Iraq
Second Review Under the Stand-By Arrangement and Financing Assurances Review-Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Iraq
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
29 Dec 2008
eISBN:
9781451819175
Language:
English
Keywords:
ISCR; CR; price; authority; world oil price; Fund.; core inflation; food price inflation; debt forgiveness; public finance; reconstruction expenditure; Oil prices; Oil exports; cash settlement
Download PDF (1.4 MB)

The second review under Stand-By Arrangement and the financing assurances review highlight Iraq’s economic activity and robust growth. The authorities continue to see the improvement in security conditions, and the related recovery of oil and non-oil activity, as a window of opportunity to move toward a path of high and sustainable growth, in the context of continued macroeconomic stability. The Central Bank of Iraq (CBI) is committed to maintaining its tight monetary stance, including through its exchange rate policy.

Abstract

The second review under Stand-By Arrangement and the financing assurances review highlight Iraq’s economic activity and robust growth. The authorities continue to see the improvement in security conditions, and the related recovery of oil and non-oil activity, as a window of opportunity to move toward a path of high and sustainable growth, in the context of continued macroeconomic stability. The Central Bank of Iraq (CBI) is committed to maintaining its tight monetary stance, including through its exchange rate policy.

I. Introduction

1. This is the second and final review under Iraq’s second Stand-by Arrangement (SBA). The (precautionary) arrangement expires on March 18, 2009, at which point Iraq will have completed over three years of programs continuously supported by upper credit tranche arrangements with the Fund. Iraq’s first SBA was approved on December 23, 2005, and was extended twice before being cancelled just prior to approval of the present arrangement on December 19, 2007. Completion of this review (by end-December 2008) will trigger the third and final stage of Iraq’s Paris Club debt reduction agreement, for a total debt reduction of 80 percent (in net present value (NPV) terms).1

II. Recent Economic and Political Developments

2. The security situation in Iraq continues to improve and some progress has been made toward political reconciliation. The rejoining of the Cabinet by ministers belonging to Sunni and other political parties in July 2008 has strengthened the position of the government. The provincial elections law was enacted on October 3, allowing the elections to be held in early 2009. A draft agreement on the future status of foreign forces in Iraq has been approved by the Council of Representatives (CoR), ahead of the expiration of the United Nations mandate on December 31, 2008. The turnaround in the security situation achieved in 2007 has been sustained. Indicators of violence show an improving trend in 2008 despite intermittent flare-ups.

Figure 1:
Figure 1:

Violence Indicators, June 2003–September 2008

(casualties and oil sector attacks per month)

Citation: IMF Staff Country Reports 2008, 383; 10.5089/9781451819175.002.A001

Source: Iraq Pipeline Watch, Iraq Body Count, and Brookings Institution.

3. Economic activity has picked up in 2008, underpinned by improving security. Following the reopening of the northern pipeline to Turkey, crude oil production in the first eight months of 2008 rose to 2.3 million barrels per day (mbpd), compared with 1.9 mbpd in the same period of 2007. Oil exports in the first nine months of 2008 were running slightly ahead of the target average for the year of 1.8 mbpd. Preliminary indications, including from the industrial production index, are that non-oil activity also picked up, albeit from a low base. On this basis, real GDP growth is expected to increase to almost 10 percent in 2008 from 1½ percent in 2007.

4. Inflation has been subdued thus far in 2008. Annual consumer price inflation in October was 7½ percent, reflecting declining black-market fuel prices. Core inflation (which excludes fuel and transportation costs) has remained somewhat higher (running at about 13½ percent in the year to October), in part because food price inflation has not yet come down. The 2008 civil service salary increase that came into effect in June has had a limited impact on inflation thus far because of the high import content of consumption spending.2 Inflation for the year as a whole is likely to remain somewhat below the target of 14 percent.

5. The fiscal balance through July 2008 was in surplus, mainly on account of larger-than-expected oil revenues, reflecting both higher export prices and volumes. While still below budget, capital expenditures during the first seven months of 2008 were twice the level recorded for the same period in 2007. The balance in the Development Fund for Iraq (DFI) increased from $12.6 billion at end-2007 to $23.5 billion at end-September 2008, and government deposits in the banking system rose by ID 4½ trillion to ID 18 trillion over the same period. Notwithstanding the recent drop in world oil prices and the increased spending in the supplementary budget for 2008, an overall budget surplus of close to 8 percent of GDP is projected for 2008.

6. Exchange rate policy was adjusted in anticipation of price pressures resulting from the fiscal expansion in 2008. During July–October 2008, the appreciation of the dinar increased to ½ percent per month from ¼ percent per month during the first half of the year. The dinar has appreciated by 20 percent since November 2006, when the CBI started to appreciate the currency to counter dollarization and reduce inflation. Gross international reserves of the CBI increased from $31.5 billion at end-2007 to $44.3 billion at end-September 2008. In light of the subdued price pressures in 2008, the CBI reduced its policy interest rate from 16 percent to 15 percent as of November 3.

Figure 2.
Figure 2.

Iraq: Output and Inflation

Citation: IMF Staff Country Reports 2008, 383; 10.5089/9781451819175.002.A001

Source: Iraqi authorities; and Fund staff calculations.
Figure 3.
Figure 3.

Iraq: External and Fiscal Indicators

Citation: IMF Staff Country Reports 2008, 383; 10.5089/9781451819175.002.A001

Source: Iraqi authorities; and Fund staff calculations.

7. Iraq has continued to make progress toward resolving outstanding external claims. As at end-October 2008, bilateral debt arrangements with eleven non-Paris Club official creditors had been signed on terms comparable to the Paris Club agreement, restructuring a debt stock of $9.4 billion. Negotiations with Greece, Morocco, Tunisia, and the United Arab Emirates have been concluded, and debt agreements are expected to be signed in the near future; this would bring the resolved share of total non-Paris Club debt (excluding the other Gulf countries) to 46 percent of the initial debt by value. Debt negotiations continue with several other non-Paris Club official creditors, including China and some Gulf countries. In August 2008, a cash settlement was completed with private creditors on terms comparable to the 2004 Paris Club agreement, resulting in a cash payment of $48.3 million and the cancellation of $470 million of outstanding commercial debt.

8. Some progress was made in structural reforms. The CBI Board approved the new reserves management guidelines, the final fiscal accounts for 2007 have been submitted to the Board of Supreme Audit (BSA), and an action plan for modernizing the government’s public financial management system was adopted in November. Some progress was also made in banking reform, but the census of public service employees is still not completed.

