## 1.    Implementation of Key Recommendations from 2015 Article IV Consultation (cr17251)

## Source details

**Canonical URL:** [1.    Implementation of Key Recommendations from 2015 Article IV Consultation (cr17251)](https://www.imf.org/-/media/files/publications/cr/2017/cr17251.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2017/cr17251.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2017/cr17251.pdf.json)

---

### Background: economy and shock impacts
- Oil-dependent, state-dominated economy with the fourth largest oil reserves and low extraction costs.
- Oil production tripled since 2003; limited non-oil diversification; public expenditure expanded toward wages, pensions and transfers; civil service employment tripled between 2003 and 2014.
- Conflict with ISIS and oil price fall since 2014 caused:
  - 3.0 million internally displaced persons;
  - 11 million people in need of humanitarian assistance (29 percent of the population);
  - over 241,000 Syrian refugees.
- Security and governance constraints (lack of electricity, political instability, corruption, lack of access to finance) have stifled private sector and financial sector development.

### Recent macroeconomic developments and fiscal outcomes (2016–17)
- Growth and inflation:
  - Real GDP increased by 11 percent in 2016 driven by a 25 percent increase in oil production.
  - Non-oil real GDP contracted by 8 percent in 2016.
  - Average consumer price inflation: 0.4 percent in 2016 (areas not occupied by ISIS); 1.0 percent in April 2017, year-on-year.
- Fiscal outcomes:
  - Overall budget deficit: 14 percent of GDP in 2016 (mainly due to a 22 percent fall in oil prices).
  - Non-oil primary balance (accrual basis, excluding KRG): contracted by 1 percent in nominal terms in 2016; non-oil primary deficit increased from 43.3 to 44.6 percent of non-oil GDP (2015 to 2016).
  - Spending overruns in 2016: non-oil investment ID 6.1 trillion; transfers ID 2.6 trillion; wages ID 0.7 trillion.
  - Authorities paid about $2.5 billion less external arrears to IOCs and other external creditors than programmed because of cash constraints.
- Arrears and financing:
  - Total arrears stock amounted to 5.5 percent of GDP at end-2016 (68 percent domestic).
  - Budget deficit financed mostly by indirect monetary financing from the Central Bank of Iraq (CBI), donor support catalyzed by the SBA, and accumulation of arrears.

### Public debt, external position, and reserves
- Public debt and guarantees:
  - Total public debt rose to 67 percent of GDP in 2016 (from 31 percent of GDP in 2013 when oil exports averaged $103 per barrel).
  - Issued debt guarantees (mostly for electricity projects) accounted for 2.3 percent of GDP at end-2016.
- External position and reserves:
  - Current account deficit widened to 8.7 percent of GDP in 2016.
  - Official foreign exchange reserves declined from $53.7 billion (end-2015) to $45.2 billion (end-2016) = 6.7 months of imports of goods and services.
  - Examples of external financing in 2016–17:
    - World Bank loan: $1.44 billion (including $0.37 billion guaranteed by the U.K. and $0.07 billion by Canada).
    - Authorities issued a $1 billion bond guaranteed by the U.S. government yielding 2.15 percent.
    - Japan disbursed a $0.27 billion budget support loan in March.

### External sector assessment and exchange rate dynamics
- External position:
  - 2016 external position substantially weaker than warranted by fundamentals; current account gap about 8 percent of GDP weaker than warranted.
- Exchange rate dynamics:
  - Real and nominal effective exchange rates appreciated by about 8 percent in 2016, linked to the U.S. dollar peg.
  - Spread between official and parallel exchange rates decreased from 11 percent (December) to about 6 percent (June 2017) after CBI simplified documentation for its FX window.
- Policy stance:
  - Staff advice: Maintain the peg to the U.S. dollar; fiscal consolidation is the preferred tool to manage external pressure; simplify FX allocation procedures while implementing AML/CFT standards and gradually eliminate remaining exchange restrictions toward Article VIII acceptance.

### Monetary and banking sector developments
- Monetary aggregates:
  - Broad money grew by 7.2 percent during 2016; credit to the economy grew by 1.9 percent.
- Banking sector structure and weaknesses:
  - Two largest banks, Rafidain and Rasheed (R&R), together hold about 71 percent of banks’ deposits (86 percent held by the seven state-owned banks) and extend 54 percent of credit (80 percent extended by the seven state-owned banks).
  - Recent audited accounts per international standards are lacking for main state-owned banks; R&R likely severely undercapitalized.
  - Non-performing loans are high across public and private banks and rising.
  - Financial depth remains much lower than in peer economies.
  - Iraq monitored by FATF for serious AML/CFT shortcomings; risk of blacklisting and loss of correspondent banking relationships.

### Implementation of Key Recommendations (Box 1)
- Exchange rate liberalization:
  - Status: Mostly done. "The authorities have removed most exchange rate restrictions subject to Article VIII, Section 2 (a)."
- Fiscal sustainability and spending composition:
  - Status: Ongoing. Fiscal consolidation under the three-year SBA; adjustment so far mainly through cuts in non-oil investment while maintaining wages and pensions.
- Non-oil tax revenue:
  - Status: Limited progress. Expanded flat tax on wages and salaries; IMF FAD mission conducted diagnostic in February 2017.
- Public financial management (PFM):
  - Status: Ongoing. Progress on fiscal reporting per GFSM, arrears surveys, and commitment control steps.
- Restructuring Rafidain and Rasheed:
  - Status: Ongoing. External audits expected by end-August 2017.
- AML/CFT and anti-corruption:
  - Status: Ongoing. Measures under SBA to strengthen AML/CFT and anti-corruption legislation.
- Structural reforms to promote private sector:
  - Status: Limited progress due to security constraints.

### Outlook and key projections (selected)
- Oil production:
  - Contract by 1.5 percent in 2017 (OPEC+); bounce back by 3.4 percent in 2018; increase by 1 percent a year thereafter.
- Iraqi oil export prices:
  - Expected about $45 per barrel in 2017; slightly increase to about $47 per barrel by 2022.
  - Note: Since January 2015, Iraqi oil prices have been about $6 lower on average than average petroleum spot prices; projected to remain at that level.
- Non-oil primary balance and public debt:
  - NOPB targeted to reach PIH-aligned level of -35 percent of non-oil GDP by roughly flat public spending in nominal terms over five years and some non-oil revenue increase.
  - Public debt projected to peak at 65 percent of GDP in 2018.
- Non-oil growth and inflation:
  - Non-oil growth projected to gradually return to half of its pre-2014 trend in the medium term.
  - Inflation projected to remain around 2 percent.
- Current account and reserves:
  - Almost eliminate current account deficit by 2022 under fiscal consolidation and oil revenue pickup.
  - Gross international reserves bottom out at $36.0 billion (5.2 months of imports of goods and services) in 2021.
- Financing gap and contingent actions:
  - Financing gap of $7.1 billion (same as 1st Review SR): $5 billion in last quarter of 2018 and $2.1 billion in 2019.
  - Financing assurances for 2018 gap needed before completion of 3rd SBA review (scheduled December 2017).
  - Authorities approached Kuwait to request postponement of war reparation payment of $4.6 billion due in 2018.

### Permanent Income Hypothesis (PIH) calibration (Box 2) — exact assumptions preserved
- PIH NOPB target: about -35 percent of non-oil GDP over next 35 years; achievable by 2020 under SBA if implemented.
- Assumptions:
  - Real non-oil GDP growth: 5.0
  - Nominal non-oil GDP growth: 7.1
  - Inflation: 2.0
  - Real interest rate: 3.0
  - Nominal interest rate: 5.1
  - Real GDP growth: 4.0
  - Non-oil revenue, excluding grants (percent of non-resource GDP): 6.3
  - Length of annuity (years): 35
  - Oil Price: L-term increase (percent, 2024-50): 2.0
  - Oil export volume (mbpd, plateau level): 6.5

### Performance under the Stand-By Arrangement (SBA) — deviations and remedies
- General assessment:
  - "Program performance has been frail but understandings on sufficient corrective actions have been reached to keep the program on track."
- Missed PCs and adjustors (end-December 2016 examples):
  - Non-oil primary deficit on cash basis, excluding KRG, was ID 4.1 trillion (4.5 percent of non-oil GDP) higher than programmed.
  - Floor on gross international reserves missed by $1.4 billion after adjustors.
  - Ceiling on net domestic assets missed by ID 2.1 trillion after adjustors.
  - Ceiling on total public debt missed by ID 5.0 trillion partly due to issuance of debt guarantees ID 4.8 trillion ($4.0 billion).
  - Obligations to IOCs outstanding > three months reduced from $2.1 billion (September) to $1.2 billion (December 2016) and $0.5 billion (March 2017); authorities request ceiling increase to $500 million starting September 2017.
- Indicative targets and structural benchmarks:
  - One of two ITs at end-December 2016 met (social spending exceeded floor by 10 percent); stock of outstanding domestic arrears on non-oil investment exceeded ceiling by 5 percent.
  - Inventory of arrears: Ministry of Finance identified arrears of ID 11.1 trillion ($9.4 billion) at end-December 2016 (ID 7.5 trillion domestic; ID 3.6 trillion ($3.0 billion) foreign).
  - Debt Directorate survey of guarantees (end-April 2017): 11 state guarantees on foreign currency-denominated service payments or debt amounted to $36.0 billion (ID 42.6 trillion, or 21 percent of GDP); $32.4 billion for IPP service payments; $3.6 billion debt guarantees; one local currency guarantee ID 0.5 trillion.

### Key fiscal policy measures (2017 supplementary budget and 2018 preparatory measures)
- 2017 supplementary budget key quantified items:
  - New tax on internet services: ID 0.2 trillion (five-months impact).
  - Reshuffle composition of spending (2017 changes):
    - Cuts in transfers: ID 0.6 trillion.
    - Cuts in non-oil investment: ID 1.5 trillion.
    - Cuts in goods and services: ID 0.9 trillion.
    - Upwards revision of pensions: ID 0.9 trillion.
    - Upwards revision of wages: ID 0.5 trillion.
    - Downward revision of non-oil revenue: ID 1.6 trillion (reflecting lower wage/pension tax rate approved by Parliament).
  - Increase credits for payment of arrears to ID 7.4 trillion (ID 3.2 trillion external; ID 4.2 trillion domestic validated by BSA).
  - Update oil price projection to $45.3 (from $42.0) and decrease indirect monetary financing by the CBI from ID 5.5 trillion to ID 4.5 trillion.
  - Increase state guarantees ceiling from $500 million to $688 million (based on electricity projects); commitment to keep guarantees contracted in 2017 below $500 million until Parliament approves new ceiling.
- Programmed medium-term fiscal measures for 2018:
  - Reduce non-oil primary deficit on accrual basis by ID 2.3 trillion in 2018.
  - Raise indirect taxes by ID 1 trillion in 2018 (including full-year effect of mid-2017 measures).
  - Reform corporate income tax: eliminate some tax holidays; introduce minimum tax on turnover.
  - Decrease transfers to electricity sector by ID 1 trillion in 2018 (improved collection or increased tariffs).
  - Cap non-wage remuneration at ID 350,000 a month — yield about ID 0.5 trillion.
  - Replace one in five retiring civil servants — yield ID 0.6 trillion in 2018.
  - Stop allocating new non-contributory pensions or finance them within 2017 allocation.

### Public financial management (PFM) and arrears management
- PFM weaknesses: lack of effective commitment controls leading to large arrears; weaknesses in cash management.
- Priority measures:
  - Regular inventories of arrears and pay them after validation by BSA.
  - Design and implement an expenditure commitment control system (IFMIS integration).
  - Move to a Treasury Single Account (TSA).
  - Implement an Integrated Financial Management Information System (IFMIS) with World Bank assistance (contract with vendor by end-August 2017; develop/test/accept by end-November 2018; rollout to pilot sites by end-June 2020).
  - Implement Public Investment Management reform with World Bank assistance.
  - Establish Cash Flow Management Unit (CMU) and Cash Flow Management Committee (CMC) by end-August 2017.
  - Quarterly surveys of arrears; prepare repayment schedules compatible with financing capacity. Government plans to pay ID 6.0 trillion of domestic arrears in 2017 (ID 3.2 trillion to contractors; ID 2.7 trillion to other creditors).

### Banking sector reform and financial sector stability
- Banking system (as of January 2017):
  - 65 banks: 7 state-owned banks; 39 Iraqi private banks; 19 foreign banks.
  - Three SOBs (Rafidain, Rasheed, Trade Bank of Iraq) account for around 90 percent of system assets.
- Restructuring R&R:
  - External audits for Rasheed and Rafidain to be completed by end-August 2017.
  - Restructuring plan for R&R due by end-February 2018.
- CBI reforms and safeguards:
  - Amendments to CBI Law and new charter for Audit Committee to strengthen governance (structural benchmarks).
  - Enforce minimum capital requirement: ID 250 billion ($214 million) (private banks compliance except one).
  - CBI to cap disbursement of its lending facilities at ID 1.3 trillion in 2017 and reassess continuation by year-end.
- AML/CFT strengthening:
  - By-law adopted October 9, 2016 to comply with UN Security Council resolutions (FATF Rec. 6).
  - CBI and sectoral regulators issuing AML/CFT instructions; timelines through end-2018 for risk profiles, onsite procedures, and FIU governance regulation.

### Debt sustainability and stress tests (Annex III and stress results)
- Debt outlook:
  - Debt path worsened slightly versus first SBA review due to lower oil prices and contracted debt guarantees.
  - Public debt expected to peak at 65 percent of GDP in 2018 and decline to 52 percent of GDP in 2022 under baseline with SBA adjustment.
  - Total public debt rose to 67 percent of GDP in 2016 (from 31 percent in 2013).
- Gross financing needs (GFN):
  - Expected average GFN over 2017–18: 19 percent of GDP (above high-risk threshold 15 percent).
- Legacy arrears and composition:
  - $41 billion external arrears accumulated before 2003 remain included in external debt and assumed not settled in baseline.
  - If legacy arrears were reduced in line with Paris Club creditors, debt-to-GDP would fall from 64 to 47 percent in 2017, peak at 49 percent in 2018, and decline to about 40 percent in 2022.
- Contingent liabilities:
  - Ministry of Finance issued $36 billion of guarantees starting in 2016 (14-year coverage).
  - Over 2017–22: $3.6 billion debt guarantees; $7 billion of service-payment guarantees to IPPs.
  - Central government contingent liability from electricity sector gap equivalent to $2.6 billion over 2018–22.
- Stress-test scenarios (selected outcomes):
  - Growth shock (lower real GDP by 4 percentage points in 2018–19): debt ratio peak 76 percent of GDP in 2019; decline to 63 percent in 2022.
  - Primary balance shock (worsening by 3 percentage points of GDP in 2018–19): debt ratio peak 71 percent in 2019; fall to 58 percent in 2022.
  - Real interest rate shock (one-time +10 percentage points in 2018): debt ratio peak 65 percent in 2019; fall to 57 percent in 2022.
  - Real exchange rate shock (one-time depreciation 30 percent in 2018): debt peak 75 percent in 2018; fall to 61 percent in 2022.
  - Combined shock: debt peak 91 percent of GDP in 2019; decline to 82 percent at end of forecast horizon.
- External debt sensitivity (stress tests):
  - Baseline external debt: 32 percent of GDP.
  - CA shock (non-interest current account half-standard-deviation): external debt peak 50 percent of GDP in 2019–2020; 47 percent in 2022.
  - Real depreciation 30 percent one-time: external debt peak 50 percent of GDP in 2018; 34 percent in 2022.
  - Combined shock (quarter-standard-deviation to real interest rate, growth, current account): external debt rises to 46 percent in 2019; 39 percent end projection.

### Structural reforms for diversification, fiscal space and public sector efficiency
- Growth strategy and priorities:
  - Maintain macro stability via SBA policies.
  - Create fiscal space to enhance human capital and rebuild physical capital.
  - Strengthen business environment and reduce role of state to incentivize private sector in reconstruction.
  - Reform and restructure financial sector to better support private sector.
- Increase non-oil tax revenue (Box 3 and MEFP recommendations):
  - Tax revenue-to-GDP ratio: 1.0 percent in 2015 (regional average 11 percent; comparator group 16 percent).
  - Priority measures: levy low ad-valorem/specific taxes on telecom, hotel services, private vehicles, sugar-sweetened drinks, cigarettes/tobacco, alcoholic beverages; enshrine in excise tax law.
  - Reduce number of tariffs in Customs Code to maximum of 3 positive rates not exceeding 30 percent.
  - Discontinue corporate income tax holidays; consider minimum tax of 1 to 2 percent on corporate turnover.
  - Subject retirement income to personal income tax; implement Large Taxpayers Office; revamp IT systems.
- Reign in expenditure and improve quality:
  - Identify and cancel ghost workers/pensioners via BSA payroll audits.
  - Implement staff reduction via natural attrition and eliminate vacated positions; design merit- and needs-based HR management.
  - Ensure sustainability of pension systems and consider unification with private sector pension system.
  - Improve targeting of social transfers; PDS cost 1.8 percent of GDP in 2016.
  - Gradually eliminate fuel subsidies (implicit and explicit costs 1.7 percent of GDP in 2016) and electricity subsidies; electricity sector deficit (all inputs at market price) projected 5.2 percent of GDP in 2017; tariff collection covers about 11 percent of cost.
  - Prioritize non-oil investment and contain domestically financed investment until public investment management framework in place.

### Program modalities, conditionality and monitoring
- Program financing and gaps:
  - Program fully financed through next twelve months; financing gap $7.1 billion in late 2018 and 2019.
  - Authorities contacted donors to fill 2018–19 gap.
- PCs, ITs and SBs:
  - PCs include GIR floor, NDA ceiling, non-oil primary balance floor, continuous ceiling on new external arrears, ceiling on total gross public debt.
  - ITs include social spending floor, ceiling on outstanding domestic arrears on non-oil investment, ceiling on outstanding arrears to IOCs.
  - Proposed change: treat obligations to IOCs as IT with ceiling $500 million starting September 2017.
  - Authorities committed to prior actions: Parliamentary approval of supplementary 2017 budget; update Financial and Accounting Manual to record expenditure commitments; Council of Ministers approval of procedures for state guarantees.
- Data and reporting requirements:
  - Extensive reporting schedule in TMU: weekly, monthly and quarterly fiscal, monetary, external and banking data; audited GIR and NDA at semester-ends; quarterly publication of fiscal tables per GFSM 2014 with six-month lag starting September 30, 2017.
- Program reviews:
  - Third review on or after October 15, 2017; fourth review on or after April 15, 2018.

### Risks, mitigation and staff appraisal
- Main risks:
  - High risk of security setbacks, sectarian tensions, oil price declines, shortfalls in financing, implementation and data-reporting weaknesses, and administrative capacity constraints (e.g., absence of full-time Finance Minister since September 2016).
- Mitigation:
  - Fiscal consolidation and prior actions to create fiscal space; technical assistance; external audits to improve data for PC assessment; donor engagement to close financing gaps.
- Staff appraisal conclusions:
  - SBA policies appropriate to address shocks; maintaining the peg appropriate; indirect CBI financing unavoidable in short term.
  - Structural priorities: expedite audits and restructuring of Rasheed and Rafidain; strengthen CBI legal framework and governance; remove remaining exchange restriction and one multiple currency practice; improve AML/CFT regime; mobilize non-oil tax revenue; step up electricity, SOE and anti-corruption reforms.
  - Staff recommends completion of second review under the SBA and modification of PCs given program performance and agreed corrective actions.

### Key statistics and memoranda (selected exact figures)
- Internally displaced persons: 3.0 million.
- People in need of humanitarian assistance: 11 million (29 percent of the population).
- Syrian refugees: over 241,000.
- Real GDP growth in 2016: 11 percent.
- Oil production increase in 2016: 25 percent.
- Non-oil real GDP change in 2016: contracted by 8 percent.
- Inflation: 0.4 percent (2016 average); 1.0 percent (April 2017, y/y).
- Non-oil primary balance (accrual, excluding KRG): contracted by 1 percent nominal in 2016; adjusted from 43.3 to 44.6 percent of non-oil GDP (2015 to 2016).
- Overall budget deficit (2016): 14 percent of GDP.
- Arrears stock at end-2016: 5.5 percent of GDP (68 percent domestic).
- Public debt: 67 percent of GDP in 2016 (31 percent in 2013).
- Oil export price reference: $103 per barrel in 2013.
- Current account deficit (2016): 8.7 percent of GDP.
- Official reserves: $53.7 billion (end-2015) to $45.2 billion (end-2016) = 6.7 months of imports.
- Broad money growth (2016): 7.2 percent.
- Credit to the economy growth (2016): 1.9 percent.
- Deposit and credit concentration: R&R hold about 71 percent of deposits; seven state-owned banks hold 86 percent of deposits and extend 80 percent of credit.
- External financing examples: $1.44 billion World Bank loan; $1 billion U.S.-guaranteed bond yielding 2.15 percent; $0.27 billion Japan disbursement.
- Financing gap in late 2018 and 2019: $7.1 billion.
- Proposed ceiling on obligations to IOCs (starting September 2017): $500 million.
- Gross international reserves projected bottom: $36.0 billion (2021) = 5.2 months of imports.
- Expected public debt peak under baseline: 65 percent of GDP in 2018.
- Average expected gross financing needs over 2017–18: 19 percent of GDP (high-risk threshold 15 percent).

*Prepared by IMF staff; and Iraqi authorities (cr17251).*

### 1.    Implementation of Key Recommendations from 2015 Article IV Consultation  __________________  12

### 1.    Implementation of Key Recommendations from 2015 Article IV Consultation

### Background: economy and shock impacts
- Iraq is oil-dependent and state-dominated, holding the fourth largest oil reserves in the world with among the lowest extraction costs.
- Oil production has tripled since 2003, but the non-oil sector shows little diversification; public expenditure expanded heavily toward wages, pensions and transfers, and civil service employment tripled between 2003 and 2014.
- Conflict with ISIS and the fall in oil prices since 2014 caused:
  - 3.0 million internally displaced persons;
  - 11 million people in need of humanitarian assistance (29 percent of the population);
  - over 241,000 Syrian refugees.
- Security and governance constraints (lack of electricity, political instability, corruption, lack of access to finance) have stifled private sector and financial sector development.

