## _cr08303

## Source details

**Canonical URL:** [_cr08303](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08303.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08303.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08303.pdf.json)

---

### Context and program scope
- Stand-By Arrangement (SBA) for Iraq approved in December 2007 and runs through March 18, 2009.
- Main objectives: maintain macroeconomic stability, facilitate higher investment and growth, and advance key structural reforms.
- Security improved since early 2007 but remains precarious; periodic political withdrawals occurred (Iraqi National List, National Accord Front, Al-Sadr block); National Accord Front rejoined in mid–July 2008.

### Recent economic developments
- Real GDP growth:
  - Estimated at about 1½ percent in 2007.
  - Projected at 9 percent in 2008 (driven by oil output expansion).
- Oil production and exports:
  - Crude oil production averaged 2.3 million barrels per day (mbpd) in January–May 2008 (compared to just above 2.0 mbpd in 2007).
  - Exports resumed through the northern pipeline to Turkey from mid-2007.
  - Crude oil exports January–June 2008 averaged 1.86 mbpd (program projection for year: 1.8 mbpd).
- Inflation:
  - Overall consumer price level in June 2008 fell by some 6 percent year-on-year.
  - Annual consumer price inflation lowered to 5 percent during 2007 from 65 percent at end-2006.
  - Core inflation (excluding fuel and transportation) about 12½ percent in June 2008; core inflation excluding food prices 15.3 percent year-on-year in June 2008.
  - CPI monthly: increased by 1.9 percent in July; CPI year-on-year in July: -1.4 percent; June year-on-year: -6.3 percent.
  - Annual core inflation in July: 13.6 percent (June: 12.4 percent).
- Fiscal and external position:
  - Overall budget surplus of 13½ percent of GDP in 2007 (program projected surplus: 1.5 percent of GDP).
  - Balance of the Development Fund for Iraq (DFI): $12.6 billion at end-2007; rose by $4.6 billion in first six months of 2008; reported as $23.6 billion at end-July 2008 in later notes.
  - Gross international reserves increased to $38.3 billion at end-April 2008 (about 10 months of imports of goods and services); projections of about $44 billion by end-2008.
- Monetary and exchange rate developments:
  - Policy interest rate reduced from 20 percent at end-2007 to 16 percent as of July 1, 2008.
  - Appreciation of the dinar slowed from about ½ percent per month in second half of 2007 to about ¼ percent per month during January–June 2008; CBI intended to increase pace to ½ percent per month during second half of 2008.
  - Exchange rates: ID 1,195 per U.S. dollar at end-June 2008; ID 1,184 per U.S. dollar on August 28, 2008. Dinar appreciation since November 2006: 19½ percent.
  - Real demand for dinar currency in circulation expanded by 23 percent in 2007.

### Fiscal policy, supplementary budget, and wage measures
- Supplementary budget for 2008:
  - Provides for sizable increase in current and capital spending; about half of expenditure increase allocated to higher public investment (including oil sector and provincial level).
  - Main increases in current spending: civil service wage hike, security, in-kind Public Distribution System (PDS; food imports), transfers to electricity sector (fuel imports) and public enterprises (wage increase), and war reparations to Kuwait.
- Civil service salary law and impact:
  - Law on Government Employee Salaries enacted May 4, 2008 (retroactive to January 1); excludes Presidency, Prime Minister’s Office, ministries of defense and interior.
  - Salary increase expands civil service wage bill by some 57 percent compared to original budget and adds roughly 9 percent of non-oil GDP to consumption demand.
  - Authorities agreed to phase in the increase by limiting effective salary increase in 2008 to 40 percent; remainder paid in 2009.
  - Total civil service wage bill (non-Defense/Interior) in 2008 projected at ID 10,005 billion (table: 2008: 10,005).
  - Wage bill historical series (non-Defense/Interior, in billion Iraqi dinar): 2004: 2,745; 2005: 4,392; 2006: 5,249; 2007: 5,955; 2008: 10,005.
- Fiscal outcomes and reserves:
  - Overall budget surplus projected for 2008: about 2¾ percent of GDP (versus programmed deficit of 8½ percent).
  - Balance of the DFI projected to increase to almost $16.5 billion by end-2008 (program target $5.1 billion).
  - Preliminary fiscal data through June indicate a surplus of ID 6.9 trillion (about 6 percent of projected 2008 GDP).

