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© 2008 International Monetary Fund

January 2008

IMF Country Report No. 08/17

Iraq: Request for Stand-By Arrangement and Cancellation of Current Arrangement—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Iraq

In the context of Iraq’s request for a Stand-By Arrangement and Cancellation of Current Arrangement, the following documents have been released and are included in this package:

• the staff report for the request for a Stand-By Arrangement and Cancellation of Current Arrangement, prepared by a staff team of the IMF, following discussions that ended on November 1, 2007, with the officials of Iraq on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on December 5, 2007. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

• A staff supplement of December 17, 2007 updating information on recent developments.

• a press release summarizing the views of the Executive Board as expressed during its December 19, 2007 discussion of the staff report that completed the request.

• a statement by the Executive Director for Iraq.

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.

Copies of this report are available to the public from

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INTERNATIONAL MONETARY FUND

IRAQ

Request for Stand-By Arrangement and Cancellation of Current Arrangement

Prepared by the Middle East and Central Asia Department

(In consultation with other departments)

Approved by Adam Bennett and Adnan Mazarei

December 5, 2007

Contents

• Glossary

• Executive Summary

• I. Introduction

• II. Recent Developments

  • A. Political and Security Situation

  • B. Developments Under the Current SBA

• III. The Authorities’ Program for 2008

  • A. Fiscal Policy and Related Issues

  • B. Monetary and Exchange Rate Policy

  • C. Banking Sector Reform

  • D. Other Issues

• IV. Program Modalities and Risks

  • A. Medium Term Outlook and Capacity to Repay the Fund

  • B. Proposed Arrangement

• V. Staff Appraisal

• Boxes

• 1. Shortfall and Offset in Iraqi Oil Exports

• 2. Recommendations of the IAMB

• Figures

• 1. Violence Indicators, June 2003–October 2007

• 2. Fiscal Developments, 2004–07

• 3. Annual Consumer Price Inflation, August 2004–October 2007

• 4. Real and Nominal Exchange Rates, January 2004–August 2007

• 5. Daily Foreign Exchange Sales and Nominal Exchange Rate, May 2006–September 2007

• 6. J.P. Morgan EMBI+ Composite and Iraq Bond Indices, January–October 2007

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

• Tables

• 1. Selected Economic and Financial Indicators, 2005–12

• 2. Fiscal and Oil Sector Accounts, 2005–12 (In billions of ID)

• 3. Fiscal and Oil Sector Accounts, 2005–12 (In percent of GDP)

• 4. Central Bank Balance Sheet, 2005–09

• 5. Summary Balance Sheet of Deposit Money Banks, 2005–09

• 6. Monetary Survey, 2005–09

• 7. Balance of Payments, 2005–12

• 8. Quantitative Performance Criteria and Indicative Targets Under the Stand-By Arrangement, 2005–07

• 9. Prior Actions, Structural Performance Criteria, and Structural Benchmarks Under the Stand-By Arrangement

• 10. Indicative Quantitative Benchmarks Under the Stand-By Arrangement

• 11. Quantitative Performance Criteria and Indicative Targets Under the New Stand-By Arrangement, 2007–08

• 12. Prior Actions, Structural Performance Criteria, and Structural Benchmarks Under the New Stand-By Arrangement

• 13. Availability of Purchases Under the Stand-By Arrangement, end-2007–09

• 14. Indicators of Fund Credit, 2004–12

• Appendix: External Debt Outlook

• Attachments

• I. Letter of Intent

• II. Memorandum of Economic and Financial Policies for 2008

• III. Technical Memorandum of Understanding

Glossary

Executive Summary

Iraq’s performance under the program supported by the 2006–07 SBA was good, especially in light of the difficult circumstances. The fiscal stance was successful in containing current spending, but fell short in the implementation of the ambitious investment program, which, combined with the difficult security situation, prevented the envisaged expansion of oil output. Rising oil prices, however, more than offset the production shortfall, thus helping to preserve fiscal sustainability. High inflation was sharply reduced by appreciating the exchange rate, tightening monetary policy, and controlling current government spending. CBI policies also helped to reduce dollarization, and the accumulation of net international reserves exceeded expectations significantly.

Progress has also been made with structural reforms, although much remains to be done. Achievements include sharply adjusting domestic fuel prices and all but eliminating direct budget subsidies on fuel products; enacting legislation to allow importation of fuel products by the private sector; amending the new pension law to make the pension system fiscally sustainable; bringing the chart of accounts and budget classification in line with the GFSM 2001; modernizing the payment system; and strengthening the accounting and reporting framework of the CBI.

The Iraqi authorities have requested a successor SBA to build on the achievements of the program supported by the current arrangement. Access is proposed at SDR 475.36 million (40 percent of quota), and the arrangement, which will be treated as precautionary, will cover 15 months through March 2009.

The main objective of the new program is to maintain macroeconomic stability, facilitate higher investment and output in the oil sector, and move forward with key reforms that were initiated under the current arrangement. The 2008 program envisages an increase of oil output to 2.2 mbpd, and overall GDP growth to reach 7 percent. Annual consumer price inflation is targeted to decline to 12 percent. The 2008 government budget makes room for sizable investment while maintaining fiscal sustainability and the continued avoidance of direct fuel subsidies. Key structural reforms under the program include the strengthening of public financial management and the accounting framework of the CBI; the restructuring of the two largest public banks; and strengthening governance in the oil sector.

With the current favorable world oil price outlook and assuming a gradual increase in oil export volumes, the overall fiscal position would be sustainable. There is, however, little room for fiscal slippage and raising oil output is critical. Debt sustainability would be achieved when the third tranche of the Paris Club debt rescheduling (20 percent in NPV terms) is triggered upon completion of the final review of the proposed SBA and progress is made in rescheduling the remaining debt from non-Paris Club official creditors on comparable terms.

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INTERNATIONAL MONETARY FUND

IRAQ

Staff Report for Request for Stand-By Arrangement and Cancellation of Current Arrangement–Informational Annex

Prepared by Middle East and Central Asia Department

December 5, 2007

Contents

• Appendices

  I. Relations with the Fund

• II. Relations with the World Bank Group

• III. Statistical Issues

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INTERNATIONAL MONETARY FUND

IRAQ

Request for Stand-By Arrangement and Cancellation of Current Arrangement—Supplementary Information

Prepared by the Middle East and Central Asia Department

Approved by Adam Bennett and Adnan Mazarei

December 17, 2007

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Press Release No. 07/301

FOR IMMEDIATE RELEASE

December 20, 2007

International Monetary Fund

Washington, D.C. 20431 USA