Iraq: Staff Report for Request for Stand-By Arrangement and Cancellation of Current Arrangement–Informational Annex
Author:
International Monetary Fund
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Publication Date:
16 Jan 2008
eISBN:
9781451819151
Language:
English
Keywords:
ISCR; CR; Stand-By Arrangement; Iraq; government; core inflation; government import; public finance; central bank; IMF Leads; government of Iraq; private sector; Government finance statistics; Monetary statistics
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Iraq showed good progress in undertaking strong macroeconomic policies and implementing economic reforms under the Stand-By Arrangement (SBA). Executive Directors welcomed this, and noted that low investment and stagnating output in the oil sector continue to hamper economic growth. They stressed that the new SBA should maintain macroeconomic stability, facilitate higher investment and output in the oil sector, and move forward with key reforms that were initiated under the previous arrangement. They also emphasized for reduction in inflation, increase in international reserves, and implementation of structural reforms.

Abstract

Iraq showed good progress in undertaking strong macroeconomic policies and implementing economic reforms under the Stand-By Arrangement (SBA). Executive Directors welcomed this, and noted that low investment and stagnating output in the oil sector continue to hamper economic growth. They stressed that the new SBA should maintain macroeconomic stability, facilitate higher investment and output in the oil sector, and move forward with key reforms that were initiated under the previous arrangement. They also emphasized for reduction in inflation, increase in international reserves, and implementation of structural reforms.

Appendix I: Iraq—Relations with the Fund

As of October 31, 2007

I. Membership status:

Date of membership: December 27, 1945

Status: Article XIV

II. General resources account:

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III. SDR department:

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IV. Outstanding purchases and loans:

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V. Latest financial arrangements:

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VI. Projected payments to Fund:

(SDR Million; based on existing use of resources and present holdings of SDRs):

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VII. Implementation of HIPC Initiative: Not Applicable.

VIII. Safeguards assessments:

Under the Fund’s safeguards assessment policy, the Central Bank of Iraq (CBI) is subject to a safeguards assessment, which should normally have been finalized before the completion of the first review under an arrangement. In view of the security and other constraints in Iraq, a phased approach to the completion of the assessment has been taken. As a first step, the CBI appointed an external auditor, Ernst & Young.

Based on the audit’s findings, an interim safeguards assessment was finalized in December 2006, which focused on three of the five areas in the safeguard assessment framework (external audit, financial reporting, and system of internal controls). Staff is in the process of updating the interim safeguards assessment, and is also trying to complete the assessment of the remaining two areas (internal audit and legal structure).

IX. Exchange rate arrangement:

The Central Bank of Iraq has been conducting foreign exchange auction on a daily basis since October 4, 2003. The central bank has followed a policy of exchange rate stability which has translated in a de facto peg of the exchange rate since early 2004. However, since November 2006, the CBI has allowed the exchange rate to gradually appreciate. Iraq continues to avail itself of the transitional arrangements under Article XIV. It is unclear whether Iraq maintains any restrictions subject to Fund jurisdiction under Article VIII, Sections 2, 3, and 4, as the review of exchange regulations by staff is ongoing. The authorities have submitted exchange regulations and provided clarifications requested by staff.

X. Article IV consultations:

The 2007 Article IV consultation was concluded on August 1, 2007. Previous Article IV consultations took place in August 2005 and, before that, in November 1979. A report for the 1983 Article IV consultation was issued to the Executive Board on August 5, 1983; however no Board meeting was convened.

XI. Recent technical assistance:

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XII. Resident Representative

Mr. Ibrahim was appointed on November 30, 2004 as resident representative for Iraq. Due to the prevailing security situation, he is currently based in Amman (Jordan).

Appendix II: Iraq—Relations with the World Bank Group

As of November 9, 2007

1. Iraq, a founding member of the International Bank for Reconstruction and Development (IBRD), received six loans from the IBRD between 1950 and 1973 for agriculture, education, flood control, telecommunications, and transport. The last loan closed in 1979. Iraq was in non-accrual status from 1990 to December 2004, when it paid its arrears to the IBRD (about US$108 million).