### Fuel pricing and subsidies
- Actions and plans:
  - Official retail prices of jet fuel and LPG increased in June and July 2008 respectively.
  - Government will refrain from direct fuel subsidies except for a small subsidy on kerosene; gasoline and diesel prices planned to be adjusted in early 2009.
  - Authorities committed to develop, in consultation with the Fund, an automatic fuel price adjustment mechanism to be implemented early next year; development of periodic adjustment mechanism for fuel prices targeted by September 30, 2008 (structural benchmark).
- Indirect subsidy:
  - Indirect subsidy from underpricing of crude oil used domestically projected to increase to 6½ percent of GDP in 2008 (from 5 percent in 2007).

### Monetary policy, CBI reforms, and safeguards
- CBI commitments and actions:
  - CBI to increase pace of appreciation of the dinar to ½ percent per month during second half of 2008 and keep policy interest rate positive in real terms.
  - Policy interest rate: 16 percent as of July 1, 2008 (reduced from 20 percent at end-2007).
  - External audit of CBI net international reserves at December 31, 2007 and CBI 2007 financial statements completed.
  - CBI Board approved new reserves management guidelines on August 4, 2008 (structural benchmark).
  - Work underway with IMF technical assistance toward adoption of new reserves management guidelines; reconciliation of CBI accounts progressing (particular issues remain for two CBI branches in Kurdish region).
  - Commitments to implement recommendations of IMF SAR finalized March 2008.

### Public financial management (PFM), audits, statistics
- PFM modernization:
  - Engagement with Fund, World Bank, USAID to improve budget execution, cash management, commitment control, accounting framework, fiscal reporting.
  - Progress with IFMIS installation before year-end (USAID cooperation).
  - Adoption of comprehensive PFM action plan underway (structural benchmark for July 31, 2008: underway).
- Audits and transparency:
  - Final fiscal accounts for 2005 audited by Board of Supreme Audit (BSA); 2006 accounts being audited; Ministry of Finance to submit 2007 final accounts to BSA soon.
  - COFE to take over IAMB responsibilities for DFI by end-2008; COFE to publish mandated audit reports and present first semi-annual COFE report by mid-September 2008 (structural benchmark).
- Statistics:
  - 2007 household expenditure survey completed; new CPI weights being incorporated; updated CPI to be published after robustness test.
  - Monetary and balance of payments statistics published in IMF’s International Financial Statistics starting March and July 2008 respectively.

### Banking sector, audits, and restructuring
- Commercial banks:
  - Financial and operational audits of Rafidain and Rasheed banks (based on 2006 accounts) completed on July 10, 2008 (despite information losses and limited branch access).
  - Restructuring plans for Rafidain and Rasheed to be developed based on audits; operational restructuring program for Rafidain and operational and financial restructuring programs for Rasheed targeted by September 30, 2008 (structural benchmarks).
  - CBI task force developing prudential regulations; nine key regulations finalized (including licensing, capital adequacy, credit risk, large exposures, liquidity); remaining regulations expected soon (completion of prudential regulations for commercial banks targeted July 31, 2008 — partially met).
  - Next steps: implement banking supervision practices to international standards, adopt IFRS for commercial banks’ accounting, prepare financial soundness indicators.

### Oil sector governance and transparency
- Metering and transparency:
  - Progress with oil-metering; meters at Basra export terminal certified and fully operational.
  - Metering for Khor Al-Amyah ordered for installation in second half of 2008; about 200 custody-transfer meters installed to date.
  - Iraq joined the Extractive Industries Transparency Initiative (EITI) and begun publishing monthly oil export data on the Internet.
  - Staff recommendation: extend metering to all oil sector activities and speed up establishment of legislative framework for hydrocarbons to attract investments.

