September 3, 2008
The Executive Board of the International Monetary Fund (IMF) completed today the first review of Iraq's Stand-By Arrangement (SBA), which is designed to support the country's economic program through March 2009. The Board also completed a financing assurances review under the SBA. The SDR 475.36 million (about US$746.3 million) arrangement was approved in December 2007. It is being treated as precautionary by the authorities (see Press Release No. 07/301), and no purchase is planned.
As part of the completion of the first review, the Board also approved Iraq's request for a waiver of an end-June 2008 quantitative performance criterion on the government wage and pension bill.
Following the Executive Board's discussion of Iraq's economic performance, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said:
"After several very difficult years, economic prospects for Iraq are improving and the authorities are persevering with the implementation of their economic program in 2008. With the recent improvement in security, oil production and exports are increasing while inflation has been reduced. The strengthened fiscal and external positions offer Iraq a good opportunity to rebuild its institutions and infrastructure in order to achieve sustained higher economic growth. The success of these endeavors will hinge on continued improvements in security, sound management of oil revenues, and implementation of key structural reforms.
"To accelerate economic reconstruction and meet other pressing needs, the supplementary budget for 2008 provides for a sizable spending increase. The additional investment, following several years of public underinvestment, is welcome but will require vigilance to ensure that the quality of public investment is maintained. A civil service salary increase will be phased in over 2008 and 2009 in order to avoid overheating the economy. To keep inflation under control, the Central Bank of Iraq will tighten its monetary policy stance, notably by increasing the pace of appreciation of the dinar and by keeping its policy interest rate positive in real terms.
"Some fuel prices were increased in mid-2008, and the government intends to raise other fuel prices early next year to reduce still-sizable indirect fuel subsidies. The Fund stands ready to assist the authorities in developing an appropriate adjustment mechanism for setting domestic fuel prices.
"It will be important to step up the pace of structural reform. Of particular urgency are the early adoption of a comprehensive reform plan for modernizing public financial management, the finalization of the census of public service employees to eliminate ghost workers, and the streamlining of the in-kind Public Distribution System. In the financial sector, restructuring programs for two major commercial banks based on the completed financial and operational audits should be taken forward, and the set of prudential regulations for commercial banks completed. Establishment of a new legislative framework for the hydrocarbon sector will facilitate investments in the sector.
"Progress has been made in strengthening governance and fighting corruption in the hydrocarbon sector, through oil-metering and Iraq's participation in the Extractive Industries Transparency Initiative. An extension of the metering system to all oil sector activities will further strengthen transparency in the sector.
"The central bank intends to continue to implement the recommendations of the IMF's Safeguards Assessment Report and the external audit report of its 2007 financial statements. The adoption of reserves management guidelines is an important step in this regard.
"The authorities are making commendable efforts to conclude debt agreements with official non-Paris Club and private creditors that have not yet provided debt relief to Iraq," Mr. Kato said.
IMF EXTERNAL RELATIONS DEPARTMENT
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