cannot be increased as projected, lower oil revenue would result in higher fiscal deficits and sizable financing gaps from 2008. Absent access to significant external borrowing, spending cuts would be necessary and unavoidable. The debt sustainability analysis indicates that Iraq’s external debt remains also vulnerable to negative oil price and production shocks (Appendix I).

B. Fiscal Policy and Related Measures

27. The 2007 budget allows for an ambitious investment program, while maintaining overall fiscal sustainability (SMEFP-3,¶8–10). The authorities indicated that they have already taken a number of administrative measures to increase the execution rate of investment projects, including accelerating cabinet approval of large projects and shortening the procurement period. However, they considered that, given the gestation period of new projects and the unsettled security situation, the impact of these measures in the short term will be limited. At the same time, they were determined to keep current spending, notably on wages and pensions, within budget to make room for public investment and security outlays, and to avoid putting excessive demand pressures on Iraq’s small non-oil economy. Taking account of the effect of a further appreciation on oil revenues, the overall fiscal deficit would be kept below 10 percent of GDP in 2007.

28. The authorities were committed to continue the phased adjustment of official fuel prices (SMEFP-3, ¶13 and Box 3). Domestic fuel prices were raised on July 1, broadly in line with the program. The increase should avoid the emergence of explicit budgetary subsidies, except for a small subsidy on kerosene. With fuel prices now equal to or above regional averages, the authorities indicated that they will consider developing a rule-based mechanism for setting domestic fuel prices in the future.

29. To reduce fuel shortages, the authorities have issued about 20 licenses to private importers (SMEFP-3, ¶12). They indicated that private imports in the Kurdish region have begun, but that the security situation in other parts of the country remains a deterrent for private sector involvement. The authorities also pointed out that they will take further steps to facilitate private sector imports of petroleum products, including by making storage facilities and pump stations available to private operators. The government will continue to put at the disposal of the State Oil Marketing Organization (SOMO) a revolving credit with a ceiling of ID 400 billion to finance its imports of fuel products.

30. The government has begun to develop a medium-term tax reform strategy with technical assistance from international partners, including the Fund (SMEFP-3, ¶18). The authorities explained that they aim to modernize the tax system to improve revenue collection without placing undue burdens on the economy. They are considering the introduction of a sales-tax as a precursor to a value-added tax, and aim to strengthen the tax and customs administration.

Iraq: Official Fuel Price Adjustments

Despite initial political resistance, Iraq has made significant adjustments to official fuel prices in the past 18 months. Before the first adjustments, in December 2005, fuel prices were extremely low, even by regional standards, with regular gasoline selling in Baghdad for about 3 U.S. dollar cents per liter, and less than half of that outside the capital. In March and June 2007, the prices of regular and premium gasoline and diesel were increased to a level exceeding the regional average. Prices for regular gasoline are now 32 U.S. dollar cents per liter, while prices for premium gasoline largely reflect the actual import cost. With a view to reduce smuggling, the price differentials of premium gasoline between Iraq and its direct neighbors Iran and Kuwait were eliminated, while the price differentials with Syria and Jordan were reduced from more than ninety to less than fifty percent.

The fiscal gains of the fuel price adjustments are substantial. The main objective of the price adjustments is to gradually eliminate budgetary subsidies, and shift resources towards much needed investments in the oil sector, healthcare, education, and security spending. In 2004, the net budget subsidy for fuel imports was ID 4.8 billion (12¾ percent of GDP). By 2006, the price adjustments had reduced this subsidy to ID 3.2 billion (4½ percent of GDP). In the 2007 budget, explicit subsidies for fuel imports have been eliminated, except for a small subsidy for kerosene imports, mostly used by the poor for cooking. These developments were largely in line with the Fund staff recommendations at the time of the previous Article IV consultation and the target set under the SBA.

uA01bx03fig01

Official Fuel Prices in Iraq, 2004–07

(In percent of average fuel prices in other oil-exporting countries in the Middle East and North Africa region) 1/

Citation: IMF Staff Country Reports 2007, 301; 10.5089/9781451819144.002.A001

Sources: Iraqi authorities and Fund staff calculations.1/ Assumes no price increase in benchmark countries in 2007; June 2007 is projection.

Budget Revenues and Expenditure of Oil Related State Owned Enterprices

(in billion ID)

article image

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

31. The authorities underlined that they attach high priority to improving public financial management. They were determined to complete the remaining steps needed to conform the chart of accounts and budget classification with the GFSM 2001, within a cash accounting framework, shortly (SMEFP-3, ¶14). The authorities also indicated that they have started using the Financial Management Information System (FMIS) on a trial basis since January 2007. Staff agreed that the existing legacy system should continue to be used by spending agencies in parallel until the FMIS is fully operational and tested. At the same time, the coverage of the FMIS is being expanded to spending units not yet connected.

32. The authorities explained that the census of public service employees turned out to be more time-consuming than initially foreseen (SMEFP-3, ¶16). They pointed out that the census is linked to the preparations for setting up a computerized payroll to better control the wage bill, and that the security situation has resulted in unexpected delays. However, the preparations for the census have been completed and the census questionnaires have been sent to most relevant government agencies. The data collection phase of the census is expected to be completed by end-November.

33. The authorities indicated that they are actively seeking to have the amendments to the new pension law enacted by the CoR as soon as possible (SMEFP-3, ¶15). The new pension law that was passed in November 2005 is fiscally unsustainable over the medium term. The amendments, once enacted, will provide for a gradual reduction of replacement rates to sustainable levels and zero indexation in 2007, in line with earlier understandings with Fund staff. The authorities also indicated that progress is being made in streamlining the social safety net (SMEFP-3, ¶17).

C. Monetary and Exchange Rate Policy

34. The CBI will continue to manage the exchange rate with a view to reducing inflation and reversing dollarization, and monetary policy will be further tightened, if the inflation situation required this (SMEFP-3, ¶11). While the recent appreciation of the dinar has been successful in helping to reverse dollarization and contain inflationary pressures, the authorities agreed that inflation needs to be further reduced. To this end, they are committed to allow the exchange rate to appreciate gradually in the coming months, while closely monitoring the effects of this policy and adjusting the pace of appreciation as needed.