### Debt reduction, creditor negotiations, and external debt projections
- Paris Club and other creditors:
  - Paris Club debt reduction equivalent to 80 percent in NPV terms to be achieved in three stages (first and second stages—each 30 percent—effective November 2004 and December 2005; final 20 percent depends on completion of second and last review under SBA by end-December 2008).
  - United Arab Emirates announced full cancellation of its claims on July 7, 2008; negotiations ongoing with other non-Paris Club and commercial creditors (notably China).
  - Debt relations with 57 countries resolved to date; bilateral agreement with Russia signed February 2008; bilateral agreements with eleven non-Paris Club official creditors signed in total.
  - Private creditors: bulk of claims resolved through 2006 exchanges; reopened commercial debt-restructuring registration January 30–March 15 (110 claimants invited to tender, 84 did so); most remaining commercial claims to be resolved via liquidation of London branch of Rafidain Bank.
- External debt stock and projections:
  - Stock of external debt at end-2006: $99.4 billion (201 percent of GDP).
  - Stock at end-2007: $102 billion (164 percent of GDP).
  - Projected external debt without third stage of debt reduction: by 2013: $43 billion (almost 25 percent of GDP).
  - Projected external debt with third stage of debt reduction (expected in 2008): by 2013: about $33.6 billion (19 percent of GDP).
  - Total debt (with third stage) series (in billions of US$): 2004: 142.1; 2005: 122.6; 2006: 111.5; 2007: 99.3; 2008: 102.2; 2009: 33.0; 2010: 33.9; 2011: 35.4; 2012: 35.1; 2013: 34.5; memo: 33.6.
  - External debt service in percent of exports (accrued): 2004: 32.3; 2005: 22.2; 2006: 20.0; 2007: 12.8; 2008: 8.3; 2009: 2.8; 2010: 2.5; 2011: 4.7; 2012: 4.1; 2013: 3.5.

### Stress tests and shock scenarios (oil shocks)
- Simulated shocks:
  - Production shock: oil production constant at 2.2 mbpd in 2008–13.
  - Price shock: oil export price lower than baseline by US$25 per barrel in 2008–09 and by US$30 per barrel in 2010–13.
  - Combined shock: production and price shocks simultaneously.
- Implications:
  - Under combined shock scenario, Iraq would need to use DFI resources and possibly borrow from international markets to close financing gaps.

### Program monitoring, performance criteria, and structural benchmarks
- Performance to end-March and end-June 2008:
  - Iraq met all quantitative performance criteria set for end-March 2008 except government imports of petroleum products.
  - All structural performance criteria were met.
  - All quantitative performance criteria for end-June 2008 met except government wage and pension bill (waiver requested; staff supports waiver).
- Key structural performance criteria met:
  - Avoid administrative measures limiting participation in CBI's regular auction of foreign exchange (Continuous) — Met.
  - Enact amendments to pension law to make it fiscally sustainable — December 31, 2007 — Met.
  - Completion by external auditor of audit of CBI net international reserves data as at December 31, 2007 — March 31, 2008 — Met.
  - Completion by external auditor of audit of the CBI 2007 financial statements — June 30, 2008 — Met.
- Selected structural benchmarks and statuses (deadlines and statuses preserved):
  - Reconciliation in CBI accounts of local banks’ current accounts, intra-branch accounts, and suspense accounts — March 31, 2008 — Partially met.
  - Adoption of reserves management guidelines by the CBI — March 31, 2008 — Underway.
  - Completion of operational and financial audits of Rasheed and Rafidain banks based on 2006 accounts — May 31, 2008 — Met on July 10.
  - Incorporate new weights in the CPI based on the 2007 household expenditure survey — May 31, 2008 — Underway.
  - Completion of census of all public service employees — June 30, 2008 — Delayed (expected in September 2008).
  - Adoption of an action plan for modernizing government's financial management — July 31, 2008 — Underway.
  - Completion of prudential regulations for commercial banks — July 31, 2008 — Partially met (nine key regulations finalized).
  - Publication of COFE audit reports and first semi-annual COFE report to Council of Ministers — September 15, 2008.
  - Development of periodic adjustment mechanism for fuel prices — September 30, 2008.
  - Adoption of operational restructuring program for Rafidain bank — September 30, 2008.
  - Adoption of operational and financial restructuring programs for Rasheed bank — September 30, 2008.
  - Submission and publication of audited accounts of the Federal Budget for year ending December 2007 — November 15, 2008.

