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kevinau
04-20-2010, 12:24 AM
IMF: Iraq economic outlook remains positive (http://www.english.globalarabnetwork.com/201004195563/Economics/imf-iraq-economic-outlook-remains-positive.html) http://www.english.globalarabnetwork.com/templates/gandefault/images/pdf_button.png (http://www.english.globalarabnetwork.com/201004195563/Economics/imf-iraq-economic-outlook-remains-positive.html?format=pdf) http://www.english.globalarabnetwork.com/templates/gandefault/images/printButton.png (http://www.english.globalarabnetwork.com/201004195563/Economics/imf-iraq-economic-outlook-remains-positive/Print.html) http://www.english.globalarabnetwork.com/templates/gandefault/images/emailButton.png (http://www.english.globalarabnetwork.com/component/option,com_mailto/link,aHR0cDovL3d3dy5lbmdsaXNoLmdsb2JhbGFyYWJuZXR3b 3JrLmNvbS8yMDEwMDQxOTU1NjMvRWNvbm9taWNzL2ltZi1pcmF xLWVjb25vbWljLW91dGxvb2stcmVtYWlucy1wb3NpdGl2ZS5od G1s/tmpl,component/) Monday, 19 April 2010 17:06 http://www.english.globalarabnetwork.com/images/stories/2010/MAR/iraq_stock_exchange_bank.jpg (http://www.english.globalarabnetwork.com/images/stories/2010/MAR/iraq_stock_exchange_bank.jpg)
Following a strong economic performance, the Iraqi economy has been seriously affected by the drop in oil prices from their peak levels in mid-2008. As a result, Iraq’s external position deteriorated substantially in 2009, with both the external current account and the overall balance of payments shifting into large deficits of about 20 percent and 10 percent of GDP, respectively. With oil export receipts accounting for about 85 percent of government revenues, the lower oil prices had a similar impact on the government’s budget. Even though the execution of the budget was seriously hampered in the second half of the year by two bomb attacks on the Ministry of Finance, the budget is estimated to have recorded a deficit of over 20 percent of GDP in 2009.

While Iraq’s medium-term economic outlook remains favorable because oil prices and production are projected to increase in the coming years, based on conservative oil price assumptions the current account and overall balance of payments are expected to remain in deficit in 2010 and 2011. Similarly, Iraq’s fiscal position is projected to record large, albeit declining deficits in both years, before returning to a surplus position in 2012. Against this background, the authorities have designed an economic program for the period through end-2011 and have requested the Fund to support it with a new twoyear Stand-By Arrangement.

The authorities view the new program primarily as a way to provide a sound macroeconomic framework during a period of high economic and political uncertainties. The authorities’ fiscal program seeks to contain current government spending while catching up on much-needed investment spending. The budget deficit is targeted to decline to 19 percent of GDP in 2010 and further to 6 percent in 2011, before shifting back into surplus in 2012. Monetary and exchange rate policies will continue to aim at keeping inflation low.

The new program will also help the authorities move forward with their structural reform agenda. In particular, the program aims to advance key reforms in the areas of public financial management, including the management of the country’s oil resources, and financial sector development, in close coordination with a Development Policy Loan provided by the World Bank.

The program will provide access to Fund resources, if needed. Based on conservative oil price assumptions and full execution of the government’s capital budget, Iraq would have a temporary financing need of almost $5 billion through end-2011. However, oil prices may turn out higher than envisaged and capacity constraints may result in under-execution of the capital budget. If either of these developments were to imply that there is no longer a financing need, the authorities have indicated that they would treat the SBA as precautionary. If drawing on Fund resources becomes necessary, the authorities intend to use the domestic counterpart to finance the budget deficit. This would avoid central bank financing of the government and help preserve the independence of the Central Bank of Iraq (CBI).

IMF has been closely engaged with Iraq since 2003. Initial work focused on providing policy advice, mainly on monetary and fiscal policies, and technical assistance to rebuild essential economic institutions. In September 2004, the Fund approved Emergency Post Conflict Assistance (EPCA) for Iraq, which—in combination with a debt sustainability analysis—paved the way for an agreement with Paris Club creditors. Since then, Iraq successfully completed two (precautionary) Stand-By Arrangements (SBA) whose main objectives were to achieve macroeconomic stability, promote growth, and continue with the process of structural and institutional reforms.

IMF has also been a partner in the International Compact with Iraq, an initiative of the Iraqi government for a new partnership with the international community. The Compact was launched in May 2007 and entails a medium-term framework for comprehensive political, security, and economic reforms, aimed at facilitating Iraq's integration with the regional and global economy. The Fund contributed to the preparation of the medium-term macroeconomic framework that underpinned the Compact.

Iraq has made substantial progress since 2003. Despite a difficult security situation, the authorities have demonstrated their commitment and ability to implement sound macroeconomic policies and advance structural reforms. Inflation has been reduced to single digits and the international reserves position has improved markedly. At the same time, domestic fuel prices were raised to eliminate direct fuel subsidies and the pension system was put on a sustainable footing, which created room for priority spending on investment and the social sectors. Several steps have also been taken to strengthen public financial management, improve transparency in the oil sector—including with the help of the International Advisory and Monitoring Board (IAMB)—and rebuild capacity at the central bank, and the authorities have initiated the restructuring of the two largest state-owned banks.

Important advances have also been made in attaining long-term debt sustainability. In 2004, the Paris Club agreed to reduce Iraq’s external debt by 80 percent in net present value terms. The third and final tranche of this debt relief was granted following the completion of the last review under the second SBA in December 2008. Out of a total of $37.2 billion due to Paris Club creditors, $29.7 billion was cancelled, and the remaining $7.4 billion has been rescheduled. Bilateral debt agreements with several non-Paris Club creditors have already been concluded, but this process is yet to be completed.

Looking forward, serious challenges remain. First and foremost is the continuing need to improve security. It is also important to maintain a stable macroeconomic environment and improve the business climate to create a viable private sector in order to sustain economic growth and provide much-needed jobs for Iraq’s labor force. In addition, many structural reforms have yet to be finished, including in the areas of public financial management and bank restructuring.

Therefore, in the attached letter to the Managing Director, the Iraqi authorities request a new 2-year SBA to support their stabilization and rehabilitation efforts, and help advance their structural reform agenda. Their request for a new Fund-supported program responds to the recent deterioration of Iraq’s economic outlook associated with a sharp decline in oil export revenues, owing mainly to the fall in oil prices from their highs of 2008. Based on conservative projections for oil prices, this has created significant balance of payments and fiscal needs. The authorities have outlined their program in the attached Memorandum of Economic and Financial Policies (MEFP) for 2010-11.

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