### Recent macroeconomic developments and fiscal outcomes (2016–17)
- Real GDP increased by 11 percent in 2016, driven by a 25 percent increase in oil production.
- Non-oil real GDP contracted by 8 percent in 2016 due to fiscal consolidation and conflict.
- Average consumer price inflation:
  - 0.4 percent in 2016 (areas not occupied by ISIS);
  - 1.0 percent in April 2017, year-on-year.
- Fiscal adjustment and program support:
  - Authorities are implementing large fiscal consolidation supported by significant official financing, including a Stand-By Arrangement (SBA) with the Fund; the Board completed the first review in December 2016.
- Non-oil primary balance (accrual basis, excluding KRG):
  - contracted by 1 percent in nominal terms in 2016, reflecting 2 percent real spending growth and a tripling of non-oil revenue from a very low base.
  - In percent of non-oil GDP, the non-oil primary deficit increased from 43.3 in 2015 to 44.6 in 2016.
- Overall budget deficit rose to 14 percent of GDP in 2016, mainly because of a 22 percent fall in oil prices.
- Arrears and financing:
  - Total arrears stock amounted to 5.5 percent of GDP at end-2016, of which 68 percent were domestic.
  - The budget deficit was mostly financed by indirect monetary financing from the Central Bank of Iraq (CBI) and donor support catalyzed by the SBA, and by accumulation of arrears.
  - The authorities paid about $2.5 billion less external arrears to IOCs and other external creditors than programmed because of cash constraints.

### Public debt, external position, and reserves
- Total public debt rose to 67 percent of GDP in 2016 (from 31 percent of GDP in 2013 when oil exports averaged $103 per barrel).
- Issuance of debt guarantees (mostly for electricity projects) accounted for 2.3 percent of GDP at end-2016.
- Iraq’s current account deficit widened to 8.7 percent of GDP in 2016 because of the 22 percent drop in oil prices.
- Official foreign exchange reserves declined from $53.7 billion at end-2015 to $45.2 billion at end-2016 (6.7 months of imports of goods and services).
- External support and financing developments (examples in 2016–17):
  - World Bank Board approved a $1.44 billion budget support loan (including $0.37 billion guaranteed by the U.K. and $0.07 billion by Canada).
  - Authorities issued a $1 billion bond guaranteed by the U.S. government yielding 2.15 percent.
  - Japan disbursed a $0.27 billion budget support loan in March.

### External sector assessment and exchange rate dynamics
- Iraq’s external position in 2016 was substantially weaker than warranted by fundamentals and desirable medium-term policies; the current account gap was about 8 percent of GDP weaker than warranted by fundamentals and desirable policy settings (Annex II).
- The real and nominal effective exchange rates appreciated by about 8 percent in 2016, continuing appreciation since 2013 linked to the U.S. dollar peg.
- The spread between official and parallel exchange rates decreased from 11 percent in December to about 6 percent in June 2017 after the CBI simplified documentation for access to its foreign exchange window.

### Monetary and banking sector developments
- Broad money grew by 7.2 percent during 2016; credit to the economy grew by 1.9 percent.
- Banking sector weaknesses:
  - Two largest banks, Rafidain and Rasheed (R&R), together hold about 71 percent of banks’ deposits (86 percent held by the seven state-owned banks) and extend 54 percent of credit (80 percent extended by the seven state-owned banks).
  - Recent audited accounts per international standards are lacking for the main state-owned banks; R&R are most likely severely undercapitalized.
  - Non-performing loans are high across public and private banks and rising.
  - The state-dominated banking sector’s liquidity position is uncertain in the absence of audited financial statements.
- Financial depth (credit and money) remains much lower than in peer economies.
- Iraq remains monitored by the FATF for serious shortcomings in its AML/CFT regime and faces the risk of being blacklisted absent sufficient progress, which would affect correspondent banking relationships.

### Policy actions underway and constraints
- Authorities are implementing fiscal consolidation measures to restore debt sustainability; the SBA supports this adjustment.
- Fiscal implementation challenges in 2016 included:
  - Spending overruns—mostly in non-oil investment (ID 6.1 trillion), transfers (ID 2.6 trillion) and wages (ID 0.7 trillion);
  - Inability of the Ministry of Finance to reduce investment expenditure as envisaged;
  - Spending pressure from the military campaign against ISIS.
- Political and governance risks:
  - Government turnover and political instability (Interior Minister resignation; Parliament withdrew confidence in Defense and Finance Ministers; Prime Minister acting as Minister of Finance).
  - Federal-KRG budget-sharing agreement not implemented in 2016; KRG planned an independence referendum in September; parliamentary elections scheduled in April 2018.

### Key statistics and exact figures from the assessment
- Internally displaced persons: 3.0 million.
- People in need of humanitarian assistance: 11 million (29 percent of the population).
- Syrian refugees: over 241,000.
- Real GDP growth in 2016: 11 percent.
- Oil production increase in 2016: 25 percent.
- Non-oil real GDP change in 2016: contracted by 8 percent.
- Inflation: 0.4 percent (2016 average), 1.0 percent (April 2017, y/y).
- Non-oil primary balance (accrual, excluding KRG): contracted by 1 percent in nominal terms in 2016; increased from 43.3 to 44.6 percent of non-oil GDP (2015 to 2016).
- Overall budget deficit (2016): 14 percent of GDP.
- Arrears stock at end-2016: 5.5 percent of GDP (68 percent domestic).
- Public debt: 67 percent of GDP in 2016 (31 percent in 2013).
- Oil export price reference: $103 per barrel in 2013.
- Current account deficit (2016): 8.7 percent of GDP.
- Official reserves: $53.7 billion (end-2015) to $45.2 billion (end-2016) = 6.7 months of imports.
- Reduction in spread between official and parallel exchange rates: from 11 percent (December) to about 6 percent (June 2017).
- Broad money growth (2016): 7.2 percent.
- Credit to the economy growth (2016): 1.9 percent.
- Deposit and credit concentration: R&R hold about 71 percent of deposits; seven state-owned banks hold 86 percent of deposits and extend 80 percent of credit.
- External financing examples: $1.44 billion World Bank loan; $1 billion U.S.-guaranteed bond yielding 2.15 percent; $0.27 billion Japan disbursement.

*cr17251 - 1.    Implementation of Key Recommendations from 2015 Article IV Consultation*

### Box 1. Implementation of Key Recommendations from 2015 Article IV Consultation

### Box 1. Implementation of Key Recommendations from 2015 Article IV Consultation

### Implementation of Key Recommendations
- Maintain the exchange rate peg and step up the liberalization of the foreign exchange market
  - Status: Mostly done. "The authorities have removed most exchange rate restrictions subject to Article VIII, Section 2 (a)."
- Ensure fiscal sustainability, rebuild fiscal buffers to address volatility in oil revenues, and alter the composition of spending by cutting current spending while protecting social spending
  - Status: Ongoing. "The authorities have embarked on a fiscal consolidation path under the three-year Stand-by Arrangement (SBA) with the aim of attaining debt sustainability and external stability. However, the brunt of the adjustment has been achieved so far through cuts in non-oil investment while maintaining wages and pensions to preserve social stability."
- Accelerate diversification of government revenues through non-oil tax instruments
  - Status: Limited progress. "The government expanded the flat tax rate on wages and salaries. A technical assistance mission by the IMF Fiscal Affairs Department conducted a diagnostic to design and implement a strategy to raise non-oil tax revenue in February 2017."
- Strengthen public financial management (PFM)
  - Status: Ongoing. "The authorities have committed to several measures to strengthen public financial management under the SBA. They have made progress on fiscal reporting per GFSM standards, have conducted surveys of arrears, and have taken steps to strengthen commitment control to prevent accumulation of new arrears."
- Press ahead with restructuring of Rasheed and Rafidain banks
  - Status: Ongoing. "An external audit of the financial statements of these banks is expected by end-August 2017."
- Bring AML/CFT and anti-corruption frameworks in line with international standards
  - Status: Ongoing. "Under the SBA the authorities are implementing measures to strengthen the AML/CFT and anti-corruption legislation per international standards."
- Accelerate structural reform to promote private sector growth
  - Status: Limited progress. "Private sector growth prospects are also hampered by the security situation."

*Sources: IMF staff; and Iraqi authorities.*

### Outlook and Risks (selected findings and projections)
- Oil production
  - Expected to contract by 1.5 percent in 2017 owing to the OPEC+ agreement, to bounce back by 3.4 percent in 2018, and to increase by 1 percent a year thereafter.
  - "Putting oil production and export on a steeper upward trend would require significantly higher oil investment that the authorities cannot finance with the present oil price outlook."
- Iraqi oil export prices
  - Expected to recover to about $45 per barrel in 2017 and then to slightly increase to about $47 per barrel by 2022.
  - Note: "Since January 2015, Iraqi oil prices have been about $6 lower on average than the average petroleum spot prices..., a difference that is projected to stay at the same level over the medium term."
- Non-oil primary balance and public debt
  - "The non-oil primary balance is projected to decline gradually to the level aligned with sustained public spending under the permanent income hypothesis (PIH; -35 percent of non-oil GDP; Box 2) by roughly flat public spending in nominal terms over the next five years and some increase in non-oil revenue."
  - "The public debt will peak at 65 percent of GDP in 2018."
- Non-oil growth and inflation
  - "Non-oil growth is projected to gradually return to half of its pre-2014 trend in the medium term, as progress is made in the war against ISIS."
  - "Inflation is projected to remain around 2 percent."
- Current account and reserves
  - "The fiscal consolidation and the pickup in oil revenue are expected to almost eliminate the current account deficit by 2022."
  - "Gross international reserves will bottom out at $36.0 billion (5.2 months of imports of goods and services) in 2021."
- Financing gap and contingent actions
  - There is "a financing gap of $7.1 billion (same as the 1st Review SR), of which $5 billion is in the last quarter of 2018 and $2.1 billion in 2019."
  - "Financing assurances for the 2018 financing gap need to be identified before the completion of the 3rd SBA review, scheduled in December 2017."
  - Authorities approached Kuwaiti authorities to request a postponement of the war reparation payment of $4.6 billion due in 2018; they will approach other donors (including China, U.S., other G7, and Iran).
- Monetary and credit outlook
  - "Broad money should grow at about the same pace as non-oil GDP."
  - Programmed fiscal consolidation should leave room for growth of credit to the economy to increase to 14 percent per year over the medium term.
- Sensitivity
  - "Every sustained increase in oil prices by $1 per barrel would increase annual oil revenue by $1.4–1.5 billion (Text Table 1)."

### Box 2. Non-Oil Primary Balance Achieving the PIH Level — key analytical points and calibration
- Rationale
  - Oil accounts for "more than 90 percent of total government revenues" and drives macroeconomic developments; oil revenue volatility has induced large swings in public expenditure.
  - A medium-term fiscal framework anchored on the Permanent Income Hypothesis (PIH) focuses on the non-oil primary balance (NOPB) to smooth consumption of oil revenue intertemporally.
- PIH calibration and target
  - "Calibration of the PIH for Iraq over the next 35 years yields a NOPB of about -35 percent of non-oil GDP, a level achievable by 2020 if the fiscal consolidation under the SBA is implemented."
  - Baseline: NOPB was -44 percent of non-oil GDP in 2016; projected to initially increase in 2017 then gradually decline to -35 percent of non-oil GDP by 2020 under the SBA.
  - Caveat: Iraq’s oil resources are not expected to be depleted before another 100 years or more, but a 35-year horizon is used as a conservative anchor.
- Assumptions underlying PIH calculations (exact figures preserved)
  - Real non-oil GDP growth: 5.0
  - Nominal non-oil GDP growth: 7.1
  - Inflation: 2.0
  - Real interest rate: 3.0
  - Nominal interest rate: 5.1
  - Real GDP growth: 4.0
  - Non-oil revenue, excluding grants (percent of non-resource GDP): 6.3
  - Length of annuity (years): 35
  - Oil Price: L-term increase (percent, 2024-50): 2.0
  - Oil export volume (mbpd, plateau level): 6.5

### Performance Under the Stand-By Arrangement (SBA) — implementation status and program performance
- General assessment
  - "Program performance has been frail but understandings on sufficient corrective actions have been reached to keep the program on track."
  - The end-June 2017 performance criteria (PCs) became controlling for the second SBA review; assessment uses end-December 2016 data due to limited information.
- Specific deviations and remedial actions
  - Obligations outstanding to IOCs for more than three months at end-June 2017 appear not to be met due to technical obstacles; authorities request a waiver for non-observance and propose subjecting these obligations to an IT rather than a PC going forward.
  - Continuous ceiling on new external arrears was missed due to temporary arrears: $2.5 million (a couple of weeks in early 2017) and $157 million (several days at beginning of July 2017). Authorities will expedite implementation of the Cash Flow Management Unit and Cash Flow Management Committee at the Ministry of Finance; a waiver is requested.
- End-December 2016 adjustors and missed PCs
  - The application of adjustors (for non-implementation of the budget sharing agreement with KRG and shortfalls in arrears repayments) led to missed PCs:
    - "The non-oil primary deficit on a cash basis, excluding transfers to the KRG, was ID 4.1 trillion (4.5 percent of non-oil GDP) higher than programmed."
    - "The floor on gross international reserves and the ceiling on net domestic assets were missed after application of adjustors for payment of external arrears ... by, respectively, $1.4 billion and ID 2.1 trillion."
    - "The ceiling on total public debt was missed by ID 5.0 trillion because the budget deficit was higher than programmed and the authorities issued debt guarantees in an amount of ID 4.8 trillion ($4.0 billion)."
    - Obligations to IOCs outstanding for more than three months were reduced but not to the program ceiling of zero by end-2016; reduced from $2.1 billion in September to $1.2 billion in December 2016 and $0.5 billion in March 2017. Authorities request increasing the ceiling to $500 million starting in September 2017.
- Indicative targets and structural benchmarks
  - One out of two indicative targets (ITs) at end-December 2016 was met: social spending exceeded its floor by 10 percent; the stock of outstanding domestic arrears on non-oil investment exceeded its ceiling by 5 percent.
  - Three of the ITs at end-March 2017 for which information is available were met.
  - Most structural benchmarks (SBs) for the second review have been met; others are in progress:
    - Inventory of arrears completed: at end-December 2016, Ministry of Finance identified arrears of ID 11.1 trillion ($9.4 billion), of which ID 7.5 trillion are owed to domestic creditors and ID 3.6 trillion ($3.0 billion) to foreign creditors.
    - Board of Supreme Audit (BSA) validated claims: out of ID 4.7 trillion of non-oil investment domestic arrears, ID 1.4 trillion validated; out of ID 2.5 trillion of arrears on wheat and rice purchases, ID 2.0 trillion validated.
    - Debt Directorate completed a survey of all guarantees: at end-April 2017, value of 11 state guarantees on foreign currency-denominated service payments or debt amounted to $36.0 billion (ID 42.6 trillion, or 21 percent of GDP), of which $32.4 billion are guarantees of service payments to IPPs and $3.6 billion are debt guarantees; one local currency-denominated debt guarantee amounted to ID 0.5 trillion.
    - Prior actions: Council of Minister’s approval of procedures for approval of state guarantees; CBI’s gross international reserves, net domestic assets and public debt audited by an external auditor; Minister of Finance circular requiring spending units to record existing commitments; Ministry of Finance posted audited financial statements of the Development Fund for Iraq and Successor Account on December 31, 2015.
    - CBI-related SBs to be met soon: adoption of a new charter for the Audit Committee prohibiting CBI executive representation; introduction to Parliament of amendments to the Law on the CBI to strengthen governance and internal control; removal of limitation on transfer of investment proceeds that gives rise to an exchange restriction.
    - Two SBs postponed: Council of Minister’s approval of draft amendments to the 2011 law establishing the Integrity Commission (postponed to the third review); a report of all current and investment commitments (postponed to the fourth review), with training to be provided by METAC.

*Prepared by IMF staff; Iraqi authorities.*

### 16.      The peg to the U.S. dollar has provided a key nominal anchor in a highly uncertain

### 16.      The peg to the U.S. dollar has provided a key nominal anchor in a highly uncertain

### Exchange rate regime and immediate risks
- Staff assessment: the current account deficit was about 8 percent of GDP weaker than warranted by fundamentals and desirable policy settings; that gap is projected to close over the medium term as the programmed fiscal adjustment is implemented (¶9).
- Persisting, though narrowing, spread between the official and parallel market exchange rates creates profit opportunities for banks that crowd out credit to the economy.
- Staff advice: Maintain the peg with the U.S. dollar. Accommodating external shocks through more exchange rate flexibility is not advisable.
  - Devaluation risks: would trigger a spike in inflation as most food and consumer items are imported; would have little impact on exports, which are almost exclusively oil and oil-related products.
  - Fiscal consolidation is the preferred tool to manage external pressure (¶17).
- Policy recommendation: Simplify procedures to allocate foreign exchange while properly implementing AML/CFT standards and gradually eliminate remaining exchange restrictions toward acceptance of the obligations under Article VIII of the IMF’s Articles of Agreement to reduce the spread between official and parallel market exchange rates (¶18).

### Authorities’ stance on exchange rate and FX access
- Authorities agreed with staff’s advice and that fiscal consolidation was the preferred response.
- Authorities reported measures by the CBI to simplify access to its foreign exchange window and requested additional technical assistance from IMF Legal and Monetary and Capital Markets departments to further reduce the spread (MEFP, ¶25; and SB, MEFP, Table 2).

### Implementing fiscal consolidation to achieve debt sustainability
- Staff advice: Continue fiscal adjustment to bring spending to a sustainable level given much lower oil revenue than in 2013–14; bring the non-oil primary balance closer to the level aligned with sustainable public spending under the permanent income hypothesis (Box 2).
- For 2017: Parliament should approve a supplementary budget to keep the non-oil primary balance on an accrual basis at first review level (prior action, MEFP, Table 2) and preserve leverage to keep non-oil primary balance within program target (¶21).
- Key elements of the 2017 supplementary budget:
  - Implement a new tax on internet services, which should yield ID 0.2 trillion in 2017.
  - Reshuffle composition of spending:
    - Cuts in transfers: ID 0.6 trillion.
    - Cuts in non-oil investment: ID 1.5 trillion.
    - Cuts in goods and services: ID 0.9 trillion.
    - Upwards revision of pensions: ID 0.9 trillion.
    - Upwards revision of wages: ID 0.5 trillion.
    - Downward revision of non-oil revenue: ID 1.6 trillion (considering outcome in 2016 and approval of a lower tax rate on wages and pensions of 3.8 percent in the 2017 budget adopted by Parliament versus 4.8 percent proposed by the government).
  - Guidelines: list of all projects by ministry to comprise total for non-oil investment in 2017; Ministry of Planning to conduct monthly monitoring of non-oil investment execution.
  - Increase credits for payment of arrears to ID 7.4 trillion:
    - ID 3.2 trillion for arrears to IOCs and other foreign suppliers.
    - ID 4.2 trillion for arrears on mostly non-oil investment and agricultural supply to domestic suppliers validated by the Board of Supreme Audit (¶15).
  - Update oil price projection to $45.3 rather than $42.0 per barrel and decrease indirect monetary financing of the budget by the Central Bank of Iraq from ID 5.5 trillion to ID 4.5 trillion.
  - Increase state guarantees ceiling from $500 million to $688 million (based on underlying electricity projects); commit to keep guarantees contracted in 2017 below $500 million until Parliament approves the new ceiling; government to inform Parliament about service payments and debt guarantees contracted in 2017 (¶21).
- Staff view on 2017 anchor: Program’s unchanged nominal non-oil primary balance anchor for 2017 is appropriate; due to sharp contraction in non-oil GDP, the program nominal anchor for 2017 corresponds to a 2 percent of non-oil GDP relaxation in the deficit target. Total fiscal adjustment remains ambitious at the top tenth percentile, but less so than originally envisaged. Public debt peaked slightly at 67 percent of GDP in 2016.

### Proposed fiscal measures (2017–18) — summary of key quantified items
- Revenue measures:
  - Raise indirect taxes on internet services (five-months impact): ID 0.2 trillion.
  - Raise indirect taxes on selected goods/services: ID 0.2 trillion (2018 projection in table shows 0.1 for some line items; see Text Table 2 for full breakdown).
- Expenditure measures (net impact): Net impact of proposed set of measures reported as 1.7 / 1.2 / 3.1 / 2.1 (table columns for 2017–2018; see Text Table 2).
  - Increase allocations for wages and salaries: -0.5 / -0.4.
  - Increase allocations for pensions: -0.9 / -0.7.
  - Reduce allocations for transfers: 0.6 / 0.4.
  - Reduce allocations for goods and services: 0.9 / 0.6.
  - Reduce allocations for non-oil investment: 1.5 / 1.1.
  - Reduce budgetary transfers to electricity sector (e.g., improve tariff revenue collection or raise tariff rates): 1.0 / 0.7.
  - Cap non-wage remuneration at ID 350,000 a month for all civilian civil servants: 0.5 / 0.4.
  - Replace one in five retiring civil servants (natural attrition): 0.6 / 0.4.
- Source: IMF Staff estimates (Text Table 2).