III. Policy Discussions

9. The discussions focused on 2009 budget in the context of lower oil prices and revenues, on the conduct of monetary policy, and on the outstanding structural reform agenda. With the average Iraqi oil export price at $95.4 per barrel in the first half of 2008, spending pressures mounted and a supplementary budget was passed that provided for significant increases in current and capital spending. The steep decline in oil prices beginning in September has worsened Iraq’s external outlook for the period ahead. The draft 2009 budget is based on an oil export price of $62.5 per barrel, a third lower than the average price expected for 2008.3 The authorities and staff agreed that the 2009 draft budget needs to allow for adequate security and investment spending, while limiting other current spending to preserve fiscal sustainability. The discussions also covered the authorities’ plans regarding adjustment of official fuel prices next year, the appropriate monetary and exchange rate policy stance, and the implementation of the structural reform agenda.

10. The authorities remain strongly committed to the program supported by the SBA. The attached second Supplementary Memorandum of Economic and Financial Policies (SMEFP-2) outlines their plans for the remainder of the program period through March 2009.

A. Macroeconomic Outlook and Risks

11. The direct impact of the global financial crisis on Iraq has been limited but the decline in oil prices prompted by the global slowdown has adverse implications for Iraq’s budget and balance of payments. Financial spillovers are small because private capital flows and foreign direct investment are low, and Iraq’s banking sector is relatively underdeveloped and primarily focused on the domestic market.

12. Real GDP growth is projected to continue at about 7½ percent in 2009, provided the reduction in violence is sustained. Oil production and exports are projected to increase to 2.5 mbpd and 2.0 mbpd, respectively, and the non-oil sector is expected to further recover as improved security would allow private commerce to expand. Assuming no further declines in black-market fuel prices, the gap between headline and core inflation would likely be reduced; annual inflation is targeted to be contained at 10 percent in 2009. The external current account surplus of 15 percent of GDP in 2008 is projected to disappear in 2009, mainly due to lower oil export revenues. From 2010 onwards, the current account balance is projected to improve again, assuming a continuing rise in oil export volumes and a gradual recovery in oil prices over the medium term.

13. The economic outlook remains subject to considerable risks. A reversal of the still fragile security gains and a resumption of political instability could lower economic growth, add to inflationary pressures, and hamper the timely implementation of the structural reform agenda. A slowing world economy could further depress international oil prices, which would pose a major risk for public finances and the balance of payments.4 Iraq’s external debt situation remains vulnerable to oil shocks, even after the completion of the debt reduction (Appendix).

B. Fiscal Policy and Related Measures

14. The draft 2009 budget provides for an increase in security and capital spending, while strictly containing other current outlays to preserve fiscal sustainability (SMEFP-2, ¶¶ 9 and 10). The draft budget was approved by Cabinet on November 10, 2008. Faced with declining oil revenues, the government significantly reduced its initial spending plans (by 14 percent of GDP) by cutting current spending and bringing investment in line with implementation capacity. Oil revenues are expected to be about a quarter lower than the projected outturn in 2008. The carry-over from the 2008 civil service salary increase will be fully funded but there will be no additional wage increases and zero net hiring of nonsecurity personnel. As a first step to reform the costly and untargeted in-kind Public Distribution System, eligibility of better-off families will be restricted as of mid-2009. Transfers to public enterprises will be contained and include transfers to the electricity sector (fuel imports) and a limited wage increase. Investment spending, including in the oil sector and at the provincial level, will be increased compared to the expected 2008 outturn, but the practice of carrying over unspent investment allocations from previous years will be ended.

15. On this basis, an overall fiscal deficit of about 17 percent of GDP is projected for 2009, which under current policies would turn into a surplus by 2012. The swing in the fiscal balance between 2008 and 2009 is mostly due to the fall in oil revenues and, with expenditures only rising moderately, is unlikely to be inflationary. The deficit will be financed by drawing down part of the balance in the DFI and by using some of the bank deposits accumulated during 2006–08. In the event that oil export revenues are substantially lower than budgeted and fiscal sustainability is at risk, the authorities have stated their readiness to prepare a supplementary budget to reduce government spending.

16. The authorities will consider adjusting official fuel prices after the provincial elections early next year (SMEFP-2, ¶11). Although official retail prices of jet fuel and LPG were increased in mid-2008, the total indirect subsidy on fuel products resulting from underpricing of crude oil used for domestic consumption is projected to increase by ½ percent to 6.3 percent of GDP in 2008 (Box 1). While recognizing that the indirect fuel subsidy remains high, the authorities were hesitant to increase domestic fuel prices now as world oil prices are falling and the indirect subsidy is projected to decline again to about 4 percent of GDP in 2009. They agreed to continue working on developing a periodic adjustment mechanism for fuel prices based on the recommendations of a recent Fund technical assistance mission.

Figure 4:
Figure 4:

Official Fuel Prices in Iraq, 2004–08

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

Citation: IMF Staff Country Reports 2008, 383; 10.5089/9781451819175.002.A001

Sources: Iraqi authorities and Fund staff calculations.

C. Monetary and Exchange Rate Policies

17. The CBI will continue to manage the exchange rate and maintain its tight monetary policy stance with a view to keeping inflation under control (SMEFP-2, ¶15). The fiscal adjustment planned for 2009 should alleviate the burden on the central bank in this regard. In the absence of an effective monetary transmission mechanism, given the weak state of the banking system, the exchange rate remains the CBI’s main policy instrument. It was agreed that the CBI will continue to gradually appreciate the exchange rate of the dinar in the coming months. Once core inflation has come down to near single digit levels, the CBI should return to its previous policy of maintaining a stable exchange rate. The CBI also agreed to keep its policy interest rate positive in real terms (as measured against core inflation), in order to signal its continued commitment to fighting inflation.

Pricing of Fuel Products in Iraq

Prices of domestic fuel products in Iraq have been raised significantly since 2005, but pass-through remains limited. While direct budgetary subsidies were eliminated in 2007 (except for a small subsidy on kerosene which will be abolished in 2009), indirect subsidies remained sizable at almost 6 percent of GDP as domestic refineries receive crude oil for a fraction of the export price (currently $2 per barrel). Indirect fuel subsidies are expected to increase by ½ percent of GDP in 2008, reflecting the significant increase in world market prices in the first part of the year. The indirect fuel subsidies are expected to fall in 2009 because of falling world oil prices.

Iraq: Domestic Fuel Prices

(In U.S. dollars per liter/per cylinder for LPG, end of period)

article image

Q2 prices reported. LPG price was raised on July 1, which is the price reported.

