Statement at Donor Meeting

The IMF Is Supporting Iraq -- Statement by Takatoshi Kato, Deputy Managing Director, International Monetary Fund, to the International Donors' Meeting for the Reconstruction of Iraq

October 13, 2004

The IMF Is Supporting Iraq
Statement by Takatoshi Kato
Deputy Managing Director, International Monetary Fund,
to the International Donors' Meeting for the Reconstruction of Iraq
Tokyo, October 13, 2004

Your Excellencies, ladies and gentlemen. It is a great pleasure for me to be here in Tokyo representing the International Monetary Fund. I would like to thank the Japanese government for organizing this meeting of donors for Iraq.

At the time of the Madrid Donors' Conference almost a year ago, the then Managing Director of the International Monetary Fund (IMF) stressed that the reconstruction of Iraq would be an immense challenge for all of us. But he underscored that the Fund was ready to face its part of this challenge and that it would work actively, in coordination with the international community, towards the reconstruction and development of Iraq, and for the stability and prosperity of the Middle East region in general. At that time, Mr. Köhler outlined six key areas in which the Fund was ready to play a major role: economic policy advice, technical assistance, regional integration, debt relief, financial assistance, and transparency issues.

Let me start with economic policy advice: since late 2003, Fund staff have held discussions with Iraqi officials (on an almost monthly basis) to assist them in preparing a macroeconomic framework for 2004 and the medium term. The IMF's role in these discussions has been to help the Iraqi authorities create a stable macroeconomic environment that would be conducive to a revival in economic activity. Iraq will need to embark in the near future on a program of ambitious structural reforms to achieve sustained private sector-led growth, including, among other things, the establishment of the legal, institutional and regulatory frameworks for markets to work effectively and the design of appropriate safety nets that would support social stability. The World Bank is doing important work in these areas and the IMF stands ready to contribute to this effort in its areas of expertise.

Fund staff have also been providing Iraq with much-needed technical assistance (TA). In September 2003, donors to a special TA sub-account at the Fund approved a TA program for the period through June 2004, which was recently revised and extended to June 2005. This program includes training in macroeconomic policy areas such as public expenditure management, fiscal federalism, tax policy, and tax and customs administration; monetary operations, banking supervision, and payments system reform; and statistics. Some of this work is being done jointly with the Bank. Fund staff have also played a coordinating role in TA efforts of other providers in macroeconomic policy areas, in particular, with the World Bank, and the United States and the U.K. government agencies.

I should also note that the Fund is establishing a Middle East Regional Technical Assistance Center (METAC) in Beirut, which will officially commence operations in a few weeks time. The principal objective of the Center is to provide technical assistance in the Fund's core areas of responsibility to countries in the region, so as to improve institutional capacity and facilitate regional integration in the Middle East. Iraq should be a major beneficiary of these activities.

The staff has also worked—in consultation with Iraqi officials—on the preparation of a preliminary external debt sustainability analysis (DSA) at the request of the Paris Club. This DSA indicated that Iraq needed substantial debt relief. We believe the international community can play a key role in Iraq's recovery by helping to put Iraq's external debt on a sustainable footing. Absent substantial debt relief, the country has only limited prospects for gaining access to private capital and using domestic resources to finance economic growth in the medium term. I should note that, while Fund staff believe that Iraq will need substantial debt reduction if it is to achieve external and fiscal viability, the staff has not made any recommendation as to the magnitude of debt reduction needed. This is a matter for Iraq and its creditors to decide, although we stand ready to help in any way we can in resolving this difficult issue.

The IMF's Executive Board, on September 29, 2004, approved financial assistance to Iraq in the form of Emergency Post-Conflict Assistance (EPCA) in the amount of some SDR 297 million (about $436 million), equivalent to 25 percent of Iraq's Fund quota. The authorities' main goals under the EPCA-supported economic program are to maintain macroeconomic stability, lay the groundwork for the development of a reform program that could be undertaken in years to come, and begin the process of restoring Iraq's fiscal and external debt sustainability. The program is to be underpinned by a prudent fiscal policy that aims to limit spending to available government revenues and external resources, the use of the exchange rate to anchor inflationary expectations, and the planning and undertaking of key structural reforms to transform Iraq into a market economy, most notably in the area of banking sector reform. EPCA should help catalyze urgently needed additional international support, including debt relief, for the reconstruction of Iraq. EPCA should also help the authorities to undertake difficult but necessary reforms, including the restructuring of the public sector, begin the phasing out of price subsidies, and the reform of the social safety net. Adherence to the EPCA-supported program should serve to establish a track record of policy implementation to help justify the transition to a program that could be supported by a regular Fund lending arrangement, once the institutional and policy-making capacity is sufficiently restored. Such future financial support would also require the formulation and implementation of a strong economic program by the Iraqi authorities.

Finally, in an effort to ensure transparency and the observance of best practices, especially in the energy sector, Fund management has been represented in the International Advisory and Monitoring Board (IAMB), which was created by U.N. resolution to oversee, and report on, the work of external auditors in monitoring the use of Iraq's oil sector revenues.

The IMF's efforts to help Iraq will continue to be conditioned by the security situation. Today, much like a year ago, security problems limit the effectiveness of our work in Iraq. An improvement in the security situation would not only help promote a recovery in economic activity and foreign investment, but more importantly allow Iraqi citizens feel confident that they can go about their daily life.

After decades of war and economic mismanagement, Iraq is on the threshold of a new beginning. Whether this is the beginning of an era of peace and prosperity, of democracy and social inclusion, of the development of an efficient market economy, and of the reintegration of Iraq into the community of nations will depend not only on the efforts of the new Iraqi government, but also on the sustained engagement of the international community. Without the commitment of the international community, the opportunity for reform risks being lost, and Iraq could return to a situation of renewed economic decline. The Fund intends to continue to help Iraq rebuild its economy and institutions and realize its considerable economic potential for the benefit of all Iraqis, and I am glad that I can report to you that, with the approval of the EPCA and sustained technical assistance, we have been playing our part in this regard.

Thank you.