35. The authorities intend to maintain the link of the dinar to the dollar. In the absence of an effective monetary transmission mechanism and indirect monetary policy instruments, the CBI will continue relying on the exchange rate as the principal nominal anchor for the economy. While the exchange rate will remain the main policy instrument, it will be backed up, as needed, by adjustments in the policy interest rate.

36. Due to data limitations and many structural changes in the economy, it is not possible to estimate the equilibrium real exchange rate. Also, since Iraq is an oil economy, it is difficult to interpret real exchange rate developments based on simple intervention analysis and developments in Iraq’s current account data. However, the improvements in the terms of trade over the past three years and higher current government spending in 2006 have most likely resulted in an appreciation of the equilibrium real exchange rate. With the nominal exchange rate fixed to the dollar for most of the past two years, the adjustment of the real exchange rate to its new equilibrium was reflected in persistent high core inflation. With the policy of allowing the exchange rate to appreciate and the subsequent drop in inflation, the undervaluation of the exchange rate has been significantly reduced. Nevertheless, the real exchange rate likely remains somewhat undervalued as core inflation is still high. Therefore, the authorities agreed that the nominal exchange rate should appreciate further, which should also help to contain inflationary expectations. This policy of gradual appreciation is believed to have a minimal impact on competitiveness, given that Iraq’s main export commodity is oil, and that to achieve lasting gains in competitiveness it is essential to improve security and implement productivity enhancing structural reforms.

Figure 7:
Figure 7:

Real Exchange Rate, Nominal Exchange Rate, and Terms of Trade, January 2004–May 2007

(Index, Jan 2004=100)

Citation: IMF Staff Country Reports 2007, 301; 10.5089/9781451819144.002.A001

Sources: The Iraqi Authorities and Fund staff calculations.1/ Increase denotes appreciation.

37. Iraq continues to maintain a liberal exchange regime. The authorities confirmed that in practice there are no restrictions on current and capital transactions as long as underlying transactions are supported by valid documentation. However, it remains unclear whether Iraq maintains exchange restrictions subject to Fund jurisdiction as the review of exchange regulations by staff is ongoing. As part of this review, the authorities have submitted exchange regulations and recently provided clarifications requested by staff.

38. The CBI’s external audit firm, Ernst and Young (E&Y), has issued in July an interim audit report of the CBI 2006 financial statements summarizing control weaknesses and recommending remedial measures (SMEFP-3, ¶19). The CBI has indicated its commitment to addressing all of E&Y’s audit observations during the course of this year, so that improvements as far as possible would be reflected in the 2007 financial accounts.

39. The CBI has made some progress in addressing the concerns raised by staff and E&Y in the interim safeguards assessment report (ISAR) and the audit of 2005 CBI financial accounts (SMEFP-3,¶20). The CBI Board has adopted a timetable that envisages full implementation of International Financial Reporting System (IFRS) as the CBI’s financial reporting framework by end-2009, and the capital of the CBI was increased to the statutory level of ID 100 billion in February 2007. Furthermore, the CBI indicated to staff that work is underway in addressing the lack of proper accounting records maintained by the CBI, and in establishing adequate control procedures for reserves management.

D. Financial Sector Reform

40. The authorities indicated that they continue to expand the coverage of the new payment system (SMEFP-3,¶21). The CBI will continue to encourage banks to connect to the real time gross settlement payment system and the automated clearing house, and expected to cover most banks by end-2007.

41. The Memoranda of Understanding (MoUs) signed in December 2006 between the CBI and the ministry of finance for the restructuring of the two largest state-owned banks are being implemented (SMEFP-3,¶22). As a first step, an international auditor has been selected to conduct operational and financial audits of both banks that are expected to be completed by early 2008. The restructuring of the remaining state-owned banks will be initiated later this year, in line with the approach adopted with Rasheed and Rafidain banks.

Banking Sector

Iraq’s banking sector comprises seven state-owned banks (SOBs) and 22 private banks as of end-2006. Their consolidated assets totaled about $26 billion (or 51 percent of GDP). The SOBs account for 90 percent of the banking sector total assets (70 percent for Rafidain and Rasheed banks alone). The credit culture is poor with very little extension of credit to the private sector and an asset composition heavily tilted toward government securities. Very few banks offer loans with more than one year maturity as most banks lack the expertise to offer appropriate credit facilities or assess risks.

Financial intermediation in Iraq is weak. The total loans portfolio of the banks was only $2.2 billion (4 percent of GDP) at end-2006, mostly in the form of overdrafts, despite the fact that credit to the private sector more than doubled in 2006. Total deposits in the banking sector were $12.9 billion (26 percent of GDP). Compared to some other countries in the region the deposit base and loan portfolio of Iraqi banks is small.

uA01bx04fig01

Financial Intermediation in Iraq and Selected Regional Comparators, 2006

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 301; 10.5089/9781451819144.002.A001

Sources: IMF International Financial Statistics, Iraqi authorities and Fund staff calculations.

Banking supervision, which involves both on-site (security permitting) and off-site supervision, has improved over the past two years, including as a result of the technical assistance provided by the Fund, which has encouraged the CBI to move from a rule-based to a risk-based system.

42. The CBI issued implementing regulations for the 2004 Anti- Money Laundering (AML) law in September 2006. A new AML office was set up within the CBI to implement these new regulations.

E. Other Structural Issues

43. Negotiations on a new legal framework for the oil sector are ongoing (SMEFP-3, ¶23). The authorities emphasized their commitment to develop a competitive and transparent hydrocarbon sector. The envisaged legal framework is provided by four draft laws, which in addition to the draft hydrocarbon law, include three accompanying draft laws pertaining to reestablishing the Iraq National Oil Company, reorganizing the ministry of oil, and setting the parameters for revenue distribution and intragovernmental fiscal relations.

44. The authorities attached great importance to enhancing transparency and fighting corruption in the oil sector (SMEFP-3,¶24). Oil meters at the Basra export terminal have become operational for the most part. However, the work on the implementation of a comprehensive country-wide metering system is still underway. The authorities intend to join the Extractive Industries Transparency Initiative. As a first step, the ministry of oil will start, during the second half of the year, to publish oil-related data on its website.

45. The authorities are in the process of rehabilitating commercially viable state-owned enterprises (SMEFP-3,¶25). They indicated that so far about 21 public enterprises have been selected, notably in the cement, textile, pharmaceutical, and petrochemical sectors. These enterprises have submitted a business plan to Rasheed and Rafidain banks to obtain financing for starting operations.

