This is a 91 page report with multiple documents. As it is too long to try and post the following are excerpts from the report. This section discusses the exchange rate policy and the exchange restrictions which have to be resolved before Iraq can transition from Article XIV to Article VIII. There are also numerous financial charts which deal with pertinent issues involving the exchange rate to include addressing the adverse impact of a 30 percent depreciation of the dinar. Windreader1
Iraq: Staff Report for the 2009 Article IV Consultation and Request for Stand-By Arrangement
E. Monetary and Exchange Rate Policies
31. The CBI intends to maintain its present monetary and exchange rate policies, which are aimed at keeping inflation in the single digits and further reducing dollarization. In the absence of an effective monetary transmission mechanism, the exchange rate remains the CBI’s main policy instrument. Up until late 2008, the CBI had allowed the dinar to appreciate gradually to bring down core inflation to near single digit levels. Once inflation was brought under control, the CBI returned to its earlier policy of maintaining a stable dinar, as it had been specified in the last SBA. The CBI also intends to keep the policy interest rate positive in real terms (as measured by core inflation).
32. The lack of data and large structural changes in the Iraqi economy preclude any meaningful estimation of the equilibrium real exchange rate. A very crude assessment suggests that the dinar is broadly in line with fundamentals.(#4 below) With the drop in oil prices, it appears that a possible prior undervaluation has disappeared, and that the dinar could even be somewhat overvalued. The relative low levels of headline and core inflation, however, do not suggest any significant deviation from the equilibrium real effective exchange rate. Moreover, as oil revenues are expected to rise substantially over the medium- to longer term, the equilibrium real exchange rate is likely to rise as well. More importantly, a nominal depreciation could undermine confidence in the dinar, destabilize expectations, lead to increased dollarization, and reignite inflation, reversing the hard-won gains made in recent years. The CBI therefore intends to continue to keep the exchange rate stable, but will consult with staff if its reserves were to fall significantly below the program targets.
(Note #4) Rough estimates based on the external sustainability approach aimed at determining the current account balance that would stabilize the country’s net foreign asset position relative to GDP suggest that the real effective exchange rate is broadly in line with the equilibrium real exchange rate. The current account norm for 2014 was estimated at a surplus of 2.9 percent of GDP. Under current projections, the current account surplus is expected to be only marginally lower than the norm in 2014.
33. The authorities are committed to a liberal exchange regime and to removing all restrictions under Fund jurisdiction. Iraq has a generally unrestricted current account regime and a significantly liberalized capital account. However, four measures have been identified to give rise to exchange restrictions subject to Fund approval. Three relate to a requirement to pay all obligations and debts to the government before relevant payments are transferred abroad, and one to an inoperative bilateral payments agreement with Jordan. The authorities are considering measures to remove the identified restrictions, with a view to accepting Article VIII of the Fund’s Articles of Agreement, but it may take time to resolve the last restriction because of the pending resolution of Iraq’s debts to Jordan.
ANNEX I. IRAQ: RELATIONS WITH THE FUND AS OF DECEMBER 31, 2009 (additional explanation of the restrictions)
Iraq continues to avail itself of the transitional arrangements under Article XIV. Iraq has a generally unrestricted current account regime and a significantly liberalized capital account. However, four measures (plus one exchange restriction maintained for national or international security) have been identified to give rise to exchange restrictions subject to IMF approval, namely, (i) the requirement to pay all obligations and debts to the government before proceeds of investments of investors, and salaries and other compensation of non-Iraqi employees may be transferred out of Iraq, (ii) the requirement to submit a tax certificate and a letter of non-objection stating that the companies do not owe any taxes to the government before non-Iraqi companies may transfer proceeds of current international transactions out of the country, (iii) the requirement that before non-Iraqis may transfer proceeds in excess of ID 15 million out of Iraq, the banks are required to give due consideration of legal obligations of these persons with respect to official entities, which must be settled before allowing any transfer, and (iv) an Iraqi balance owed to Jordan under an inoperative bilateral payments agreement. In addition, one exchange restriction maintained for security reasons should be notified to the IMF under the framework of Decision 144-(52/51
http://www.imf.org/external/pubs/cat/longres.cfm?sk=23713.0
Iraq: Staff Report for the 2009 Article IV Consultation and Request for Stand-By Arrangement
E. Monetary and Exchange Rate Policies
31. The CBI intends to maintain its present monetary and exchange rate policies, which are aimed at keeping inflation in the single digits and further reducing dollarization. In the absence of an effective monetary transmission mechanism, the exchange rate remains the CBI’s main policy instrument. Up until late 2008, the CBI had allowed the dinar to appreciate gradually to bring down core inflation to near single digit levels. Once inflation was brought under control, the CBI returned to its earlier policy of maintaining a stable dinar, as it had been specified in the last SBA. The CBI also intends to keep the policy interest rate positive in real terms (as measured by core inflation).
