Last updated on March 31, 2011
IRAQ—PROGRAM NOTE
Background
Current Program Status:
Two-year Stand-By Arrangement (SBA) in the amount of SDR 2.38 billion (about US$3.8 billion), approved by the IMF's Executive Board on February 24, 2010. The IMF's Executive Board completed the first program review on October 1, 2010, and the second review on March 18, 2011, bringing the total resources currently available to Iraq under the arrangement to SDR 1069.56 million (about $1.7 billion). At the time of the second review, the program duration was extended by five months to July 2012, along with a rephasing of program disbursements based on a shift in financing needs from 2010 into 2011.
Background
Iraq is estimated to have the world’s second-largest oil reserves, with reserves recently revised upward from 115 to 143 billion barrels, based on new geological surveys. By the 1970s, Iraq’s oil resources had enabled the country to reach middle-income status, with a modern infrastructure, and good education and healthcare systems. Since then, however, Iraq has suffered through three devastating wars, a long period of economic and financial mismanagement, and 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 has been—and remains—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. Nevertheless, Iraq’s longer-term outlook is strong as domestic and foreign investment in the hydrocarbon sector starts to bear fruit, and oil production and exports are projected to increase considerably in the years ahead.
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 macroeconomic stability as a key condition for economic growth and the generation of sustainable employment opportunities for Iraq’s large labor force. 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 and the steady improvement in the security situation. 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 the creation of 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 to develop. IMF technical assistance in support of policy advice has proven essential in helping the Iraqi authorities develop their institutional capacity and governance infrastructure.
Current Program
The current 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 about US$3.8 billion (SDR 2,376.8 million, or 200 percent of quota). The program provided a macroeconomic framework supporting ongoing reconstruction efforts during the political transition after the March 2010 parliamentary elections.
The key objectives of the current 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 preserving macro-stability and providing budgetary support, the program also aims at supporting the authorities’ medium-term structural reform agenda. This 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.
•Developing the financial sector—by enhancing Central Bank of Iraq (CBI) operations, and developing a banking sector that can provide basic financial services, including to the private sector which is essential to help create a vibrant private sector. Reinforcing central banking operations includes rebuilding the capacity of the central bank to conduct monetary and exchange rate policies, supervise banks, and manage the country’s foreign exchange reserves. The financial restructuring of the two main state-owned banks is an important step to help establish the conditions for the banking system to extend credit to the private sector.
•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 Initiative (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 second review of the SBA program on March 18, 2011 highlighted that:
•Iraq has maintained macroeconomic stability under difficult external and internal circumstances. Inflation has remained in the low single digits and the exchange rate has remained stable. The 2010 budget deficit is estimated to have been limited to about 10 percent of GDP, significantly smaller than had been projected, partly reflecting delays in the execution of the investment budget. The 2011 budget aims to accelerate investment in public services and in oil infrastructure, as well as to accommodate higher social safety net and security outlays, while remaining consistent with medium-term fiscal sustainability. Based on a relatively conservative assumption for oil revenues, the 2011 budget deficit would be limited to about 14 percent of GDP, before falling in 2012. A strong emphasis on ensuring the quality of public spending remains important.
•Decisive efforts to rebuild key economic institutions and improve governance remain critical to strengthening public service delivery and private sector development. Progress in implementing structural reforms in late 2010 and early 2011 has been uneven. This largely reflected the still severe capacity and security constraints, which also hampered the effective delivery of technical assistance, as well as the political transition. The formation of the new government and the expected increase in oil production in the coming years offer an opportunity to step up reform efforts while maintaining macroeconomic stability.
•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.
IRAQ—PROGRAM NOTE
Background
Current Program Status:
Two-year Stand-By Arrangement (SBA) in the amount of SDR 2.38 billion (about US$3.8 billion), approved by the IMF's Executive Board on February 24, 2010. The IMF's Executive Board completed the first program review on October 1, 2010, and the second review on March 18, 2011, bringing the total resources currently available to Iraq under the arrangement to SDR 1069.56 million (about $1.7 billion). At the time of the second review, the program duration was extended by five months to July 2012, along with a rephasing of program disbursements based on a shift in financing needs from 2010 into 2011.
Background
Iraq is estimated to have the world’s second-largest oil reserves, with reserves recently revised upward from 115 to 143 billion barrels, based on new geological surveys. By the 1970s, Iraq’s oil resources had enabled the country to reach middle-income status, with a modern infrastructure, and good education and healthcare systems. Since then, however, Iraq has suffered through three devastating wars, a long period of economic and financial mismanagement, and 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 has been—and remains—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. Nevertheless, Iraq’s longer-term outlook is strong as domestic and foreign investment in the hydrocarbon sector starts to bear fruit, and oil production and exports are projected to increase considerably in the years ahead.
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 macroeconomic stability as a key condition for economic growth and the generation of sustainable employment opportunities for Iraq’s large labor force. 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 and the steady improvement in the security situation. 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 the creation of 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 to develop. IMF technical assistance in support of policy advice has proven essential in helping the Iraqi authorities develop their institutional capacity and governance infrastructure.
Current Program
The current 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 about US$3.8 billion (SDR 2,376.8 million, or 200 percent of quota). The program provided a macroeconomic framework supporting ongoing reconstruction efforts during the political transition after the March 2010 parliamentary elections.
The key objectives of the current 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 preserving macro-stability and providing budgetary support, the program also aims at supporting the authorities’ medium-term structural reform agenda. This 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.
•Developing the financial sector—by enhancing Central Bank of Iraq (CBI) operations, and developing a banking sector that can provide basic financial services, including to the private sector which is essential to help create a vibrant private sector. Reinforcing central banking operations includes rebuilding the capacity of the central bank to conduct monetary and exchange rate policies, supervise banks, and manage the country’s foreign exchange reserves. The financial restructuring of the two main state-owned banks is an important step to help establish the conditions for the banking system to extend credit to the private sector.
•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 Initiative (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 second review of the SBA program on March 18, 2011 highlighted that:
•Iraq has maintained macroeconomic stability under difficult external and internal circumstances. Inflation has remained in the low single digits and the exchange rate has remained stable. The 2010 budget deficit is estimated to have been limited to about 10 percent of GDP, significantly smaller than had been projected, partly reflecting delays in the execution of the investment budget. The 2011 budget aims to accelerate investment in public services and in oil infrastructure, as well as to accommodate higher social safety net and security outlays, while remaining consistent with medium-term fiscal sustainability. Based on a relatively conservative assumption for oil revenues, the 2011 budget deficit would be limited to about 14 percent of GDP, before falling in 2012. A strong emphasis on ensuring the quality of public spending remains important.
•Decisive efforts to rebuild key economic institutions and improve governance remain critical to strengthening public service delivery and private sector development. Progress in implementing structural reforms in late 2010 and early 2011 has been uneven. This largely reflected the still severe capacity and security constraints, which also hampered the effective delivery of technical assistance, as well as the political transition. The formation of the new government and the expected increase in oil production in the coming years offer an opportunity to step up reform efforts while maintaining macroeconomic stability.
•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.