### SBA availability, financing assurances, and staff recommendation
- Scheduled access (SDR; percent of quota):
  - May 15, 2008: SDR 368,404,000 — 31.00 percent of quota — Condition: Completion of first review and observance of end-March 2008 performance criteria.
  - August 15, 2008: SDR 35,652,000 — 3.00 percent of quota — Condition: Observance of end-June 2008 performance criteria.
  - November 15, 2008: SDR 35,652,000 — 3.00 percent of quota — Condition: Completion of second review and observance of end-September 2008 performance criteria.
  - February 15, 2009: SDR 35,652,000 — 3.00 percent of quota — Condition: Observance of end-December 2008 performance criteria.
  - Total access: SDR 475,360,000 — 40.00 percent of quota.
- Disbursements and Fund credit indicators (table context):
  - Disbursements of Fund credit (SBA): 0.0 (prior years), 439.7 in 2008, 35.7 in 2009 (in millions of SDRs in table context).
  - EPCA outstanding: 297.1 (SDR millions) (table context).
- Staff recommendation:
  - Staff recommends completion of the first review under the SBA, citing authorities’ strong commitment and policies in the SMEFP.
  - Staff supports establishment of quantitative performance criteria for end-September and end-December 2008 and completion of the financing assurances review.

### Staff appraisal — key findings and policy recommendations
- Macroeconomic opportunity:
  - Improvements in security, oil production and exports, and stronger fiscal/external positions create opportunity to rebuild institutions and infrastructure while maintaining macroeconomic stability.
  - Government needs to ensure sound management of oil revenues and press ahead with priority structural reforms.
- Fiscal policy recommendations:
  - Supplementary budget viewed as acceptable given higher-than-expected oil revenues and spending needs.
  - Support for restriction of effective wage increase in 2008; urges completion of public service employee census to computerize payroll and eliminate ghost workers.
  - Prepare to streamline costly and untargeted PDS.
  - Safeguard quality of large public investment program.
- Fuel pricing:
  - Increase in official prices of LPG and jet fuel appropriate; staff encourages increasing other fuel prices early next year and developing a fuel price adjustment mechanism to reduce indirect fuel subsidies.
- Monetary policy:
  - Welcome CBI intention to tighten policy stance; step up pace of dinar appreciation and keep policy interest rate positive in real terms.
- Structural reforms and governance:
  - Press ahead with PFM reform plan; adopt restructuring programs for Rafidain and Rasheed banks; complete prudential regulations for commercial banks.
  - Speed up electricity sector rehabilitation and legislative framework for hydrocarbons to attract investment.
  - Strengthen governance and fight corruption, especially in hydrocarbons; extend metering systems across oil sector.
- CBI governance and reserves management:
  - Urge CBI to address IMF SAR and external audit recommendations and to speed up adoption of reserves management guidelines.

*Source: IMF staff report (content unit _cr08303).*

### Executive Summary ......................................................................................................

### Executive Summary

### Context and program scope
- The current Stand-By Arrangement (SBA) for Iraq was approved in December 2007 and runs through March 18, 2009.
- Main objectives: maintain macroeconomic stability, facilitate higher investment and growth, and advance key structural reforms.
- Security improved since early 2007 but remains precarious; periodic flare-ups and political withdrawals from government occurred (ministers from the Iraqi National List, the National Accord Front, and the Al-Sadr block withdrew; the National Accord Front rejoined in mid–July 2008).

