With Chapter 7 Lifted, Iraq Regains Control of Its Own Economy

by RUDAW 21 hours ago

According to Iraq’s energy plan, oil exports are expected to reach six million barrels per day (bpd) by 2017. AFP photo

By Goran Mustafa 

ERBIL, Kurdistan Region – The lifting of Chapter 7 sanctions last month can be considered one of Iraq’s biggest achievements since the ouster of Saddam Hussein a decade ago, allowing Baghdad to regain control over its own currency, oil and economy.

Chapter 7, imposed on Iraq by the UN Security Council after Saddam’s invasion of Kuwait in 1991, froze all Iraqi assets in international banks, ordering they be used to compensate victims of the aggression. Besides placing limits on use of its wealth, the sanctions also placed limits on the Iraqi military.

One of the biggest advantages of the lifting of the sanctions is the return of all frozen assets to the Iraqi government, estimated at $82 billion, according to Central Bank data.  Its return will not only revitalize the economy, it will strengthen the value of the Iraqi dinar and increase its purchasing power.

A few hours after Chapter 7 was lifted, the value of Iraqi dinar increased against other currencies. The exchange rate of dinar is fixed against the dollar, but its value continues to rise. Saif Al-Halafi, an economic and banking expert, expects that the dinar will probably replace the dollar for investments, and that as demand for the dinar rises, so will its value.

With Chapter 7 lifted, Iraq also can independently handle its oil revenues without UN supervision. 

“The lifting of Chapter 7 against Iraq will enable it to regain independence in its oil policy, and Iraq again can become an important regional and international energy player,” said economic expert, Dr. Rebwar Khinsi. Iraq plans to emerge as one of the world’s biggest oil exporters in 12 years.

According to Iraq’s energy plan, oil exports are expected to reach six million barrels per day (bpd) by 2017, elevating the federal budget to $216 billion dollars. The plan aims for exports of nine million barrels bpd by 2020, raising the budget to $324 billion dollars. In 2025, the federal budget will reach 432 million dollars, if Iraq succeeds to export 12 million barrels of oil per day. 

Under George Bush’s administration the US government agreed to keep $50 billion belonging to Iraq in America, and Barack Obama’s administration continues to do the same. An estimated $7.8 billion dollars are blocked in Jordan and Lebanon, and a huge amount of capital belonging to Iraqi Airways remains frozen in Kuwait and Jordan.

The United Nations Security Council forced Iraq to compensate Kuwait for an estimated $52 billion. Following the first Gulf War, Iraq did not have an independent economic policy, with all of its income administered by Iraq’s development program and supervised by the UN. Five percent of Iraq’s annual oil revenue was allocated to compensating Kuwait. 

So far, Iraq has paid $41 billion dollars to Kuwait. According to Iraqi Foreign Minister Hoosyar Zebari, Baghdad is committed to paying the rest of the remaining $11 billion in compensation to Kuwait, and expects to pay off all of its debts by 2015.