2. The Bank began reengaging with Iraq in 2003, with the preparation of Watching Briefs followed by a Joint Needs Assessment together with the United Nations. A first Interim Strategy Note for Iraq, discussed by the Bank’s Executive Directors in January 2004, relied on grants from the multi-donor World Bank Iraq Trust Fund to finance projects.

A. The Bank Group Strategy and Operations

3. The World Bank’s Group’s Second Interim Strategy Note (ISN) for Iraq was discussed by the World Bank’s Executive Directors on September 15, 2005. The Bank’s overarching objective is to help Iraq build efficient, inclusive, transparent, and accountable institutions. To this end, the ISN provides a framework for: (i) an expanded program of analytical and advisory activities; (ii) additional grant resources from the Iraq Trust Fund; (iii) up to US$500 million from IDA; (iv) assuming critical progress regarding IBRD creditworthiness, up to US$500 million of IBRD lending; and (v) support from the International Finance Corporation.

4. Analytical and Advisory Activities. Given Iraq’s own financial resources, the Bank places special emphasis on its analytical and advisory activities (AAA), including capacity building, policy advice, and economic and sector work, as key vehicles of Bank assistance to Iraq.

5. The Bank prepared a Briefing Book for the new government in mid-2006, building on work over 2003–05, including a Country Economic Memorandum (CEM) published in February 2006. Part I of the Briefing Book discusses core reforms, giving priority to strengthening governance and institutions, modernizing social safety nets, and accelerating economic reforms; and Part II covers key sectors for reconstruction.

6. The Bank provided technical support for the socio-economic pillar of the International Compact with Iraq. The Bank participated in a Technical Committee, together with the Government of Iraq and the UN, which oversaw the drafting of Compact documents. The Bank’s two international staff in the International Zone provided daily support to Compact formulation, backstopped by the Bank’s Country Economist at Headquarters and key Bank sector staff. The Bank has emphasized public sector and public finance management, which is the core of the socio-economic pillar of the Compact. The Briefing Book prepared by the Bank in mid-2006 was used to formulate Compact benchmarks.

7. Public finance management reform is the centerpiece of the Bank’s AAA in 2007. The Bank is supporting the Government of Iraq to undertake a Public Expenditure and Institutional Assessment (PEIA) to outline steps for strengthening the accountability and transparency of public finance institutions and policies and help Iraq meet the goals set in the Iraq Compact. The PEIA is expected to underpin an Iraqi-owned public finance management reform program. The Bank is also providing related support to modernize the public procurement system, including the drafting of a new public procurement law.

8. While focusing on public resource management, the Bank is supporting other key issues: strengthening social safety nets and modernizing the pension system; improving the efficiency and effectiveness of the Public (food) Distribution System; assessing poverty and vulnerability; improving management of oil revenues; and restructuring the state-owned banking system. The Bank will also continue to provide policy support in a wide range of sectors including education, electricity, health, transport, water supply and sanitation, and water resource management.

9. World Bank Iraq Trust Fund. Seventeen donors have provided about US$460 million for the World Bank’s Iraq Trust Fund. The Bank has so far approved sixteen grants amounting to about US$437 million for capacity building and investments in education, health, irrigation rehabilitation, municipal water supply and sanitation, poverty monitoring, private sector development, stronger social safety nets, telecommunications, and urban reconstruction. About 75 percent of grant monies have been tendered or contracted, indicating that the procurement process is now advancing after the initial learning curve. The value of signed contracts now exceeds US$237 million (56 percent of grant monies). Disbursements stand at about US$125 million.

10. Additional trust fund projects are under preparation, obligating nearly all remaining trust fund deposits. The Bank is also working with the Government of Iraq to prepare projects to strengthen public financial management and the financial sector to be financed by future trust fund deposits.

11. The Bank engages a Fiduciary Monitoring Agent (FMA) to help supervise project implementation. The FMA employs about 24 Iraqi professionals to monitor the physical implementation of projects and compliance with procurement and financial management requirements. The FMA visits projects sites and meets with ministry staff on a daily basis; and provides monthly progress reports to the Bank.

