IMF AND IRAQ STAND-BY AGREEMENT

IMF Executive Board Completes Second Review Under Stand-By Arrangement with Iraq, Grants Waivers and Approves US$471.1 Million Disbursement

Press Release No. 11/90

March 18, 2011

The Executive Board of the International Monetary Fund (IMF) today completed the second review of Iraq’s economic performance under a program supported by a Stand-By Arrangement (SBA). Completion of the second review makes an additional SDR 297.1 million (about US$471.1 million) available for disbursement, bringing the total resources currently purchased by Iraq under the SBA to SDR 1.069 billion (about US$1.7 billion).

The Executive Board also approved a waiver of applicability of the end-December 2010 performance criteria on the central government fiscal deficit and on the central government spending bill, for which data is not yet available. The Executive Board furthermore approved an extension of the SBA by five months to July 2012, and a rephasing of access under the SBA to match disbursements with Iraq’s balance of payments financing needs.

The SBA was approved on February 24, 2010 (see Press Release No. 10/60) for SDR 2.38 billion (about US$3.77 billion). The SBA supported program aims to ensure macroeconomic stability and provide a framework for advancing structural reforms in Iraq.

Following the Executive Board’s discussion on Iraq, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“Iraq has maintained macroeconomic stability under difficult external and internal circumstances, while making efforts to rebuild key economic institutions. Inflation has remained subdued, and the exchange rate has remained stable. The 2011 budget aims to accelerate investment in public services and infrastructure, and accommodates higher social safety net provisions to support those in need. Iraq’s rehabilitation needs remain large and the higher investment spending is essential to help create a vibrant private sector that provides employment opportunities for Iraq’s large labor force, thus helping to reduce poverty. At the same time, a strong emphasis on ensuring the quality of public spending will be important.

“Decisive efforts to rebuild key economic institutions and improve governance will be critical for private sector development. The formation of the new government and the expected increase in oil production in the coming years offer an opportunity to do so while maintaining macroeconomic stability. Further strengthening public financial management encompasses the introduction of an automated financial management and information system and improvements in cash management which would eventually culminate in the establishment of a single treasury account. Establishing a framework for oil revenues to succeed the Development Fund for Iraq should help ensure continued accountability and transparency. In the financial sector, moving ahead with the financial and operational restructuring of the two largest state-owned banks and enhancing the central bank’s supervision capacity will contribute to creating a financial sector that can provide essential services to the private sector.

“Iraq continues to make progress to conclude debt agreements and resolve outstanding claims under terms comparable to the 2004 Paris Club Agreement.”
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February 24, 2010

IMF Executive Board Approves US$3.6 Billion Stand-By Arrangement for Iraq
Press Release No. 10/60

The Executive Board of the International Monetary Fund (IMF) today approved a two-year Stand-By Arrangement for Iraq for an amount equivalent to SDR 2.38 billion (about US$3.64 billion) to cover the country’s balance of payments needs. The Board’s approval makes an amount equivalent to SDR 297.1 million (about US$455 million) immediately available to the Iraqi authorities.

The new arrangement follows a 15-month program supported by a Stand-By Arrangement, which was approved by the executive Board on December 20, 2007 and expired on March 18, 2009 (Press Release No 07/301). The successor arrangement is designed to support Iraq's economic program over the next 24 months through February 23, 2012.

Following the Executive Board's discussion of Iraq, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said:

“Iraq has made substantial progress in rebuilding its economy and consolidating macroeconomic stability under difficult security and political conditions. The economy was severely affected in 2009 by the drop in international oil prices. The current account and the overall balance of payments are expected to remain in deficit in 2010 and 2011. Similarly, the fiscal position is projected to record large, albeit declining, deficits in both years, before returning to a surplus position in 2012.

“Against this background, the economic program for 2010 and 2011 aims at providing a sound macroeconomic framework during a period of economic and political uncertainties. Consistent with this program, the 2010 budget adopted by parliament seeks to contain current spending while increasing investment to address Iraq’s large rehabilitation needs and improve public service delivery. Monetary and exchange rate policies will continue to aim at keeping inflation low.

“The economic program will also help the authorities move forward with their structural reform agenda. Strengthening the public financial management system is critical to improving the allocation and execution of public resources, as well as enhancing transparency and accountability in the management of the country’s natural resources.

The program also incorporates banking sector reforms, including a restructuring of state-owned banks, with a view to improving the financial services required by a growing economy.

“The authorities intend to treat the new Stand-by Arrangement as precautionary should oil prices turn out to be significantly higher than envisaged, or investment execution be lower than budgeted.

“The authorities have made significant progress in their external debt negotiations with official and private creditors. They remain committed to completing the restructuring of remaining non-Paris Club claims,” Mr. Kato stated.

ANNEX

Program Summary
The main objectives of the program are to maintain macroeconomic stability during a period of high economic and political uncertainties (parliamentary elections are scheduled for March 7, 2010), and to provide a framework for deepening structural reforms.

While Iraq’s medium-term economic outlook remains favorable because oil prices and production are projected to increase in the coming years, based on conservative oil price assumptions the current account and overall balance of payments are expected to remain in deficit in 2010 and 2011. Similarly, Iraq’s fiscal position is projected to record large, albeit declining deficits in both years, before returning to a surplus position in 2012.

Against this background, the authorities have designed an economic program for the period through end-2011 and have requested the Fund to support it with a new two-year Stand-By Arrangement. The authorities view the new program primarily as a way to provide a sound macroeconomic framework during a period of high economic and political uncertainties. The authorities’ fiscal program seeks to contain current government spending while catching up on much-needed investment spending. The budget deficit is targeted to decline to 19 percent of GDP in 2010 and further to 6 percent in 2011, before shifting back into surplus in 2012. Monetary and exchange rate policies will continue to aim at keeping inflation low.

The new program will also aim to advance key reforms in the areas of public financial management (PFM) and financial sector development, in close coordination with a Development Policy Loan (DPL) provided by the World Bank. Both operations focus on advancing PFM and bank restructuring action plans prepared by the authorities during 2008 and 2009 with the assistance of Fund and World Bank staff.