View Full Version : IMF PROGRAM NOTE Iraq

01-27-2011, 12:23 PM
This provides an overview of IMF expectations of Iraq as if Oct 12 I didn't see that it had been posted.


Last Updated: October 12, 2010
Current Program Status:

Two-year Stand-By Arrangement (SBA) in the amount of SDR 2.38 billion (about US$3.64 billion), approved by the IMF’s Executive Board on February 24, 2010. The IMF’s Executive Board completed the first review under the SBA on October 1, 2010, bringing the total resources currently available to Iraq under the arrangement to SDR 772.46 million.

With the world’s fourth-largest oil reserves, rising oil production enabled Iraq to reach middle-income status in the 1970s and develop a modern infrastructure, as well as good education and healthcare systems. Since then, however, Iraq has suffered through three devastating wars, a long period of economic and financial mismanagement, and stifling international sanctions imposed during the 1990s. These events traumatized the population, severely damaged political and economic institutions, and undid earlier economic and social gains. By 2004, per capita GDP had fallen to less than US$800, and the country suffered from a crippling debt burden.
The task of rebuilding the country after 2003 is immense and was made harder by sectarian politics and prolonged violence. Iraq’s reconstruction requires not only the rebuilding of its infrastructure, but also of its economic and social institutions, and the creation of a business environment that attracts capital and brings with it new technology and skills to modernize the economy. Iraq’s huge oil reserves could, in principle, provide the resources needed to finance the reconstruction, but with the oil industry in disrepair and subject to attacks by insurgents, translating these resources into revenues has not been easy.
Role of the IMF

The IMF commitment to Iraq relies on two main pillars. First and foremost, the IMF is helping the authorities in their efforts to maintain economic stability as a key condition for economic growth and the generation of sustainable employment opportunities. And second, the IMF has and will continue to assist the Iraqi authorities in rebuilding essential economic institutions with its policy advice and technical expertise.

Macroeconomic stability is at the heart of the IMF programs with Iraq. With the support of a number of IMF programs, the macroeconomic situation of Iraq has improved substantially since 2003 despite extremely difficult security circumstances and periods of political uncertainty. Inflation has been reduced to low single digits, and has remained low for a number of years now, after spiraling up to rates of 70 percent in 2007. The economy is growing with the revival of the oil sector, but also with a revival of private sector activitiy as security has improved. And with the support of the international community, debt levels have been brought down to sustainable levels.
Policy advice focuses on the fiscal, monetary and financial policy areas. In the fiscal area, major emphasis has been put on the adoption of policies that support the reconstruction of Iraq and a targeted safety net system for the poor, while preserving medium-term fiscal sustainability. In the monetary and financial areas, the emphasis has centered on keeping inflation under control, as it is a pervasive tax on the poor, and in helping to establish a framework that enables the private sector. IMF technical assistance in support of policy advice has proven essential in helping the Iraqi authorities develop their institutional capacity and governance infrastructure.

New Program

The new program aims to continue to support the reconstruction of Iraq in challenging times. Following the successful conclusion of Iraq’s second SBA program, the IMF’s Executive Board approved a new two-year SBA program on February 24, 2010 that allows for disbursements of US$3.6 billion (SDR 2,376.8 million, or 200 percent of quota). The program provides a macroeconomic framework supporting ongoing reconstruction efforts during the political transition after the March 2010 parliamentary elections.
The key objectives of the 2010 SBA remain the same as in past programs—the preservation of macroeconomic stability, and the adoption of policies and measures to ensure sustainable growth and poverty reduction. The program responded to the drop in oil prices from their peak levels in mid-2008, which translated into a substantial deterioration of Iraq’s external position in 2009 and to a financing gap in the government finances. Besides the budgetary support, the program covers an agenda of structural reforms that builds on progress made under past programs and that aims at strengthening the use of public resources and the development of a financial sector that can support private sector activity.
Performance under the program has been broadly satisfactory, and Iraq’s medium-term economic outlook is projected to stay favorable. During the first half of 2010, inflation remained in the low single digits, while the budget recorded a surplus—due to higher-than-projected oil revenues and a slow start in spending. Oil revenues were higher because lower-than-projected export volumes were offset by higher-than-budgeted prices. In the second half of 2010, spending is expected to be ramped up, and the budget deficit for 2010 is projected to reach 14 percent of GDP, before declining to below 10 percent of GDP in 2011 and shifting back into surplus in 2012. In the medium term, the economy is projected to grow significantly as domestic and foreign investments in the oil sector start to bear fruit and oil production picks up.
The program also aims at supporting the authorities’ medium-term structural reform agenda. The agenda relies on three key pillars:

Modernizing Iraq’s public financial management system. This encompasses improvements in the allocation, execution, transparency, and accountability of the mobilization and use of public resources. Priority areas include improving budget preparation, reporting and cash management, public procurement, internal audit and control systems, and the accounting framework.
Restructuring the financial sector—by enhancing Central Bank of Iraq (CBI) operations, and developing a banking sector that can provide basic financial services. Reinforcing central banking operations covers, among others, rebuilding the capacity of the central bank to conduct monetary and exchange rate policies, and improving foreign-exchange reserve management in line with the CBI’s reserve management guidelines. The financial restructuring of the two main state-owned banks is another important step in establishing the conditions for banks starting to extend credit to the private sector, essential for medium-term growth and poverty reduction.
Strengthening governance in the oil sector. As part of the authorities’ efforts to ensure transparency and accountability in the oil sector, Iraq became a candidate member to the Extractive Industries Transparency Inititaive (EITI) in February 2010, with a view to becoming a full member in 2012. Efforts are also directed at completing the installation of oil metering systems, which will help to fully reconcile the flows of oil and oil products with the financial flows between the budget and the oil sector, and at maintaining a single account for all oil export proceeds.

The completion of the first review of the SBA program on October 1, 2010 highlighted the progress made, but also the risks ahead:

Despite important capacity constraints that were further aggravated by the repeated attacks on government institutions, all but one of the measures under the program—the financial restructuring of the two main state-owned banks—through end-June were fully or largely observed, albeit with some with delays.

Looking forward, actions are under way to ensure continued progress. Efforts are especially tilted towards the strengthening of public financial management by working to introduce an automated financial management and information system that in the coming years should culminate in the establishment of a single treasury account.

Iraq’s economic prospects continue to be subject to significant risks. Major risks derive from institutional and capacity constraints, volatility of oil prices, and a fragile political and security situation.