### Measures for 2018 and medium-term guidance
- For 2018: Prepare measures to reduce the non-oil primary deficit on an accrual basis by ID 2.3 trillion and tilt consolidation towards non-oil revenue and current expenditure (¶23).
- Proposed measures to prepare for inclusion in 2018 budget (finalization during third review):
  - Levy low ad-valorem or specific taxes on a few additional products/services to increase indirect taxes by ID 1 trillion in 2018 (including full year effect of mid-2017 measures).
  - Reform corporate income tax by eliminating some tax holidays and introducing a minimum tax on turnover.
  - Decrease budgetary transfers to the electricity sector by ID 1 trillion in 2018 (via improved collection rates or increased tariffs).
  - Cap non-wage remuneration at ID 350,000 (about $300) a month for all civilian civil servants — could yield savings of about ID 0.5 trillion (about 3 percent of the civilian wage bill) and would affect about the best paid quarter of civil servants.
  - Replace only one in five retiring civil servants — should yield savings of ID 0.6 trillion in 2018.
  - Stop allocating non-contributory pensions, or finance them within the 2017 budget allocation for pensions paid by the budget.

### Authorities’ views on fiscal consolidation
- Authorities committed to fiscal consolidation but acknowledged implementation challenges given security, political and social conditions.
- Authorities agreed oil price outlook necessitates containing spending to maintain fiscal and external sustainability. Adjustment must consider spending pressures from war against ISIS, internally displaced population, reconstruction needs, and parliamentary elections in 2018 (¶24).

### Monitoring financial risks and preserving financial sector stability
- Banking sector characterization:
  - Iraq’s banking sector is shallow, dominated by state-owned banks that are capital deficient with loan portfolio weaknesses (¶25).
  - Private bank credit provision is low because profiting from the spread between official and parallel exchange rates is more profitable.
  - CBI provided lines of credit to state-owned and commercial banks for SME, agriculture and infrastructure lending with state guarantee: ID 0.6 trillion out of 6 trillion ID (or 3 percent of GDP) used so far.
  - CBI plans to cap its disbursement at ID 1.3 trillion in 2017 and assess continuation by year-end, considering fiscal risks to the government.
- Governance and legal framework:
  - Efforts to strengthen the CBI’s legal framework per the 2016 safeguards assessment are underway: amendments to the Law on the CBI to strengthen governance to be enacted soon; revised audit committee charter prohibiting CBI executive representation on the committee (structural benchmarks; see MEFP, Table 2).
  - External auditors continue to audit program monetary data at test dates; progress on other recommendations has been slow (¶26).
- Staff advice on financial sector reforms:
  - Prioritize restructuring the two largest state-owned banks; complete audits of latest financial statements of R&R per international standards and design and implement a restructuring strategy based on audit results.
  - Enhance prudential and AML/CFT framework and strengthen CBI governance.
  - Compile financial stability indicators in line with international standards (STA technical assistance).
  - Continue to upgrade prudential laws and regulations (METAC and World Bank technical assistance) and tighten banking supervision.
  - Implement IMF safeguards assessment recommendations and continue to enhance AML/CFT regime with LEG and World Bank technical assistance.
  - Ensure CBI direct credit lending facilities remain of manageable size and narrowly targeted to collateral-backed housing loans (¶27).
- Authorities’ response: Agreed with staff; announced external audit of R&R to be completed by end-August and highlighted SBA commitments to advance reforms (¶28).

### Structural reforms for diversified and inclusive growth
- Staff’s growth strategy:
  - Maintain macroeconomic stability by implementing SBA policies (¶¶17–18 and 20–22).
  - Create additional fiscal space to enhance human capital and rebuild physical capital.
  - Strengthen the business environment and reduce the role of the state to improve incentives for private sector development during reconstruction.
  - Reform and restructure the financial sector to better support private sector over the medium term (¶¶25).
- Create fiscal space — increase non-oil revenue:
  - Exploit large room to increase non-oil tax revenue by broadening the tax base and modernizing tax and customs administration (Box 3).
  - FAD technical assistance identified dependence on oil revenue, overreliance on direct taxes, widespread tax exemptions, complicated tax and customs codes, and sub-par administrative capacity as key factors behind weak tax collection (¶29).
- Reign in expenditure — priority actions to reduce size and improve quality of public expenditure (¶30):
  - Identify and cancel payments to ghost workers and ghost pensioners, considering results of the BSA payroll audits (SB, MEFP, Table 2).
  - Implement staff reduction via natural attrition and elimination of vacated positions; voluntary paid administrative leave unlikely to permanently reduce payroll.
  - Design a merit- and needs-based centralized human resource management system.
  - Ensure financial sustainability of contributory and non-contributory pension systems and unify with the private sector pension system (World Bank recommendation).
  - Improve targeting of social transfers; Public Food Distribution System covers entire population and cost 1.8 percent of GDP in 2016.
  - Gradually eliminate fuel subsidies by increasing prices above cost and implementing a formula smoothing retail oil prices to international prices while protecting low-income households; explicit (on budget) and implicit (opportunity) costs of low energy prices amounted to 1.7 percent of GDP in 2016.
  - Gradually eliminate electricity subsidies by increasing collection and reducing cost; electricity sector deficit (with all inputs at market price) projected to reach 5.2 percent of GDP in 2017; tariff collection will cover only about 11 percent of cost. Substituting imported gas/fuel with captured associated gas offers potential to decrease power generation production cost.
  - Contain domestically financed non-oil investment at much lower levels until a proper public investment management framework is in place; prioritize ongoing projects and focus on most crucial new ones due to weak quality of past non-oil capital spending (World Bank Expenditure Review).
- Box 3 — Priority measures to increase non-oil tax revenue:
  - Context: Tax revenue-to-GDP ratio of 1.0 percent in 2015 in Iraq vs. regional average 11 percent and comparator group 16 percent.
  - Priority measures:
    - Levy low ad-valorem or specific taxes on telecom and hotel services, private vehicles, sugar-sweetened drinks, cigarettes and other tobacco products, and alcoholic beverages; enshrine in a new excise tax law (SB; MEFP, Table 2).
    - Reduce number of tariffs in Customs Code from more than 10 to a maximum of 3 positive rates not exceeding 30 percent (SB, MEFP, Table 2).
    - Discontinue corporate income tax holidays.
    - Consider minimum tax of 1 to 2 percent on corporate turnover, creditable against CIT.
    - Subject retirement income to personal income tax.
    - Limit ministers’ power to change customs tariffs or provide exemptions by decree.
    - Implement a Large Taxpayers Office for large taxpayers and high wealth individuals.
    - Revamp/implement IT systems to support revenue operations.

*IMF staff report excerpt (cr17251).*

### 31.      Continue to improve public expenditure control, cash and public investment

### 31.      Continue to improve public expenditure control, cash and public investment management

### Public financial management weaknesses and priority measures
- Fiscal pressures amplified underlying weaknesses in the public finance management system in Iraq, including a lack of effective commitment controls that led to the accumulation of large arrears (¶15), and weaknesses in cash management.
- Priority measures to improve public financial management:
  - Undertake regular inventories of arrears and pay them after validation by the BSA, in line with the government’s financing capacity.
  - Design and implement an expenditure commitment control system for budget execution to prevent the accumulation of new arears, in line with IMF technical assistance recommendations (prior action and SBs, MEFP, Table 2).
  - Take steps to move to a Treasury Single Account and improve cash management.
  - Design and implement an Integrated Financial Management Information System (IFMIS) with the assistance of the World Bank.
  - Implement Public Investment Management reform with the assistance of the World Bank to improve the quality of future investment.

### Business environment and structural reforms
- Key areas to strengthen the business environment:
  - Improving security and political stability, including restoring control over territories liberated from ISIS.
  - Reforming the electricity sector to make it financially self-sustainable (¶30).
  - Reforming the R&R framework (¶27) to increase the role of the private sector in the economy.
  - Implementation of strong anti-corruption legislation, including an amended law establishing the Integrity Commission (SB, MEFP, Table 2).
- World Bank recommendation: design and implement gradual fiscal decentralization while beefing up public financial management at the decentralized level to strengthen political stability.
- Authorities’ view: agree with staff’s advice but emphasize implementation difficulties given current fragility; recommend proceeding in a gradual but sustained manner and highlight challenges reducing the public-sector payroll given lack of alternatives for the young and fast growing population.

### Program modalities, financing, and conditionality
- Financing:
  - The program is fully financed through the next twelve months, but there is a financing gap of $7.1 billion in late 2018 and 2019.
  - The authorities have contacted one donor to fill the 2018–19 financing gap, for which there is good prospect (¶12).
- Prior actions and structural benchmarks (SBs):
  - Authorities committed to three prior actions and several additional SBs; requesting modifications to some program modalities (MEFP, Table 2 and ¶46).
  - Prior actions for completion of the second review include:
    - Approval by Parliament of a supplementary 2017 budget in line with ¶¶29-34 of the MEFP.
    - Update of the Financial and Accounting Manual to require all spending units to report expenditure commitments.
    - Approval by the Council of Ministers of procedures for approval of state guarantees as described in ¶38 of the MEFP.
  - Authorities propose six additional SBs in areas essential for program success: arrears’ monitoring, non-oil tax revenue mobilization, current expenditure control, and monetary and debt reporting.
- Arrears and reporting adjustments:
  - Considering difficulty to reduce obligations due for more than three months to IOCs to zero because of the minimum size of oil shipments, it is proposed to raise the ceiling on such obligations to $500 million, starting in September 2017 (¶15).
  - Given uncertainty about whether these obligations constitute arrears (¶15), it is proposed to make this ceiling an IT rather than a PC.
  - Authorities support staff’s proposal for a revision of all ITs at end-September 2017 and the PCs at end-December 2017 and to set PCs and ITs in 2018.
  - Authorities request postponement of two SBs for the second review (amendments to the law establishing the Integrity Commission, report on expenditure commitments) to the third and fourth reviews respectively (¶14) and one SB (audit of the pensioner payroll) from the third to the fourth review.
- Program performance and waivers:
  - Performance under the SBA has been frail; further corrective actions and prior actions agreed to keep the program on track.
  - Based on available information, Iraq is likely to miss the PC on arrears to IOCs at end-June 2017 and missed the continuous PC on new external arrears (which have since been paid).
  - Authorities request a waiver of nonobservance for the missed PC at end-June 2017 and the continuous PC, and waivers of applicability for four end-June 2017 PCs since information to assess them is not yet available.
  - Staff supports these requests and proposes changes to the level of the PCs on the gross international reserves of the CBI, the net domestic assets of the CBI, the non-oil primary balance, and the gross public debt at end-December 2017 to take account of the revised macroeconomic framework.

### Risks and mitigation
- Main risks:
  - Risks remain very high: setbacks in security or post-ISIS sectarian tensions could weaken growth, public finances and the balance of payments.
  - A decline in oil revenue or a shortfall in projected financing would widen the financing gap in 2018–19.
  - If additional donor financing does not materialize and projections for oil prices remain at their current levels or decline, the program framework may need to be fundamentally reconsidered.
  - Implementation and data reporting risks remain high; absence of a full-time Finance Minister since September 2016 hinders implementation capacity.
- Upside:
  - Higher oil prices would improve the macroeconomic outlook (¶14 and Text Table 1).
- Mitigation measures:
  - Program mitigates risks related to authorities’ commitment and capacity by proposing prior actions in fiscal policy and public financial management (¶31).
  - Technical assistance and use of data audited by external auditors will continue to mitigate implementation and data reporting risks for assessment of PCs on gross international reserves, net domestic assets and public debt (SBs, MEFP, Table 2).

### Key quantitative and program facts
- Financing gap in late 2018 and 2019: $7.1 billion.
- Proposed ceiling on obligations to IOCs (starting September 2017): $500 million.
- Total outstanding Fund credit would peak at:
  - 14 percent of gross official reserves,
  - 9 percent of exports of goods and services,
  - 7 percent of external public debt (Table 10).
- Supplementary 2017 budget needs to cut total spending by 2 percent and reshuffle the composition of spending to account for wage and pension commitments.
- Policy priorities for the 2018 budget: increase non-oil tax revenue, reduce the wage bill, and reduce transfers to the electricity sector to create fiscal space for growth-enhancing investment expenditure.

### Staff appraisal and recommendations
- Macroeconomic outlook:
  - The program should help growth to return in 2018 and gradually increase but risks are very high.
  - Economic activity in the current year expected to remain muted due to Iraq’s implementation of the OPEC+ agreement and a modest recovery in the non-oil sector.
  - Medium-term growth prospects are positive with moderate increase in oil production and rebound in non-oil growth supported by expected improvement in security and structural reforms.
  - Moderate increase in oil revenue and ongoing fiscal adjustment should suffice to restore fiscal and external balance by 2021, but risks remain very high from oil price volatility, unstable security, political tensions, and feeble administrative capacity.
- Policy assessment:
  - Policies put in place to deal with shocks (ISIS attacks and plunge in oil prices) are appropriate.
  - Fiscal policy: authorities are addressing revenue shortfalls with fiscal adjustment, mostly through capital expenditure retrenchment while protecting social spending, supported by bilateral and multilateral financing.
  - External policy: maintaining the peg to the U.S. dollar is appropriate as an anchor for the economy.
  - Indirect central bank financing is unavoidable given limited access to capital markets.
- Structural recommendations:
  - Expedite audits of the financial statements of the two state-owned banks Rasheed and Rafidain per international standards and implement restructuring plans.
  - Accelerate steps to strengthen the legal framework of the CBI, remove one remaining exchange restriction and one multiple currency practice, and implement AML/CFT measures to improve financial integration.
  - Tap fiscal space from very low non-oil tax revenue and very high public consumption to finance high-quality expenditure on human and physical capital.
  - Step up electricity, state-owned enterprise and anti-corruption reforms; bring tariff collection above cost recovery levels; amend the law establishing the Integrity Commission to strengthen its independence.
- Conclusion:
  - Staff recommends completion of the second review under the SBA and modification of the PCs, judging the performance under the SBA and the policies in the MEFP adequate to deal with urgent balance of payments and budget needs and to maintain debt sustainability.

*IMF staff report: "Continue to improve public expenditure control, cash and public investment management" (CR17251).*

### 49.      The next Article IV consultation with Iraq is expected to take place within 24 months,

### cr17251 - 49.      The next Article IV consultation with Iraq is expected to take place within 24 months,

### Consultation timing
- The next Article IV consultation with Iraq is expected to take place within 24 months, in accordance with Decision No. 14747-(10/96), as amended, on consultation cycles.

### Economic growth and prices
- Real GDP (percentage change): 7.6; 0.7; 4.8; 10.2; 11.0; 1.1; -0.4; 0.7; 2.9; 1.1; 1.7; 1.4; 2.0; 1.5; 2.1; 2.1
- Non-oil real GDP (percentage change): 12.4; -3.9; -9.6; -5.0; -8.1; 3.0; 1.5; 2.0; 2.0; 3.0; 3.0; 3.9; 3.9; 4.0; 4.0; 4.1
- GDP deflator (percentage change): 0.0; -0.7; -26.9; -11.5; -12.9; 9.7; 12.9; 6.4; 2.3; 4.7; 2.9; 5.4; 3.8; 5.0; 4.4; 4.7
- Consumer price inflation (end of period): 3.1; 1.6; 2.3; 2.0; -1.0; 2.0; 2.0; 2.0; 2.0; 2.0; 2.0; 2.0; 2.0; 2.0; 2.0; 2.0
- GDP per capita (US$): 7,021; 6,517; 4,869; 4,818; 4,533; 5,200; 4,958; 5,434; 5,091; 5,608; 5,194; 5,843; 5,362; 6,073; 5,569; 5,806

### Output and sector composition (selected)
- GDP (in ID trillion): 273.6; 273.6; 209.7; 205.1; 202.7; 227.4; 227.7; 243.8; 239.9; 258.0; 251.0; 275.8; 265.8; 294.0; 283.1; 302.8
- Non-oil GDP (in ID trillion): 148.0; 149.5; 139.8; 139.0; 134.1; 149.3; 141.8; 158.8; 150.8; 170.6; 162.0; 184.9; 175.5; 200.6; 190.3; 206.6
- Oil GDP share (percent of GDP): 49.4; 5.4; 18.4; 20.4; 24.6; ... (see sector tables for detailed annual shares)
- Selected GDP shares: Agriculture 4.3; Mining, crude oil and Quarrying 49.7; Manufacturing 1.5; Construction 8.7; Transport, Storage and Communications 7.2; Wholesale and Retail Trade, Restaurants and Hotels 8.5; Finance, Insurance, Real Estate and Business Services 7.2; Producers of Government Services 9.9

### Oil sector and external sector indicators
- Oil production (mbpd): 3.0; 3.1; 3.7; 4.5; 4.6; 4.5; 4.6; 4.5; 4.7; 4.5; 4.8; 4.5; 4.8; 4.5; 4.9; 4.9
- Oil exports (mbpd): 2.4; 2.6; 3.4; 3.8; 3.8; 3.8; 3.8; 3.8; 3.9; 3.8; 3.9; 3.8; 4.0; 3.8; 4.0; 4.1
- Iraq oil export prices (US$ per bbl): 102.9; 96.5; 45.9; 35.5; 35.6; 42.0; 45.3; 45.7; 45.4; 47.0; 44.9; 48.8; 45.2; 50.2; 45.9; 47.1
- Trade balance (US$ billion): 23.2; 25.6; -0.2; -1.3; -3.1; -0.8; 1.4; 3.7; 3.7; 5.3; 3.6; 7.0; 4.8; 8.0; 6.1; 8.5
- Current account (US$ billion): 2.7; 6.1; -11.6; -11.9; -14.9; -13.1; -12.3; -12.9; -13.6; -6.3; -8.7; -4.4; -7.2; -2.9; -5.0; -1.5
- Exports (US$ billion): 89.8; 92.9; 56.5; 49.2; 50.0; 57.9; 62.4; 63.0; 64.9; 64.9; 65.1; 67.5; 66.5; 69.7; 68.3; 71.2
- Imports (US$ billion): -66.5; -67.3; -56.7; -50.5; -53.1; -58.7; -61.0; -59.3; -61.3; -59.6; -61.5; -60.5; -61.7; -61.7; -62.2; -62.7

### Public finance (central government)
- Government revenue and grants (percent of GDP): 42.2; 38.2; 30.3; 32.2; 27.4; 34.8; 36.0; 35.1; 36.5; 34.3; 35.6; 33.5; 34.6; 32.5; 33.8; 33.1
- Government oil revenue (percent of GDP): 38.6; 36.0; 27.5; 28.3; 23.3; 30.1; 31.8; 30.6; 31.7; 29.7; 30.6; 28.9; 29.4; 27.9; 28.3; 27.5
- Government non-oil revenue (percent of GDP): 3.5; 2.1; 2.8; 3.9; 4.1; 4.6; 3.9; 4.5; 4.6; 4.6; 4.8; 4.6; 5.0; 4.6; 5.2; 5.5
- Expenditure (percent of GDP): 48.0; 43.5; 42.6; 40.4; 41.5; 41.8; 41.0; 40.4; 41.2; 36.0; 37.3; 33.4; 35.0; 31.4; 33.1; 31.1
- Current expenditure (percent of GDP): 30.6; 25.5; 27.5; 32.3; 30.1; 30.6; 30.5; 30.6; 31.1; 26.8; 27.8; 25.0; 26.1; 23.4; 24.3; 22.6
- Capital expenditure (percent of GDP): 17.4; 18.0; 15.1; 8.1; 11.4; 11.2; 10.5; 9.9; 10.1; 9.2; 9.5; 8.4; 8.9; 8.0; 8.8; 8.6
- Overall fiscal balance (including grants, percent of GDP): -5.8; -5.4; -12.3; -8.2; -14.1; -7.0; -5.0; -5.3; -4.7; -1.7; -1.6; 0.1; -0.5; 1.1; 0.7; 2.0
- Non-oil primary fiscal balance, accrual basis (percent of non-oil GDP): -67.6; -56.1; -45.1; -43.1; -44.6; -45.4; -47.8; -41.2; -43.4; -37.6; -39.6; -33.6; -35.4; -30.4; -32.0; -28.9
- Adjusted Non-oil primary fiscal balance (excl. KRG, percent of non-oil GDP): -56.8; -54.4; -43.3; -37.4; -44.6; -38.2; -39.9; -34.4; -36.1; -31.2; -32.9; -27.8; -29.4; -25.0; -26.4; -23.6

### Public debt and financing (memoranda)
- Total government debt (percent of GDP): 31.2; 32.0; 55.1; 61.3; 66.9; 61.9; 63.8; 63.1; 65.3; 61.3; 64.2; 57.3; 61.4; 52.6; 57.3; 51.9
- Total government debt (US$ billion): 73.1; 75.2; 98.0; 106.6; 114.6; 119.1; 122.9; 130.1; 132.4; 133.9; 136.2; 133.7; 138.0; 130.9; 137.1; 132.9
- External government debt (percent of GDP): 25.3; 24.8; 36.8; 37.8; 39.3; 38.2; 38.1; 40.3; 40.7; 38.7; 40.2; 34.7; 36.7; 30.7; 32.6; 27.7
- Financing gap (US$ billion, unidentified financing only): 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 6.5; 5.0; 0.6; 2.1; 0.0; 0.0; 0.0; 0.0; 0.0

### Monetary and financial indicators
- Growth in reserve money (annual): 12.6; -9.6; -12.6; 2.2; 7.1; -0.2; 2.1; 7.2; 3.5; 6.8; 4.9; 5.5; 5.6; 5.5; 5.6; 5.8
- Growth in broad money (annual): 15.9; 3.6; -9.0; 5.1; 7.2; 4.9; 4.9; 7.2; 4.9; 7.5; 4.9; 6.3; 6.3; 8.2; 7.0; 8.2
- Policy interest rate (end of period): 6.0; 6.0; 6.0; ...; 4.0; ... (periods with "..." indicate not reported)