http://rudaw.net/english/business/07072013

IMF Executive Board Concludes 2013 Article IV Consultation with Iraq

Public Information Notice (PIN) No. 13/58 May 21, 2013 Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. On May 13, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Iraq.1 Background Iraq is exceptionally rich in oil, but its economy suffers from severe structural weaknesses, such as a small non-oil sector, a dominating role of the government in all areas of the economy, and a poor business environment. Nevertheless, partly thanks to the increase in oil production since 2003, Iraq has achieved a rise in GDP per capita from $1,300 in 2004 to $6,300 in 2012 in a very difficult security and political context. During this period, Fund program engagement with Iraq was instrumental in maintaining macroeconomic stability—even though progress on structural reforms and job creation was mixed. Recent macroeconomic developments have been broadly positive. Economic growth has reached 8.4 percent in 2012 and is expected to rise to 9 percent in 2013 as oil production increases to 3.3 million barrels per day (mbpd). Inflation has declined from about 6 percent at end-2011 to 3.6 percent at the end of last year, and should increase only slightly in 2013. International reserves of the Central Bank of Iraq (CBI) rose from $61 billion at end-2011 to $70 billion at end-2012, and fiscal reserves held at the Development Fund for Iraq (DFI) have increased from $16.5 billion to $18 billion. Thanks to higher-than-expected oil revenues and the under-execution of the investment budget, fiscal surpluses reached almost 5 percent of GDP in 2011 and 4 percent in 2012. However, with a break-even oil price of about $100, fiscal performance is very vulnerable to oil revenue shocks—either from oil price declines or export shortfalls. Furthermore, fiscal discipline weakened over the past two years, with poor budget planning and execution, large off-budget spending, and low investment execution rates. The 2013 budget includes large unfunded commitments, increasing fiscal risks, including the possible depletion of fiscal reserves, if the budget were to be fully executed. The policy of a de facto peg to the U.S. dollar provides a key nominal anchor to the economy, and the nominal exchange rate in the official market has remained stable since 2010. However, since late 2011, the authorities enforced existing exchange restrictions and introduced new restrictions in response to concerns about money laundering and illegal foreign exchange outflows related to the increased demand for foreign exchange. As a result, the spread between the official rate and the parallel market rate—which had been up to that point below 2 percent—started to climb, passing 9 percent in May 2013. Over the medium term, Iraq’s macroeconomic outlook will continue to be driven by developments in the oil sector. Staff projects that oil production will rise gradually by about 400-500 thousand barrels per day per year, reaching 5.7 mbpd by 2018. Overall, growth is projected to remain above 8 percent and inflation at 5–6 percent over the medium term. Risks to the macroeconomic outlook remain high. They include (a) weak policy implementation, particularly in the fiscal area; (b) further deterioration of the political and security situation; (c) a larger-than-projected decline in global oil prices; and (d) delays in developing Iraq’s oil fields and oil export capacity, possibly due to security issues but also insufficient investment in oil infrastructure. These risks can translate into lower oil revenues, deterioration in the fiscal position, pressures to use CBI reserves for fiscal purposes, and higher inflation. Executive Board Assessment Executive Directors commended the authorities for maintaining macroeconomic stability in a difficult security and political environment. With risks remaining high, including from oil price volatility, they stressed the need to build fiscal buffers and further strengthen the institutional framework. They urged the authorities to step up reforms to develop the private non oil sector to help generate employment and inclusive growth. Directors emphasized the need to implement sustainable fiscal policies and address risks from oil revenue volatility. Rationalizing current spending—including public employment, energy subsidies, the Public Distribution System, and transfers to state owned enterprises—is needed to create space for priority social spending and public investment and to accumulate buffers. Enhancing public financial management and avoiding quasi fiscal operations by the state owned banks are also crucial. Directors noted that fiscal rules could provide a framework for fiscal policy over the medium term. Directors supported the objective of the Central Bank of Iraq (CBI) to liberalize the foreign exchange market and the recent steps to simplify market regulations. Further measures are needed to liberalize fully the supply of foreign currency, with the objective of lowering the exchange rate spread, removing distortions, and complying with Article VIII of the Fund’s Articles of Agreement. Directors considered that strengthening the Anti Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework, in line with the Middle East and North Africa Financial Action Task Force (MENA FATF) recommendations and FATF standards, would be more effective than restricting foreign exchange in curbing money laundering and terrorist financing. Directors agreed that a stable exchange rate, supported by a high level of international reserves, provides a valuable anchor in an uncertain environment. They agreed that the two tier architecture of prudent management of CBI reserves and use of the Development Fund for Iraq (DFI) as a de facto oil stabilization fund is appropriate. They urged the authorities to continue to rely on the DFI to help stabilize government spending and ensure oil revenue transparency. Directors highlighted the importance of a stable financial sector in developing the private sector and diversifying the economy, and were encouraged by recent progress in strengthening banking supervision and restructuring the Rasheed and Rafidain banks. They encouraged the authorities to ensure a level playing field for public and private banks by opening to private banks access to government business. More broadly, Directors emphasized that fostering growth in the private non oil sector requires improving the business environment, investing in infrastructure and social capital, reforming state owned enterprises, and enhancing public service delivery. Judicious use of the country’s oil wealth can help address these pressing challenges. Improving the authorities’ capacity to implement reforms will also be critical.