46. The new investment law still needs an operational framework (SMEFP-3,¶26 and Box 5). The authorities indicated that they are working to set up the National Investment Commission, which would develop and monitor the implementation of investment policies and regulations to attract investments. They are also seeking to establish national and regional one-stop agencies that would be in charge of issuing investment licenses.

The New Investment Law

In November 2006, the Presidential Council issued a new investment law, which covers all areas of investment except those in banking, insurance, and the extraction and production of oil and gas, which are covered by separate laws. The new law promotes equal treatment for investors regardless of nationality and stipulates the establishment of national and regional investment commissions. The commissions will develop and monitor the implementation of investment policies and regulations, and establish one-stop agencies at the national and regional levels to approve investments. The law also specifies the rights (e.g., leasing the land up to 50 years renewable), benefits, and obligations for investors.

The new investment law provides various tax holidays to promote investment. For example, an investment project may be exempted from taxes for a period of 10 years after the commercial operation starts. Also, imported assets for the project would be exempted from customs duties, provided that they are brought into Iraq within three years from the date of granting the investment license.

47. Iraq continues to maintain an open trade regime and has made significant progress in the process of WTO accession. The authorities intended to maintain the 5 percent custom duty (reconstruction levy) on imports, while reducing its numerous exemptions. However, the security situation and capacity constraints have hampered effective customs administration. The Working Party on Iraq’s WTO accession met for the first time in Geneva in May 2007, and started the process of accession negotiations. Subsequently, the Iraqi delegation met bilaterally with representatives of more than ten WTO members, and has been invited to submit initial offers to advance their market access negotiations on goods and services.

48. The authorities reiterated their commitment to resolving the remaining external claims (SMEFP-3,¶28). Official contacts have been established with key creditor countries in the Gulf region and China, and the process of debt negotiation and reconciliation is ongoing. The authorities hoped that the SPV for debt securitization would facilitate the negotiations with other official creditors. They also expected that the liquidation of the London branch of Rafidain Bank could be completed by end-2007, enabling them to complete the resolution of all private claims.

V. Program Monitoring and Financing Assurances

49. All quantitative performance criteria set for end-March 2007 were met, but there have been slippages in structural conditionality (Tables 7 and 8). The measures set as structural performance criteria for end-May and end-June are expected to be implemented partially or with delay. As a result, waivers are sought for the following performance criteria (LOI, ¶4):

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, the average is for January–June.

For 2007, as of January 7.

Table 2.

Iraq: Fiscal and Oil Sector Accounts, 2004–12

(In billions of ID; unless otherwise indicated)

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

Projections for 2008-12 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 includes ID270 billion allocated toward government's share of capital in new regional commercial banks. ID1,500 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, 2004–12

(In percent of GDP)

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Sources: Iraqi authorities and Fund staff estimates and projections.

Projections for 2008–12 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 includes ID 270 billion allocated toward government's share of capital in new regional commercial banks. ID1,500 formerly recorded under this item were re-classified as non-oil investment expenditures in 2006 budget presentation. Finally, ID 265 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: Central Bank Survey, 2004–08

(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 includes both SDR holdings and the reserve tranche position.

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 Survey, 2004–06

(In billions of Iraqi dinars, unless otherwise indicated)

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Sources: Iraqi authorities, and Fund staff estimates and projections.
Table 6.

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.

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 offers.

Based on the 2004 Paris Club agreement, the payments of principal and most interest during 2005–10 are deferred and capitalized.

Reflects advance transfers for the execution of letters 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: Quantitative Performance Criteria and Indicative Targets Under the Stand-By Arrangement (SBA), 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 8.

Iraq: 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 DVI; and (iv) insufficient information to support amounts, and to ensure the completeness and valuation of off-balance sheet commitments.

  • The audit of CBI net international reserves data was completed on time but the interim audit report of the CBI 2006 financial accounts has been delayed and was completed on July 15.

  • The adoption of a fully detailed budget classification and chart of accounts in line with the IMF’s GFSM 2001 within a cash accounting framework is expected shortly. 7

  • The census of public service employees, while in progress, was not completed by end-June as planned. This is mainly due to the prevailing security situation, and the fact that it is linked to the preparation for setting up a computerized payroll.

50. The authorities have requested an extension of the SBA until December 28, 2007, in order to keep a policy framework in place during the discussions for a successor arrangement they intend to seek (LOI, ¶3). The authorities have also requested a waiver of applicability for all the end-June quantitative performance criteria. Data to verify performance against these targets will not be available by the time of the Board discussion (scheduled for August 1).

51. The program will continue to be monitored through quantitative and structural performance criteria. In light of the authorities’ request to extend the SBA by three months to December 2007, they requested the establishment of the quantitative performance criteria proposed in the SMEFP-3 for end-September. The authorities requested that the structural performance criterion on completion of the census of all public service employees be redefined and rescheduled to completion of the data collection for the census of all public service employees by end-November 2007. They also requested that the penultimate purchase linked to the fifth review and the last purchase available upon observance of the end-June 2007 performance criteria be rephased, while leaving total access under the arrangement unchanged (Table 10). In case there remain arrears to private creditors by the end of the program period, a financing assurances review will be undertaken.

Table 9.

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 10.

Iraq: Availability of Purchases Under the Stand-by Arrangement, 2007

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Source: Fund staff projections.

VI. Staff Appraisal

52. Iraq’s economic situation in recent years has been very difficult because of the unsettled political situation and the deterioration in security in 2006. Reconstruction and investment have proceeded at a slow pace, thereby keeping oil production low and hampering economic growth. Shortages of key commodities have contributed to sharply rising inflation in 2006.

53. Under these circumstances, staff commends the authorities for having strengthened their economic policies and for having made progress in structural reforms. In particular, the authorities have successfully intensified their policy response to bring the dangerously high inflation on a downward path, and have increased fuel prices to regional levels. Steps have also been taken to increase public investment, which is key to boosting growth and generating sufficient revenues to maintain fiscal sustainability. Despite delays caused by the lack of security and serious capacity constraints, structural reforms continued.