12. IDA. The Government of Iraq asked that IDA funding allocated for Iraq (US$500 million) focus on basic services—education, electricity, roads, and water supply and sanitation. The Bank’s Board of Executive Directors has approved four projects amounting to US$399 million for investments in education, electricity, and transport.1 Iraq’s parliament ratified the four loans on July 29, 2007; and the presidency council subsequently signed three of the four loans. Therefore, three IDA loans amounting to US$273 million became effective in October 2007.

13. International Finance Corporation. The International Finance Corporation (IFC) is supervising three investments amounting to US$115 million made in FY05 and FY06 in private sector projects. The IFC is also providing technical assistance mainly in the financial sector through the donor-funded Iraq Small Business Financing Fund (ISBFF) and PEP-MENA.

B. IMF-World Bank Collaboration in Specific Areas

14. The Bank is working closely with the Fund on the reform program in Iraq. The two institutions have conducted a number of joint missions and organized policy workshops and training courses for Iraqi civil servants and academics, covering public financial management, oil revenue management, intergovernmental finance, investment climate, payment system, banking supervision, social safety nets, and the like. There are no major differences of views between the two institutions on policy issues. The staffs are in broad agreement on the core reform program in Iraq, namely: (i) reinforcing public governance and institutions, including management of oil revenues; (ii) ensuring coherent and well-sequenced market-focused reforms; (iii) strengthening social safety nets; and (iv) improving delivery of essential services, including education and health.

C. Areas in Which the World Bank Leads and There is No Direct IMF Involvement

15. Through ITF- and IDA-funded projects the Bank is providing emergency support to rehabilitate vital public services—education, health, water supply and sanitation, urban infrastructure, power, and telecommunications. The Bank anchors its project work in focused analysis of sector issues, and supports Iraqi capacity-building via policy workshops and training courses. The Bank leads work on gender issues; and is helping the Government of Iraq to undertake an IHSES and a Poverty Assessment.

D. Areas in Which the World Bank Leads and Its Analysis Serves as Input into the IMF-Supported Program

16. The Bank has provided policy advice and inputs to the Prime Minister’s Supreme Economic Committee and to key ministries. Bank inputs are provided in the form of policy papers on key reform areas, such as subsidy reform, pension system and social protection, oil revenue governance, public finance management, civil service and payroll reform, restructuring of SOEs and public banks, investment climate, and trade policy and facilitation.

17. The IMF has a strong interest in the areas listed above from the macroeconomic perspective (economic growth and fiscal sustainability, including the phasing out of nontransparent quasi-fiscal operations). The IMF has also a strong interest in governance issues, in particular with regards to oil revenue management.

E. Areas of Shared Responsibility

18. The IMF and the World Bank are working together on macroeconomic and fiscal sustainability, revenue management, the reform of domestic subsidies, financial sector reform (comprising state bank restructuring, strengthening payment system and banking supervision and regulation), public debt management, and statistical capacity building. The Bank and the Fund closely coordinate their capacity building activities in macroeconomic management, public sector governance, private sector development, and social safety nets. The Bank’s design of the IHSES benefited from comments provided by the Fund.

F. Areas in Which the Fund Leads and its Analysis Serves as Input into the World Bank–Supported Programs

19. The IMF leads the dialogue on core macroeconomic policies and has taken the lead on debt sustainability analysis, monetary policy, and the management of aggregate expenditures. The Bank is working with the IMF to ensure consistency of the overall macroeconomic and fiscal framework.

G. Areas in Which the IMF Leads and There is No Direct World Bank Involvement

20. The IMF leads the dialogue on monetary and credit policies, exchange rate management, tax policy and administration, and balance of payments issues.

Iraq Country Director: Mr. Joseph P. Saba, contact number (202) 473-2992.

Table 1.