Average import prices for the period January-July, 2008.

uA01fig01

Iraq: Indirect Fuel Subsidies

(as a percent of GDP)

Citation: IMF Staff Country Reports 2008, 383; 10.5089/9781451819175.002.A001

To preserve the cost recovery gains made in 2005–07, the government intends to develop a periodic price adjustment mechanism for fuel prices based on changes in domestic production costs and import costs. To assist the authorities in this undertaking, FAD conducted a seminar on petroleum product prices and sector financial flows in Beirut during August 10–14, 2008.1 Key recommendations of the seminar included to:

  • Gradually move toward export parity pricing whereby domestic fuel prices are based on a pre-determined fraction of the Iraqi export price of crude oil plus a margin for refining and distribution costs;

  • Implement price adjustments on a quarterly or semi-annual basis to avoid large price jumps and discourage hoarding; and

  • Smooth price changes by basing adjustments on a moving average of production and import costs.

1/ The seminar was originally scheduled for May but had to be postponed for security reasons.
Figure 5.
Figure 5.

Real and Nominal Exchange Rates, January 2004–September 2008

(Index, Jan 2004=100)

Citation: IMF Staff Country Reports 2008, 383; 10.5089/9781451819175.002.A001

Sources: Iraqi authorities; and Fund staff calculations.1/ Increase denotes appreciation.

18. Some progress has been made in the implementation of outstanding safeguards measures (SMEFP-2, ¶16). An independent audit committee, including one external expert, has been set up to make recommendations regarding external and internal audit oversight, financial reporting, and controls consistent with the requirements of the central bank law. The CBI has started implementing the new reserves management guidelines that were adopted in early August. Finally, the CBI will appoint an international external auditor before year-end to conduct the audit of the CBI 2008 financial statements.

19. Iraq is making progress to accept the obligations of Article VIII, Sections 2(a), 3, and 4, of the Fund’s Articles of Agreement (SMEFP-2, ¶17). The staff’s review of exchange laws and regulations has almost been completed, and the authorities intend to implement staff’s recommendations in this area to complete the process.

D. Public Finance Reform

20. The authorities continue to give high priority to improving public financial management. The government has adopted an action plan for modernizing its financial management system (Box 2 and SMEFP-2, ¶13), with the assistance of the Fund and the World Bank. The action plan includes a timetable for priority reforms in this area and specifies technical assistance needs.

21. Progress is also being made in other public finance-related areas:

  • While completion of the census of public service employees has been delayed due to technical problems, 25 percent of the data collection was completed by end-October, and half of this work is expected to be achieved by end-November (SMEFP-2, ¶14). The census is now expected to be completed by end-January 2009;

  • The 2005 final fiscal accounts have been audited by the BSA, and the audits of the 2006 and 2007 final accounts are underway (SMEFP-2, ¶13);

  • The Committee of Financial Experts (COFE) has published on its website the audit report covering DFI operations in the first half of 2008 (SMEFP-2, ¶18). The COFE has also presented its first semi-annual report to the Council of Ministers.5

  • Some progress was made in developing a medium-term tax reform strategy. A draft law on import tariffs has been prepared that will be reviewed by the Fund and envisages establishing a transparent and efficient system of tariffs with fewer exemptions (SMEFP-2, ¶12). Efforts to develop a sales tax (as precursor for a VAT) and to reduce the number of brackets for the personal income tax are also underway.

Public Financial Management Reform

The Iraqi authorities have actively engaged with the Fund, the World Bank, and other international partners in recent years with a view to modernizing public financial management (PFM). A new budget classification based on the IMF Government Finance Statistics Manual (GFSM) 2001, within a cash accounting framework, was adopted in 2007. Progress is also being made, in cooperation with USAID, on the Iraq Financial Management Information System (IFMIS), which is expected to become fully operational in 2009.

However, the PFM framework continues to have shortcomings in a number of critical areas. Recent Fund technical assistance has focused on budget execution, cash management, commitment control, and the accounting framework. The authorities are also working with the World Bank on a new project covering budget preparation, public procurement, and fiscal reporting.

To set these efforts in a unified framework, the authorities have adopted—in close consultation with the Fund and the World Bank—a comprehensive PFM action plan. Its main pillars are:

  • budget preparation, including strengthening the link between government policy and resource allocation, achieving a better coordination between the current and capital budgets, and incorporating information on donor-financed projects;

  • budget execution, cash management, and reporting, including introduction of effective cash release and commitment control systems, establishment of additional monthly reporting requirements for spending units, and expansion of the application of the IFMIS; and

  • public procurement, including ratification of the draft Public Procurement Law and introduction of standard bidding documents for all procurement entities.

E. Banking Reform

22. The financial and operational audits of Rafidain and Rasheed banks have been completed, but work on the restructuring plans for both banks has been delayed (Box 3 and SMEFP-2, ¶19). The authorities have requested assistance from the World Bank and other international partners to develop the restructuring plans for Rafidain and Rasheed banks as soon as possible. The BSA will undertake diagnostic reviews for the three smaller specialized state banks in the coming months with a view of developing restructuring plans for them.

23. The authorities completed half of the prudential regulations for commercial banks, including key regulations on licensing, capital adequacy, credit risk, large exposures, and liquidity risk (SMEFP-2, ¶20). Work is ongoing, with Fund technical assistance, to finalize the remaining regulations, including those related to minimum capital requirements, liquidity risk, and anti-money laundering.

F. Other Issues

24. Further efforts are being undertaken to strengthen governance, in particular in the hydrocarbon sector (SMEFP-2, ¶18). Oil-metering systems are being extended to the northern pipeline and export terminals, and all domestic oil sector activities. Work on the implementation procedures under the Extractive Industries Transparency Initiative (EITI) has started, with technical assistance from the World Bank. Discussions on a new legislative framework for the hydrocarbon sector are ongoing.

25. The authorities are continuing their efforts to improve the statistical database (SMEFP-2, ¶22). The publication of monetary and balance of payments data in the IMF’s International Financial Statistics is a welcome development. While the Socio-Economic Household Survey has been completed, the updating of the weights in the CPI, with technical assistance of the World Bank, is still underway. A new national coordinator for the General Data Dissemination System (GDDS) has been appointed and GDDS participation is expected next year.

IV. Program Monitoring, Financing Assurances, and Future Relations

26. Iraq has met the quantitative performance criteria set for end-September on the net international reserves of the CBI and on CBI lending to the government and the private sector (Table 8). Based on the available information, the other end-September quantitative performance criteria are expected to have been met as well. All structural performance criteria have been met. Staff will inform the IMF Executive Board on compliance with the other end-September quantitative performance criteria and on progress made in meeting the structural benchmarks through November before Board consideration of the second review. The program will continue to be monitored through quarterly quantitative performance criteria set for end-December 2008, as specified in Table 8.

Table 1.

Iraq: Selected Economic and Financial Indicators, 2006–13

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.

2008 at end-October.