### Central Bank and reserves
- Gross reserves (US$ billion): 77.8; 66.7; 53.7; 43.0; 45.2; 38.5; 41.4; 38.1; 44.6; 38.1; 40.8; 37.3; 39.7; 35.5; 36.0; 36.5
- Gross reserves (in months of imports of goods and services): 10.8; 10.9; 9.2; 6.7; 6.7; 5.9; 6.2; 5.8; 6.0; 5.6; 5.9; 5.2; 5.4; 5.2; 5.2; 5.3
- Central Bank net foreign assets (ID trillions, selected): 88,544; 74,647; 60,350; 46,416; 49,233; 43,863; 51,229; 41,101; 44,608; 40,588; 43,967; 39,625; 42,610; 37,474; 39,649; 37,984; 38,234; 38,905
- Central Bank reserve money (ID trillions, selected): 73,259; 66,231; 57,888; 59,179; 62,015; 58,615; 60,497; 59,063; 63,307; 63,298; 65,513; 67,633; 68,703; 71,338; 72,553; 75,255; 76,645; 81,124
- Broad money (ID trillions, selected): 89,379; 92,638; 84,272; 88,534; 90,334; 89,000; 90,170; 92,890; 94,750; 99,551; 99,361; 107,054; 104,199; 113,748; 110,764; 123,050; 118,544; 128,310

### Balance of payments and external financing
- Financial account (US$ billion): 1.6; -2.5; 8.4; 5.9; 8.9; 8.6; 10.5; 6.1; 8.2; 5.6; 6.4; 4.1; 5.8; 5.1; 5.3; 3.7
- Direct and portfolio investment (net, US$ billion): 5.7; 4.1; 2.8; -1.2; 1.8; 0.5; 1.8; 2.0; 2.2; 3.0; 3.1; 5.0; 5.3; 5.9; 6.0; 6.5
- Errors and omissions (US$ billion): -7.4; -27.1; -9.4; 0.0; -0.2; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0
- Overall balance (US$ billion): -3.1; -23.4; -12.7; -6.0; -6.2; -4.5; -1.8; -6.8; -5.4; -0.7; -2.3; -0.3; -1.4; 2.2; 0.4; 2.1
- Financing (US$ billion, selected): 3.1; 23.4; 12.7; 6.0; 6.2; 4.5; 1.8; 0.3; 0.4; 0.1; 0.2; 0.3; 1.4; -2.2; -0.4; -2.1

### Selected fiscal-account details (central government, ID trillions)
- Revenues and grants: 115.4; 104.4; 63.5; 66.0; 55.5; 79.1; 82.0; 85.6; 87.5; 88.5; 89.5; 92.4; 91.9; 95.6; 95.6; 100.3
- Expenditures: 131.2; 119.0; 89.3; 82.9; 84.1; 95.0; 93.4; 98.6; 98.8; 92.9; 93.5; 92.2; 93.1; 92.4; 93.7; 94.3
- Fiscal balance (ID trillions): -15.8; -14.6; -25.8; -16.7; -28.6; -15.9; -11.4; -13.0; -11.3; -4.5; -4.1; 0.2; -1.3; 3.3; 1.9; 6.0
- Financing (ID trillions): 17.2; 19.0; 25.8; 16.7; 28.6; 15.9; 11.4; 13.0; 11.3; 4.5; 4.1; -0.2; 1.3; -3.3; -1.9; -6.0
- External financing (ID trillions): 12.7; 6.5; 4.2; -1.7; 2.1; 9.1; 7.2; 3.4; 4.9; 0.8; 0.5; -4.2; -3.2; -7.8; -5.2; -8.3
- Domestic financing (ID trillions): 4.5; 12.5; 21.6; 18.4; 26.5; 6.8; 4.2; 13.0; 11.3; 4.5; 4.1; -0.2; 1.3; -3.3; -1.9; -6.0

*Source: Iraqi authorities; and Fund staff estimates and projections.*

### 1. Total financing requirements-24.3-9.6-9.6-3.4

### 1. Total financing requirements-24.3-9.6-9.6-3.4

### Financing overview
- Total financing requirements: 24.3-9.6-9.6-3.4
- Total available financing: 24.39.64.61.4
  - Domestic: 22.53.50.40.9
    - T-bills and bonds: 12.68.11.60.9
      - o/w CBI purchases: 12.13.80.30.9
    - Other 1/: 9.9-4.6-1.20.0
  - External: 1.86.14.20.5
    - Budget loans: 2.95.31.80.8
      - International Financial Institutions: 2.72.61.60.8
        - International Monetary Fund (SBA): 1.31.61.60.8
        - World Bank: 1.01.00.00.0
        - Canada, UK: 0.40.00.00.0
      - Bilateral: 0.20.70.20.0
        - Japan: 0.20.30.20.0
        - France: 0.00.50.00.0
      - Eurobond (with and without U.S. Guarantee): 0.02.00.00.0
    - Project loans 2/: 2.03.84.12.3
      - U.S.: 1.30.90.00.0
      - Other: 0.62.94.12.3
    - Other 3/: -3.1-3.0-1.7-2.6
- Financing gap: 0.00.05.02.1

- Memorandum Items:
  - Gross International Reserves, Billions of U.S. dollars: 45.241.440.839.7
  - Months of imports: 6.76.26.05.9
  - Exchange rate, average: 1180118211821182

- Notes:
  - Source: IMF staff estimates and projections.
  - 1/ Includes commercial bank loans, drawdown of deposits, amortization, and arrears.
  - 2/ Includes Italian, German, and other project loans.
  - 3/ Includes amortization, accounts payable and arrears.

### Reserve adequacy indicators (Table 12 / Text Table 1)
- Reserves in USD billion (selected years and projections):
  - 2014: 66.7
  - 2015: 53.7
  - 2016 (Prog./Est.): 45.2 / 38.5
  - 2017 (Prog./Rev. Prog./Proj.): 41.4 / 38.1 / 40.8
  - 2018 (Proj.): 37.3
  - 2019 (Proj.): 39.7
  - 2020 (Proj.): 35.5
  - 2021 (Proj.): 37.1
  - 2022 (Proj.): 36.0 / 36.5 (two entries shown)
- Reserves in months of imports of goods and services (selected values):
  - 2014: 10.9
  - 2015: 9.2
  - 2016: 6.7
  - 2017 projections: 6.7, 5.9, 6.2, 5.8, 6.0, 5.6, 5.9, 5.2, 5.4, 5.2, 5.3 (presented across years and revisions)
- Reserves in percent of external debt service coming due (selected values):
  - 2014: 3,533
  - 2015: 3,606
  - 2016: 934
  - 2017 onward (selected): 2,454; 696; 1,409; 587; 1,047; 419; 767; 376; 566; 400; 405
- Reserves in percent of reserve money (selected values):
  - 2014: 117.3
  - 2015: 108.2
  - 2016: 85.8
  - 2017 onward (selected): 86.1; 77.1; 77.3; 71.2; 73.6; 65.2; 68.3; 58.8; 60.5; 55.5; 53.2
- Reserves in percent of broad money (selected values):
  - 2014: 83.9
  - 2015: 74.3
  - 2016: 57.4
  - 2017 onward (selected): 59.1; 49.0; 51.6; 45.3; 48.5; 41.2; 45.0; 36.9; 39.6; 35.9; 33.6
- Reserves in percent of the IMF RA metric (selected values):
  - 2014: 217
  - 2015: 203
  - 2016: 160
  - 2017 onward (selected): 173; 137; 148; 129; 141; 119; 133; 109; 119; 112; 110
- Reserves in percent of the augmented IMF RA metric (selected values where shown):
  - Selected projection entries: 142; 173; 119; 120; 112; 110; 104; 113; 95; 103; 97; 96
- Additional note from Text Table 1:
  - 1/ Starting 2014 includes US$ account balances from oil revenues.
  - 2/ Reserves within 100–150 percent of the Reserve Adequacy (RA) metric are considered adequate.
  - 3/ The augmented RA metric adds a term to account for the possibility of lower than projected oil prices.

### Financial soundness indicators (Table 13)
- State-owned Commercial Banks (six state banks included), selected indicators Q3 2015–Q4 2016:
  - Regulatory Tier 1 capital to risk-weighted assets: 6.3 6.2 7.9 8.0 6.4 19.6
  - Regulatory Tier 1 capital to (non-risk weighted) assets: 1.9 1.9 1.9 2.0 2.0 2.0
  - Nonperforming loans net of provisions to capital: 14.1 18.0 23.2 26.5 25.6 17.3
  - Nonperforming loans to total gross loans: 7.4 8.1 10.1 10.1 9.9 10.0
  - Return on assets: 0.3 0.4 0.3 0.3 0.3 0.4
  - Liquid assets to short-term liabilities: 76.7 76.5 75.5 76.5 76.0 75.8
  - Net open foreign exchange position to capital: -76.2 -70.8 -73.6 -65.2 -58.8 -51.5
- Private Commercial Banks (thirty-three private banks included), selected indicators Q3 2015–Q4 2016:
  - Regulatory Tier 1 capital to risk-weighted assets: 65.5 58.4 66.1 72.1 74.8 93.5
  - Regulatory Tier 1 capital to (non-risk weighted) assets: 42.1 42.2 43.7 44.2 45.8 48.5
  - Nonperforming loans net of provisions to capital: 0.7 2.8 7.9 8.4 9.9 9.1
  - Nonperforming loans to total gross loans: 7.5 11.2 19.5 20.6 24.4 23.7
  - Return on assets: 3.6 2.4 1.3 1.7 1.3 1.6
  - Liquid assets to short-term liabilities: 74.4 79.3 91.9 90.3 93.0 101.5
  - Net open foreign exchange position to capital: 10.2 10.2 7.4 9.9 8.3 11.4
- Source: Central Bank of Iraq.
- Note: FSIs compiled following an STA technical assistance mission in March 2017. Work underway to check and improve data quality. The increase in the State banks' Tier 1 ratio in Q4 2016 is explained by a significant drop of risk-weighted asset.

### Risk Assessment Matrix (Annex I) — key risks, likelihood, impact, and policy responses
- Policy and geopolitical uncertainties:
  - Risk: Retreat from cross-border integration; protectionism and economic isolationism.
    - Relative Likelihood: High
    - Economic Impact and Time Horizon: High; Medium; Short to Medium-Term (entries indicate multiple concern levels)
    - Policy to Minimize Impact: Implement fiscal consolidation to create fiscal space for spending increasing human and physical capital and boosting trend growth; Increase non-oil revenue, seek further financial support from international community, and protect social spending.
  - Risk: Heightened fragmentation/security dislocation in parts of Middle East, Africa, Europe leading to migrant flows.
    - Relative Likelihood: High
    - Economic Impact and Time Horizon: High; Short to Medium-Term
    - Policy: Implement fiscal consolidation to create fiscal space for spending increasing human and physical capital and boosting trend growth; Increase non-oil revenue, seek further financial support from international community, and protect social spending.
- Financial conditions and de-risking:
  - Risk: Significant further strengthening of the U.S. dollar and/or higher rates; reduced correspondent banking services ("de-risking").
    - Relative Likelihood: High (first); Medium (second)
    - Economic Impact and Time Horizon: High (first); Medium (second); Short-Term or Short to Medium-Term
    - Policy: Implement fiscal consolidation and economic reforms supported by the IMF and the World Bank; Implement AML/CFT measures supported by the IMF and the World Bank to avoid blacklisting and negative impact on CBS.
- Oil price and production risks:
  - Risk: Lower energy prices or production cuts not materializing or other supply increases.
    - Relative Likelihood: Low/Medium
    - Economic Impact and Time Horizon: High; Short to Medium-Term
    - Policy: Implement fiscal consolidation and reforms to facilitate more inclusive and diversified growth.
- Security and political risks:
  - Risk: Protracted conflict; political fragmentation; poor policy implementation and corruption.
    - Relative Likelihood: High
    - Economic Impact and Time Horizon: High; Short to Medium-Term
    - Policy: Implement fiscal consolidation to create fiscal space for security spending; Implement budget sharing agreement with KRG and fiscal decentralization; Implement Public Financial Management Reforms, including at the decentralized level to pave the way for fiscal decentralization.
- Note: The RAM is based on Global Risk Assessment Matrix (February 2017). Relative likelihood interpretation: "low" < 10 percent, "medium" 10–30 percent, "high" 30–50 percent.

### External Sector Assessment (Annex II) — assessment and projections
- Staff assessment: The external position in 2016 was substantially weaker than suggested by fundamentals and desirable medium-term policy settings.
- Current account and reserves:
  - 1. Current account deficit rose to 8.7 percent of GDP in 2016 from 6.5 percent in 2015 despite fiscal consolidation.
  - 2017: Current account expected to slightly fall to 6.3 percent of GDP, helped by oil price recovery and a moderate increase in oil production.
  - Medium term: Current account deficit expected to improve slowly, reaching 2.2 percent of GDP in 2021.
  - Real and nominal effective exchange rates appreciated by about 8 percent in 2016.
- Reserves trajectory and adequacy:
  - 2. Reserves contracted by 15 percent y-o-y in 2016; projected -8.5 percent decline in 2017 to $41.4 billion.
  - Over 2017–22 oil exports projected to contribute little to reserves accumulation; reserves decline during 2019–21 driven by increased external debt amortization from less than 1 percent of GDP in 2016 to 3 percent of GDP in 2022.
  - Reserves projected to show small recovery starting 2022; remain close to the 100 percent threshold of the IMF RA and adjusted RA metrics if fiscal consolidation under the SBA is implemented.
- External Balance Assessment (EBA)-Lite results:
  - EBA-lite suggests Iraq’s current account was substantially weaker than warranted by fundamentals; current account gap estimated at -7.6 percent of GDP.
  - Confidence interval considerations: CA gap ranges between -5.6 and -9.6 percent of GDP; REER overvaluation ranges between 15–25 percent.
  - Text Table 2 (CA Approach, in percent of GDP):
    - Current account balance (1): -8.7
    - Fitted CA (2): -2.1
    - Policy Gap (3): -1.1
    - Current account norm (4) = (2 - 3): -1.1
    - Current account gap (5) = (1 - 4): -7.6
- Policy conclusion:
  - The Iraqi dinar peg with the U.S. dollar remains appropriate as a nominal anchor. The REER misalignment is expected to be corrected by ongoing fiscal consolidation. Structural policies to improve competitiveness and achieve export diversification are needed.

### Public and External Debt Sustainability (Annex III) — key findings
- Overall assessment:
  - Debt outlook under baseline has worsened slightly since the first SBA review, mostly owing to lower-than-expected oil prices and recently contracted debt guarantees.
  - Total public debt path will rise by an average of 3 percent of GDP over 2017–21 compared with the first SBA review.
  - Staff assesses Iraq’s debt is sustainable and would remain so over the medium run if recommended fiscal adjustment is implemented.
  - Public debt expected to peak at 65 percent of GDP in 2018 and decline to 52 percent of GDP in 2022.
- Drivers and sensitivities:
  - Increased reliance on CBI indirect monetary financing due to higher financing needs.
  - About one-third of domestic debt consists of short-term debt held by the central bank.
  - About 60 percent of external debt consists of legacy arrears still to be restructured on Paris Club terms.
- Quantitative changes versus first SBA review:
  - Medium-term debt path projected to increase by 3 percent of GDP due to lower-than-expected oil revenue 2018–21 and recently contracted debt guarantees.
  - In 2016, a $7.3 billion upward revision to nominal domestic debt increased the debt ratio to 67 percent of GDP from 61 percent previously estimated.
  - The shortfall in government oil revenue is expected to increase domestic borrowing and raise the domestic nominal debt path by about $3 billion over 2017–21.
  - Nominal debt path further shifted upward by a $3.6 billion worth of debt guarantees starting from end-2016.
  - Nominal debt path worse by an average of $4.1 billion over 2017–21 relative to first SBA review.
  - Nominal GDP revised downward, reducing non-oil GDP over the projected period.
- Text Figure 1 (Public Debt, 2015–22) indicates:
  - Rising domestic and external debt shares reflected in total debt increasing to a peak in 2018 before declining toward 2022.

*Source: IMF staff estimates and projections as presented in the provided IMF chapter/section.*

### 2022. The worsening in the debt profile is explained by the increase of the nominal debt path—

### cr17251 - 2022. The worsening in the debt profile is explained by the increase of the nominal debt path—

### Debt profile change and drivers
- The increase of the nominal debt path is expected to increase the debt ratio by an average 1.8 percent of GDP.
- A fall in the nominal GDP path would deteriorate the debt-to-GDP path by about 1.4 percent of GDP.

### Gross financing needs (GFN)
- Gross financing needs have increased since the first SBA review and remain above the high-risk threshold in the near term.
- On average, the expected gross financing needs (GFS) over 2017–18 are estimated at 19 percent of GDP, higher than previously projected (16 percent of GDP) and substantially above the high-risk threshold of 15 percent of GDP.
- Government short-term debt mostly consists of T-bills purchased by state-owned banks and discounted at the Central Bank of Iraq, which mitigates rollover risk.
- Need to finance the government deficit through domestic borrowing will continue to remain high, in line with deteriorating oil prospects.

### Debt composition and legacy arrears
- The share of domestic debt is expected to rise slightly from 40 percent of total debt in 2017 to 43 percent of total debt in 2021.
- The $41 billion external arrears accumulated before 2003 and under negotiation remain included in the stock of external debt and have yet to be settled in line with the 2004 Paris Club meeting agreement terms.
- The DSA maintains the conservative assumption that these arrears will not be settled during the projection period.
- If external arrears were reduced in line with Paris Club creditors’ debt, the debt-to-GDP ratio would:
  - fall from 64 to 47 percent in 2017,
  - peak at 49 percent in 2018,
  - decline to about 40 percent in 2022.

### Contingent liabilities and guarantees
- Starting in 2016, the Ministry of Finance (MoF) has issued $36 billion worth of guarantees covering the next 14 years.
- Over 2017–22, these guarantees consist of:
  - $3.6 billion of debt guarantees,
  - $7 billion of service payments guarantees of the Ministry of Electricity’s (MoE) purchase of electricity from independent power producers (IPPs).
- The central government contingent liability is captured by the gap between projected electricity purchases and tariff collections, equivalent to $2.6 billion over 2018–22.
- Service payments guarantees’ cumulative contribution to public debt amounts to 1.1 percent of GDP over the medium term.
- In the worst-case scenario, if the full electricity purchase bill is paid by the MoF over 2018–22, contingent liabilities’ contribution to total public debt increases to 3 percent of GDP.

### Risks to debt sustainability and fiscal implementation
- Risks hinge on the implementation of the fiscal consolidation agreed under the SBA; any deviation would increase the debt path and compromise public debt sustainability.
- Iraq’s budget constraint relies heavily on oil revenue and on the commitment to contain spending and raise additional non-oil revenue.
- In 2016, Iraq’s ratio of external debt-to-total public debt was 59 percent, above the 45 percent high-risk threshold; this risk is moderated by legacy arrears to non-Paris Club creditors.
- Iraq’s spread over the EMBIG index averaged 565 basis points (bps) over the last 3 months and had fallen to 550 bps as of June 2017, below the high-risk threshold (600 bps), partly driven by increased investors’ confidence from the successful completion of the first SBA review and the issuance of a $1 billion U.S.-guaranteed bond.

### Stress test scenarios and outcomes
- Growth shock:
  - If projected real GDP rates are lowered by one standard deviation (implying lower real growth by 4 percentage points) in 2018 and 2019, the debt ratio would peak at 76 percent of GDP in 2019 before gradually declining to 63 percent in 2022.
- Primary balance shock:
  - Worsening of the primary balance by 3 percentage points of GDP in 2018 and 2019 would make the debt ratio peak at 71 percent in 2019 and fall to 58 percent in 2022.
- Real interest rate shock:
  - A one-time real interest rates increase by 10 percentage points in 2018 would make the debt ratio peak at 65 percent of GDP in 2019 and fall to 57 percent in 2022.
- Real exchange rate shock:
  - A one-time real depreciation of 30 percent in 2018 would make total public debt peak at 75 percent of GDP in 2018 and fall to 61 percent in 2022.
- Combined shock:
  - A combination of these shocks would make debt peak at 91 percent of GDP in 2019 and thereafter decline to 82 percent of GDP at the end of the forecast horizon.

### External debt sustainability (excluding legacy arrears)
- Excluding legacy arrears, external debt is highly concessional and mostly consists of official loans.
- Official loans accounted for 70 percent of total debt in 2016, mostly on a concessional basis.
- The effective interest rate of external debt is low (3 percent in 2017).
- In 2016:
  - average time to maturity was 8.5 years,
  - effective maturity of external debt was 30 years.
- In the baseline scenario, external debt excluding legacy arrears is expected to reach its peak in 2019 and decline afterward, mostly driven by multilateral and bilateral debt amortization.
- Iraq’s stock of unidentified financing is expected to peak at $7.1 billion in 2019 and be amortized starting from 2021.

*Source: IMF staff calculations and text from cr17251 - 2022.*

### 8.      Stress tests confirm that external debt sustainability is particularly sensitive to current

### Stress tests confirm that external debt sustainability is particularly sensitive to current account and real depreciation shocks

### Key stress-test findings
- Baseline external debt (reference in Figure 5): 32 percent of GDP.
- Non-interest current account shock:
  - Shock: An increase in the current account excluding interest payments by half a standard deviation in each year from 2017 onwards.
  - Impact: External debt would peak at 50 percent of GDP in 2019 and 2020, before edging down to 47 percent of GDP in 2022.
- Real exchange rate shock:
  - Shock: A one-time real depreciation of 30 percent in 2017.
  - Impact: External debt would peak at 50 percent of GDP in 2018 and decline to 34 percent of GDP by 2022.
- Combined shock:
  - Shock: A one quarter standard deviation shock to the real interest rate, the growth rate and the current account.
  - Impact: The external debt ratio would rise to 46 percent in 2019 and to 39 percent at the end of the projection period.