Iraq: Selected Economic and Financial Indicators, 2010–2013   (Quota: SDR 1188.4 million) (Population: 31.7 million; 2010) (Poverty rate: 22.9 percent; 2007) (Main exports: Crude oil)   2010 2011 2012 2013   Actual Actual Prel. Proj.   Economic Growth and Prices         Real GDP (percentage change) 5.9 8.6 8.4 9.0 Non-oil real GDP (percentage change) 9.7 5.7 6.3 6.0 GDP per capita (US$) 4,278 5,529 6,305 6,708 GDP (in US$ billions) 135.5 180.6 212.5 233.3 Oil production (mbpd) 2.38 2.65 2.95 3.33 Oil exports (mbpd) 1.91 2.17 2.42 2.70 Iraq oil export prices (US$ per barrel) 74.2 103.6 106.7 102.6 Consumer price inflation (percentage change; end of period) 3.3 6.0 3.6 5.0 Consumer price inflation (percentage change; average) 2.4 5.6 6.1 4.3 Core price inflation (percentage change; end of period) 3.3 7.0 4.2 5.0   (In percent of GDP) National Accounts         Gross domestic investment 21.4 19.3 20.3 21.1 Of which: public 15.2 13.0 13.5 14.7 Gross domestic consumption 77.9 66.9 70.8 73.2 Of which: public 25.2 21.7 21.3 21.6 Gross national savings 24.4 31.8 27.3 24.9 Of which: public 10.8 17.7 18.1 17.1 Saving – Investment balance 3.0 12.5 7.0 3.8   (In percent of GDP; unless otherwise indicated) Public Finance         Government revenue and grants 46.4 49.5 48.2 46.4 Government oil revenue 40.0 46.0 44.6 44.4 Government non-oil revenue 3.5 2.5 4.1 2.0 Grants 2.9 1.0 0.0 0.0 Expenditure, of which: 50.7 44.6 44.1 44.8 Current expenditure 35.5 31.6 30.6 30.1 Capital expenditure 15.2 13.0 13.5 14.7 Primary fiscal balance -3.8 5.6 4.5 2.3 Overall fiscal balance (including grants) -4.3 4.9 4.1 1.6 Non-oil primary fiscal balance (percent of non-oil GDP) -76.0 -84.6 -73.1 -73.6           Memorandum items:         Tax revenue/non-oil GDP (in percent) 1.8 1.9 2.3 2.0 Development Fund of Iraq (in US$ billions; end of period)1 7.4 16.5 18.1 18.9 Total government debt (in US$ billions; end of period)2 70.8 73.4 74.1 40.4 o/w external debt (in US$ billions; end of period) 60.9 61.0 60.2 27.8   (In percent; unless otherwise indicated) Monetary indicators         Growth in reserve money 15.2 9.9 9.2 7.7 Growth in broad money 14.8 38.0 4.1 13.8 Policy interest rate (end of period) 6.0 6.0 6.0   (In percent of GDP; unless otherwise indicated) External sector         Current account 3.0 12.5 7.0 3.8 Trade balance 6.6 18.8 14.8 12.4 Exports of goods 37.9 44.1 44.3 43.5 Imports of Goods -31.3 -25.3 -29.5 -31.1 Overall external balance 1.7 10.5 5.1 4.6 Gross reserves (in US$ billions) 50.6 61.1 70.3 80.1 In months oil imports of goods and services 10.6 9.5 9.3 9.7 Exchange rate (dinar per US$; period average) 1,170 1,170 1,166 -.- Real effective exchange rate (percent change) 1.3 4.7 5.7 -.-   Sources: Iraqi authorities; and IMF staff estimates and projections. 1 Excluding escrow account held abroad to purchase military equipment. 2 Assumes a debt reduction in 2013 by non-Paris Club official creditors, comparable to the Paris Club agreement. 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:http://www.imf.org/external/np/sec/misc/qualifiers.htm.