Reserve money growth in 2007 reflects the impact of the increase in the required reserves ratio on government deposits from 25 percent to 75 percent per September 2007.

2008 as of November 3.

Table 2.

Iraq: Fiscal and Oil Sector Accounts, 2006–13

(In billions of ID; unless otherwise indicated)

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.

For 2008 and 2009-11, includes $1.875 and $0.625 billion mobile operator license fees, respectively.

The 2008 wage bill includes an allocation of ID216 billion for salaries of provincial councils and personnel contingent upon the enactment of the draft Provinces Law.

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

Includes security spending associated with the implementation of reconstruction projects.

2008 data excludes an amount of ID636 billion included in the Supplementary Budget to settle arrears of the electricity sector to the state-owned oil companies; this cross-settlement is expected to have no net impact on the budget.

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 reclassified as non-oil investment expenditures in the 2006 budget presentation. Finally, ID265 billion were reclassified 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 full 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, 2006–13

(In percent of GDP)

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.

For 2008 and 2009-11, includes $1.875 and $0.625 billion mobile operator license fees, respectively.

The 2008 wage bill includes an allocation of ID216 billion for salaries of provincial councils and personnel contingent upon the enactment of the draft Provinces Law.

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

Includes security spending associated with the implementation of reconstruction projects.

2008 data excludes an amount of ID636 billion included in the Supplementary Budget to settle arrears of the electricity sector to the state-owned oil companies; this cross-settlement is expected to have no net impact on the budget.

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 reclassified as non-oil investment expenditures in the 2006 budget presentation. Finally, ID265 billion were reclassified 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 full down-payment is customarily required.

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

Table 4.

Iraq: Central Bank Balance Sheet 2006–13

(In billions of Iraqi dinars, unless otherwise indicated)

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.

Valued at market exchange rates.

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

Reserve money growth in 2007 reflects the impact of the increase in the required reserves ratio on government deposits from 25 percent to 75 percent per September 2007.

Table 5.

Iraq: Summary Balance Sheet of Deposit Money Banks, 2006–13

(In billions of Iraqi dinars, unless otherwise indicated)

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.
Table 6.

Iraq: Monetary Survey, 2006–13

(In billions of Iraqi dinars, unless otherwise indicated)

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.
Table 7.

Iraq: Balance of Payments, 2006–13 1/

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

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.

Excludes U.S. military spending in Iraq.

Includes interest accrued, deferred, and capitalized.

2008 data include $3.75 billion obtained from telecoms licensing fees.

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

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

Based on Paris Club agreement, the payments of principal and most interest during 2006-10 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 the implementation of the 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 8.

Iraq: Quantitative Performance Criteria and Indicative Targets Under the Stand-By Arrangement, 2007–08 1/

(In billions of Iraqi dinars, unless otherwise indicated)

article image

The Technical Memorandum of Understanding will provide for precise definitions of all performance variables.

Amount at 6/30/07 has been revised from 21,045 at the time of the Board meeting in light of updated data.

Rolling over t-bills does not constitute new lending.

Flows for 2007 and 2008 are cumulative starting 1/1/2007 and 1/1/2008, respectively.

Excluding salaries paid by ministries of defense and interior.

Consessionality is defined as loans with a grant element of 35 percent or higher.

To be monitored on a continuous basis.

Key Findings of the Financial and Operational Audits of Rafidain and Rasheed Banks

The financial and operational audits of Iraq’s two large state-owned banks provide the basis for restructuring plans that the Iraqi authorities are committed to develop in the coming months. The analysis of assets and liabilities points to a recapitalization need of ID 15.7 trillion, which is higher than staff’s previous estimate of roughly ID 10 trillion. This amount is an approximation of the minimum amount of additional capital required in order to bring the banks into compliance with Basel II guidelines. The estimate is based on a partial analysis of the loan portfolio and may increase when all loans are taken into account and accounting errors have been resolved. The bulk of the recapitalization needs stem from losses arising from the revaluation of foreign currency assets and liabilities that appear as a claim on the government on the balance sheet of Rafidain bank. Recapitalization needs arising from non-performing loans are relatively modest despite the high share of non-performing loans (56 percent in value terms), because both banks’ loan portfolios are very small.

From an operational point of view, the audits show that the banks’ weaknesses are serious, and restructuring will be time-consuming and challenging. Some key operational shortcomings are:

  • The banks have no documented strategy and business plan, and no documented objectives;

  • Operational rules and regulations are not clear for all employees, and reporting requirements and responsibilities are not clearly allocated;

  • Information technology and other infrastructure is inadequate and outdated;

  • Risk management is inadequate: there is no formally recognized risk management function, no active asset-liability management function, and no centralized treasury department;

  • Product offering is limited: the banks do not offer letters of credit and other key banking products, and insufficient importance is given to customer relations, sales, and marketing; and

  • The internal audit function’s methodology follows a compliance-based and not a risk-based approach.

Rafidain and Rasheed Banks: Selected Indicators

(In billion Iraqi dinar, unless indicated otherwise)

article image

Based on assessment of 80 percent (Rafidain) and 74 percent (Rasheed) of the loan portfolio.

27. The Iraqi authorities continue to make good faith efforts to reach collaborative agreements with remaining commercial creditors. The settlement process of outstanding private claims as part of the liquidation of the London branch of Rafidain Bank is well under way and the process to liquidate fixed assets has begun. The settlement is expected to conclude before end-2009 under terms consistent with the Fund’s policy on lending into arrears.

28. The authorities have expressed interest in a follow-up program with the Fund after the current SBA expires on March 18, 2009. The Fund stands ready to discuss such an arrangement that would build on the progress made under the current SBA.

V. Staff Appraisal

29. Iraq continues to make encouraging progress in recovering from the very difficult economic situation of the past several years. With the reduction in violence, growth prospects have improved as oil production and exports are beginning to increase and non-oil activity is starting to rebound. At the same time, macroeconomic stability has been maintained.

30. The authorities remain committed to rebuilding the economy, while preserving fiscal sustainability over the medium term. This objective has become more challenging in the context of the sharp fall in oil prices in recent months. Staff welcomes the scaling down of the initial spending plans for 2009 and the readiness of the government to take further measures should oil revenues fall substantially more than currently projected. Although the draft budget implies a large fiscal deficit in 2009, this outcome is acceptable because under current policies the deficit should disappear again over the next few years. It is important to strictly contain current spending, especially the wage bill and transfers. The decision to begin streamlining the costly and untargeted Public Distribution System in mid-2009 is timely. However, the census of public service employees is long overdue, and staff urges its completion as soon as possible. Staff welcomes the increased investment allocation.