### Context and supporting projections
- Figure 5 baseline and scenario snapshots (as presented):
  - Baseline: 32 (external debt, in percent of GDP).
  - CA shock scenario box: 49 (illustrative average projection shown in figure box).
  - Combined shock scenario box: 42 (illustrative average projection shown in figure box).
  - Real depreciation (30 percent) scenario box: 40 (illustrative average projection shown in figure box).
- Identified external debt-creating flows (illustrative historical/projection pattern shown in the external DSA table):
  - Current account deficit, excluding interest payments: example historical and projection values include -11.2, -5.4, -1.4, -2.9, 6.2, 8.3, 5.9, 6.1, 3.4, 2.6, 1.6 (rows presented in the external DSA table).
  - Net non-debt creating capital inflows (negative): example values include -1.0, -1.3, -2.4, -1.7, -1.6, -1.1, -0.9, -1.1, -1.5, -2.3, -2.5.
  - Automatic debt dynamics (illustrative contributions): example values include -10.8, -4.6, -1.7, 0.2, 7.8, -3.9, 0.6, -0.4, 0.0, -0.1, -0.2.
- External-debt-to-exports ratio (illustrative series in the DSA): 73.9, 62.2, 63.7, 59.9, 105.4, 120.7, 106.6, 114.6, 117.0, 109.2, 99.7 (projection series shown).
- Gross external financing need (in billions of US dollars) (illustrative series in the DSA): -19.8, -10.2, -1.7, -4.5, 13.0, 15.8, 13.3, 15.3, 11.1, 11.0, 10.3; corresponding percent of GDP example noted for one year: -10.6 (as shown).

### Analysis implications
- External debt dynamics are highly sensitive to:
  - Persistent adverse non-interest current account developments (half-standard-deviation, multi-year shocks).
  - Large one-time real depreciations (30 percent example).
  - Coincident adverse macro shocks to real interest rates, growth, and current account balances (combined shock).
- Under the highlighted adverse scenarios, external debt can rise from the baseline (32 percent of GDP) to as high as 50 percent of GDP in peak years, substantially increasing debt-service and external financing pressures.

### Policy-relevant considerations (derived from stress-test outcomes)
- Strengthen external current account resilience to reduce vulnerability to persistent non-interest current account shocks.
- Consider measures to limit the macroeconomic impact of large exchange rate depreciations, including shock-absorbing fiscal buffers and foreign-exchange liquidity management.
- Monitor and manage exposures to simultaneous adverse shocks (interest-rate, growth, and current account) given the significant combined impact on external debt ratios.
- Use stress-test scenarios to inform contingency planning for gross external financing needs and to prioritize policies that stabilize exports, imports, and non-debt inflows.

*Source: IMF staff (from the External Debt Sustainability and Public Debt Sustainability Analysis materials presented in the chapter).*

### 3.      The government has made good progress in meeting the structural benchmarks (SBs) for

### 3.      The government has made good progress in meeting the structural benchmarks (SBs) for

### Progress on structural benchmarks (SBs) and outstanding SBs
- Completed SBs:
  - Survey of arrears of the central government.
  - Audit of arrears on non-oil investment and on wheat purchases by the Board of Supreme Audit (BSA).
  - Survey of guarantees issued by the central government.
  - External audit of the gross international reserves and the net domestic assets of the Central Bank of Iraq (CBI).
  - External audit of the total public debt.
  - Circular sent by the Ministry of Finance requiring all spending units to record all existing commitments on current and capital expenditures.
  - Posting on the Ministry of Finance’s external website of the financial statements of the Development Fund for Iraq and Successor Account according to international standards.
  - Adoption by the Governing Council of the CBI of a new charter for the Audit Committee prohibiting CBI executive representation on the committee.
  - Introduction to Parliament of amendments to the Law on the CBI to strengthen CBI governance and the internal control framework.
  - Issuance by the CBI of clarifying implementing regulations to remove the limitation on transfer of investment proceeds that gave rise to an exchange restriction.
- SBs in progress and proposed postponements:
  - Amendments to the 2011 law establishing the Integrity Commission — progress made but needs more time; proposed to postpone to the third review.
  - Report of all current and investment commitments by the Ministry of Finance — progress made but needs more time for implementation and training; proposed to postpone to the fourth review.

### Program adjustments, performance criteria (PCs), and indicative targets (ITs)
- Proposal to adjust treatment of obligations to International Oil Companies (IOCs):
  - Due to the lumpy size of oil shipments, the government proposes to raise the floor on obligations outstanding for more than three months to IOCs to $500 million, starting in September 2017.
  - Supports staff’s proposal to set the stock of these obligations as an indicative target rather than a PC starting in September 2017.
- Support for modifying performance criteria calendar:
  - Supports staff’s proposal of changing end-December 2017 PCs for the fourth review in line with the revised macroeconomic framework, and setting PCs for end-June and end-December 2018.
  - Program will continue to have indicative targets on variables serving as PCs at the end of the first and third quarters each year to maintain quarterly monitoring.

### Request to the IMF and government commitments
- Requests:
  - Completion of the second review under the SBA.
  - Purchase of the third tranche of SDR 584.2 million (35.1 percent of our quota).
- Commitments:
  - Implement the economic and financial policies during 2017–19 described in the attached MEFP to gradually bring expenditure down consistent with lower oil revenues to achieve debt sustainability while maintaining the exchange rate peg, strengthening public financial management and banking supervision, and fighting money laundering, the financing of terrorism, and corruption.
  - Protect social spending and maintain such spending above a floor during the SBA.
  - Consult with IMF staff prior to any revision of the policies described in the attached MEFP.
  - Provide IMF staff with relevant information referred to in the attached TMU concerning progress under the program.
  - Intend to make public the content of the IMF staff report, this letter, the attached MEFP, the TMU, and the informational annex, and authorize IMF staff to publish these documents on its website once the Executive Board has approved this review.

### Recent economic developments and outlook highlights (selected from MEFP)
- Conflict and humanitarian impact:
  - Internally displaced persons: 3 million.
  - People in need of humanitarian assistance: 11 million (29 percent of the population).
  - Syrian refugees in Iraq: over 241,000 (Iraq is the fourth largest hosting country in the region).
- Growth, inflation, monetary aggregates:
  - Real GDP increased by 11 percent in 2016 owing to a 25 percent increase in oil production.
  - Average consumer price inflation was 0.4 percent in 2016 in areas not occupied by ISIS; CPI inflation was 1.0 percent year-on-year in April 2017.
  - Broad money grew by 7.2 percent in 2016; credit to the economy grew by 1.9 percent.
- External and fiscal positions:
  - Current account deficit in 2016: 8.7 percent of GDP.
  - Official foreign exchange reserves fell from $53.7 billion at end-2015 to $45.2 billion at end-2016 (6.7 months of imports of goods and services).
  - Non-oil primary balance on an accrual basis contracted by 1 percent in nominal terms in 2016; contraction was smaller than programmed due to spending overruns.
  - Preliminary Q1 2017: non-oil primary expenditure, excluding KRG, was less than programmed by ID 2.9 trillion (17 percent); non-oil revenue, excluding KRG, was lower than programmed by ID 0.6 trillion.
- Banking sector and exchange market:
  - State-owned banks have weaknesses in capital and loan portfolios; private banks’ non-performing loans seem to be on the rise per CBI FSIs.
  - Spread between official and parallel exchange rates decreased from 9 percent on average at end-2016 to below 6 percent in June 2017.
  - Yield on Iraqi dollar bonds maturing in 2028 declined from about 14 percent in February 2016 to 8.5 percent in early July 2017.

### Arrears, guarantees, and related fiscal details
- Inventory and audit of arrears:
  - Ministry of Finance identified arrears at end-December 2016 of ID 11.1 trillion ($9.4 billion, or 5.5 percent of GDP), of which ID 4.3 trillion on current expenditure and ID 6.8 trillion on investment expenditure.
  - Out of 7,023 claims amounting to ID 4.7 trillion of non-oil investment domestic arrears, the BSA validated 1,855 claims worth ID 1.363 trillion.
  - Out of the stock of outstanding arrears of ID 2.5 trillion of the Ministry of Trade for purchases of wheat and rice, the BSA verified ID 2.0 trillion.
- Guarantees survey:
  - At end-May 2017, value of 11 state guarantees on foreign currency-denominated service payment or debt amounted to $36.0 billion (ID 42.6 trillion, or 21 percent of GDP), comprising $32.4 billion guarantees of service payments to independent power producers (IPPs) and $3.6 billion in debt guarantees; one local currency-denominated guarantee amounted to ID 0.5 trillion.
- Outstanding obligations to IOCs:
  - Stock of outstanding obligations to IOCs for more than three months at end-2016: $1,227 million (programmed zero).
  - Overdue obligations to IOCs at June 2016: $3,679 million.
  - Government expects about $500 million of obligations outstanding to IOCs for more than three months at end-June 2017 and requests a waiver for the non-observance of the PC.
  - Technical reason: payments to IOCs are made through shipments of crude oil of at least 1 million barrels each; smaller claims must be aggregated.
- Other PC/IT outcomes and deviations:
  - End-December 2016: gross reserves of the CBI dipped below the adjusted programmed floor by $1.4 billion.
  - End-December 2016: net domestic assets of the CBI exceeded the adjusted programmed ceiling by ID 2.1 trillion.
  - End-December 2016: non-oil primary balance missed the adjusted programmed floor by ID 4.2 trillion (3.1 percent of non-oil GDP).
  - End-December 2016: gross public debt missed the adjusted programmed ceiling by ID 5.0 trillion.
  - Temporary missed continuous PC on no new external arrears due to delayed payments: JPY 294 million ($2.5 million) payment delayed from January 7 until February 28, 2017; several debt service payments totalling $157 million delayed during early July 2017. Government requests a waiver and will expedite implementation of the Cash Flow Management Unit and Cash Flow Management Committee at the Ministry of Finance.
  - End-December 2016 IT on social spending (indicative target) was met overall, but social spending ID 20.0 trillion exceeded its floor of ID 18.2 trillion.
  - Inventory of arrears on non-oil investment at end-December 2016: ID 4.723 trillion exceeded ceiling of ID 4.491 trillion due to uncovering additional arrears.
  - End-March 2017: stock of gross reserves of the CBI exceeded the adjusted programmed floor by about $7.0 billion; net domestic assets of the CBI were ID 6.8 trillion below the adjusted programmed ceiling; non-oil primary balance remained above its adjusted programmed floor. Gross public debt exceeded its adjusted programmed ceiling due to overrun at end-2016. Stock of outstanding arrears to IOCs at end-March 2017 was $447 million (programmed zero). Stock of outstanding domestic arrears on non-oil investment breached the programmed ceiling by about ID 230 billion because of an upward revision of the stock at end-2016.

### Implementation actions and institutional measures
- Circular and recording of commitments:
  - On March 6, 2017, the Minister of Finance sent a circular, elaborated with the Ministry of Planning and the BSA, requiring all spending units to record all existing commitments on current and capital expenditures.
  - The Ministry of Finance could not yet produce a consolidated report on all current and investment commitments because the circular was issued only on March 6 and 663 spending units need training; 24 auditors were trained by the BSA in March 2017. SB on this item proposed to be postponed to the third SBA review.
- Audit and transparency:
  - External audits completed for CBI reserves and net domestic assets and for total public debt at end-December 2016 as defined in the TMU.
  - Ministry of Finance posted audited financial statements of the Development Fund for Iraq and Successor Account on its external website for December 31, 2015.
- Governance and safeguards:
  - Governing Council of the CBI adopted a new charter for the Audit Committee prohibiting executive representation on the committee.
  - Council of Ministers approved and sent to Parliament amendments to the Law on the CBI to strengthen governance and internal control framework, in line with IMF safeguards assessment recommendations.
  - Council of Ministers has not yet approved draft amendments to the 2011 law establishing the Integrity Commission; more consultation needed.

_This summary is based solely on the provided IMF content unit._

### 21.      Hit by the fall in oil prices and the ISIS attack, the government has started to

### cr17251 - 21.      Hit by the fall in oil prices and the ISIS attack, the government has started to 

### Macroeconomic impact and projections
- Iraqi oil price decline from $103 per barrel in 2013 to $36 in 2016 caused:
  - budget deficit increase from 6 percent of GDP in 2013 to 14 percent of GDP in 2016;
  - public debt increase from 31 percent of GDP in 2013 to 67 percent of GDP in 2016;
  - current account deterioration from a surplus of 1.1 percent of GDP in 2013 to a deficit of 8.7 percent of GDP in 2016.
- Official gross foreign exchange reserves fell from $77.8 billion (10.8 months of imports of goods and services) in 2013 to $45.2 billion (6.7 months of imports of goods and services) in 2016.
- Oil price and production projections:
  - Iraqi oil prices expected to average $45.3 per barrel in 2017.
  - Futures indicate flattening to about $46 per barrel at the 2021 horizon.
  - 2017 average production (Iraq, including KRG) projected at 4.566 million barrels per day (mbpd), or 0.21 mbpd less than October 2016 level.
  - April 2018 production projected to revert to 4.776 mbpd until year-end; increase by 1 percent per year from 2019 over the projection period.
- Under the fiscal consolidation program with about $12.0 billion of committed financial support (including $5.3 billion under the SBA with the IMF):
  - total public debt projected to decrease to 65 percent of GDP in 2018 and 57 percent of GDP in 2021;
  - official gross foreign exchange reserves projected to bottom out at $36 billion, 5.2 months of imports of goods and services in 2021.
- Macroeconomic outcomes by 2021–22 under current projections and SBA implementation:
  - fiscal deficit reduced from 14 percent of GDP in 2016 to zero in 2021;
  - current account deficit reduced from 8.7 percent of GDP in 2016 to less than 1 percent of GDP in 2022.
- Financing gap:
  - $7.1 billion in 2018–19 (with $5.0 billion in the last quarter of 2018, and $2.1 billion in 2019);
  - this gap excludes post-ISIS reconstruction needs (not yet assessed and not included in SBA projections).

### Foreign exchange policy
- Government committed to maintaining the peg with the U.S. dollar as key nominal anchor.
- CBI measures to address concerns over foreign exchange sales:
  - strengthened procedures with technical assistance from the U.S. Treasury and the Federal Reserve Board and recourse to external auditors;
  - requested IMF Legal and Monetary and Capital Markets Department technical assistance to analyze the rise in exchange rate spread and recommend measures to reduce it;
  - simplified procedures for access to CBI foreign exchange window, which narrowed the spread.
- Steps to remove exchange restrictions and multiple currency practice (MCP) toward Article VIII obligations:
  - October 16, 2016: CBI made weekly limits on purchase of banknotes at foreign currency auctions indicative (banks can obtain amounts above limits with appropriate documentation).
  - CBI issued clarifying implementing regulations to remove the limitation on transfer of investment proceeds that gave rise to an exchange restriction.

### Fiscal consolidation program and commitments
- Overall objective: bring spending in line with available resources in 2017–19 to maintain macroeconomic stability and debt sustainability.
- Required actions:
  - reduce the adjusted non-oil primary balance by about 12 percent of non-oil GDP over 2016–19;
  - obtain a large increase in mostly domestic but also external financing in the short run, remaining compatible with medium-run debt sustainability.
- Social protection:
  - continue to protect social spending: health, education, reconstruction, and transfers supporting the social safety net, internally displaced persons (IDPs), and refugees.

### Fiscal program in 2017 (supplementary budget and measures)
- Supplementary budget features:
  - slight reduction in total spending by 2 percent compared to earlier draft to offset revenue measures removed during Parliamentary deliberations;
  - credit allocation for repaying arrears incurred during previous years;
  - oil revenue valued at $45.3 per barrel (revised from $42.0) and based on oil export of 3.75 mbpd.
- Non-oil primary deficit target:
  - contain non-oil primary deficit to no more than ID 67.8 trillion on an accrual basis (same level as first SBA review).
- Non-oil revenue and expenditure adjustments:
  - collect at least ID 8.9 trillion (6.3 percent of non-oil GDP) in non-oil revenue (down from ID 10.5 trillion, 7.0 percent of non-oil GDP, in the first SBA review objective);
    - downward revision driven by Parliament's lower 3.8 percent levy on salary and pensions (versus 4.8 percent proposed) and non-tax revenue revision from ID 3.5 to ID 2.3 trillion;
    - government to implement new tax on internet services expected to yield ID 0.2 trillion in 2017.
  - reduce non-oil primary expenditure to ID 76.9 trillion (54.2 percent of non-oil GDP) from ID 78.4 trillion (52.5 percent of non-oil GDP) in the first SBA review program.
- Key expenditure line changes (2017):
  - wage bill increased to ID 36.3 trillion (from ID 35.8 trillion in the 2017 budget); implement natural attrition replacing one in five staff retiring, targeting annual reduction of about 50,000 staff (~2 percent).
    - total civil servants and military personnel approximately 2.9 million at end-2016, about 900,000 military and security personnel.
  - pension payments by Ministry of Finance increased to ID 11.3 trillion (from ID 10.3 trillion in 2017 budget); medium-term cap at that level via natural attrition and enforcement to prevent multiple pensions or pensions without required contributions or age.
  - goods and services reduced to ID 6.4 trillion (from ID 7.3 trillion in 2017 budget); includes credit of ID 1.0 trillion for gas purchase from Basra Gas Company (BGC); still above 2016 executed level adjusted for KRG (ID 5.5 trillion).
  - transfers reduced to ID 12.8 trillion (from ID 13.3 trillion in 2017 budget); decrease versus 2016 executed level (ID 13.2 trillion) but allows increases in transfers to IDPs, food distribution, and social safety net compared to 2016.
  - non-oil investment expenditure reduced to ID 10.2 trillion (from ID 11.7 trillion in 2017 budget), of which ID 4.5 trillion financed by project loans; includes ID 0.2 trillion for BGC investment and ID 1.5 trillion for Ministry of Electricity (ID 1.0 trillion financed by project loans). Investment allocation to be prioritized to already started projects.
- Other supplementary budget allocations:
  - transfer to KRG increased from ID 11.6 to ID 12.0 trillion;
  - oil investment expenditure kept at ID 13.7 trillion (of which ID 11.6 trillion equals $9.8 billion for the IOCs);
  - allocation of ID 7.4 trillion for repayment of arrears (ID 3.2 trillion external arrears; ID 4.2 trillion domestic arrears);
  - increase ceiling on all state guarantees by $0.188 million (0.2 trillion); government to inform parliament of ID 42.6 trillion debt and service-payment guarantees issued previously and request authorization for additional ceiling of $0.188 million in addition to $0.5 billion already authorized in 2017 budget; total value of guarantees contracted since February 23, 2017 will be kept below $0.5 billion until parliamentary approval of the supplementary budget.
- Financing plan for 2017 needs (to cover non-oil primary fiscal deficit ID 67.8 trillion, interest payments ID 2.8 trillion, and oil investment expenditure ID 13.7 trillion):
  - oil revenue: ID 72.9 trillion;
  - external financing: ID 7.2 trillion;
  - domestic financing: ID 4.2 trillion.
    - external financing composition includes loans and grants from IMF under SBA ($1.6 billion), World Bank Development Policy Loan ($1.0 billion), U.S. guaranteed bond ($1.0 billion, issued in January 2017), Eurobond issuance ($1 billion), JICA budget support loan ($267 million), France budget loan ($450 million), European Commission grant ($100 million), and project loans from the United States ($883 million), China ($833 million), Export Credit Agencies ($755 million), JICA ($380 million), World Bank ($205 million), Germany ($190 million), Italy ($134 million), United Kingdom Exim Bank ($100 million), Islamic Development Bank ($50 million), and JBIC ($50 million).
    - domestic financing mainly via issuance of Treasury bills to be refinanced by commercial banks at the discount window of the CBI (ID 4.5 trillion).
- Fiscal execution and arrears policy:
  - Prime Minister (Acting Finance Minister) issued budget circular to limit spending units’ envelopes in line with draft supplementary budget and reduce monthly releases accordingly;
  - Economic Reform Unit and BSA to monitor budget execution monthly and report to Council of Ministers monthly;
  - government commits to not accumulate arrears to finance the deficit: zero ceiling on new external arrears and gradual reduction of outstanding arrears to IOCs to $500 million starting in September 2017;
  - will conduct regular inventories of domestic arrears and steadily pay down existing domestic arrears after proper audit at a pace compatible with financing capacity.

### Fiscal program in 2018 (preparatory measures)
- 2018 budget commit to reduce non-oil primary deficit on an accrual basis by ID 2.3 trillion (4.4 percent of non-oil GDP) compared to the draft 2017 supplementary budget; measures to be finalized during the third review and may include:
  - levy low ad-valorem or specific taxes on a few additional products/services to increase indirect taxes by ID 1 trillion in 2018;
  - reform corporate income tax by eliminating some tax holidays and introducing a minimum tax on turnover;
  - decrease budgetary transfers to electricity sector by ID 1 trillion (via improved collection or higher tariffs);
  - cap non-wage remuneration at ID 350,000 ($296) a month for all civilian civil servants, yielding savings of about ID 0.5 trillion (~3 percent of civilian wage bill), borne by highest paid quarter of civil servants;
  - continue replacing only one in five retiring civil servants, yielding savings of ID 0.6 trillion in 2018;
  - stop allocating new non-contributory pensions or finance them within the 2017 budget allocation for pensions.