54. The main economic challenges facing the Iraqi authorities are to increase economic growth and further reduce inflation. This requires: (i) taking measures to speed up reconstruction and increase investment, especially in the oil sector; (ii) continuing macroeconomic policies to bring inflation further down; and (iii) pressing ahead with priority structural reforms.

55. Much remains to be done to advance the reconstruction of Iraq’s economy over the medium term. Rebuilding infrastructure and reversing the decline in living conditions will depend critically on progress in establishing a broad-based political consensus and especially on improving security. Implementation of the investment program will also require judicious management of the country’s available resources by ensuring that these are used for priority investment projects and by containing current spending.

56. It is extremely important that the authorities succeed in increasing investment in the oil sector. This will depend critically on improving security. The staff believes that a gradual expansion of crude oil production is achievable, provided the protection of oil installations is reinforced and the envisaged investments in the sector are effectively realized. In this regard, staff welcomes the measures taken by the government to increase the implementation rate of its investment program, and urges it to take additional measures if needed.

57. On this basis, and given the current favorable world oil price projections, the medium-term outlook for Iraq is promising. However, since available resources (mainly expected oil revenues, domestic revenues, assets held in the Development Fund for Iraq, and some remaining external grants) will be limited in the next few years, fiscal prudence is of utmost importance. This is essential, as there are significant downside risks, including from volatile world oil prices, and the political and security situation.

58. Staff welcomes the government’s commitment to keep current spending in 2007 within the budget limits and seek to maintain fiscal sustainability over the medium term. This will require resisting undue spending pressures and strictly containing the wage bill, pensions, and transfers. It remains crucial that the pension law amendments be enacted soon to ensure the long-run fiscal sustainability of the pension system. Staff welcomes the recent increase in official fuel prices, which will enable the government to continue avoiding direct subsidies on fuel products, except for kerosene. The expansion of the new social safety net and ongoing rationalization of the Public Distribution System are also encouraging.

59. Staff supports the decision of the CBI to continue allowing the gradual appreciation of the dinar through end-2007. This policy should contribute to reducing inflation and dollarization, and help correct for any modest undervaluation of the exchange rate in light of Iraq’s favorable terms of trade. However, data and analytical limitations prevent confident estimation of the equilibrium real exchange rate in Iraq. The CBI should keep a close watch on inflationary developments, and be ready to increase the pace of appreciation and tighten monetary conditions further if inflation deviates from its downward path and dollarization is not reduced as expected. The government can further assist the fight against inflation by restraining public spending pressures on the small non-oil economy and by stepping up its efforts to reduce shortages, notably by supporting private sector fuel imports.

60. Concerted efforts are needed to implement priority structural reforms as expeditiously as circumstances permit. Following the modernization of the chart of accounts and budget classification, the authorities should broaden the coverage of the FMIS. Staff encourages the authorities to modernize and streamline the tax system with a view to expanding the tax base and improving incentives for economic activity. It is also important to press ahead with the restructuring of the banking system, in order to enhance the banks’ role in financing new investments. The efforts to rehabilitate viable public enterprises on a commercial basis are welcome; however, any government financial support should be efficient and fully reflected in the budget. In view of Iraq’s large investment needs to increase oil production, a new legislative framework for the hydrocarbon sector should be put in place as soon as possible.

61. Staff welcomes the authorities’ intention to maintain open trade and investment regimes, and supports their efforts to secure WTO accession. While keeping the present low import tariff (reconstruction levy), it is important to increase revenues by scaling down exemptions and strengthening the customs administration. The new investment law provides an important framework to attract much-needed foreign investment, although the numerous tax holidays seem excessive. Staff encourages the authorities to establish the National Investment Commission as soon as possible.

62. Staff also welcomes the authorities’ intention to establish a liberal exchange regime and is in the process of examining additional information provided by the authorities to determine whether or not any exchange restrictions exist that might fall under Fund jurisdiction. Staff urges the authorities to remove any such restrictions, and encourages them to subsequently accept the obligations under Article VIII, Sections 2(a), 3, and 4.

63. Staff urges the authorities to improve the transparency and accountability of public financial management and step up their fight against corruption, which hurts the economy and undermines the credibility of their reform program. Staff underscores the need to put in place a comprehensive oil metering system and encourages the authorities to follow up on their intention to join the EITI.

64. Staff welcomes the steps taken in the central bank safeguards area and urges the CBI to address all recommendations of the ISAR and the interim audit report on its 2006 financial statements. Satisfactory progress in this area will be important in securing a successor arrangement.

65. Staff urges the authorities to continue their efforts to conclude debt agreements with the remaining official and private creditors. However, despite good faith efforts by the authorities, the process of resolving Iraq’s debt to non-Paris Club official creditors remains slow.

66. Staff underscores the importance of further improving the statistical database, notably as regards real sector data, the balance of payments, and public finances.

67. Staff recommends that the fifth review under the SBA be completed. In view of the authorities’ commitment to the program, and the policies and measures described in the third SMEFP, staff supports the authorities’ request for: (i) a waiver of applicability of end-June quantitative performance criteria; (ii) waivers for the nonobservance of the end-May and end-June structural performance criteria; (iii) an extension of the SBA through December 28, 2007, and the rephasing of purchases under the SBA; (iv) the establishment of quantitative performance criteria for end-September 2007; and (v) the setting of a new structural performance criterion (relating to the census of public sector employees) for end-November 2007.

68. Staff supports the completion of the financing assurances review. 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.

69. It is proposed that the next Article IV consultation be held according to the provisions applying to countries with Fund arrangements.

Table 11.

Iraq: Indicators of Fund Credit, 2004–11 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.

Appendix I: Iraq—External Debt Outlook

1. Iraq has received substantial debt reduction from official and private creditors, but the amount of external debt remains large. By assuming that debt reduction comparable to the Paris Club agreement is applied to non-Paris Club creditor’s claims, the latest estimates of external debt indicate that the stock of debt was $69 billion (220 percent of GDP) at end-2005 and $55 billion (111 percent of GDP) at end-2006. Without the third stage of debt reduction, external debt would increase to about $62 billion (about 55 percent of GDP) by 2012. The third stage reduction (expected in 2008) would further reduce Iraq’s external debt to about $36 billion (32 percent of GDP) by 2012 (Appendix, Table 1). 1 The medium term projections assume that new debt disbursement is mostly from multilateral creditors and Japan.

