Sunday, August 19, 2007

IMF report on Iraq stresses importance of reconstruction, security, oil investment

Author: Moussa Ahmad
Source: BI-ME and agencies
Published: 17 August 2007

IRAQ. For the first time in 25 years, the International Monetary Fund (IMF) has issued an economic assessment on Iraq, advising the government to increase the pace of reconstruction and investment, mainly in the oil sector.

"Directors commended the Iraqi authorities for keeping their economic programme on track by strengthening economic policies and making progress in structural reforms, despite an unsettled political situation and a very difficult security environment," said the IMF in a statement on Thursday summarising its Executive Board assessment on Iraq's economic performance.

Iraq has taken steps to strengthen its economy but there will be no real progress until the country's dire security situation has improved, the IMF said.

Announcing the completion of the fifth review of Iraq's US$727 million standby arrangement, which Baghdad wants as a precaution and not because it badly needs the money, the IMF said the country faced some serious economic challenges.

"The expansion of oil production is lagging, and that inflation, while on a downward path, remains high, reflecting in large part continued shortages, notably of fuel products," added the statement. After a decline in oil production in 2005, economic growth was estimated at nearly 6% in 2006, while maintaining an average annual crude oil production of two million barrels per day since 2004.

The IMF urged the Iraqi authorities to "strengthen the protection of oil installations" and welcomed Baghdad's decision to raise the fuel price to the regional level to avoid direct subsidies on fuel products.

Inflation in Iraq is at 46% in June 2007, the Central Bank of Iraq (CBI) allowed the exchange rate of the Iraqi Dinar to appreciate by 15% and the CBI's gross domestic reserves increased to US$ 18.7 billion by end of last year.

The Executive Board praised the Iraqi government's fiscal policy in 2007, calling on the CBI to "stand ready to accelerate the pace of appreciation and tighten monetary conditions further if inflation deviates from its downward path and dollarisation is not reduced as expected."

"Key to fighting inflation would be to continue restraining public spending pressures and stepping up efforts to reduce shortages, especially by actively supporting private sector fuel imports," added the statement.

"A turnaround hinges critically on an improvement in the security situation," it said.

The United States has rushed 30,000 extra troops to reinforce a clampdown aimed at stemming sectarian violence, which has pushed Iraq to the brink of all-out civil war.

US President George Bush has said he hopes the surge of military force will curb the bloodshed while efforts aimed at kick-starting the economy cut crippling unemployment, which has pushed many young men into the anti-US insurgency.

The IMF said it welcomed steps taken by the Iraqi government to bolster the economy and cited increases in official fuel prices as a step in the right direction.

The hikes have lifted the official price of gasoline from pre-2003 invasion level of around 3 US cents a litre to around 32 cents a litre, meaning money previously spent on subsidies can go toward more pressing public projects.

However, the IMF was definitely worried by a lack of progress in revamping the country's crucial energy industry.

"Measures to speed up reconstruction and increase investment, especially in the oil sector, are needed," it said.

Iraq sits on the third largest oil reserves in the world and depends on oil sales for almost all its foreign currency earnings. These funds will be vital for rebuilding its infrastructure and public services, which have been badly run down by years of international sanctions and war.

But foreign investment to modernise the industry has been held up while Iraqi politicians have failed to finalise a new oil law to determine the structure of oil industry institutions and the international tendering process. A separate law to determine how revenues will be shared between the Shi'ite and Sunni Arabs, and the Kurds, has been approved by the cabinet and the Kurdish Regional Government but is still locked in parliament.

"Unlocking Iraq's oil wealth requires advancing the enactment of a new legislative framework for the hydrocarbon sector, in view of the large investments needed to increase oil production," the IMF said.

The IMF said it had approved an extension of the standby arrangement by three months to 28 December.

It waived certain performance criteria under the deal, including an interim audit of the Central Bank of Iraq's 2006 financial statement, a census of all public service employees, and improvements to the budget classification and accounts.

However, IMF officials said the central bank audit and budget classification changes had since been adopted by the Iraqi authorities, albeit a few weeks after deadline, and took this as an encouraging sign of progress.

The IMF also said the central bank ought to continue its tight monetary and exchange rate policy to curb inflation and de-dollarise Iraq's economy.

Monthly inflation rose 6% in June after a spike in black market fuel prices and recorded a 46% year-on-year gain, after a 38% increase the previous month.

But core inflation, excluding fuel, edged down slightly to a 19% yearly pace from 21% in May, and a 32% level at the end of 2006.

The Iraqi central bank has raised interest rates and the Iraqi Dinar has strengthened sharply against the US Dollar, in a deliberate effort to squeeze inflation and improve confidence in the domestic currency.

This was relaunched at some cost after the fall of Saddam Hussein, and officials want to stem the widespread use of dollars and coax people back to dinars.

This consultation, taking over two years to culminate, advised the Iraqi government to "streamline the tax system with a view to expanding the tax base and improving incentives for economic activity", improve public transparency and accountability, and restructure the banking system.

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