PROGRAM NOTE ON IRAQ 2009

Program note : Iraq


Last Updated: July 22 2009

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Current IMF-Supported Program

15-month US$744 million (precautionary) Stand-By Arrangement (SBA), approved by the IMF’s Executive Board on December 20, 2007 (expired in March 2009). Discussions on a possible successor arrangement are ongoing.
Background

With the world’s fourth-largest oil reserves, rising oil production enabled Iraq to reach middle-income status in the 1970s and develop a modern infrastructure, as well as good education and healthcare systems. Since then, however, Iraq has suffered through three devastating wars, a long period of economic and financial mismanagement, and stifling 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 was immense and made harder by sectarian politics and prolonged violence. Iraq’s reconstruction required not only the rebuilding of its infrastructure, but also of its economic and social institutions, and the creation of a business environment that would attract capital and bring 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 was not easy.
Role of the IMF

Since 2003, the Fund has been closely involved with Iraq through three programs: an Emergency Post-Conflict Assistance program in 2004, followed—in 2005 and 2007—by two precautionary Stand-By Arrangements (SBAs). The second SBA expired on March 18, 2009.

Policies under these programs have sought to achieve macroeconomic stability—including low inflation, a strong dinar, and sustainable government finances—as well as external debt sustainability. They also aimed at rebuilding economic institutions and implementing broader structural reforms to pave the way for strong economic growth. In addition to policy advice and financial support, the Fund has provided substantial technical assistance to improve public financial management, build central bank expertise, introduce a new currency, create an efficient banking system, and upgrade economic statistics.

The authorities have indicated their interest in continuing a close relationship with the Fund, and discussions on a possible follow-up arrangement are ongoing.
Progress to Date

Despite very difficult circumstances, performance under the SBAs has been strong. The economy rebounded sharply in 2004 as oil production recovered, but growth slowed subsequently, as the increasing violence took its toll on economic activity and oil production stagnated. In 2006, as the insurgency intensified and fuel shortages spread, annual inflation accelerated to 65 percent. The turning point was in 2007, when a tightening of monetary policy combined with measures to control public current spending and ease fuel shortages succeeded in lowering inflation to 5 percent by end-2007. In 2008, oil production rose to 2.3 million barrels per day and real GDP growth rebounded to close to 10 percent, while inflation remained low. The final review of the last SBA (in December 2008) unlocked the third and final tranche of Paris Club debt relief (for a full debt reduction of 80 percent of the original amounts).
The Challenges Ahead

The fall in oil prices from their 2008 peak levels poses a considerable challenge for Iraq, which is hoping to ramp up its investment program now that the security environment has improved. Government budgets, which recorded surpluses over the past few years due to higher-than-expected oil revenues, are now turning into deficits owing to falling oil revenues. As Iraq’s reconstruction needs are still very large, the government will need to keep current spending under control in order to limit the budget deficit and make room for higher levels of investment so as not to imperil the country’s medium-term growth prospects. Investment in the oil and gas sector is particularly vital to help unlock the country’s vast hydrocarbon wealth and improve living standards. Further efforts are also needed to strengthen public financial management and governance, and to create an efficient banking system that is capable of providing the basic financial services needed for a market economy.

http://www.imf.org/external/np/country/notes/iraq.htm