Table 1.

Iraq: Estimated External Debt Stock, 2004–12

(In billions of U.S. dollar) 1/

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Sources: Iraqi authorities 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 may differ from those in the IMF Country Report No. 07/115 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 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.

2. Under the program scenario, Iraq’s external debt remains vulnerable to a negative oil shock, particularly 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; the interest payments accrued during 2005–10 are mostly capitalized. The debt service would be relatively small until 2010 before it increases to about 10 percent of exports in 2011. Simulations for two oil shocks (a production shock that keeps oil production constant at 2.0 mbpd in 2007–08 followed by a gradual production increase of 0.2 mbpd per year, 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 international markets to close the financing gaps (Appendix, Table 2).

Table 2.

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+g r) times previous period debt stock. 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 is constant at 2.0 mbpd in 2007-08, followed by a gradual production increase of 0.2 mbpd per year.

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

Attachment I

Baghdad, July 17, 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. The first and second reviews under the SBA were completed on August 2, 2006, and the third and fourth reviews were completed on March 12, 2007. To allow more time to reach the objectives and complete the reforms under the SBA, the period of the arrangement was extended to September 28, 2007.

2. Despite the implementation of a new security plan in recent months, the security situation remains difficult. Nevertheless, we managed to make further progress in implementing our economic program supported by the SBA. Inflation, which rose to worrisome heights in 2006, has started to abate but additional actions are needed to bring it down further as described in the attached third Supplementary Memorandum of Economic and Financial Policies (SMEFP).

3. In order to keep a policy framework in place during discussions for an envisaged successor arrangement, we request an extension of the current SBA by three months to December 28, 2007. Completion of the final review of three years of implementation of upper credit tranche Fund arrangements by end-December 2008, will allow us to benefit from the last stage of the 2004 Paris Club debt reduction agreement. 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 the fifth review).

4. Iraq has met all quantitative performance criteria set for end-March 2007. The structural performance criterion on completion by May 31, 2007 of an audit of the net international reserves of the Central Bank of Iraq (CBI) was met, and the interim audit report of the CBI 2006 financial accounts was completed on July 15. The structural performance criterion for end-June, 2007 on adopting a chart of accounts and budget classification in line with the IMF’s Government Finance Statistics Manuel 2001, and the structural performance criterion on completion of a census of all public service employees by end-June 2007 were, however, missed.

5. On the basis of corrective actions being undertaken as specified in the third SMEFP, we would like to request waivers for the nonobservance of these performance criteria, and completion of the fifth review under the SBA. We also request a waiver of applicability of end-June quantitative performance criteria and establishment of the quantitative performance criteria proposed in the third SMEFP for end-September 2007, as well as the rescheduling and redefinition of the missed performance criterion on completion of the census of all public service employees, as described in the third SMEFP.

6. In the period ahead, we shall strive to implement our investment program to increase oil-production, reduce inflation further, maintain a sustainable fiscal stance, and undertake reforms needed to spur the non-oil economy. We will continue to refrain from explicit budgetary subsidies on fuel products (except kerosene), as agreed under the program. To this end, we have raised the domestic prices of regular and blended gasoline and diesel as of July 1, 2007, as specified in the third SMEFP. We are paying special attention to the measures needed to facilitate private sector imports of gasoline. We will also 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.

7. We believe that the policies and measures set forth in the attached memorandum will allow achieving 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 Fund staff on adoption of such measures in advance of revisions to the policies contained in the third 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. We consent to the publication of this letter, the third SMEFP, the attached Addendum to the Technical Memorandum of Understanding, and the staff report on the 2007 Article IV consultation and the fifth review under the SBA.

8. Finally, we wish to thank the Fund for its support of Iraq’s economic program under these difficult circumstances. We look forward to continue our engagement with the Fund through the regular Article IV consultation process and technical assistance. We will also seek a successor to the present arrangement, for which we intend to initiate negotiations in the fall, to achieve macro-economic stability, continue our economic reform program, and reach the third and last stage of the 2004 Paris Club debt reduction agreement.

Sincerely yours,

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

July 17, 2007

I. Introduction

1. This memorandum supplements the Memorandum of Economic and Financial Policies for 2005–06 (MEFP) and the first and second supplements thereto, annexed to our letters dated December 6, 2005, July 15, 2006, and February 23, 2007, respectively. It describes additional economic objectives and policies agreed in the context of the fifth and final review under the Stand-By Arrangement (SBA). Policies and unfulfilled commitments specified in the MEFP and previous supplements continue to be part of the program.

II. Recent Developments Under the Stand-By Arrangement

2. Macroeconomic stability came under pressure in 2006 with the pronounced deterioration in the security situation but decisive policy actions since mid-November have put inflation on a downward path. The Central Bank of Iraq (CBI) has tightened its monetary policy stance and allowed the exchange rate to appreciate, while the Government of Iraq (GoI) has kept its spending under control. Also, we have taken measures to reduce fuel shortages. As a result, annual consumer price inflation has come down to 46 percent in June, after reaching about 66 percent in January 2007. The core inflation rate (excluding fuel and transportation) has come down to 19 percent.

3. Lower-than-expected crude oil production has continued to suppress real GDP growth. Economic growth is estimated at 6¼ percent in 2006, compared to 10½ percent projected at the outset of the program. Security, technical, and other difficulties in undertaking the necessary investments kept average oil output at 2 million barrels per day (mbpd), below the target of 2.3 mbpd. Although crude oil production recovered in March and April, it averaged only 1.9 mpbd in the first four months of 2007. Based on indicators for the production of cement, fertilizer, and electricity the non-oil real GDP growth rate is estimated at 7½ percent in 2006. Non-oil real GDP growth is expected to continue at a rate of 5 percent in 2007.

4. The GoI has run a fiscal surplus through March 2007 because of continued underspending but budget execution accelerated in April. Oil revenue was broadly on target, with lower-than-projected production volumes compensated by higher-than-expected prices. Revenues of oil-related state owned enterprises were in line with full cost recovery of fuel imports. The mechanism of funding fuel imports through a revolving credit to the Ministry of Oil (MoO) has worked well, although the disbursement from the Ministry of Finance (MoF) exceeded the indicative target. The indicative target for kerosene was exceeded by a small margin. Non-oil revenue was in line with developments in the tax base.