Iraq: Bank-Fund Collaboration

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Appendix III: Iraq—Statistical Issues

A. Background

1. Data provision to the Fund is broadly adequate for program monitoring, but there are some delays in provision and serious weaknesses persist that hamper economic analysis. Macroeconomic statistics have suffered from years of neglect and recent turmoil has added to the difficulties. Given these setbacks, the extent to which statistical data are available is remarkable.

2. The long period of neglect by government institutions had devastating effects in many respects and reduced statistical capacity. Although the Central Organization for Statistics and Information Technology (COSIT) remained in place, its technical expertise was outdated. For instance, national accounts experience was solely with System of National Accounts, 1968 (1968 SNA). At the Central Bank of Iraq (CBI) statistical capacity is slightly better, although the staff need training.

3. The Statistics Department (STA) has provided technical assistance (TA) since 2003. After the June 2003 Fund assessment mission in which STA took part, the first monetary statistics mission visited Baghdad in July as part of an MFD-led mission. In December 2003, a Multisector Statistics Mission (MSM) met with Iraqi representatives from the CBI, COSIT, and the ministry of planning (MoP) in Amman, Jordan. The mission covered monetary and financial statistics, balance of payments and foreign trade statistics, national accounts, and consumer price statistics.

4. Following the 2003 MSM, 18 follow-up missions (held in Amman and Beirut) have been conducted on national accounts, price statistics, balance of payments statistics, money and banking statistics, and the General Data Dissemination System (GDDS). In May 2005, STA, the IMF’s Middle East Technical Assistance Center, and the World Bank, jointly hosted a workshop in Amman for statisticians from Iraq and the West Bank and Gaza on GDDS metadata development. The objective of the workshop was to assist the authorities in drafting GDDS metadata with a view to support participation in the GDDS. In September 2005, the authorities indicated their intention to participate in the GDDS and have nominated a national GDDS coordinator. STA continues to deliver its TA program taking account of the absorptive capacity of the statistical agencies involved, and the contributions of other donors.

B. Shortcomings of Statistical Framework

National accounts

5. The COSIT compiles national accounts mainly for government use. Under the existing Statistical Act, the COSIT reports to the minister of planning who has to agree on the data before release, which constrains COSIT’s statistical independence. COSIT releases national accounts statistics to the public only in a limited form. It publishes current price estimates in the Statistical Yearbook, but this has limited circulation. It is available but only after application to, and approval of, the minister of planning.

6. The Statistics Act was amended in 2005; however, these amendments have not yet been implemented. The amendments reinforce the right of COSIT to conduct surveys and emphasize the compulsory reporting by institutions and individuals. The fines for nonreporters have been updated to reflect the current economic situation. The amendments reaffirm the need of a statistical unit in each economic statistics-producing institution, and stress the cooperation between statistical agencies.

7. The national accounts follow the 1968 SNA but there are gaps and flaws in its implementation. Deficiencies affect the scope of the accounts, both in the geographical and industrial coverage. The accounts have not—since 1991—included the northern region of the country (Kurdistan), do not cover the informal sector, and the surveys used are out of date. Also, they miss a significant portion of the building industry, and there are many gaps in the coverage of business, community, social, and personal services. The COSIT uses out-of-date classifications, which do not follow international best practice. The data on the oil sector is generally adequate and timely, but there is little information on non-oil economic activity.

8. Data collection is reasonably comprehensive for current price data in the formal sector. Under current procedures, businesses employing more than 10 people must report calendar year data by the following October, and small businesses need to report by the following June. Because there are sizable penalties for noncompliance, respondents usually meet these deadlines. However, with recent changes in the country, there is a risk that the timeliness of data reporting will deteriorate.

9. There is a shortage of quarterly and monthly indicators of economic activity and a lack of timely data for services. For several industries, extrapolating from out-of-date benchmarks adversely affects data reliability.

10. Technical assistance by STA consultants is continuing. Areas in need of improvement include the implementation of 1993 SNA, improvement of data on external trade and capital formation, the compilation of the accounts by institutional sectors, and updating of surveys.