31. The decision to delay further adjustments of domestic fuel product prices until the first part of 2009 is reasonable. The explicit subsidy (on imported fuels) has already been eliminated and the implicit subsidy (on domestic production) will go down automatically as a result of lower world oil prices. Staff encourages the government to develop a fuel price adjustment mechanism in the coming months to help put future fuel price adjustments on a sound footing.

32. Staff welcomes the intention of the CBI to continue managing the exchange rate with a view to keeping inflation under control. Once core inflation has come down to near single digit levels, the CBI should revert to maintaining a stable exchange rate. It is important to keep the central bank’s policy interest rate positive in real terms.

33. It is important to speed up the rather slow pace of implementation of key structural reforms. The recently adopted action plan provides a good basis for modernizing public financial management. In order to strengthen financial intermediation in Iraq, restructuring programs for Rafidain and Rasheed banks should be adopted without further delay. It is also important to continue improving the accounting and reporting framework of the CBI and to complete the set of prudential regulations for commercial banks. The recent drop in world oil prices underscores Iraq’s vulnerability to lower oil revenues. Therefore, there is a need to significantly expand its oil and gas production, including by establishing a new legislative framework for the hydrocarbon sector to attract the large investments needed to develop capacity.

34. Efforts must continue to strengthen governance and fight corruption, especially in the oil sector. The ongoing extension of oil metering systems is encouraging and staff looks forward to further progress in this area. Staff encourages the authorities to complete the work on the implementation procedures under the EITI soon.

35. Staff encourages Iraq to accept the obligations of Article VIII, Sections 2(a), 3, and 4, of the Fund’s Articles of Agreement in the near future.

36. Staff recommends that the second review under the SBA be completed in view of Iraq’s overall good performance under the program. Staff believes that Iraq is making best efforts to reach bilateral debt agreements with official non-Paris Club creditors and that the authorities have been negotiating in good faith to resolve the remaining arrears to private creditors, consistent with the Fund’s policy on lending into arrears, and supports the completion of the financing assurances review.

Table 9.

Structural Performance Criteria, and Structural Benchmarks Under the Stand-By Arrangement

article image

Reconciliation of local banks’ current account has improved after the CBI tightened its reporting requirements from the banks. No progress has been made with respect to the reconciliation of suspense accounts (mainly with the Ministry of Finance), and of CBI intra-branch accounts.

Expected in January 2009.

Nine key regulations have been finalized.

Preparation of the restructuring programs will start before end-2008.

Table 10.

Iraq: Availability of Purchases Under the Stand-By Arrangement, 2008–09

article image
Source: Fund staff projections.
Table 11.

Iraq: Indicators of Fund Credit, 2004–14 1/

(In millions of SDRs, unless otherwise indicated)

article image
Sources: Fund staff estimates and projections.

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

The SBA repayments are on a expectations basis.

Appendix. Iraq—External Debt Outlook

1. Iraq has received substantial debt reduction from official and private creditors, but the amount of external debt remains large. Assuming that debt reduction comparable to the terms of the 2004 Paris Club agreement is applied to non-Paris Club creditors’ claims in 2008, the latest estimates of external debt indicate that the stock of debt was $98 billion (198 percent of GDP) at end-2006 and $102 billion (163 percent of GDP) at end-2007. Without the third stage of debt reduction, external debt would amount to $41 billion (31 percent of GDP) by 2013. The third stage reduction (expected in 2008) would further reduce Iraq’s external debt to about $33 billion (25 percent of GDP) by 2013 (Appendix, Table 1).1 The medium-term projections assume that new debt disbursements are mostly from multilateral creditors, Italy and Japan.

Table 1.

Iraq: Estimated External Debt Stock, 2004–13

(In billions of US$) 1/

article image
Sources: Iraqi authorities and 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 IMF Country Report No. 08/303 to incorporate the latest results of debt reconciliation and settlement.

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.

Assumes debt reduction comparable to the 2004 Paris Club agreement for creditors with whom a debt agreement has been signed. For the remaining non-Paris Club creditors, such debt reduction is assumed to take place by end-2008.

Assumes that by end-2009 all debt to private creditors would be settled by debt and cash exchanges.

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

Assumes precautionary SBA during 2005–09.

2. Iraq’s external debt remains vulnerable to a further negative oil shock, particularly when Iraq will start repaying the debt to official creditors. Based on the Paris Club agreement, the repayment of the remaining debt stock would start in 2011; the interest payments accrued during 2005–10 are mostly capitalized. The debt service remains moderately large through 2008, when those non-Paris Club creditors that have not yet provided debt relief are assumed to provide 80 percent debt reduction in net present value terms. Debt service is projected to increase in 2011 because of Paris Club debt repayments. Simulations include two oil shocks (a production shock that keeps oil production constant at 2.2 mbpd in 2008–13, and a price shock that lowers the oil export price by 10 percent per barrel during 2008–13), as well as a combined shock in view of the considerable level of uncertainty under the baseline scenario. Under all three scenarios, the oil production shock, oil price shock and the combined shock scenarios, Iraq would need to use resources from the Development Fund for Iraq and possibly to borrow from international markets to close the financing gaps (Appendix, Table 2).

Table 2.

Iraq: External Debt Sustainability Framework, 2004-13

(In percent of GDP, unless otherwise indicated)

article image

Includes net FDI, other net private sector inflows (all assumed to be equity), and use of official assets held abroad (Development Fund for Iraq). Projections do not assume the third stage of debt reduction by the Paris Club in 2008, but assume the remainig non-Paris Club claims are settled in 2008.

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 remains constant at 2.2 mbpd from 2008 onward.

Assumes that the oil price in 2008–13 is 10 percent lower than the WEO price before adjusting by the quality discount factor.

Assumes that oil production remains at 2.2 mbpd and the oil price is 10 percent lower than WEO price before adjusting by the quality discount factor.

Attachment I. Iraq—Letter of Intent

Baghdad, November 29, 2008

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. Strauss-Kahn:

The Executive Board of the IMF approved a request for a Stand-By Arrangement (SBA) for Iraq on December 19, 2007, in support of our economic program for 2008. The first review was completed on September 3, 2008. The security situation has improved in recent months but remains precarious. Nevertheless, we continue to make progress in the implementation of our program. In particular, growth prospects have improved as crude oil production and exports have increased compared to previous years while inflation has remained subdued, despite a large increase in government spending provided for in the 2008 supplementary budget and higher food prices. We have also advanced with the implementation of structural reforms.

Iraq has met all quantitative performance criteria set for end-June 2008, except for the quantitative performance criterion on the government wage and pension bill because payment of the civil service salary increase included in the 2008 supplementary budget started earlier than anticipated. In completing the first review under the SBA, the Fund has granted a waiver for the nonobservance of this performance criterion. All structural performance criteria have been met. We request completion of the second and final review under the SBA.