5. The CBI has gradually appreciated the exchange rate to a level of ID 1,250 per dollar at end-June 2007, a 15 percent appreciation since mid-November 2006. Net international reserves continued to grow and reached a level of $19.7 billion at end-April 2007. The CBI also raised its policy interest rate in two steps to 20 percent as of early January this year.

6. All quantitative performance criteria set for end-March 2007 were met (Table 1). The structural performance criterion set for end-May on completing a final audit of the CBI net international reserves as at December 31, 2006, was met and the structural performance criterion on completing the interim audit report of the CBI 2006 financial accounts was also met albeit with a delay. However, the structural performance criteria set for end-June 2007 on completion of a census of all public sector service employees (central government and military), and on adoption of a fully detailed budget classification and chart of accounts in line with the IMF’s GFSM 2001, within a cash accounting framework, were missed (Table 2).

Table 1.

Iraq: Quantitative Performance Criteria and Indicative Targets Under the Stand-By Arrangement (SBA), 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 2.

Iraq: 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 DVI; and (iv) insufficient information to support amounts, and to ensure the completeness and valuation of off-balance sheet commitments.

III. Economic and Financial Policies in 2007

7. The GoI’s main macroeconomic policy objectives continue to be maintaining fiscal sustainability, further reducing inflation, and accelerating oil sector and other reforms to increase economic growth.

8. In the implementation of the 2007 budget, we are focusing on the need to increase investment, notably in the oil sector, which is key to achieving our growth objective and generating sufficient revenues to maintain fiscal sustainability. We have already taken a number of measures to increase the implementation rate of investment projects. In particular, the cabinet sub-committee on investment has accelerated the approval of large investment projects; the procurement period has been reduced from 60–90 days to no more than 30 days; the thresholds for projects that can be approved at the line-ministry or governorate level has been raised significantly; and budget allocations are being made available to the line ministries on a timely basis. In light of the gestation period of new investment projects in the oil sector and the continued unsettled security situation, however, we expect average crude oil production in 2007 to increase to 2.1 mbpd.1

9. The GoI will continue keeping current spending within the 2007 budget limits. To this end, we will continue resisting undue wage and pension increases and bonuses, and strictly limit hiring, including in public enterprises, in order to keep the wage bill within the budgeted amount. Direct subsidies on fuel products will be avoided (except for a small subsidy for kerosene).

10. These policies, and taking account of the effect of a further appreciation of the exchange rate on oil revenues, should keep the overall government budget deficit below 10 percent of GDP. In case of a sizable shortfall of oil revenues or the need to reallocate capital expenditure, we intend, in consultation with Fund staff, 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 about ID 6 trillion in assets in the Development Fund for Iraq (DFI). To keep the option of domestic financing of the deficit open and maintain a market indicator for interest rates, we will step up the bi-weekly issuance of treasury bills to ID 150–200 billion.

11. We are committed to achieving a further reduction of inflation through the appropriate management of the exchange rate. The CBI will continue to allow the exchange rate to appreciate gradually in the coming months. We will closely monitor the effect of this policy on the dollarization of the economy and inflation, and will adjust the pace of appreciation as needed. While we consider the exchange rate the CBI’s main policy instrument to bring down inflation, we will also stand ready to further increase the CBI’s policy interest rate, if the inflationary situation requires this. The government will continue to support the anti-inflation policies of the CBI by avoiding to put excessive demand pressures on the economy and by taking further measures to reduce commodity shortages, in particular of fuel products.

12. The GoI will take further steps to facilitate private sector imports of petroleum products. We have issued some 20 licenses to private importers of fuel products and expect to issue more in the coming months. We will continue to make available to the private sector storage facilities and pump stations, and will respond promptly to any impediments to the importation of fuel products by the private sector. While private imports in the Kurdish region have begun, the security situation in other parts of the country remains a deterrent for getting the private sector involved in the importation of fuel products.

13. We have raised the domestic prices of fuel products to eliminate direct budgetary subsidies, except for a small subsidy on kerosene (Table 3). A further adjustment was made as of July 1 to bring domestic fuel prices closer to the regional average. By that date, regular gasoline was priced at ID 400 per liter, blended gasoline at ID 450 per liter, and diesel at ID 400 per liter. The State Oil Marketing Organization (SOMO) will continue to use the revolving credit with a ceiling of ID 400 billion provided by the MoF to finance its imports of fuel products. The GoI is willing to consider developing a rule—based mechanism for setting domestic fuel prices in the future. In the coming months we will seek technical assistance on the design and implementation of such a mechanism.

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.

14. The GoI is determined to adopt soon a new chart of accounts and budget classification that is consistent with the Fund’s GFSM 2001, within a cash accounting framework (structural performance criterion for end-June 2007). The MoF has started using the Financial Management Information System (FMIS) on a trial basis in January 2007 but the existing legacy system will continue to be used by spending agencies in parallel for the time being. The MoF has also adopted a plan to increase coverage of spending units not yet connected to the FMIS, which is currently being implemented. We are also working on entering opening balances and budget transfers in the FMIS and are reviewing the accuracy of the system’s output. In order to supplement the functionality offered by the existing FMIS, we are in the process of developing user requirements for a purchasing and a budget module.

15. We are actively seeking to have the amendments to the new pension law enacted by the CoR as soon as possible. The amendments provide for a gradual reduction of replacement rates to fiscally sustainable levels and zero indexation in 2007, in line with earlier understanding with Fund staff. An extra-budgetary pension fund will be created, which will receive all pension contributions but will only pay out to new pensioners, while the budget will continue to be responsible for paying existing pensioners. These changes allow the pension outlays to stay within the budgeted envelope for 2007. We are committed to managing the extrabudgetary fund in a transparent manner, in line with international best practices, and will seek technical assistance from the IMF and the World Bank in this area.

16. The census for public sector employees (structural performance criterion for end-June 2007) has not yet been completed. This project turned out more complicated and time-consuming than initially foreseen as it is linked to the preparations for setting up a computerized government payroll. Also, the security situation has caused unexpected delays, in particular by disrupting the operations of the MoF Information Technology Department. Nevertheless, the preparations for the census have been completed and the census questionnaires have been sent to most relevant government agencies. We envisage to complete the data collection phase of the census (i.e., the completed questionnaires have been received back from the government agencies) by end-November 2007.