IMF Mission Concludes Article IV Discussions with Iraq

Press Release No. 13/87
March 21, 2013

An International Monetary Fund (IMF) mission, led by Mr. Carlo Sdralevich, met with an official Iraqi delegation headed by the Acting Minister of Finance, Dr. Ali Al Shukri, in Amman, Jordan, during March 2-12, 2013 to conduct the Article IV Consultation discussion. The IMF mission met with the Acting Minister of Finance, the Acting Governor of the Central Bank of Iraq (CBI), head of the Board of Supreme Audit, AbdulBasit Al Turki Said, and other Iraqi officials from the ministries of finance, planning, and oil, and representatives from the Central Bank and the Board of Supreme Audit. The team also met with representatives from the Iraqi banking and business community.

At the conclusion of the mission, Mr. Sdralevich made the following statement:

“Following the recent expiration of the Stand-By Arrangement with Iraq approved in 2010, the IMF is committed to continue close collaboration with Iraq to support its development and help the government improve the social conditions and employment opportunities of Iraqi citizens.

“Despite a difficult security and political environment, Iraq managed to maintain macroeconomic stability over the past two years. On the back of rising oil production and robust non-oil activity, economic growth has remained strong at about 8 percent in 2012. We expect activity to accelerate further to 9 percent in 2013, as oil production increases from just under 3 million barrels per day (mbpd) in 2012 to 3.3 mbpd in 2013. In 2012, inflation was contained at 6 percent, and we project it to decline slightly next year. On account of strong oil proceeds, CBI reserves reached US$70 billion at the end of 2012, while the Development Fund for Iraq (DFI) rose to US$18 billion.

“While we welcome the achievement of a budget surplus of about 4 percent of GDP in 2012, largely due higher-than expected oil revenues, the execution of the 2013 budget should be aligned with available financing and provide for the accumulation of adequate fiscal buffers in the DFI, which suggests to target a budget surplus in 2013. Public financial management should be strengthened, notably by phasing out off-budgetary spending practices and reliance on state-owned bank financing to support public enterprises. Approval of additional spending commitments during the fiscal year should also be avoided.

“Financial sector policies are improving, but more remains to be done. The CBI’s ongoing efforts to refine monetary policy instruments, strengthen banking supervision, and accelerate the restructuring of the banking system are crucial. In this respect, the recent steps to clean up the balance sheets of Rasheed and Rafidain in preparation for their restructuring and recapitalization are key. The CBI should also take measures to gradually liberalize the provision of foreign exchange through its auctions, with the objective of avoiding in future the turbulence experienced by the market in the past year.

“Iraq will need to address serious medium-term challenges in order to be able to create the conditions for high and sustainable growth that is necessary to improve the living standards of its people. The economy continues to suffer from severe structural weaknesses such as a small nonoil sector, high unemployment, public sector dominance, and a weak business environment. In this context, we discussed the role of economic policies in leveraging Iraq’s potential and creating an enabling environment.

“With regard to the fiscal sector, the budget must be managed carefully to maintain macroeconomic stability, meet Iraq’s large social and investment needs while continuing to accumulate buffers to address oil market volatility, and ensure medium-term fiscal sustainability. At the same time, Iraq needs to strengthen fiscal institutions and public financial management to make sure that the large oil revenues are used effectively and transparently.

“Developing a stronger financial sector development will require moving away from the current model in which weak state-owned banks dominate the financial sector and enjoy favorable treatment vis-a-vis private banks. A solid banking system that can support growth and employment will require the full financial and operational restructuring of state-owned banks and creating a level playing field for both private and public banks.

“Finally, while oil-growth is projected to remain high over the coming years, boosting non-oil private sector growth will need a long-term government strategy centered on improving the business environment and opening up opportunities for the private sector.”

IMF EXTERNAL RELATIONS DEPARTMENT

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http://www.imf.org/external/np/sec/pr/2013/pr1387.htm