### Recent economic developments
- Real GDP growth:
  - Estimated at about 1½ percent in 2007.
  - Projected to increase to 9 percent in 2008, driven by oil output expansion.
- Oil production and exports:
  - Crude oil production averaged 2.3 million barrels per day (mbpd) in January–May 2008, compared to just above 2.0 mbpd in 2007.
  - Exports resumed through the northern pipeline to Turkey from mid-2007.
- Inflation:
  - Overall consumer price level in June 2008 fell by some 6 percent year-on-year.
  - Annual consumer price inflation lowered to 5 percent during 2007 from 65 percent at end-2006.
  - Core inflation (excluding fuel and transportation) was about 12½ percent in June 2008.
  - Core inflation excluding food prices was 15.3 percent, year-on-year, in June 2008.
- Fiscal and external position:
  - Overall budget surplus of 13½ percent of GDP in 2007 (program projected a surplus of 1.5 percent of GDP).
  - Balance of the Development Fund for Iraq (DFI) was $12.6 billion at end-2007 and rose by a further $4.6 billion in the first six months of 2008.
  - Gross international reserves increased to $38.3 billion at end-April 2008 (about 10 months of imports of goods and services).
- Monetary and exchange rate developments:
  - Policy interest rate reduced from 20 percent at end-2007 to 16 percent as of July 1, 2008.
  - Appreciation of the dinar slowed from about ½ percent per month in the second half of 2007 to about ¼ percent per month during January–June 2008.
  - Real demand for dinar currency in circulation expanded by 23 percent in 2007.
- Investment and execution:
  - Higher oil revenues combined with below-budget investment spending; indications that measures to improve investment execution have begun to bear fruit.
- Debt restructuring progress:
  - Paris Club debt reduction equivalent to 80 percent in net present value (NPV) terms to be achieved in three stages (first and second stages—each 30 percent—went into effect in November 2004 and December 2005; final 20 percent depends on completion of the second and last review under the current SBA by end-December 2008).
  - United Arab Emirates announced full cancellation of its claims in early July 2008; negotiations ongoing with other non-Paris Club and commercial creditors.
  - Box 1 data (selected figures):
    - Paris Club creditors: Before debt restructuring 42.5 (nominal debt stock in U.S.$ billion); Debt relief to date 25.8; Outstanding 16.7.
    - Non-Paris Club creditors (concluded agreements only): Before debt restructuring 9.4; Debt relief to date 7.5; Outstanding 1.9.
    - Cash settlement involves a payment of $614 million in 2008 (note in Box 1).
- Structural reform progress:
  - Pension law amendments enacted.
  - External audits of CBI net international reserves at end–2007 and of the CBI 2007 financial statement completed.
  - Progress in modernizing government financial management, banking reform, and strengthening statistical database; mixed results on implementing IMF safeguards assessment recommendations.

### Key policy elements for the remainder of 2008 (authorities’ program)
- Fiscal measures:
  - Supplementary budget for 2008 provides for a sizable increase in current and capital spending.
  - A significant civil service salary increase will be implemented gradually in 2008 and 2009.
  - The impact on inflation expected to be modest because of the high import content of the additional outlays.
- Fuel pricing:
  - Domestic retail prices of LPG and jet fuel have been increased.
  - Government will continue to refrain from providing direct fuel subsidies, except for a small subsidy on kerosene.
  - Gasoline and diesel prices are planned to be adjusted again in early 2009.
- Monetary and exchange rate policy:
  - CBI will increase the pace of appreciation of the dinar and keep the policy interest rate positive in real terms to keep inflation under control.
  - Policy interest rate stood at 16 percent as of July 1, 2008 (reduced from 20 percent at end-2007).
- Structural reforms and financial sector measures:
  - Continue improvements in public financial management (PFM), including adoption of a comprehensive PFM action plan.
  - CBI to further improve accounting and reporting practices and adopt new reserve management guidelines.
  - Restructuring plans for the two largest state-owned banks will be developed based on finalized financial and operational audits.
  - Work to complete the full set of prudential regulations for commercial banks will proceed.