Consumer price index

11. Consumer price data are available with relatively short lags but do not cover the Kurdish region. The staff is inadequate in number and has only recently received training during STA technical assistance missions. There is not enough computer hardware and software to process the CPI efficiently. Recent technical assistance missions have focused on providing hands-on training on methodologies for compiling the CPI and on methods for making adjustments in the CPI for changes in the quality of goods and seasonality. Improvements in the CPI are limited by outdated weights, which date back to 1993, but cannot be updated until the next household budget survey is concluded. Limited training has also been provided on methods for constructing the producer price index (PPI) and the wholesale price index (WPI) and on documenting the procedures and methods used to compile the CPI (metadata); work in this area is continuing.

Monetary and financial statistics

12. Notable progress has been made in developing the components and structure for compiling a depository corporations survey, but the quality of the data continues to be hampered by several factors: (i) the lack of sufficiently trained staff and adequate internal cooperation within the CBI; (ii) difficulty in collecting information on banking transactions in the northern region (Kurdistan); (iii) a chart of accounts (COA) that is not fully compliant with current monetary and financial data requirements—the CBI approved in April 2007 a resolution for drafting a new COA by end-2007; (iv) the use of pre-conflict forms for reporting monetary statistics; and (v) the balance sheet presentations for the commercial banks that do not conform with the sectorization and instrument classification of the Monetary and Financial Statistics Manual (MFSM).

13. Recent missions (January-February 2007, and April-May 2007) found that the authorities have made progress in implementing the recommendations from previous missions. These missions (1) reviewed the concepts and presentation formats of the Central Bank Survey (CBS), the Other Depository Corporations Survey (ODCS), and the Depository Corporations Survey (DCS); (2) advanced compilation of the DCS; (3) developed a system of reporting monetary data to STA in Standardized Report Forms (SRFs); (4) drafted explanatory country notes to pave the way for publication of monetary data in International Financial Statistics (IFS); (5) completed the financial sector GDDS metadata; (6) resolved outstanding issues on classification of financial instruments and sectorization of monetary accounts; and (7) started preparatory work for compiling data on other financial corporations. Monthly monetary data for the Central Bank and depository corporations from December 2004 through April 2007 in the SRF format are available.

14. The CBI has recently prepared a consolidated balance sheet of the commercial banks and started producing a monetary survey that excludes the Kurdish region. Together with Bearing Point consultants, CBI staff have been working with staff at the commercial banks to produce “best immediately available” correspondences to populate the SRFs for commercial banks and compile an ODCS. While progress has been made in compiling the data necessary for an ODCS, it is not yet clear whether the financial statements from which they are derived conform fully to generally accepted accounting principles. Consequently, data integrity remains an issue. Also, reporting from some branches is not timely and the reporting forms used currently by the CBI do not allow a complete mapping to the sectorization and classification requirements of the MFSM.

Balance of payments statistics

15. There is little information on the balance of payments. Balance of payments statistics are available to the Fund for 2005 in the IMF’s Balance of Payments Manual, fifth edition (BPM5) format.2 The quality of the information for the past four years has improved, however, the presentation is still limited by coverage problems and some deviations from the internationally acceptable methodologies.

16. A balance of payments statistics mission took place during November 13–27, 2006. The mission assisted the CBI staff in preparing balance of payments statistics consistent with the methodology of the BPM5. A major goal was also to work toward publishing the balance of payments in the IFS. However, issues regarding the recording of external debt data continue to impede the publication of the data. International reserves are compiled consistent with international methodologies and, published in the IFS since end-2006.

17. The mission also found that progress has been made since the January 25–February 6, 2006 mission in the following areas: (a) the Balance of Payments Statistics Division has an adequate organizational structure, and the balance of payments is currently compiled with additional data sources and with a BPM5 breakdown; (b) cooperation between the CBI departments has improved; (c) an international transactions reporting system (ITRS) for banks has been implemented as of March 2006—bank reporters have received training on the ITRS and started reporting in June 2006.