32. The lack of data and large structural changes in the Iraqi economy preclude any meaningful estimation of the equilibrium real exchange rate. A very crude assessment suggests that the dinar is broadly in line with fundamentals.(#4 below) With the drop in oil prices, it appears that a possible prior undervaluation has disappeared, and that the dinar could even be somewhat overvalued. The relative low levels of headline and core inflation, however, do not suggest any significant deviation from the equilibrium real effective exchange rate. Moreover, as oil revenues are expected to rise substantially over the medium- to longer term, the equilibrium real exchange rate is likely to rise as well. More importantly, a nominal depreciation could undermine confidence in the dinar, destabilize expectations, lead to increased dollarization, and reignite inflation, reversing the hard-won gains made in recent years. The CBI therefore intends to continue to keep the exchange rate stable, but will consult with staff if its reserves were to fall significantly below the program targets.
(Note #4) Rough estimates based on the external sustainability approach aimed at determining the current account balance that would stabilize the country’s net foreign asset position relative to GDP suggest that the real effective exchange rate is broadly in line with the equilibrium real exchange rate. The current account norm for 2014 was estimated at a surplus of 2.9 percent of GDP. Under current projections, the current account surplus is expected to be only marginally lower than the norm in 2014.
33. The authorities are committed to a liberal exchange regime and to removing all restrictions under Fund jurisdiction. Iraq has a generally unrestricted current account regime and a significantly liberalized capital account. However, four measures have been identified to give rise to exchange restrictions subject to Fund approval. Three relate to a requirement to pay all obligations and debts to the government before relevant payments are transferred abroad, and one to an inoperative bilateral payments agreement with Jordan. The authorities are considering measures to remove the identified restrictions, with a view to accepting Article VIII of the Fund’s Articles of Agreement, but it may take time to resolve the last restriction because of the pending resolution of Iraq’s debts to Jordan.
ANNEX I. IRAQ: RELATIONS WITH THE FUND AS OF DECEMBER 31, 2009 (additional explanation of the restrictions)
Iraq continues to avail itself of the transitional arrangements under Article XIV. Iraq has a generally unrestricted current account regime and a significantly liberalized capital account. However, four measures (plus one exchange restriction maintained for national or international security) have been identified to give rise to exchange restrictions subject to IMF approval, namely, (i) the requirement to pay all obligations and debts to the government before proceeds of investments of investors, and salaries and other compensation of non-Iraqi employees may be transferred out of Iraq, (ii) the requirement to submit a tax certificate and a letter of non-objection stating that the companies do not owe any taxes to the government before non-Iraqi companies may transfer proceeds of current international transactions out of the country, (iii) the requirement that before non-Iraqis may transfer proceeds in excess of ID 15 million out of Iraq, the banks are required to give due consideration of legal obligations of these persons with respect to official entities, which must be settled before allowing any transfer, and (iv) an Iraqi balance owed to Jordan under an inoperative bilateral payments agreement. In addition, one exchange restriction maintained for security reasons should be notified to the IMF under the framework of Decision 144-(52/51
http://www.imf.org/external/pubs/cat/longres.cfm?sk=23713.0