### Revenue reforms
- Measures to strengthen revenue and fiscal transparency:
  - audit financial statements of the Development Fund for Iraq and Successor Account 300/600 at the CBI to ensure all oil revenue reaches the treasury and monitor use of deposited resources; Ministry of Finance to have all transactions moving the balance of its foreign exchange account 300/600 audited by an international audit company every six months and post audit reports on its external website within six months after the end of each audited semester.
  - implement measures to increase non-oil tax revenue per IMF FAD recommendations (February 2017), targeting easy-to-tax items: telecom and hotel services, private vehicles, sugar-sweetened drinks, cigarettes and other tobacco products, and alcoholic beverages; government commits to prepare a sales and excise tax law and send it to parliament (proposed SB for the third SBA review).
  - simplify Customs Code by reducing number of tariff rates from currently more than 10 (0 to 80 percent) to a maximum of three positive rates not exceeding 30 percent; government commits to introduce Customs Code changes (proposed SB for the third SBA review).
  - modernize tax and customs administrations with technical assistance from IMF, World Bank, World Customs Organization, and UNCTAD:
    - expand Large Taxpayers Unit to a Large Taxpayers’ Office (including high wealth individuals) administering all national-level domestic taxes with METAC technical assistance by end-August 2017;
    - Customs Administration to propose by end-August 2017 a strategy to implement a computerized information system (e.g., ASYCUDA).

*IMF — cr17251, chapter 21.*

### 37.      To streamline expenditure to ensure spending priorities are met, the government will

### cr17251 - 37.      To streamline expenditure to ensure spending priorities are met, the government will

### Streamline expenditure: wages, pensions, electricity, transfers, and SOEs
- Control the evolution of wages and pensions by a combination of measures (in addition to those implemented in the 2017 budget, ¶30–34):
  - complete the audits of the wage earner and pensioner payrolls of the civil service by the Board of Supreme Audit (BSA) to first identify, and then cancel payments to, illegitimate wage and pension recipients (SBs for the third and fourth SBA reviews);
  - implement legislative changes to contain the evolution of government and SOE employees’ wages and non-contributory pensions paid by the Treasury:
    - first step: compile an inventory of all the laws and regulations governing these wages and pensions;
    - second step: the Ministry of Finance will carry out technical work for potential legislative changes to reduce spending on wages, non-contributory pensions and transfers, considering the selected issues paper on creating fiscal space for more inclusive growth discussed with IMF staff on the 2017 Article IV consultation;
    - legislative changes to that end will be discussed during the fourth SBA review (proposed SB for the fourth SBA review, Table 2);
  - adopt, by end-December 2017, revised parameters of the public pension system proposed by the World Bank.
    - World Bank estimate (footnote): amending the Pension Law 9/2014 with specified parametric changes would yield cumulative savings of over ID 1 trillion through 2018 and ID 31 trillion through 2028 (details enumerated in footnote).
- Reform the electricity sector by a combination of measures:
  - include sufficient transfers to the Ministry of Electricity in the budget to reach production targets without accumulating arrears. In 2017, after the tariff reduction decided by the government in January (¶14), the deficit of the electricity sector with all inputs valued at market price is estimated at ID 11.7 trillion (5.2 percent of GDP). The cash deficit is estimated to be ID 3.8 trillion (1.7 percent of GDP), because the Ministry of Electricity will get fuel from the Ministry of Oil for free, an effective subsidy of 3.5 percent of GDP. This cash deficit will be more than fully covered by the allocations for the Ministry of Electricity included in the 2017 budget (Table 4). The need for additional budgetary transfer in 2017 will be reviewed, and the need for budgetary transfer in 2018, will be assessed, in the context of the third SBA review. The Ministry of Electricity will prepare proposals to reduce its cash deficit by ID 1 trillion compared to the level programmed for 2017.
  - progressively reduce budgetary transfers by increasing the collection rates and reducing the production costs:
    - in 2017, the Ministry of Electricity expects to collect ID 16 per KW produced while the production cost, with the fuel provided by the Ministry of Oil valued at zero, will be ID 39 per KW (Table 4). The Ministry of Electricity plans to progressively close this difference by 2020 by increasing the collection rate, and reducing the production cost, while at the same time increasing electricity production by about 15 percent a year. The expansion plans of the electricity sector in 2018 will be reviewed during the third review, considering Iraq’s financing capacity.
    - with that fuel valued at market prices, the production cost will be ID 122 per KW (Table 4).
  - capture flared gas and use it for electricity production: World Bank estimate could yield about ID 1.4 trillion ($1.2 billion, or 1.0 percent of non-oil GDP) in budget savings per year with an upfront investment of $0.5 billion starting in 2017. To that end, the Ministry of Oil will:
    - pay all its outstanding arrears from 2017 ($137 million);
    - pay its estimated remaining gas purchase from BGC in 2017 amounting to $0.9 billion within the contractual period (30 days after billing);
    - pay $200 million for capital expenditure in the 2017 budget.
    - to improve the payment performance of the Ministry of Oil to BGC, it is proposed to align the definition of arrears to BGC in the SBA to the contractual payment terms starting in September 2017 (TMU, ¶9).
- Reform the social transfers to ensure they reach the needy:
  - the Ministry of Labor and Social Affairs (MOLSA) is setting up a Proxy Means Testing (PMT) database with the assistance of the World Bank. When completed, MOLSA will use the database to determine eligibility for cash transfers based on the available budget. The same database could be utilized by other programs (i.e., PDS) to target assistance to poor households based on welfare scores determined by the PMT.
  - Moving to a more targeted Public Distribution System could yield annual savings of up to ID 1.8 trillion (1.4 percent of non-oil GDP) (footnote reference).
- Reform state-owned enterprises (SOEs):
  - non-financial SOEs in Iraq include 176 SOEs with over 550,000 employees, of whom 30 to 50 percent are estimated to represent excess labor.
  - out of 136 SOEs for which some information is available, only 15 seemed to have made profit in 2015.
  - the exact scope and scale of the economic, financial and fiscal cost that SOEs represent is unknown due to poor reporting. With World Bank assistance, the government has started to set up a database to monitor fiscal risks of non-financial SOEs. The government will elaborate measures to restructure the non-financial SOEs during future reviews of the SBA.

### Public Financial Management Reforms
- Improve Government Finance Statistics (GFS) reporting:
  - Ministry of Finance sent fiscal reporting tables at end-December 2015, end-March 2016, end-June 2016 and end-September 2016 in compliance with the IMF Government Finance Statistics Manual 2014 (GFSM 2014).
  - publish quarterly fiscal reporting tables in compliance with IMF GFSM 2014 with a six-month lag on the external website of the Ministry of Finance starting on September 30, 2017.
- Survey, audit and pay domestic arrears:
  - carry out quarterly surveys of arrears by systematically recording and monitoring unpaid obligations. By end-August 2017, complete a survey of all arrears of the central government (payments due for more than 90 days) until at least end-June 2017, including:
    - (i) current spending (salaries, pensions, goods and services and transfers), managed by the Ministry of Finance;
    - (ii) non-oil investments managed by the Ministry of Planning; and
    - (iii) spending managed by the Ministry of Oil.
  - Ministry of Finance will elaborate a consolidated table on all these arrears for the included ministries (proposed SB for the third SBA review).
  - at end-December 2016, the government identified arrears in an amount of ID 11.1 trillion (¶19), out of which ID 7.5 trillion were domestic arrears and ID 3.6 trillion ($3.0 billion) were external arrears.
  - based on surveys, prepare plans for orderly payment of arrears after independent audit by the BSA and a repayment schedule in line with financing capacity. BSA validated ID 2.0 trillion of arrears to farmers and ID 1.363 trillion of arrears to domestic contractors.
  - government plans to pay ID 6.0 trillion of domestic arrears in 2017, out of which ID 3.2 trillion to contractors and ID 2.7 trillion to other creditors, mostly farmers (Tables 5-6). In 2018, it plans to pay the balance of domestic arrears, i.e. ID 1.5 trillion to contractors.
  - external arrears payment timetable: ID 3.2 trillion ($2.7 billion) in 2017, ID 0.2 trillion ($0.2 billion) in 2018, and ID 0.2 trillion ($0.2 billion) in 2019.
  - observe a ceiling on the stock of domestic arrears as surveyed by the Ministry of Finance (IT, Table 1). This will include domestic arrears on investment and current spending. This IT will be upgraded to a PC on zero accumulation of domestic arrears as soon as the government can reliably monitor and prevent them.
- Design and implement a commitment control system for budget execution (in line with IMF technical assistance):
  - Ministry of Finance to update the Financial and Accounting Manual to require spending units to: (i) capture all invoices into an accounting ledger (“journal”), after adequate verification by the internal audit unit; and (ii) report monthly on payables to the Accounting Department as part of the trial balance report (prior action, Table 2).
  - update the trial balance report to add data on accounts payable as per the model in Appendix 1 of the IMF Fiscal Affairs Technical Assistance report.
  - introduce a simple form for spending units to report to the Ministry of Finance (Accounting) on budget execution, including budget encumbrance.
  - Ministry of Finance to produce a report on all recurrent and investment commitments (by project) in coordination with the Ministry of Planning as at end-August 2017 (SB postponed to the fourth review, Table 2).
  - ensure commitment control functionality is designed in the Integrated Financial Management Information System (IFMIS).
- Develop cash management:
  - establish a Cash Flow Management Unit (CMU) in the Accounting Department to develop cash flow forecasts extending at least three months ahead (by end-August 2017).
  - establish a Cash Flow Management Committee (CMC), chaired by the Deputy Minister, to review developments, review cash flow forecasts prepared by the CMU, and decide on anticipatory action (by end-August 2017).
- Move to a Treasury Single Account (TSA) — steps taken and planned:
  - Ministry of Finance and the CBI compiled a list of all bank accounts controlled by the Ministry of Finance and all spending units and sub-spending units of the federal government in CBI, state-owned and commercial banks at end-December 2015.
  - Ministry of Finance constituted a working group (Ministry of Finance, CBI, Rasheed and Rafidain Banks and TBI) to take stock of readiness of payment and settlement systems and develop a plan for modernizing systems to enable operation of a TSA.
  - Ministry of Finance, with CBI and state-owned banks, will explore feasibility of reducing the time lag between cash transfers to spending unit bank accounts and payments; more frequent sweeping of spending units and revenue agencies bank account balances; and centralizing some large payments.
  - Ministry of Finance will identify options for further developing the TSA using core banking systems and subsequently IFMIS (initial review of options by end December 2017).
- Design and implement an Integrated Financial Management Information System (IFMIS) with World Bank assistance:
  - July 2016: Ministry of Finance adopted a road map detailing core functional requirements (chart of accounts, multi-year expenditure tracking, carry-over of resources, management of advances and cash management arrangements).
  - publish final standard bidding documents and hire company to develop IFMIS: sign contract with selected IFMIS vendor by end-August 2017.
  - develop, test and accept the IFMIS by end-November 2018.
  - progressively roll out IFMIS to pilot sites (Ministry of Finance, Ministry of Planning, Ministry of Interior, Ministry of Construction, Housing and General Municipalities, and Baghdad and Babil Governorates) by end-June 2020.
- Implement Public Investment Management (PIM) reform with World Bank assistance in line with Decree 445 of October 18, 2015 on PIM:
  - design organizational structure of the PIM Central Unit at the federal Ministry of Planning (April 2016) and make it fully operational (by end-December 2016).
  - make and publish on the Ministry of Planning website a detailed inventory at both ministry and governorate levels of public investment projects (ongoing and new projects with a minimum cost of US$10 million), having a feasibility study made through cost-benefit analysis and expenditure efficiency.
  - conduct a capacity needs assessment for the PIM Central Unit at the federal Ministry of Planning and in two IFMIS pilot governorates (Baghdad and Babil) by end-October 2017.
  - conduct training for the PIM Central Unit in line with recommendations of the capacity needs assessment with preliminary focus on the Logical Framework Approach and the Integrated Project Appraisal at a basic level (by end-2017).
- Strengthen Debt Management:
  - Public Debt Directorate capacity will be strengthened with technical assistance from JICA.
  - Debt Directorate conducted a survey of all guarantees issued by the government (SB, Table 2; ¶20).
  - Ministry of Finance will start regular publication of a quarterly public debt bulletin, including guarantees.
- Strengthen State Guarantees’ Approval (prior action, Table 2):
  - establish a committee by cabinet decree composed of two representatives of the Prime Minister's office, the head of the legal department of the Secretariat of the Council of Ministers, a representative of the Ministry of Finance, and a representative of the Ministry of Planning.
  - by July 30 of each year, ministries and spending units will submit a list of guarantee requests for the following year to the committee; projects must have been included first in Iraq’s Development Management System (IDMS) of the Ministry of Planning.
  - the Committee will propose a priority list of guarantees and a ceiling on all guarantees compatible with debt sustainability for approval by the Prime Minister and then the Council of Ministers. The IMF will provide the Ministry of Finance and the Central Bank of Iraq with the debt sustainability model it uses.
  - once the cabinet approves, the final priority list will be submitted to parliament in the annual draft budget with a note on each guarantee, including project, amount of guarantee, and financing parties. The draft budget law will contain a ceiling on all guarantees.
  - in accordance with Iraq’s Financial Management Law, the Ministry of Finance will only sign guarantees within the ceiling in the budget law approved by Parliament.

### Anti-Corruption Measures
- Strengthen the Commission on Integrity:
  - Council of Ministers—after review by the Shura Council—will approve and forward to parliament by end-September 2017 draft amendments to the 2011 law establishing the Commission on Integrity to strengthen governance, accountability, oversight, and independence, and provide powers in line with the United Nations Convention Against Corruption (UNCAC, SB, Table 2).
  - draft amendments will include clarity on mandate, powers, governance and oversight, operational and financial autonomy, eligibility criteria for appointments, transparent rules/procedures for dismissal, and protection for management and staff.
  - draft amendment will include requirements to set up a comprehensive asset declaration regime for senior public officials, their family members and associates, and a requirement to publish their asset declaration. Parliament will adopt the draft law by October 2017.
- Criminal Code and related legislation:
  - Council of Ministers will adopt and forward to parliament by September 2017 amendments to the Criminal Code to criminalize all corruption acts including illicit enrichment, bribery in the private sector, and obstruction of justice.
  - Council of Ministers will adopt and forward to parliament by September 2017 several draft legislations finalized by the Commission on Integrity on access to information, conflict of interest, asset recovery, and protection of whistleblowers and witnesses.
- UNDP memorandum of understanding (signed August 11, 2016):
  - UNDP will provide staff to support investigation of significant corruption cases, especially involving financial transactions transferring money out of Iraq, and provide advice on tracing and returning such assets.
  - UNDP will provide assistance on legislation to bodies investigating corruption (Bureau of Supreme Audit, Inspector Generals, National Integrity Commission) to make them more independent and robust.
  - UNDP will provide staff for capacity building and public relations assistance on corruption matters.
  - UNDP will assist Iraq in improving international rankings and perceptions on corruption in Iraq.

*IRAQ — INTERNATIONAL MONETARY FUND*

### 40.      As of January 2017, there were 65 banks operating in Iraq: including 7 state-owned banks

### As of January 2017, there were 65 banks operating in Iraq: including 7 state-owned banks

### Banking sector structure and concentration
- Total banks: 65 (as of January 2017).
- Composition:
  - 7 state-owned banks (SOB), of which one is an Islamic bank.
  - 39 Iraqi private banks, of which 15 are Islamic banks.
  - 19 foreign banks, of which four are Islamic banks.
- Market concentration:
  - The SOBs dominate the financial sector and account for the bulk of assets and credits.
  - Three SOBs—Rafidain Bank, Rasheed Bank and Trade Bank of Iraq (TBI)—account for around 90 percent of the banking system’s assets.

### Financial condition and restructuring of Rafidain and Rasheed Banks
- Current condition: The financial positions of Rasheed Bank and Rafidain Bank are fragile following years of quasi-fiscal operations.
- Restructuring steps and deadlines:
  - First step: Ministry of Finance appointed international auditors to audit their financial statements for the year ended December 31, 2014 per international standards, in cooperation with the Executive Committee for the restructuring of these banks and the World Bank. The audits should be completed by end-August 2017.
  - Second step: The Ministry of Finance will, by end-February 2018, elaborate a restructuring plan for these two banks, in cooperation with the Executive Committee for the restructuring of these banks and the World Bank, considering the results of the audits.

### Central Bank of Iraq (CBI) reform measures to enhance stability
- Prudential regulation review with assistance from IMF METAC and the World Bank.
- Strengthening banking supervision, including for AML/CFT, with IMF and World Bank technical assistance.
- Compiling and publishing financial stability indicators, elaborated with IMF technical assistance.
- Enforcing minimum capital requirement:
  - Minimum capital requirement of banks: ID 250 billion ($214 million).
  - Status: a level to which all private banks except one have increased their capital.
- Bank rating exercise:
  - CBI contracted a consultant to assist in rating banks; 17 banks were already rated.
  - At end-December 2016: three banks rated “satisfactory”, eight banks rated “fair” and six banks “marginal”.
- Upgrading prudential regulations:
  - Contracting a consultant to assist the CBI in upgrading prudential regulations on “Liquidity” and “Capital Adequacy Ratio”.
- Deposit Insurance Scheme:
  - Preparing a Deposit Insurance Scheme stipulating establishment of a corporation to be licensed by the CBI, with banks having the opportunity to take a share in the capital.
- Credit information:
  - Contracting a private firm to provide the CBI with a credit registry system for sharing information among banks on their common existing and potential borrowers.
- Islamic finance framework:
  - Issuing a banking law for financial institutions offering Islamic services.
- Enforcement:
  - Penalizing, financially and administratively, banks and non-bank financial institutions for any non-compliance with laws and regulations in force.
- Payment systems:
  - Implementing the international bank account number (IBAN) system in Iraq in 2017.

### CBI governance and safeguards
- Follow-up on IMF safeguards assessment (December 2015):
  - The Governing Council of the CBI approved a new charter for the Audit Committee prohibiting Central Bank of Iraq executive representation on the committee.
  - The Council of Ministers approved and introduced to parliament amendments to the Law on the Central Bank of Iraq to strengthen CBI governance and the internal control framework, in line with the IMF safeguards assessment's recommendations.
- Specific amendments to the CBI Law (developed in consultation with the IMF):
  - (i) specify external auditor selection criteria and timely appointment (i.e., before the end of the fiscal year for which the financial statements need to be audited);
  - (ii) shift the authority to appoint the external auditor from the Ministry of Finance to the CBI;
  - (iii) provide for multi-year appointment terms for the external auditor;
  - (iv) provide for timely publication of audited financial statements;
  - (v) establish an audit committee, including its mandate and composition, and representation on the CBI Board;
  - (vi) change the CBI Board’s composition to a non-executive majority;
  - (vii) strengthen the autonomy of the chief internal auditor;
  - (viii) require market-based rates for lender of last resort operations.

### CBI credit lines and fiscal risk management
- On November 25, 2015, the prime minister approved CBI credit lines to banks amounting to ID 6 trillion for on-lending:
  - ID 1 trillion for small and medium-sized enterprises (SME).
  - ID 5 trillion for agriculture or infrastructure projects, the latter with state guarantee.
- Disbursements to date:
  - ID 21.2 billion for the SME line.
  - 0.5 trillion for the agriculture/infrastructure line.
- CBI plan and cap:
  - The CBI plans to cap its disbursements at ID 1.3 trillion in 2017 and to assess the need for its continuation by year-end considering the fiscal risks for the government.

### Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) measures
- Overall objective: Strengthen the AML/CFT framework to improve financial integration, lower transaction costs, improve governance, reduce the informal sector, and disrupt terrorist funding.
- Key actions and timelines:
  - By-law adoption:
    - On October 9, 2016, the government adopted a by-law to set up a mechanism to comply with relevant UN Security Council resolutions related to terrorism and terrorism financing in line with FATF Recommendation 6.
  - Sectoral AML/CFT instructions:
    - March 2017: the CBI Governor issued AML/CFT instructions for financial institutions.
    - May 2017: the Iraq Securities Commission (ISC) issued AML/CFT instructions for brokerage companies.
    - By end-September 2017: the CBI and Iraqi Insurance Diwan (IID) will issue AML/CFT instructions for exchange and insurance companies, respectively, with customer due diligence and suspicious transactions’ reporting requirements in line with the FATF standard.
    - By end-December 2017: the CBI and the Financial Intelligence Unit (AML Bureau) will issue guidance to all reporting entities covered by the AML/CFT Law regarding implementation of preventive measures including enhanced due diligence.
  - Supervisory capacity and risk profiling:
    - By end-March 2018: the CBI will develop ML/TF risk profiles for banks.
    - By end-June 2018: review allocation of resources for AML/CFT supervision of banks accordingly.
    - By end-October 2018: start implementing AML/CFT onsite inspection procedures for banks on a risk sensitive basis.
    - By end-December 2017: the CBI, the IID, and the ISC will develop and implement on-site examination procedures for exchange, insurance and brokerage companies respectively.
    - By end-June 2018: the CBI, IID and ISC will develop ML/TF risk profiles for exchange, insurance and brokerage companies respectively.
  - AML Bureau governance:
    - By end-October 2017: the AML Bureau will develop a draft regulation clarifying its governance and operations for strengthened operational autonomy and effective implementation of its mandate as per the AML/CFT Law.
    - By end-December 2017: the AML Bureau will submit this draft regulation to the Council of Ministers, through the AML/CFT Council, for approval.
    - The Council of Ministers will approve the FIU regulation by March 2018.
  - Cross-border cash controls and reporting:
    - August 2016: the AML/CFT Council issued controls on the declaration of cross border cash transportation, including declaration forms.
    - By end-November 2017: the Customs Administration will report to the AML/CFT Council and start publishing on the AML Bureau website, on a quarterly basis, statistical information reflecting implementation of these controls, including:
      - the number of currency and bearer negotiable instruments suspicious reports received and analyzed by the AML Bureau;
      - value of falsely-declared and non-declared cross-border currency and bearer negotiable instruments seized and confiscated.