### Macroeconomic outlook and risks (highlights)
- Growth and output composition:
  - Real GDP growth projected at 9 percent in 2008 (driven by oil).
  - Crude oil production expected to average at least 2.3 mbpd and exports 1.8 mbpd.
  - Agricultural output likely affected by drought in 2008; other non-oil activities expected to recover.
- Inflation target and rationale:
  - Annual inflation objective increased to 14 percent (slightly above the original program target) to account for pass-through of higher international food prices.
  - If no further declines in black-market fuel prices occur, the gap between headline and core inflation would likely be reduced.

### Program implementation and institutional considerations
- Authorities remain strongly committed to the SBA-supported program; a Supplementary Memorandum of Economic and Financial Policies (SMEFP) outlines plans for the remainder of the program period.
- Continued emphasis on completing structural benchmarks, improving safeguards implementation at the CBI, and advancing debt restructuring with non-Paris Club and commercial creditors.

*Source: _cr08303 - Executive Summary.*

### 14.      The economic outlook remains subject to considerable risks. A reversal of the still

### 14.      The economic outlook remains subject to considerable risks. A reversal of the still fragile security gains and/or political instability could hamper economic growth, add to inflationary pressures, and obstruct timely implementation of the structural reform agenda.

### B. Fiscal Policy and Related Measures
- A sizable increase in wages and allowances for the civil service was signed into law in early May 2008 (SMEFP, ¶12).
  - The salary increase, which was not envisaged under the program, would expand the civil service wage bill by some 57 percent compared to the original budget and add roughly 9 percent of non-oil GDP to consumption demand.
  - Authorities agreed to phase in the salary increase by limiting the effective salary increase in 2008 to 40 percent; the remainder will be paid in 2009.
  - Note: In 2008, some payments were made in June, but most of the increase will be paid in the second half of the year.
- Iraq: Wages and Employment, 2004-08 (In billion Iraqi dinar unless otherwise indicated)
  - Wage bill (non-Defense/Interior): 2004: 2,745; 2005: 4,392; 2006: 5,249; 2007: 5,955; 2008: 10,005
  - Employment (non-Defense/Interior): 2004: 580,647; 2005: 997,547; 2006: 1,374,605; 2007: 1,452,258; 2008: 1,536,349
  - Average real wage index (non-Defense/Interior)1/ : 2004: 100; 2005: 75.6; 2006: 39.8; 2007: 29.0; 2008: 43.0
  - Average CPI: 2004: 100; 2005: 137.0; 2006: 209.9; 2007: 274.6; 2008: 293.9
  - 1/ Evaluated at mid-year employment level. The average wage index is, to some extent, biased downwards as new hirings most likely took place at lower grade levels.
- Draft supplementary budget for 2008:
  - Provides for significant increases in current and capital spending while preserving a sustainable fiscal stance overall (SMEFP, ¶13).
  - Enables stepped-up investment, partly repairs real wage erosion, and accommodates impact of higher world food prices and war reparations to Kuwait.
  - About half of the total expenditure increase is allocated to higher public investment in priority sectors, including the oil sector and at the provincial level.
  - Main increases in current spending (in addition to the civil service wage hike) are for: security; the in-kind Public Distribution System (PDS; food imports); transfers to the electricity sector (fuel imports) and public enterprises (wage increase); and war reparations to Kuwait.
  - Authorities intend to request technical assistance from the Fund and the World Bank to prepare a reform of the PDS as of early 2009.
- Fiscal outcomes and reserves:
  - An overall budget surplus of about 2¾ percent of GDP is projected for 2008 (versus a programmed deficit of 8½ percent).
  - As a result, the balance of the DFI would increase to almost $16.5 billion by end-2008 (the program target is $5.1 billion).