In the period ahead, we will strive to maintain macroeconomic stability and take measures that will enable Iraq to move toward a path of high and sustainable growth as proposed in the attached second Supplementary Memorandum of Economic and Financial Policies (SMEFP). The sharp drop in world oil prices triggered by the current international financial and economic crisis is having a serious adverse impact on Iraq’s fiscal and external positions. We have based the draft budget for 2009 on a crude oil export price of $62.5 per barrel, which is much lower than the average crude oil export price of $101.3 per barrel realized during January-September 2008. In order to maintain a sustainable fiscal stance, we have significantly scaled down our initial spending plans for 2009. At the same time, we have maintained a sizable allocation for government investment, including in the oil sector, to further step up our reconstruction efforts. In the event that the average export price of Iraqi oil in 2009 would fall below $62.5 per barrel and fiscal sustainability is at risk, we will prepare a supplementary budget to further cut current spending and adjust investment. We will also continue the appropriate management of the exchange rate of the dinar and maintain a tight monetary policy stance, in order to keep inflation under control.

The attached memorandum updates our economic program for 2008 and outlines the main elements of our program for 2009. We believe that the policies and measures set forth in the second SMEFP are adequate to achieve the objectives of the program that is supported by the SBA through March 2009. However, we will take any additional measures that may be needed to ensure that the program remains on track. We will consult with the Fund on the adoption of such measures, and in advance of revisions to the policies contained in the second SMEFP, in accordance with the Fund’s policies on such consultation. We will provide the Fund with such information as it requests on policy implementation and achievement of the program objectives.

We intend to continue to treat the SBA as precautionary and consent to the publication of this letter and the second SMEFP. Finally, we would like to thank the Fund for its support to Iraq’s economic programs over the last four years under very difficult circumstances, and hope that we can count on the continued support of the Fund for the implementation of Iraq’s economic policy agenda.

Sincerely yours,

article image

Attachment II. Iraq—Second Supplementary Memorandum of Economic and Financial Policies for 2008–09

November 29, 2008

I. Introduction

1. This memorandum supplements the Memorandum of Economic and Financial Policies for 2008 (MEFP) and the first supplement thereto, annexed to our letters dated December 4, 2007 and August 10, 2008, respectively. It describes additional economic objectives and policies agreed in the context of the second review under the Stand-By Arrangement (SBA). Policies and unfulfilled commitments specified in the MEFP and the first supplement thereto continue to be part of the program.

II. Recent Developments Under the Stand-By Arrangement

2. Economic developments have been encouraging so far in 2008. Oil production in January–August 2008 rose on average to 2.3 million barrels per day (mbpd), compared to 1.9 mbpd in the same period of 2007, and is expected to remain at that level for the year as a whole. Oil exports in January–September 2008 were running slightly ahead of the target average for the year of 1.8 mbpd. Indications are that the improved security situation is also starting to benefit the non-oil sector. Preliminary estimates by the Central Organization for Statistics and Information Technology (COSIT) show that real non-oil GDP increased by about 8 percent, year-on-year, in the first half of 2008. Total real GDP growth is projected to increase to close to 10 percent in 2008, from 1½ percent in 2007. Headline inflation has remained subdued thus far in 2008, mainly because of a further decline in (black-) market fuel prices and the limited initial price effect of the civil service salary increase that came into effect in June. On this basis, it seems likely that inflation in 2008 will be kept below the target of 14 percent. Annual core inflation (excluding fuel and transportation costs), however, remained at 13½ percent in October, in part because of increasing food prices.

3. The fiscal outturn through July 2008 showed a surplus, mainly on account of higher-than-expected oil revenues resulting from both higher export prices and volumes of crude oil. Underspending on investment also contributed to the surplus, although our efforts to improve investment execution have resulted in a doubling of recorded capital expenditures in January–July 2008 compared to the same period last year. The balance in the Development Fund for Iraq (DFI) increased by almost $11 billion to $23.5 billion at end-September 2008. The salary increase for civil servants granted this year is being phased in gradually, in line with the program ceilings for the government wage and pension bill. Taking account of the increased spending included in the 2008 supplementary budget and the sharp drop in oil export prices since the summer, an overall budget surplus of almost 8 percent of GDP is expected for 2008 (compared to a surplus of 2.8 percent in the revised program).

4. The Central bank of Iraq (CBI) has stepped up the rate of appreciation of the dinar vis-à-vis the U.S. dollar to about ½ percent per month since mid-2008 to keep inflation under control and counter dollarization. Since November 2006, the dinar has appreciated by 20 percent to ID 1,176 per dollar at end-October 2008. Net international reserves increased to a level of $44.3 billion at end-September. In light of the subdued inflation thus far in 2008, the CBI has reduced its policy interest rate from 16 percent to 15 percent as of November 3, 2008, while keeping the real interest rate in positive territory (as measured against core inflation).

5. All quantitative performance criteria for end-June 2008 were met, except for the performance criterion on the government wage and pension bill, which was missed because the implementation of the civil service salary increase granted in 2008 started earlier than anticipated (Table 1). All structural performance criteria were met (Table 2).

Table 1.

Iraq: Quantitative Performance Criteria and Indicative Targets Under the Stand-By Arrangement, 2007–08 1/

(In billions of Iraqi dinars, unless otherwise indicated)

article image

The Technical Memorandum of Understanding will provide for precise definitions of all performance variables.

Amount at 6/30/07 has been revised from 21,045 at the time of the Board meeting in light of updated data.

Rolling over t-bills does not constitute new lending.

Flows for 2007 and 2008 are cumulative starting 1/1/2007 and 1/1/2008, respectively.

Excluding salaries paid by ministries of defense and interior.

Consessionality is defined as loans with a grant element of 35 percent or higher.

To be monitored on a continuous basis.

Table 2.

Structural Performance Criteria, and Structural Benchmarks Under the Stand-By Arrangement

article image

Reconciliation of local banks’ current account has improved after the CBI tightened its reporting requirements from the banks. No progress has been made with respect to the reconciliation of suspense accounts (mainly with the Ministry of Finance), and of CBI intra-branch accounts.

Expected in January 2009.

Nine key regulations have been finalized.

Preparation of the restructuring programs will start before end-2008.

6. We have also continued to make progress toward resolving external claims. Bilateral agreements with eleven non-Paris Club official creditors have already been signed. The United Arab Emirates has announced the full cancellation of Iraq’s debt and we have finalized the debt negotiations with Greece, Morocco and Tunisia; we hope to sign the relevant debt agreements in the near future. Also, debt negotiations are underway with several other non-Paris Club official creditors, notably some Gulf countries and China. Regarding private creditors, we have completed a cash settlement of about $470 million of commercial debt in August. The process to resolve most of the remaining private claims as part of the liquidation of the London branch of Rafidain Bank has also begun.