18. The mission noted that despite the progress, the quality of information is still hampered by the lack of technological resources. Furthermore, the collection of data from certain sources outside the CBI is sometimes impeded by the security situation. To further develop balance of payments statistics, the mission proposed several short-term recommendations: (1) Further strengthening internal cooperation in the CBI and request COSIT to conduct the CBI’s balance of payments surveys; (2) align the concept of residency, as defined in BPM5, in order to be consistent with international methodologies; (3) disseminate in the CBI’s hardcopy publications and on its website balance of payments statistics consistent with the recommended presentation in BPM5; and (4) compile and disseminate data on external debt-related transactions.

External trade statistics

19. External trade data are compiled on a monthly basis; however there are serious problems of timeliness due to the late receipt of customs data, which is also of poor quality. The COSIT, in collaboration with the CBI and the Customs Department, has developed a new customs form for imports and in the near future will focus on the revision of the export form. Data are classified according to region, country, and item, using the SITC Rev. 1. Imports are valued on a c.i.f. basis, and exports are valued on a f.o.b. basis. The coverage of the external trade statistics does not include the northern region of the country (Kurdistan), and no estimates for smuggling are made.

20. The import form is not being used at the customs border due to the security situation and the lack of human and technological resources of the Customs Department at the border outlets. Imports are calculated based on the reconstruction fee form, but are considered to be undervalued and therefore unreliable. Therefore, data for private sector imports were excluded and derived from a survey. Wholesale traders were surveyed at five border outlets to elicit information on imports by economic activity.

21. Export data from the oil sector are received from the BOPSD at the CBI. The non-oil export data, which consists of 3–5 percent of total exports, are compiled based on information from the customs export form. Non-oil export data are provided to the CBI on a monthly basis for crosschecking purposes.

Government finance

22. Despite the difficult security situation, which has a direct impact on data compilation and analysis, the provision of fiscal data for program monitoring purposes has been satisfactory, although incomplete data on letters of credit issued by the Trade Bank of Iraq to finance the government imports hampers the assessment of the fiscal stance. Infrequent submission delays occur and coverage of the Kurdish region remains sketchy. However, the authorities are taking measures to address these shortcomings.

23. The February 2005 government finance statistics (GFS) mission—held jointly with a parallel FAD and World Bank mission—discussed a work plan aimed at building up GFS reporting as an integral part of a major rehabilitation of the budgetary, accounting, and fiscal management information system. The mission identified institutional, technical, resource, and coordination issues that would need to be addressed prior to developing GFS. These include establishing a macro-fiscal directorate-general in charge of developing and disseminating fiscal statistical data, implementing the GFS classification for mapping the chart of accounts and budget classification onto the format of the Government Finance Statistics Manual (GFSM 2001) (an area where significant progress has been made), initiating a General Data Dissemination System (GDDS) project to draw up plans for GFS development and dissemination, and preparing preliminary estimates of GFS-compliant data for general government on a best effort basis. The MoF has also set up a debt unit with the support of external consultants. Iraq does not report government finance statistics for publication in the Government Finance Statistics Yearbook (GFSY) or IFS. Currently there are no fiscal statistics published by the government beyond the summary of central government budgetary estimates and outturn. Iraq was represented at the GFS course held at the Arab Monetary Fund (Abu Dhabi) in May 2007.

Iraq: Table of Common Indicators Required for Surveillance

(As of November 14, 2007)

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Sources: CBI, Ministry of Finance, COSIT.

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); NA: Not available.

1

The Third Emergency Education Project (US$100 million) was approved by the Board in November 2005; the Emergency Road Rehabilitation Project (US$135 million) was approved in June 2006; the Dokan and Derbandikan Emergency Hydropower Project (US$40 million) was approved in December 2006; and the Emergency Electricity Reconstruction Project (US$126 million) was approved in March 2007.

2

During the 2007 Article IV consultation in June 2007, the authorities provided staff with the preliminary estimates of the 2006 Balance of Payments (not in BPM5 format).

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Cover IMF Staff Country Reports
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
Author:
International Monetary Fund
Volume/Issue:
Volume 2008: Issue 017
Publisher:
International Monetary Fund
ISBN:
9781451819151
ISSN:
1934-7685
Pages:
90
DOI:
https://doi.org/10.5089/9781451819151.002