### Fuel pricing and subsidies
- Government actions:
  - Official retail prices of jet fuel and LPG were increased in June and July 2008, respectively.
  - Plans to adjust gasoline and diesel prices in early 2009.
  - No direct subsidies on fuel products, except for a small subsidy on imported kerosene.
- Indirect subsidy:
  - Due to higher international oil prices, the indirect subsidy on fuel products resulting from underpricing of crude oil used for domestic consumption is projected to increase to 6½ percent of GDP in 2008, from 5 percent in 2007.
- Authorities’ commitments:
  - Agreed that the surge in world fuel prices necessitates a further adjustment of domestic prices but preferred to wait until after the provincial elections later this year.
  - Committed to develop, in consultation with the Fund, an automatic fuel price adjustment mechanism that can be implemented early next year.

### PFM and audits
- Engagement with Fund, World Bank, and other partners to improve public financial management (SMEFP, ¶15).
  - Recent Fund technical assistance areas: budget execution, cash management, commitment control, accounting framework, and fiscal reporting.
  - World Bank cooperation on capacity building project covering budget preparation, public procurement, and fiscal reporting.
  - Progress with USAID to install the Iraq Financial Management Information System (IFMIS) before year-end.
  - Efforts underway, in consultation with the Fund and World Bank, to adopt a comprehensive PFM action plan.
- Transparency and audits:
  - Final fiscal accounts for 2005 have been audited by the Board of Supreme Audit (BSA); those for 2006 are being audited; Ministry of Finance will submit final accounts of the Federal Budget for 2007 to the BSA soon.
  - Census of public service employees is underway; completion delayed to end-September due to technical and security-related problems and difficulties with data collection (SMEFP, ¶16).

### C. Monetary and Exchange Rate Policy
- CBI policy stance and actions:
  - CBI recognizes planned fiscal expansion poses a challenge to keep inflation under control and requires tightening of its policy stance (SMEFP, ¶17).
  - In response, the CBI will increase the pace of appreciation of the dinar to ½ percent per month during the second half of 2008.
  - CBI agreed to keep the policy interest rate positive in real terms to signal commitment to fight inflation.
  - Rationale: consistent with a more appreciated equilibrium real exchange rate due to continued improvement in Iraq’s terms of trade since end-2007 and expansion of domestic demand.
- Commitments and reforms:
  - Authorities committed to implementing recommendations of the IMF SAR finalized in March 2008 (SMEFP, ¶18).
  - External audit of the CBI net international reserves at December 31, 2007 and external audit of the CBI 2007 financial statements have been completed as planned despite the fire that largely destroyed the CBI headquarters in January.
  - Progress with strengthening accounting and reporting framework of the CBI, with better and more frequent reconciliation of accounts, except for accounts of the two CBI branches in the Kurdish region.
  - Work underway, with technical assistance from the Fund, towards adoption of new reserves management guidelines.
  - Authorities remain committed to maintaining a liberal exchange system (SMEFP, ¶19).

### D. Other Structural Issues
- Oil sector governance and transparency:
  - Progress with oil-metering.
  - Iraq has joined the Extractive Industries Transparency Initiative (EITI) and begun to publish oil export data on the Internet on a monthly basis.
  - Discussions on a new legislative framework for the hydrocarbon sector are continuing.
- Commercial bank restructuring:
  - Restructuring progressed in close collaboration with the Fund and World Bank (SMEFP, ¶21).
  - Financial and operational audits of Rasheed and Rafidain banks based on 2006 financial accounts completed despite insecurity and curfews.
  - Audits affected by loss of information on branch loans and credit files during the war and by limited access to documentation from branches outside Baghdad, but provide a basis for restructuring plans.
  - CBI task force developing comprehensive prudential regulations for commercial banks with Fund technical assistance; almost half of the regulations prepared—including licensing, capital adequacy, credit risk, large exposures, and liquidity—remaining regulations expected to be completed soon (SMEFP, ¶22).
- Electricity sector:
  - Government intends to rehabilitate the electricity sector.
  - Supplementary budget for 2008 provides ID 1,439 billion to cover unpaid electricity supplies via a netting out operation between the electricity sector, oil companies, and the ministry of finance.
  - Reform plan envisages increasing supply of electricity, improving payment collection, and gradual tariff increases toward cost recovery levels.
- Statistics and CPI:
  - Progress in addressing weaknesses in Iraq’s statistical database (SMEFP, ¶24).
  - Compilation of national accounts data has improved with Fund technical assistance.
  - Publication of monetary and balance of payments statistics in IMF’s International Financial Statistics started in March and July 2008, respectively.
  - 2007 household expenditure survey completed; new weights being incorporated in the CPI. Updated CPI will be published soon after completion of a robustness test.