17. We are making progress in implementing the new Social Safety Net. To date more than 1 million families have been identified and received cash payments (of up to $80 per month) under the program. This year, we aim to extend coverage to 1.5 million families. We remain committed to further rationalizing the Public Distribution System and have taken some measures in that regard. As a start, we have cancelled eligibility for support of some of the most well-off individuals (ministers, members of the CoR, and others).

18. We are developing a medium-term tax reform strategy. To this end, we have set up a Tax Policy Unit at the MoF and we are receiving technical assistance from international partners, including the IMF. We aim to develop a strategy that will equip Iraq with a tax system that significantly improves revenue collection while at the same time is conducive for economic development. Our tax strategy will cover the oil sector, personal and non-oil corporate income, and consumption taxes, as well as measures to strengthen the tax and customs administrations. We are considering to introduce a sales-tax as a precursor to a value added tax.

19. Ernst and Young (E&Y) has finalized the 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) on May 20. It has also issued an interim audit report of the 2006 CBI financial statements in accordance with International Standards on Auditing on July 15. However, we missed the target date by a few weeks (performance criterion for end-May 2007). We intend to implement in full all recommendations provided in the final audit report of the 2006 CBI financial statements during the course of this year. The capital of the CBI was increased to the statutory level of ID 100 billion in late February (structural benchmark for end-December 2006).

20. We continue to address key concerns raised in the interim safeguards assessment report and the management letters from E&Y. The CBI Board recently adopted a timetable for full implementation of International Financial Reporting Standards as the CBI’s financial reporting framework by end-2009 (structural benchmark for March 31, 2007). We are also taking steps to improve the quality of our accounting records and accounting control procedures, while work is underway to improve foreign reserves management by developing a foreign reserves management policy and investment guidelines (structural benchmarks for June 30, 2007).

21. We continue to make progress in expanding the coverage of the real time gross settlement payment system and the automated clearing house. Currently 10 commercial banks’ headquarters and the MoF are connected to the CBI; we expect to cover most banks by the end of the year.

22. We have taken important steps towards the restructuring of Rafidain and Rasheed banks. The memoranda of understanding for operational restructuring of both state-owned banks, and a financial restructuring of Rasheed bank were approved by the economic committee of the Council of Ministers in March 2007. 2 The setting-up by the CBI of the secretariat of the Restructuring Oversight Committee has been completed. An international auditor has been selected in early June to conduct an operational and financial audit of both banks and will be appointed shortly (structural benchmark for end-April 2007). The audits will start soon thereafter and are expected to be completed by early 2008. Work has also begun on the reconciliation of the foreign debt held by both banks and the cleaning up of the banks’ large suspense accounts. Later this year, we will initiate, in consultation with the IMF and the World Bank, the restructuring of the other four smaller state-owned banks in line with the approach adopted with regard to Rasheed and Rafidain banks.

23. The GoI will continue its efforts towards developing a competitive and transparent hydrocarbon sector. Draft hydrocarbon legislation will be submitted to the CoR when final agreement between all concerned parties has been reached, possibly in the next few months. The envisaged legislative package includes a draft oil and gas law to regulate the sector, a draft law to reestablish the Iraq National Oil Company, a draft law reorganizing the MoO, and a draft financial management law on the sharing of oil revenues.

24. We are committed to step up our efforts to enhancing transparency and fighting corruption in the oil sector. In this regard, the installation of meters at the Basra export terminal has been completed. These meters are for the most part operational but some of them still need to be certified. The comprehensive metering project with Shell and British Petroleum is underway. We are committed to joining the Extractive Industries Transparency Initiative. The MoO will start publishing on its website information on production, export, and processing of crude oil in the next few months.

25. In order to promote economic activity, we have initiated a rehabilitation program for viable public enterprises, notably in the cement, textile, pharmaceutical, and petrochemical sectors. As a first step, we have encouraged 21 public enterprises to submit a business plan to Rasheed and Rafidain banks, in order to obtain financing to restart activities on a purely commercial basis. Any future government support that may be needed will be modest in size and for a limited period only; such support will be fully included in the government budget.

26. In November 2006, a new investment law was adopted that aims to encourage investment and promote equal treatment for domestic and foreign investors. We are now in the process of setting up the National Investment Commission that will develop and monitor the implementation of investment policies and regulations, and establish one-stop agencies at the national and regional levels to issue investment licenses.

27. We are committed to preserving open trade policies. We will maintain the 5 percent import duty (reconstruction levy), while significantly reducing the number of exemptions to increase customs revenue. In May 2007, the Working Party on Iraq’s accession to the World Trade Organization (WTO) met in Geneva and started the process of accession negotiations. We will continue our efforts to secure the accession as soon as possible.

28. We will continue to work toward resolving outstanding external claims. Bilateral agreements with all Paris Club creditors, except Russia, and with nine non-Paris Club official creditors have been signed. Official contacts with key creditor countries in the Gulf region and China have been made, and the technical process of debt reconciliation is ongoing. A Special Purpose Vehicle has been established to facilitate official creditors desiring to securitize their claims, while avoiding the emergence of a multiplicity of different securitizations. Most of the remaining claims of private creditors are in the process of reconciliation with claims that are being settled as part of the liquidation of the London branch of Rafidain Bank. We expect the liquidation to be completed by end-2007, enabling us to complete the resolution of all private claims.

29. As part of the ongoing review of Iraq’s exchange system by IMF staff, we have submitted additional exchange regulations and provided requested clarifications. We have also issued new regulations to apply the Anti Money Laundering (AML) Law and set up a new AML office within the CBI to implement the regulations.

30. The newly established Committee of Financial Experts (COFE) is fully operational, and is expected to continue the work of the International Advisory and Monitoring Board (IAMB) once it is dissolved. We are closely involving the COFE in the IAMB’s regular work to provide it with relevant training prior to the eventual expiration of the IAMB mandate at the end of 2007. The mandate for the DFI expires at the end of this year. We hope to extend the DFI, with help from the international community, for another two years until end-2009. Meanwhile, the immunity of the DFI accounts held at the Federal Reserve Bank of New York has been extended for a year through May 22, 2008.