III. Economic and Financial Policies in the Remainder of 2008 and in 2009

7. The serious international financial and economic crisis, notably the recent precipitous fall in world oil prices, has significantly worsened Iraq’s external outlook for the period ahead. The projected drop in oil export revenues in 2009, in particular, presents a challenge in view of strong spending pressures fueled by the high oil revenues and fiscal surpluses of recent years. We are determined to strengthen spending discipline to better ensure that the reduced public resources are put to productive use and preserve fiscal sustainability. Therefore, we have revised our spending plans for 2009 downwards by reducing non-priority current outlays and by better aligning the investment budget with our implementation capacity. Appropriate management of the exchange rate and a positive real policy interest rate remain instrumental to keep inflation under control. We will also continue with structural reforms to achieve high growth over the medium term and to strengthen governance and administrative capacity in the public sector.

8. Provided violence continues to decline, real GDP growth is expected to remain strong at about 7½ percent in 2009. Growth would be driven by the ongoing expansion of oil output and a further recovery of non-oil activity. We will strife to further increase average crude oil production and exports to 2.5 mpbd and 2.0 mbpd, respectively, in 2009. We aim to contain inflation at 10 percent in 2009. With average oil export prices projected to fall from $93 per barrel in 2008 to $62.5 per barrel in 2009, oil export earnings would drop by about one-quarter. As a result, the surplus in the external current account of 15 percent of GDP in 2008 is projected to disappear in 2009. The net international reserves of the CBI are expected to further increase to about $64 billion by end-2009.

A. Fiscal Policy and Reforms

9. The 2009 draft budget adopted by Cabinet is designed to preserve fiscal sustainability over the medium term in light of sharply lower expected oil revenues, while continuing to support a sizable investment program. The draft budget provides for sizable security outlays while strictly limiting other current spending. The 2008 civil service salary increase will be fully funded, including the carry-over of the part that was postponed in 2008. We will not grant any additional wage increases and there will be no net hiring of non-security personnel in 2009. In order to limit its costs, we have initiated a reform of the in-kind Public Distribution System aimed at restricting eligibility of well-off beneficiaries as of mid-2009. Other transfers, including to state-owned enterprises, will be strictly limited. In view of the improved investment execution, we have somewhat increased next year’s investment budget for the oil, electricity, water and sanitation, education, health, and agricultural sectors. The practice of carrying over unspent investment allocations from the previous year will be stopped, and we will step up our efforts to safeguard the quality of investment spending.

10. Despite this significant fiscal adjustment, a sizable fiscal deficit is foreseen for 2009, which we intend to eliminate over the next two years. The draft budget aims to limit the overall deficit to ID 17 trillion or 17.3 percent of GDP in 2009. The deficit will be financed by drawing down part of the balance in the DFI and by using some of the bank deposits accumulated during 2006-08. In order to maintain a benchmark for market interest rates and help develop a secondary market for treasury bills, we will continue our regular bi-weekly issuance in the order of ID 150-200 billion.

11. We are considering to increase official fuel prices for regular and blended gasoline, diesel, and kerosene in the first part of 2009. The adjustment will depend on developments in international oil and fuel prices, and aim to reduce the still sizable indirect subsidies and to counter smuggling. At the same time, we will continue to work on the development of a periodic adjustment mechanism for fuel prices, based on the recommendations of a recent Fund technical assistance mission.

12. We have made some progress in developing a medium-term tax reform strategy with the objective to streamline the tax system while broadening the tax base and increasing revenue collection. A draft law on import tariffs has been prepared and will be discussed with the Fund before submission to the Council of Ministers. The objective of the draft law is to establish a transparent and efficient tariff system with fewer exemptions. We are working on the development of a sales tax as a precursor for a value-added tax. As a first step, we intend to introduce a mobile phone tax in 2008. We are also considering to reduce the number of income tax brackets. We will seek technical assistance from the Fund and other international partners to support our tax reform efforts.

13. We are making progress in modernizing public financial management (PFM). The Board of Supreme Audit (BSA) has completed the audit of the final accounts of the federal budget for 2005 and the audit of the final accounts for 2006 is underway. We have submitted the final accounts of the federal budget for 2007 to the BSA in October. The audit reports will be submitted to the Council of Representatives and published. We have also adopted, in consultation with the Fund and the World Bank, a three-year action plan that identifies priority measures to modernize PFM, notably as regards budget preparation, execution and reporting; cash management; public procurement; cash management; and the accounting framework. We will step up our efforts to put in place, in cooperation with USAID, the renewed Iraq Financial Management Information System (IFMIS), in order to make this system fully operational in 2009.

14. We have completed about 25 percent of the data collection for the census of public service employees at end-October, but finalization of the project is being delayed due to technical problems. We will make all efforts to have the census completed by end-January 2009. After completion of the census we will move swiftly to eliminate ghost workers and adopt an action plan to computerize the payroll, as a first step for a comprehensive civil service reform. In parallel, the BSA has begun a project to verify the personnel records in line ministries, in order to clean up the existing payroll.

B. Monetary and Exchange Rate Policies

15. The policy stance of the CBI will continue to be geared to keeping inflation under control. The subdued inflationary pressures thus far in 2008 and the fiscal adjustment envisaged for 2009 would help in this regard. The current policy to appreciate the exchange rate of the dinar will be continued at least until end-2008. Once annual core inflation is brought down to single digits, we intend to maintain a stable exchange rate as the nominal anchor for the economy. The CBI will keep its policy interest rate positive in real terms (measured against core inflation) to signal our firm commitment to continue fighting inflation. Any downward adjustments of the policy interest rate that would be made possible by lower inflation, will be implemented gradually.

16. We continue to strengthen the accounting and reporting framework of the CBI. The CBI has appointed a control committee, which is responsible for developing control procedures and manuals, and for establishing a modern internal audit function with the assistance of external consultants. An independent audit committee has also been set up, which will be made operational shortly. The audit committee includes one external expert and is tasked with making recommendations regarding external and internal audit oversight, financial reporting, and controls. Efforts will be stepped up to reconcile suspense accounts and CBI intra-branch accounts, and to establish a register of outstanding off-balance sheet commitments (letters of credit and guarantees). We will also appoint shortly an external auditor to undertake the audit of the CBI 2008 financial statements in accordance with International Standards on Auditing. The CBI will work with the Ministry of Finance to adopt an audit selection and rotation policy for future audits. To facilitate implementation of International Financial Reporting Standards (IFRS) by end-2009, we will engage an external expert to assist the CBI in the conversion process. We are also moving ahead in implementing our new reserves management guidelines that were adopted in early August.