### Program monitoring and review schedule (selected items)
- The program will maintain performance criteria (PCs) and indicative targets (ITs) on variables including the non-oil primary balance, stock of total public debt, stock of net domestic assets of the CBI, gross official foreign exchange reserves, non-accumulation of new external arrears, and conditional ITs on social spending, stock of outstanding domestic arrears, and stock of outstanding obligations to IOCs.
- Adjustments and proposals:
  - Government supports staff’s proposal to modify the level of PCs on the gross international reserves of the CBI, the net domestic assets of the CBI, the non-oil primary balance and the gross public debt at end-December 2017.
  - Government proposes to raise the ceiling on arrears to IOCs to $500 million, starting in September 2017, and to monitor these obligations as an IT rather than a PC starting in September 2017.
  - Government commits to clarify the nature of these obligations by the time of the third review for program monitoring purposes.
  - Government proposes to set PCs at end-June and end-December 2018.
- Review timelines:
  - The third review will take place on or after October 15, 2017.
  - The fourth review will take place on or after April 15, 2018.

*Source: IMF staff report (cr17251) excerpts on Iraq's banking sector, CBI reforms, and AML/CFT measures.*

### 36. second bullet of the MEFP.

### 36. second bullet of the MEFP.

### Policy actions and recommendations
- 3rd review: Increase non-oil revenue.
- Approval by the Council of Ministers of amendments to the Customs Code in line with ¶
- Study by the Ministry of Finance of potential legislative changes to reduce spending on wages, non-contributory pensions and transfers.
- 4th review: Decrease current expenditure.
- Source: Iraqi authorities.

### Social spending (Table 3) — key cumulative figures (in billions of Iraqi dinars)
- Total Social spending (floor): Prog. 18,228; Rev. 20,093; Mar-18 Prog. 4,493; Jun-18 Prog. 8,986; Sep-18 Prog. 13,480; Dec-18 Prog. 15,635; Dec-18 Rev. 17,973; Dec-18 Prog. 20,846; Mar-17 Prog. 5,212; Jun-17 Prog. 10,423; Sep-17 Prog. 15,635; Dec-17 Prog. 20,846.
- Social Safety Net: Prog. 1,800; Rev. 1,069; Mar-18 Prog. 494; Jun-18 Prog. 988; Sep-18 Prog. 1,482; Dec-18 Prog. 1,645; Dec-18 Rev. 1,976; Dec-18 Prog. 2,194; Mar-17 Prog. 548; Jun-17 Prog. 1,097; Sep-17 Prog. 1,645; Dec-17 Prog. 2,194.
- Public Distribution System (PDS - food subsidies): Prog. 1,485; Rev. 1,204; Mar-18 Prog. 381; Jun-18 Prog. 762; Sep-18 Prog. 1,143; Dec-18 Prog. 1,270; Dec-18 Rev. 1,524; Dec-18 Prog. 1,693; Mar-17 Prog. 423; Jun-17 Prog. 847; Sep-17 Prog. 1,270; Dec-17 Prog. 1,693.
- Wheat and rice subsidy: Prog. 1,080; Rev. 2,803; Mar-18 Prog. 342; Jun-18 Prog. 684; Sep-18 Prog. 1,027; Dec-18 Prog. 1,141; Dec-18 Rev. 1,369; Dec-18 Prog. 1,521; Mar-17 Prog. 380; Jun-17 Prog. 761; Sep-17 Prog. 1,141; Dec-17 Prog. 1,521.
- Assistance and subsidy to Iraqi refugees: Prog. 0; Rev. 0; Dec-18 Prog. 278; Dec-18 Rev. 0; Dec-17 Prog. 370; Mar-17 Prog. 93; Jun-17 Prog. 185; Sep-17 Prog. 278; Dec-17 Prog. 370.
- Assistance and subsidy to internally displaced persons: Prog. 900; Rev. 608; Mar-18 Prog. 308; Jun-18 Prog. 617; Sep-18 Prog. 925; Dec-18 Prog. 590; Dec-18 Rev. 1,234; Dec-18 Prog. 787; Mar-17 Prog. 197; Jun-17 Prog. 394; Sep-17 Prog. 590; Dec-17 Prog. 787.
- Farmer subsidies: Prog. 405; Rev. 462; Mar-18 Prog. 110; Jun-18 Prog. 221; Sep-18 Prog. 331; Dec-18 Prog. 367; Dec-18 Rev. 441; Dec-18 Prog. 489; Mar-17 Prog. 122; Jun-17 Prog. 245; Sep-17 Prog. 367; Dec-17 Prog. 489.
- Health Ministry and Environment Ministry - wages: Prog. 2,520; Rev. 2,846; Mar-18 Prog. 615; Jun-18 Prog. 1,230; Sep-18 Prog. 1,845; Dec-18 Prog. 2,049; Dec-18 Rev. 2,460; Dec-18 Prog. 2,732; Mar-17 Prog. 683; Jun-17 Prog. 1,366; Sep-17 Prog. 2,049; Dec-17 Prog. 2,732.
- Higher Education Ministry - wages: Prog. 2,070; Rev. 2,148; Mar-18 Prog. 492; Jun-18 Prog. 984; Sep-18 Prog. 1,476; Dec-18 Prog. 1,640; Dec-18 Rev. 1,968; Dec-18 Prog. 2,187; Mar-17 Prog. 547; Jun-17 Prog. 1,094; Sep-17 Prog. 1,640; Dec-17 Prog. 2,187.
- Lower Education Ministry - wages: Prog. 6,300; Rev. 7,304; Mar-18 Prog. 1,456; Jun-18 Prog. 2,912; Sep-18 Prog. 4,369; Dec-18 Prog. 4,853; Dec-18 Rev. 5,825; Dec-18 Prog. 6,471; Mar-17 Prog. 1,618; Jun-17 Prog. 3,236; Sep-17 Prog. 4,853; Dec-17 Prog. 6,471.
- Goods and services and other line items reported with exact cumulative figures in Table 3 (see source).

### Ministry of Electricity (MoE) budget and operations (Table 4) — key figures (in billions of Iraqi dinars)
- Electricity tariff collection: Initial Budget 1,506; Supplementary Budget (additional allocation) 750.
- Expenditure: Initial Budget 13,249; Supplementary Budget 2,370.
- Wages: Initial Budget 1,015; Supplementary Budget 403.
- Goods and services: Initial Budget 10,358; Supplementary Budget 980.
- Cost of fuel and other (cash): Initial Budget 2,410; Supplementary Budget 980.
- Fuel from Ministry of Oil (MoO, non-cash: value of in-kind subsidy): 7,948.
- Investment expenditure: Initial Budget 1,514; Supplementary Budget 843; Transfer from MoF to MoE 3,120; Balance (accrual) -11,743; Balance (cash) -3,795.
- Financing: 11,743; Contribution from MoF 5,503; Fuel subsidy 7,948; Arrears -1,712.
- Memorandum items: Production (MWh) 96,360,000; Tariff (ID/KW; a) 72; Tariff collected (ID/KW; b) 16; Tariff collection rate (a/b) 22%; Operational cost with fuel from MoO at market price (ID/KW) 122; Operational cost with fuel from MoO for free (ID/KW) 39.
- Source: Iraqi authorities.

### Arrears on current spending (Table 5) — outstanding stocks (Iraqi dinar)
- Total arrears: 4,284,675,993,668 (Stock and Payment).
- Domestic arrears: 2,749,675,993,668.
- External arrears: 1,535,000,000,000.
- Major individual stocks: Ministry of Trade 2,509,814,327,354; Ministry of Electricity (external arrear) 1,535,000,000,000; Ministry of Education 132,319,000,000; Ministry of Agriculture 106,103,734,314.
- Source: Iraqi authorities.

### Arrears on investment expenditure (Table 6) — stocks and scheduled external arrears (Iraqi dinar)
- Total reported: 6,773,059,577,273 (total at top line).
- External arrears (IOCs and BCG): 1,450,296,952,440 (Ministry of Oil external arrears).
- Ministry of Electricity external arrears (Shanghai): 599,274,000,000 with schedule entries 177,300,000,000; 210,987,000,000; 210,987,000,000.
- Domestic arrears and external arrears broken out across ministries; Domestic arrears 4,723,488,624,833; External arrears 2,049,570,952,440.
- Note: "All arrears at end 2016 are expected to be paid over three years, even though this table only shows the repayment schedule for external arrears."
- Source: Iraqi authorities.

### Central government fiscal accounts, 2017–18 (Table 7) — selected cumulative figures (In trillions of Iraqi dinars)
- Revenues and grants (various columns): sample values include 18.8, 17.2, 38.4, 58.6, 59.7, 79.1, 82.0, 164.3, 465.5, 875.5 (values shown across columns).
- Revenues: 18.8; Oil 16.3; Non-oil 2.5.
- Expenditures: 23.7; Current expenditures 17.4; Salary and pension 11.5 (Salary 8.9; Pension 2.6).
- Investment expenditures: 6.4 (Non-oil investment expenditures 2.9; Oil investment expenditures 3.4).
- Balance (including grants) samples: -4.9; -0.5; -9.1; -12.6; -7.0; -15.9; -11.4; -3.1; -6.0; -8.6; -11.3.
- Financing (samples): 4.9; 0.6; 9.1; 12.6; 7.1; 15.9; 11.4; 3.1; 6.0; 8.6; 11.3.
- Memorandum items: Security-related expenditure (military and police equipment and salaries) 4.3; Social spending 5.0; Transfer to KRG 2.9.
- Non-oil primary fiscal balance, accrual basis examples: -17.1; -12.1; -34.1; -51.0; -48.4; -67.8; -67.8; -16.5; -33.0; -49.2; -65.5.
- Non-oil primary fiscal balance, cash basis example: -17.1; -12.1; -34.7; -51.6; -51.3; -69.1; -73.8; -16.5; -33.1; -49.4; -67.2.
- Sources: Iraqi authorities; and Fund staff estimates and projections.

### Balance of Payments, 2017–18 (Table 8) — selected cumulative figures (In billions of U.S. dollars)
- Trade balance samples: -0.9; 3.8; -1.3; -1.1; 0.0; -0.8; 1.4; 0.8; 1.7; 2.7; 3.7.
- Exports (percent of GDP series): 13.8; 15.7; 28.1; 42.9; 46.6; 57.9; 62.4; 16.1; 32.3; 48.7; 64.9.
- Crude oil (percent of GDP series): 13.6; 15.6; 27.9; 42.6; 46.3; 57.5; 62.0; 16.0; 32.1; 48.3; 64.4.
- Imports samples: -14.7; -12.0; -29.3; -44.0; -46.6; -58.7; -61.0; -15.3; -30.6; -45.9; -61.3.
- Current account samples: -4.0; 1.0; -7.3; -10.3; -10.4; -13.1; -12.3; -3.5; -6.9; -10.2; -13.6 (In percent of GDP series also provided).
- Financial account samples: 1.9; 1.5; 2.8; 3.8; 6.7; 8.6; 10.5; 0.9; 2.9; 5.1; 8.2.
- Overall balance samples: -2.2; 2.5; -4.5; -6.5; -3.7; -4.5; -1.8; -2.6; -4.0; -5.2; -5.4.
- Gross International Reserves (end of period, memorandum): 40.9; 47.0; 38.5; 36.6; 39.8; 38.5; 41.4; 38.6; 37.2; 36.0; 40.8.
- Sources: Iraqi authorities; and Fund staff estimates and projections.

### Monetary survey and Central Bank balance sheet (Tables 9–10) — key figures (In trillions of Iraqi dinars unless indicated)
- Monetary aggregates (Table 9):
  - Net foreign assets: 56,091; 61,741; 55,052; 54,359; 58,083; 52,973; 55,156; 54,930; 54,780; 54,680; 54,480.
  - Net domestic assets: 32,909; 28,429; 34,448; 37,141; 35,075; 39,917; 39,594; 40,739; 42,152; 43,440; 44,881.
  - Broad money: 89,000; 90,170; 89,500; 91,500; 93,158; 92,890; 94,750; 95,669; 96,932; 98,120; 99,361.
  - Currency outside banks: 34,121; 40,225; 33,616; 33,460; 41,104; 33,201; 41,835; 42,132; 42,588; 42,969; 43,292.
  - Transferable deposits: 38,490; 35,253; 39,195; 40,707; 36,093; 41,864; 36,690; 37,122; 37,681; 38,240; 38,877.
- Central Bank balance sheet (Table 10):
  - Net foreign assets (CBI): 43,863; 51,229; 41,084; 38,754; 42,706; 41,101; 44,608; 41,336; 39,601; 38,261; 43,967.
  - Foreign assets: 48,689; 55,961; 45,910; 43,580; 47,438; 45,928; 49,283; 46,012; 44,277; 42,936; 48,545.
  - Official reserve assets: 48,323; 55,600; 45,544; 43,214; 47,077; 45,562; 48,930; 45,658; 43,923; 42,582; 48,191.
  - Reserve money: 58,615; 60,497; 58,757; 59,000; 62,201; 59,063; 63,307; 63,756; 64,447; 65,024; 65,513.
  - Currency in circulation: 41,687; 44,118; 41,678; 41,598; 45,225; 41,414; 46,297; 46,652; 47,222; 47,678; 48,029.
  - Bank reserves: 16,928; 16,379; 17,079; 17,402; 16,977; 17,649; 17,011; 17,104; 17,225; 17,346; 17,484.
- Memorandum: Gross foreign exchange assets (in millions of U.S. dollars) examples: 40,882; 47,039; 38,532; 36,560; 39,829; 38,546; 41,396; 38,628; 37,160; 36,026; 40,771.
- Sources: Iraqi authorities; and Fund staff estimates and projections.

*Source: cr17251 - 36. second bullet of the MEFP. (PDF material provided by Iraqi authorities and IMF staff tables.)*

### 1.      This memorandum defines the quantitative performance criteria (PCs) and indicative targets (ITs)

### This memorandum defines the quantitative performance criteria (PCs) and indicative targets (ITs) for the economic program of the Iraqi authorities during the period September 2017–December 2018 under the Stand-By Arrangement (SBA)

### A. Performance Criteria and Indicative Targets
- Performance criteria (PCs):
  - a floor on the stock of gross international reserves of the Central Bank of Iraq (CBI);
  - a ceiling on net domestic assets of the CBI;
  - a floor on the central government non-oil primary balance;
  - a continuous ceiling on new external payments arrears on any existing, rescheduled and new debt of the central government and/or the CBI;
  - a ceiling on the total gross public debt (domestic and foreign).
- Indicative targets (ITs):
  - a floor on the central government social spending;
  - a ceiling on the stock of outstanding domestic arrears on non-oil investment expenditure;
  - a ceiling on the stock of outstanding arrears to international oil companies (IOCs).

### B. Definitions
- Exchange rate for monitoring:
  - An exchange rate set at Iraqi dinar (ID) 1,182 per U.S. dollar ($) will be used for monitoring purposes.
  - CBI assets/liabilities denominated in SDRs and other foreign currencies will be converted to U.S. dollars at their respective SDR-exchange rates prevailing as of November 20, 2016.
- Central government (for monitoring) includes:
  - central administration, the Kurdistan Regional Government (KRG), and agencies included under Section 6 of the federal government budget (local boards, Iraqi media network, Iraqi national Olympic committee, Bait-Al-Hikma, Ammant Baghdad, Municipality institutions, General directorates of sewage and water).
- Gross international reserves (GIR) of the CBI (¶6):
  - Claims of the CBI on nonresidents, controlled by the CBI, denominated in foreign convertible currencies, immediately and unconditionally available for balance of payments needs or intervention, not earmarked.
  - Include: monetary gold, SDR holdings, Iraq’s reserve position in the IMF, foreign currency cash, holdings of non-resident equity and debt securities, deposits in foreign currency abroad, including foreign exchange account of the government (300/600).
  - Exclude: assets pledged/collateralized/encumbered; claims on residents; precious metals other than monetary gold; assets in nonconvertible currencies; illiquid assets; and claims arising from derivatives in foreign currencies vis-à-vis domestic currency.
  - For program monitoring, foreign assets of the CBI shall be valued at program exchange rates (¶4).
- Net domestic assets (NDA) of the CBI (¶7):
  - NDA = reserve money − net foreign assets (calculated at the program exchange rates).
  - Reserve money includes currency in circulation and CBI liabilities to: (i) commercial banks (other depository corporations), (ii) other private sector, and (iii) state and local government.
  - For this SBA, net foreign assets of the CBI = (sum of gross international reserves as defined in ¶6 and other foreign assets) − foreign liabilities.
  - Foreign liabilities = use of Fund credit (net) + other foreign liabilities of the CBI held by non-residents.
  - For this SBA, foreign liabilities exclude SDR allocation.
- Central government non-oil primary balance (¶8):
  - Defined as non-oil revenue − non-oil primary expenditure, measured on a cash basis.
  - Non-oil revenue = total revenue and grants excluding oil-related receipts (exports of crude oil and refined products, transfers from oil-related state-owned enterprises, and tax revenue on oil companies).
  - Non-oil primary expenditure = total expenditure, including off-budget spending approved by government decree, excluding (i) interest payments on domestic and external debt; and (ii) all oil-related spending (including war reparations).
  - Non-oil primary expenditure measured on a cash basis excludes spending financed by accumulation of arrears and includes payment of arrears on such spending accumulated in previous years.
- Obligations outstanding to international oil companies (IOCs) (¶9):
  - Bills of IOCs validated by the Ministry of Oil and due for more than three months after their invoice.
  - IOCs include the Basra Gas Company.
  - Obligations outstanding to the Basra Gas Company are bills validated by the Ministry of Oil and due for more than 30 days after their invoice.
- New external payments arrears on rescheduled debt and new external debt (¶10):
  - External payment arrears consist of external debt service obligations (principal and interest) falling due that have not been paid within the grace period specified in the contractual agreements falling due after June 30, 2016.
  - “Debt” follows the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No. 15688-(14/107) of December 5, 2014) and includes loans, suppliers’ credits, leases (present value at inception of lease payments), and arrears, penalties, and judicially awarded damages arising from failure to pay within contractual grace periods.
  - For program purposes, external debt is defined based on the residency of the creditor.
  - For this performance criterion, external payment arrears do not include obligations outstanding to IOCs as defined in ¶9.
- Total public debt contracted or guaranteed by the central government (¶11):
  - “Debt” as defined in ¶10.
  - Total public debt = domestic debt + external debt (defined by residency of creditor).
  - Total public debt excludes debt contracted by the KRG.
  - Total public debt includes claims of the CBI on the central government.
  - Total public debt includes arrears as defined in ¶¶9 and 13.
  - Total public debt excludes short-term supplier related credit (less than 90 days).
- Social spending (¶12):
  - Sum of expenditure on the social safety net, the public distribution system, wheat and rice subsidies, assistance to the internally displaced, farmer subsidies, reconstruction, and wage expenditure and goods and services of the health, environment and the higher and lower education ministries.
  - Expenditure measured at the time the Ministry of Finance transfers the money to the spending units.
- Stock of outstanding domestic arrears (¶13):
  - Value of unpaid bills to domestic creditors for more than 90 days after their invoice, as measured by the regular surveys of the Ministry of Finance.

### C. Adjustors
- Transfer/KRG transfer adjustor (¶14):
  - The floor on the central government non-oil primary balance will be adjusted if the actual transfer of the central government to the KRG net of the non-oil revenue from KRG is less than the programmed amount; the floor will be adjusted upwards by the absolute amount of the difference.
- KRG fiscal balance adjustor (¶15):
  - The ceiling on the total public debt will be adjusted if the fiscal balance of all the KRG-related flows is lower than programmed; the ceiling will be adjusted downwards by the absolute amount of the difference.
  - Fiscal balance of KRG-related flows = oil revenue from KRG + non-oil revenue from KRG − transfer of the central government to the KRG.
- Project loan expenditure adjustor (¶16):
  - The floor on the central government non-oil primary balance will be adjusted upwards (downwards) if actual expenditure financed by project loans is less (more) than programmed, by the absolute amount of the difference.
- NDA ceilings adjustor for lower foreign financing (¶17):
  - Ceilings on the stock of net domestic assets (NDA) of the CBI will be adjusted upwards if foreign financing is lower than programmed, to a limit of ID 1.18 trillion.
  - Size of the adjustment = difference between observed and programmed value of foreign financing, capped at values enumerated in the paragraph.
- NDA ceilings adjustor for higher foreign financing or oil revenue (¶18):
  - The ceiling on NDA will be adjusted downward if (i) foreign financing and/or (ii) oil export revenue is higher than programmed.
  - Size of adjustment = difference between observed and programmed value of foreign financing and/or oil export revenue.
- GIR floor adjustor for lower foreign financing (¶19):
  - The floor on the stock of gross international reserves of the CBI will be adjusted downwards if foreign financing is lower than programmed to a limit of $1 billion.
  - Size of the adjustment = difference between observed and programmed value of foreign financing and capped at that value.
- GIR floor adjustor for higher foreign financing or oil revenue (¶20):
  - The floor on the stock of GIR will be adjusted upward if (i) foreign financing and/or (ii) oil export revenue is higher than programmed.
  - Size of adjustment = difference between observed and programmed value of foreign financing and/or oil export revenue.
- Social spending adjustor for KRG transfers (¶21):
  - The floor on social spending will be adjusted downward if the actual transfer of the central government to the KRG for social spending is less than the programmed amount; the floor will be adjusted downwards by the absolute amount of the difference.