31. With the help of the international community we have launched an International Compact for Iraq (ICI) to spearhead a process of comprehensive political, security, and economic reform. The macroeconomic component of the ICI is consistent with the program under the SBA.

32. We appreciate the technical assistance received from the IMF, and hope to continue receiving such assistance in the areas of bank restructuring, banking supervision, monetary policy operations, reserves management, development of secondary markets, tax policy, tax and customs administration reform, public financial management, and statistics. We would also like to receive Fund technical assistance to implement the safeguards recommendations.

IV. Program Monitoring

33. In light of our request to extend the current SBA by three months, we would also like that the remaining two purchases under the arrangement be rephased accordingly and that the last purchase will be available upon observance of the end-September 2007 performance criteria.

34. 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 performance criteria have been set for end-September, as specified in Table 1. The missed structural performance criterion on completion of the census of all public service employees has been rescheduled and redefined, as specified in Table 2. We remain committed to submitting data to the Fund within the time lags agreed upon in the MEFP and its supplements.

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

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

July 17, 2007

1. All aspects of the Technical Memorandum of Understanding (TMU) of December 6, 2005 and the addenda thereto of July 15, 2006 and February 23, 2007 remain in effect, except for the changes described below.

2. Quantitative performance criteria for end-September 2007 are being added for: (i) the net international reserves of the CBI; (ii) lending to the government and the private sector by the CBI; (iii) central government total financing; (iv) the government wage and pension bill; (v) revenue of oil related enterprises, including those remitted to the budget; and (vi) new medium-and long-term nonconcessional external debt (with original maturities of one year of more) contracted or guaranteed by the government. The quantitative performance criterion for no external arrears on new borrowing will continue to be monitored on a continuous basis. Indicative targets are also being established for end-September 2007.

3. Cumulative flow variables for the quantitative performance criteria will be measured on a cumulative basis from January 1, 2007, except for the net international reserves of the CBI and the lending to the government and the private sector by the CBI, for which cumulative flow variables will be measured from September 30, 2005.

4. The indicative targets on the revolving government credit to the State Oil Marketing Organization and the government imports of petroleum products will be measured on a cumulative basis from January 1, 2007.
1

The Iraqi Medical Association, for example, estimates that at least one-third of the country’s 40,000 doctors have fled to Jordan, Syria, and other countries.

2

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

3

For example, in the 2005 Article IV consultation, oil production was projected at 2.4 million barrels per day (mbpd) in 2006 whereas the outcome was 2.0 mbpd.

4

Cash sales of dollars at auctions are considered to be a key indicator of dollarization. Dollar sales for bank transfers largely represent the financing of imports and the increasingly important remittances to Iraqi refugees abroad.

5

The final 2006 fiscal accounts have not yet been completed, mainly due to the damage caused by the recent car bomb explosion at the Ministry of Finance on March 21, 2007.

6

The total debt to non-Paris Club official creditors is estimated at $67.7 billion, of which bilateral agreements have been signed for an amount of $3.4 billion. The bulk of unresolved debt (more than 80 percent) is to the Gulf countries and China.

7

Progress was hampered by the kidnapping of an external consultant in May.

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 with the Fund.

1

Projects in the oil sector include the rehabilitation of 120–150 oil wells in the South.

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: 2007 Article IV Consultation, Fifth Review Under the Stand-By Arrangement, Financing Assurances Review, and Requests for Extension of the Arrangement, Waiver of Applicability, and Waivers for Nonobservance of Performance Criteria: Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Iraq
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 301
Publisher:
International Monetary Fund
ISBN:
9781451819144
ISSN:
1934-7685
Pages:
65
DOI:
https://doi.org/10.5089/9781451819144.002
  • Figure 1:
    View in gallery
    Figure 1:

    Violence Indicators, June 2003–May 2007

    (casualties and oil sector attacks per month)

  • View in gallery

    Quality of Life Indicators in Iraq, 2004-05, and 2007

    (Percentage of respondents indicating the availability or condition was “very bad” or “quite bad”)

  • Figure 2:
    View in gallery
    Figure 2:

    Crude Oil Production, January 2005–March 2007

    (In million barrels per day)

  • Figure 3:
    View in gallery
    Figure 3:

    Annual Consumer Price Inflation, August 2004–June 2007

    (In percent)

  • Figure 4:
    View in gallery
    Figure 4:

    Daily Forex Sales and Nominal Exchange Rate May 2006–June 2007

    (In thousands of U.S. dollars and ID/$)

  • Figure 5:
    View in gallery
    Figure 5:

    Fiscal Developments, 2004–07

    (In percent of GDP)

  • Figure 6.
    View in gallery
    Figure 6.

    Current Account Balance, External Debt and International Reserves, 2004–12

  • View in gallery

    Official Fuel Prices in Iraq, 2004–07

    (In percent of average fuel prices in other oil-exporting countries in the Middle East and North Africa region) 1/

  • Figure 7:
    View in gallery
    Figure 7:

    Real Exchange Rate, Nominal Exchange Rate, and Terms of Trade, January 2004–May 2007

    (Index, Jan 2004=100)

  • View in gallery

    Financial Intermediation in Iraq and Selected Regional Comparators, 2006

    (In percent of GDP)

Figure 1:

Violence Indicators, June 2003–May 2007

(casualties and oil sector attacks per month)

Quality of Life Indicators in Iraq, 2004-05, and 2007

(Percentage of respondents indicating the availability or condition was “very bad” or “quite bad”)
Figure 2:

Crude Oil Production, January 2005–March 2007

(In million barrels per day)
Figure 3:

Annual Consumer Price Inflation, August 2004–June 2007

(In percent)
Figure 4:

Daily Forex Sales and Nominal Exchange Rate May 2006–June 2007

(In thousands of U.S. dollars and ID/$)
Figure 5:

Fiscal Developments, 2004–07

(In percent of GDP)
Figure 6.

Current Account Balance, External Debt and International Reserves, 2004–12

Official Fuel Prices in Iraq, 2004–07

(In percent of average fuel prices in other oil-exporting countries in the Middle East and North Africa region) 1/
Figure 7:

Real Exchange Rate, Nominal Exchange Rate, and Terms of Trade, January 2004–May 2007

(Index, Jan 2004=100)

Financial Intermediation in Iraq and Selected Regional Comparators, 2006

(In percent of GDP)