17. We have made progress in moving towards accepting the obligations of Article VIII, Sections 2(a), 3, and 4, of the Fund’s Articles of Agreement. The review of exchange laws and regulations is nearing completion. We will work with Fund staff to complete the review as soon as possible and are ready to implement the Fund staff’s recommendations once we receive them. In the meantime, we are committed to not impose any restrictions on the making of payments and transfers for current international transactions nor to introduce any multiple currency practices.

C. Other Structural Policies

18. Transparency and good governance in the oil sector remain a top priority. The metering system for the Al-Basra oil export terminal has been installed. The second phase of the installation of metering systems for the northern pipeline and the Khor Al-Amyah export terminal has started and will be completed by October 2009. Also, a comprehensive custody-transfer metering system is largely installed and will be completed by September 2009, while a computerized tracking system for oil transports by road and rail is up and running. Since joining the Extractive Industries Transparency Initiative (EITI), implementation procedures are underway, especially with regards to informing the public about oil production, exports and domestic consumption. The Iraqi Committee of Financial Experts (COFE) is set to take over the responsibilities of the International Advisory and Monitoring Board (IAMB) as the audit and oversight body for the DFI by the end of this year. The COFE has published the audit report, which covers DFI operations in the first half of 2008, on its website. The COFE has also presented its first semi-annual report to the Council of Ministers.

19. We will accelerate the further implementation of our reform strategy for the banking sector. Before the end of the year, we will start, with assistance from the World Bank and other international partners, to develop restructuring plans for Rafidain and Rasheed banks, based on their completed financial and operational audits. The BSA will begin the reconciliation of the foreign debt held by Rasheed and Rafidain and the cleaning up of their large suspense accounts before year-end. The Restructuring Oversight Committee (ROC) will complete its preparation of individual strategies for the three specialized state-owned banks by March 2009. In the meantime, the BSA will start its diagnostic review of these banks. Based on these strategies and the results of the diagnostic reviews, we will develop restructuring plans for these three banks.

20. We have partially completed the set of prudential regulations for commercial banks. Nine key regulations have already been finalized. Work on the relevant reporting tables for the banks will be completed soon. We will make every effort to draw up the remaining regulations as soon as possible, including those related to minimum capital requirements, liquidity risk, and anti-money laundering. This work will be carried out in consultation with the Fund and other providers of technical assistance. At the same time, we are pursuing our efforts to further develop banking supervision practices in line with international standards and best practices. In addition, we will continue to work toward changing the commercial banks’ accounting norms in line with IFRS, and prepare a set of financial soundness indicators for commercial banks.

III. Other Issues and Program Monitoring

21. We will continue our efforts to resolve outstanding external claims under terms that are consistent with the 2004 Paris Club agreement. We are working to finalize the negotiations on a number of debt agreements with non-Paris Club creditors, including China, in the near future. We will continue our best efforts to reach bilateral debt agreements with other remaining non-Paris Club creditor countries with a view to an early conclusion of debt agreements. We will also make every effort to complete the settlement phase of commercial claims as part of the liquidation of the London branch of Rafidain Bank as soon as possible.

22. We will continue our efforts to improve Iraq’s statistical database. Monetary and balance of payments data are now being published in the IMF’s International Financial Statistics regularly. Annual national accounts data has been compiled up to 2007. We will now focus on improving the quality of these annual data before turning our attention to further developing quarterly national accounts data. While the Socio-Economic Household Survey has been completed, the updating of the CPI weights has been delayed because of difficulties with the start-up of the software for processing the new CPI. We will step up our efforts to resolve these problems and update the CPI weights as soon as possible. We have appointed a new national coordinator for the General Data Dissemination System (GDDS). Once we have finalized the remaining meta data, we intend to start participating in the GDDS in the course of next year.

23. Macroeconomic policy performance will continue to be monitored through quarterly quantitative performance criteria and an indicative target (Table 1). Progress in structural reform will be monitored through benchmarks (Table 2).
1

The Paris Club agreed on November 21, 2004 to a debt reduction for Iraq, equivalent to 80 percent in NPV terms, to be achieved in three stages. The first and second stages, each comprising a 30 percent debt reduction in NPV terms, went into effect in November 2004 and in December 2005 (following approval of the first SBA), respectively. The final stage will comprise an additional 20 percent debt reduction in NPV terms, and depends on completion by end-2008 of the second and last review under the current SBA.

2

The salary increase would increase the civil service wage bill by some 57 percent. The effective salary increase in 2008 has been limited to 40 percent and the remainder will be paid in 2009.

3

The budget oil export price is in line with the latest WEO forecast (October 20, 2008) for 2009 of $68 per barrel, less a quality discount of $5.50 per barrel.

4

As Iraq’s oil exports account for a relatively small share in the world market (about 2½ percent), a downturn in global or regional demand should have only a minor impact on export volumes. In addition, Iraq continues to be exempt from OPEC’s production ceilings.

5

The COFE is scheduled to take over the responsibilities of the International Advisory and Monitoring Board (IAMB) as the audit oversight body for the DFI by end-2008.

1

The third stage of debt reduction would be contingent on Iraq completing the second and final review under the current Stand-By Arrangement.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Iraq: Second Review Under the Stand-By Arrangement and Financing Assurances Review-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 383
Publisher:
International Monetary Fund
ISBN:
9781451819175
ISSN:
1934-7685
Pages:
52
DOI:
https://doi.org/10.5089/9781451819175.002
  • Figure 1:
    View in gallery
    Figure 1:

    Violence Indicators, June 2003–September 2008

    (casualties and oil sector attacks per month)

  • Figure 2.
    View in gallery
    Figure 2.

    Iraq: Output and Inflation

  • Figure 3.
    View in gallery
    Figure 3.

    Iraq: External and Fiscal Indicators

  • Figure 4:
    View in gallery
    Figure 4:

    Official Fuel Prices in Iraq, 2004–08

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

  • View in gallery

    Iraq: Indirect Fuel Subsidies

    (as a percent of GDP)

  • Figure 5.
    View in gallery
    Figure 5.

    Real and Nominal Exchange Rates, January 2004–September 2008

    (Index, Jan 2004=100)

Figure 1:

Violence Indicators, June 2003–September 2008

(casualties and oil sector attacks per month)
Figure 2.

Iraq: Output and Inflation
Figure 3.

Iraq: External and Fiscal Indicators
Figure 4:

Official Fuel Prices in Iraq, 2004–08

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

Iraq: Indirect Fuel Subsidies

(as a percent of GDP)
Figure 5.

Real and Nominal Exchange Rates, January 2004–September 2008

(Index, Jan 2004=100)