### D. Provision of Information to the Fund Staff (timing and items)
- General timing:
  - Quarterly PCs and ITs; actual outcomes should be provided within eight weeks following the end of the quarter.
  - Many indicators required at higher frequencies with specified lags below.
- Key Financial Indicators:
  - Weekly preliminary monetary and financial aggregates including exchange rate data (daily), currency in circulation, transferable and other deposits at commercial banks, balances on government accounts at the CBI, interest rates on loans and deposits at commercial banks, holdings of government securities, and credit outstanding to public and private sectors.
  - Data (excluding exchange rates) should be reported no later than three weeks after the end of the reference period.
- Real sector:
  - Indicators of oil activity (crude oil and gas production and use, production and sales (export and domestic) of refined petroleum products, including heavy residuals, and associated prices) monthly; reported no later than two months after end of reference month.
  - Indicators of non-oil real economic activity (quarterly), including production of cement, fertilizers, and electricity; reported no later than two months after end of reference month.
  - Total GDP: reported no later than twelve weeks after the end of the reference quarter.
  - Consumer price index (CPI), including indices for main cities (monthly); reported no later than one month after the end of the relevant month.
- Monetary and financial sector:
  - CBI gross foreign exchange reserves (weekly) and balances of the foreign exchange account of the government (300/600); reported no later than 2 weeks after end of reference week.
  - The value of CBI gross foreign exchange reserves as defined in ¶6 at end-July 2017 and at the end of each semester thereafter will be audited by the CBI’s external auditor and transmitted to the Fund within three months.
  - Monthly balance sheet of the CBI, with a one-month lag.
  - The value of CBI net domestic assets as defined in ¶7 at end-July 2017 and at the end of each semester thereafter will be audited by the CBI’s external auditor and transmitted to the Fund within three months.
  - Monthly consolidated balance sheet of other depository corporations (commercial banks), with an eight-week lag.
  - Monthly assets and liabilities of the central government (ministry of finance and line ministries) in the banking sector with an eight-week lag.
  - Depository corporations (monetary) survey of all commercial banks and the CBI (monthly), with an eight-week lag.
  - Latest balance sheet and income statement (quarterly) of the Trade Bank of Iraq and data on issued, implemented and outstanding Letters of Credit, with no more than a six-week lag.
  - Latest balance sheet and income statement (quarterly) of the Rasheed and Rafidain Banks.
  - Quarterly financial stability indicators of the banking system, distinguishing state-owned and private banks, with an eight-week lag.
- Fiscal sector:
  - Monthly fiscal reporting tables in line with the 2014 IMF Government Financial Statistics Manual, with an eight-week lag.
  - Detailed revenues, operating and capital expenditure, and financing items of consolidated fiscal and oil operations, and overall fiscal balance, including monthly reporting on:
    - execution of the Iraqi budget;
    - transfers to and from the KRG;
    - social spending (as defined in ¶12) and total transfers (including support of social safety net, internally displaced, refugees);
    - domestic payments arrears, documented by the Ministry of Finance survey (¶13);
    - payments and/or arrears in payments to international oil companies as defined in ¶9 on quarterly basis with an eight-week lag;
    - disbursements of external assistance and loans including issuance of Eurobonds and loans from the Trade Bank of Iraq (TBI);
    - execution of letters of credit financed through the TBI or by other means;
    - all operations of account 300/600 and its sub-accounts;
    - other forms of multilateral and bilateral assistance, exceptional financing resources, and other financing resources (issuance of domestic or foreign bonds, loans securitized by futures oil revenue, etc.);
    - balances of all government accounts held at the CBI and the commercial banks (including government and/or line ministry deposits, and those of spending and sub-sending units);
    - amounts related to all off-budget and on-budget advances;
    - outstanding stock of government securities (including treasury bills) held at/by commercial banks, the CBI, and pension funds.
  - These fiscal data should be reported monthly and no later than two months after end of reference month.
- Balance of payments:
  - Preliminary quarterly balance of payments compiled by the CBI: provided three months after the end of the reference quarter.
  - Foreign trade statistics (imports, exports, re-exports) (quarterly): reported no later than eight weeks after end of reference quarter.
  - Amount of total imports of petroleum products financed from the budget and total value of imports of petroleum products quarterly starting with Q1 2016: reported no later than eight weeks after end of reference quarter.
  - Detailed data on disbursement of external assistance (project and budget financing) from all external creditors and donors and foreign debt amortization and interest payments made: reported monthly no more than eight weeks after end of reference month.
- Public debt:
  - Stock of public debt as defined in ¶11 quarterly with the audited value at end-July 2017, end-December 2017, end-June 2018, and end-December 2018 transmitted to the Fund within three months.
  - List of short, medium, and long-term government or government-guaranteed external loans contracted each quarter, identifying: creditor, borrower (ultimate obligor), amount and currency, maturity and grace period, repayment terms, and interest rate (monthly).
  - Details on new debt rescheduling and debt relief agreements with bilateral, multilateral, and commercial creditors, including new outstanding amount and currency, schedule of payments (principal and interest), terms of agreement, repayment terms, and interest rate arrangements (quarterly).

*Memorandum and technical memorandum of understanding defining PCs and ITs for the SBA (September 2017–December 2018).*

### 23.      Structural benchmarks comprise a critical component of the SBA. In accordance with agreed

### cr17251 - 23.      Structural benchmarks comprise a critical component of the SBA. In accordance with agreed

### Structural benchmarks and program documentation
- Structural benchmarks are a critical component of the Stand-By Arrangement (SBA).
- In accordance with agreed benchmarks (Table 2 of the MEFP), the authorities will prepare and send to the IMF staff reports, with appropriate documentation, documenting completion.

### Other information on program sequencing
- Other details on major economic and social measures (changes in legislation, regulations, or other pertinent documents) that are expected to have an impact on program sequencing will be sent in a timely manner to IMF staff, for consultation or information.

### Relations with the Fund — membership and financial positions (as of May 31, 2017)
- Quota: 1,663.80 SDR Million (100.00 percent of Quota)
- Fund Holdings of Currency: 3,175.16 SDR Million (190.84 percent of Quota)
- Reserve Tranche Position: 289.95 SDR Million (17.43 percent of Quota)
- SDR Department net cumulative allocation: 1,134.50 SDR Million (100.00 percent of Allocation)
- SDR Department holdings: 0.94 SDR Million (0.08 percent of Allocation)

### Outstanding purchases and loans (SDR Million; Percent of Quota)
- Stand-By Arrangements: 910.00 SDR Million (54.69 percent of Quota)
- Emergency Assistance: 891.30 SDR Million (53.57 percent of Quota)

### Latest financial arrangements (selected)
- Stand-By: Date of Arrangement Jul 07, 2016 — Expiration Date Jul 06, 2019 — Amount Approved 3,831.00 SDR Million — Amount Drawn 910.00 SDR Million
- Stand-By: Date of Arrangement Feb 24, 2010 — Expiration Date Feb 23, 2013 — Amount Approved 2,376.80 SDR Million — Amount Drawn 1,069.56 SDR Million
- Stand-By: Date of Arrangement Dec 19, 2007 — Expiration Date Mar 18, 2009 — Amount Approved 475.36 SDR Million — Amount Drawn 0.00 SDR Million

### Overdue obligations and projected payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming payments by year (Principal; Charges/Interest; Total):  
  - 2017: Principal 111.41; Charges/Interest 17.15; Total 17.15  
  - 2018: Principal 502.53; Charges/Interest 34.24; Total 145.65  
  - 2019: Principal 789.24; Charges/Interest 29.85; Total 532.38  
  - 2020: Principal 398.13; Charges/Interest 19.51; Total 808.75  
  - 2021: Charges/Interest 9.96; Total 408.09

### Safeguards assessment of the Central Bank of Iraq (CBI)
- Most recent safeguards assessment completed in April 2016.
- Findings: CBI faces capacity constraints, difficult security situation, and has engaged in indirect financing of the government due to loss of budget revenue from falling oil prices.
- Priorities: address weaknesses in the legal framework and the internal audit function.
- Authorities actions: about to amend the Law on the CBI and adopt a new charter for the audit committee (structural benchmarks).
- Progress on other recommendations has been slow.
- Positive development: substantial improvement in the quality of financial reporting (assisted by external auditors).

### Exchange arrangement and market conditions
- De jure and de facto exchange rate arrangement: conventional peg arrangement.
- CBI Board realigned the peg from 1166 to 1182 dinar per USD on December 1, 2015, unifying effective rates at 1190 including the central bank commission.
- The average spread between the official and market rates was around 6 percent in June 2017.
- CBI published daily volume of the auction allocation on its website until March 2016.
- Iraq uses transitional arrangements under Article XIV but maintains one exchange restriction and one multiple currency practice subject to Fund approval under Article VIII, Sections 2(a) and 3.

### Article IV consultation and technical assistance
- Upon approval of the new 36-month Stand-By Arrangement on July 7, 2016, Iraq was placed on the 24-month consultation cycle.
- Last Article IV consultation concluded July 29, 2015; staff report published as IMF Country Report No. 15/235 on August 18, 2015.
- Technical assistance (2012–17) provided across departments (FAD, LEG, MCM, STA) covering public financial management, AML/CFT, banking supervision, reserve management, national accounts, government finance statistics, CPI, external sector statistics, and more. Examples of TA dates and topics include:
  - FAD: March 2012 Public financial management (METAC); February 2017 Revenue administration: tax policy; February 2017 PFM-commitment control, cash management, treasury single account (METAC).
  - MCM: November 2015 Banking supervision (METAC); November 2016 Regulations on capital adequacy and liquidity (METAC); March 2017 Regulations on credit risk (METAC).
  - STA: December 2013 Balance of payments statistics; March 2016 Government finance statistics; January 2017 National accounts (METAC); February 2017 Price statistics (METAC).

### Relations with the World Bank Group — selected programs and timing (as of May 31, 2017)
- World Bank work program items and timing include: Iraq energy subsidies and tariff reforms (July/October/December 2016), Country Partnership Framework (June 2017 / October 2017), modernization of public financial management system project (December 2016–December 2021), social protection support program TA (Phase I November 2015–April 30, 2017; Phase II May 1, 2017–June 2018).
- IFC and World Bank deliverables include support on central bank payment system, anti-money laundering, banking supervision, gas value chain, KRG procurement and social protection, and financial markets infrastructure.

### Statistical issues — assessment of data adequacy for surveillance (as of July 5, 2017)
- General: Data provision to the Fund has serious shortcomings that significantly hamper surveillance. Macroeconomic statistics suffer from years of neglect and recent turmoil. CSO lacks adequate technical expertise and resources; CBI statistical capacity is slightly better but interagency data sharing issues hamper external sector statistics.
- National accounts:
  - CSO compiles annual and quarterly GDP at current and constant (2007) prices from the production approach, and in current prices from the expenditure approach.
  - National accounts mainly follow the 1968 SNA; work underway to move toward 2008 SNA concepts with METAC TA.
  - Reduced regional coverage (conflicts in four provinces) weakens GDP measures.
- Price statistics:
  - CSO compiles monthly CPI for all-Iraq (including Kurdistan) and for each governorate; CPI was rebased in 2016 on the 2012 Household Social and Economic Survey.
  - CPI covers only urban areas in all governorates; since June 2014 official CPI data do not include the four conflict-affected governorates.
  - Quarterly PPI for manufacturing on a 2012 base is compiled.
- Government finance statistics:
  - Provision of fiscal data for program monitoring has been satisfactory despite the security situation; coverage of Kurdistan remains sketchy.
  - STA missions (March 2015, March 2016, August 2016, January 2017) assisted in improving frequency and timeliness and setting a migration plan to GFSM 2014.
  - Iraq resumed reporting government finance statistics for publication in the Government Finance Statistics Yearbook (GFSY).
- Monetary and financial statistics:
  - CBI reports monetary statistics for the central bank and ODCs for IFS using SRFs, but data quality and timeliness are hampered by lack of staff capacity and source data quality.
  - Major inconsistencies between financial soundness indicators for deposit takers and SRF 2SR for ODCs indicate data quality problems.
  - All foreign-owned companies operating in Iraq are classified as nonresidents (deviation from international residence concept).
  - Monetary statistics do not cover the northern region (Kurdistan).
  - Publication of SRF data in IFS has been delayed; reporting of Fund accounts in relevant statistics pending authorities’ confirmation.
  - A monetary and financial statistics mission planned for FY17 to improve compilation practice.
- Financial sector surveillance:
  - CBI compiled and reported the 12 core FSIs and 7 of the 13 additional FSIs for state banks and a similar set for private banks beginning Q1 2015 on a quarterly basis.
  - Data issues remain; a follow-up FSI mission was conducted in March 2017 to improve data quality.
- External sector statistics:
  - CBI compiles and reports annual and quarterly balance of payments data in BPM6 format and an annual IIP statement.
  - January 2017 ESS TA noted improvements: inclusion of oil sector data in BOP, need to estimate imports from Kurdistan, and accelerate enhanced international transactions reporting system.
  - Data sources for ESS are not comprehensive; particularly weak for external trade in goods and services and FDI.
  - External trade statistics suffer from poor quality and timeliness due to absence of reliable customs data and lack of interinstitutional coordination; coverage excludes Kurdistan; smuggling not estimated.
  - Non-oil exports equivalent to 3–5 percent of total exports are derived from customs export form data.
  - Transactions related to oil exploration, extraction, and development payments to international oil companies have recently been included in the BOP.
- Data standards and quality:
  - Iraq is an e-GDDS participant. Metadata updated in early 2016 are available on the IMF’s Dissemination Standards Bulletin Board.
  - No data ROSC (Report on the Observance of Standards and Codes) is available.

### Table of Common Indicators Required for Surveillance (selected entries; as of June 30, 2017)
- Exchange rates: Date of latest observation 12/2016; Date received 03/20/2017; Frequency of data D; Frequency of reporting D; Frequency of publication D.
- International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation 12/2016; Date received 03/20/2017; Frequency M; Frequency of reporting M; Frequency of publication M, 4–6-week lag.
- Reserve/Base money: Date of latest observation 05/2016; Date received 07/06/2016; Frequency M; Frequency of reporting M; Frequency of publication M, 4–6-week lag.
- Broad money: Date of latest observation 06/2016; Date received 10/31/2016; Frequency M; Frequency of reporting M; Frequency of publication M, 4–6-week lag.
- Consolidated balance sheet of the banking system: Date of latest observation 04/2016; Date received 10/06/2016; Frequency M; Frequency of reporting M; Frequency of publication Q, 4–6-week lag.
- Interest rates: Date of latest observation 01/2017; Date received 02/03/2017; Frequency M; Frequency of reporting M; Frequency of publication M, 4–6-week lag.
- Consumer price index: Date of latest observation 03/31/2016; Date received 05/2016; Frequency M; Frequency of reporting M; Frequency of publication M, 3-week lag.
- Revenue, expenditure, balance and composition of financing—general government: Date of latest observation 06/2016; Date received 09/2016; Frequency M; Frequency of reporting M; Frequency of publication N/A.
- Revenue, expenditure, balance and composition of financing—central government: Date of latest observation 06/2016; Date received 09/2016; Frequency M; Frequency of reporting M; Frequency of publication N/A.
- External current account balance: Date of latest observation Q4/2016; Date received 04/2017; Frequency Q; Frequency of reporting Q; Frequency of publication Q, 9-month lag.
- Exports and imports of goods and services: Date of latest observation 2015; Date received 03/2017; Frequency Q; Frequency of reporting Q; Frequency of publication Q, 9-month lag.
- GDP/GNP: Date of latest observation 03/2016; Date received 04/2016; Frequency Q; Frequency of reporting Q; Frequency of publication Q, 3-month lag.
- International investment position: Date of latest observation 12/2014; Date received 12/6/2016; Frequency Q; Frequency of reporting Q; Frequency of publication Q, 9-month lag.

*Prepared by Middle East and Central Asia Department; Information as presented in the IMF staff report informational annex.*

### 1.      Since mid-2014, Iraq has been facing a double shock resulting from the so-called

### Since mid-2014, Iraq has been facing a double shock resulting from the so-called

### Context and shocks
- Double shock: the Islamic State of Iraq and Syria (ISIS) conflict and the sharp drop in global oil prices.
- Humanitarian and social impact:
  - Over three million people displaced internally.
  - About 11 million people in need of humanitarian assistance.
- Consequences:
  - Marked deterioration in living conditions and severe constraints on the government’s ability to provide basic public goods and services.
  - Extensive damage to infrastructure and productive assets, disrupted internal and external trade, and deteriorated investor confidence.

### Recent economic developments
- Real GDP growth:
  - Real GDP growth increased by 11 percent in 2016, driven by increased oil production from past oil investment.
  - Oil production expected to contract in 2017 in line with the OPEC-agreed production cut.
- Non-oil sector:
  - Non-oil GDP continued to contract in 2016 due to fiscal consolidation and the ISIS conflict.
- External sector and reserves:
  - Oil prices and exports dropped sharply in 2016, widening the balance of payments to 8.7 percent of GDP and causing a further decline in foreign exchange reserves.
- Financial market indicators:
  - Yield of the 2028 bond diminished since early 2016 in reaction to the increase in oil prices and progress in fiscal consolidation.
  - Streamlined procedures for access to the Central Bank of Iraq (CBI) foreign exchange window have contributed to a reduction of the spread between the parallel and official rates since the fall of 2016.

### Fiscal policies, consolidation, and reforms
- Fiscal strategy and trade-offs:
  - Authorities pursuing fiscal consolidation to bring spending in line with available resources while being mindful of fragile security, political, and social conditions.
  - The brunt of adjustment achieved through cuts in non-oil investment, while maintaining wages and pensions and protecting social spending (health, education, social safety net, assistance for internally displaced persons and refugees).
- Recent budget actions:
  - Parliament approved a supplementary 2017 budget reducing total spending by 2 percent and introducing a credit allocation for repaying arrears incurred during previous years.
- 2018 budget planning:
  - Government will prepare measures (to be finalized during the third review) to reduce the non-oil primary deficit on an accrual basis by ID 2.3 trillion (4.4 percent of non-oil GDP) compared to the draft supplementary budget for 2017.
- Revenue and tax policy measures (intended):
  - Audit the Development Fund for Iraq and Successor Account 300/600 at the CBI to check that all oil revenue reaches the treasury.
  - Prepare and send to parliament a sales and excise tax law in line with Fund technical assistance (proposed SB for the third SBA review).
  - Introduce changes in the Customs Code in line with Fund TA recommendations (proposed SB for the third SBA review).
- Sectoral and enterprise reforms:
  - Continue reforming state-owned non-financial enterprises and the electricity sector, focusing on increasing collection, reducing production costs, and capturing flared gas for electricity production.

### Public financial management reforms
- Recent and planned measures:
  - Adopted tight procedures for the approval of state guarantees (prior action).
  - Improve Government Finance Statistics reporting in line with Fund TA recommendations.
  - Carry out quarterly surveys of arrears and prepare plans for their orderly payment, following an independent audit of domestic arrears by the Board of Supreme Audit.
  - Design and implement a commitment control system for budget execution in line with IMF TA recommendations to avoid the emergence of new arrears.
- Future reforms to be implemented progressively:
  - Gradually move to a Treasury Single Account.
  - Design and implement an Integrated Financial Management Information System.
  - Implement Public Investment Management reform.
  - Strengthen Debt Management with TA support from the Japanese International Cooperation Agency.

### Monetary, exchange rate, and financial sector policies and reforms
- Exchange rate policy:
  - Authorities remain committed to maintaining the peg to the U.S. dollar as the key nominal anchor.
  - Working to remove remaining exchange restrictions and a multiple currency practice in close cooperation with Fund staff.
- Banking sector stability measures:
  - Audit of the financial statements of the two largest state-owned banks Rasheed and Rafidain will be completed by end-August 2017.
  - Based on these audits, the Ministry of Finance will prepare a plan to restructure the two banks, in cooperation with the World Bank.
  - Strengthening legal framework of the CBI to provide for independent oversight, building on the December 2015 IMF safeguards assessment.
- AML/CFT:
  - Continue implementing reforms to strengthen the Anti-Money Laundering and Combating the Financing of Terrorism framework.
  - Following adoption of an AML/CFT compliance mechanism in October 2016, the CBI and Iraqi Insurance Diwan will issue AML/CFT instructions for exchange and insurance companies, followed by guidance to all reporting entities covered by the AML/CFT Law regarding the implementation of preventive measures.

### Performance under the Stand-By Arrangement (SBA)
- Program commitment:
  - Government fully committed to SBA objectives: bring expenditure down to levels consistent with lower oil revenues to achieve debt sustainability, maintain the exchange rate peg, strengthen public financial management and banking supervision, and fight money laundering, financing of terrorism, and corruption, while ensuring social spending is protected.
- Program implementation and misses:
  - Performance criteria (PC) at end-December 2016 and one continuous PC were missed because of spending pressures from the war against ISIS and the humanitarian crisis, resulting in larger spending and lower external arrears payments than programmed for 2016.
  - Authorities request waivers for the non-observance of the continuous PC and one PC at end-June 2017.
  - Authorities request waivers of applicability for the four PCs at end-June 2017 for which complete information is not available yet.
  - Despite constraints, social spending was preserved above program floors by a significant margin.
- Structural benchmarks (SBs):
  - Ten out of twelve SBs for the second review of the SBA were met; the remaining two are in progress.
  - Completed SBs targeted fiscal transparency, governance, debt management, cash management, safeguards and governance of the CBI, and improving the business environment, as detailed in the Memorandum of Economic and Financial Policies.
  - Proposal to raise the floor on obligations outstanding for more than three months to international oil companies to $500 million, starting in September 2017, given difficulty to reduce these obligations to zero because of the lumpy size of oil shipments.
- Program monitoring:
  - A unit was set up in the Prime Minister's Office to strengthen monitoring of commitments under the SBA and coordinate among government agencies.

### Conclusion and risks
- Ongoing challenges and risks:
  - Further decline in oil prices, political and security instability, and considerable constraints in administrative capacity remain major risks.
  - Stable security conditions identified as a prerequisite for the success of policies.
- Request and rationale:
  - In light of performance under the SBA and policies laid out in the MEFP, the authorities request completion of the second review under the SBA and the purchase of the third tranche.
  - The SBA provides needed financial support and a valuable anchor during a period of considerable uncertainty.
- Acknowledgments:
  - Authorities express appreciation for the Fund’s Executive Board, management and staff for continued support, staff’s hard work and constructive engagement, and the valuable technical assistance received.

*Source: cr17251*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17251.pdf_