### IV. Program Monitoring and Financing Assurances
- Performance criteria and benchmarks:
  - Iraq met all quantitative performance criteria set for end-March 2008, except for government imports of petroleum products.
  - All structural performance criteria were met.
  - Government imports of petroleum products exceeded the program ceiling by a small margin due to higher-than-expected import prices for kerosene.
  - Staff will inform the IMF Executive Board on compliance with end-June quantitative performance criteria and the end-July structural benchmarks before Board consideration of the first review.
- Ongoing monitoring:
  - Program will be monitored through quarterly quantitative performance criteria and indicative targets, and structural benchmarks.
  - Additional quantitative performance criteria set for end-September and end-December 2008, as specified in Table 8.
  - A financing assurances review will be undertaken before the last scheduled disbursement date if any arrears on Iraq’s debt remain at that time.
  - A prior action for completing the first review has been set (Table 9).

### V. Staff Appraisal — Key findings and policy recommendations
- Macroeconomic outlook:
  - Recent improvements in security, incipient recovery of oil production and exports, and strengthening of fiscal and external positions create an opportunity to speed up rebuilding institutions and infrastructure while maintaining macroeconomic stability.
  - To seize this opportunity, government needs to: (a) ensure sound management of oil revenues; and (b) press ahead with priority structural reforms.
- Fiscal balance:
  - Staff views the supplementary budget as acceptable given much higher-than-foreseen oil revenues and pressing needs for additional spending.
  - Staff welcomes decision to restrict the effective wage increase in 2008 and considers the overall domestic demand impact of the revised 2008 budget manageable.
  - Urges completion of the census of public service employees without further delay to computerize payroll and eliminate ghost workers and to lay the basis for civil service reform.
  - Essential to prepare to streamline the costly and untargeted Public Distribution System.
  - Additional investment allocation is welcome but underscores the need to safeguard the quality of the large public investment program.
- Fuel pricing:
  - Increase in official prices of LPG and jet fuel is appropriate.
  - Staff encourages authorities to increase other fuel prices early next year.
  - Development of a fuel price adjustment mechanism in the coming months could help reduce the still sizable indirect fuel subsidies.
- Monetary policy:
  - Staff welcomes CBI intention to tighten policy stance in light of fiscal expansion.
  - Important to step up the pace of appreciation of the dinar to contain inflation and to keep the central bank’s policy interest rate positive in real terms.
- Structural reforms:
  - Government must press ahead with key structural reforms, including a comprehensive reform plan for public financial management.
  - Modernization of financial intermediation requires adoption of restructuring programs for Rafidain and Rasheed banks and completion of prudential regulations for commercial banks.
  - Staff welcomes efforts to rehabilitate the electricity sector and encourages speeding up efforts to establish a new legislative framework for the hydrocarbon sector to attract investments needed to further increase oil production.
- Governance and transparency:
  - Further efforts needed to strengthen governance and fight corruption, especially in the hydrocarbon sector.
  - Metering systems should be extended to all oil sector activities.
  - Staff welcomes Iraq’s joining of EITI and encourages strengthening transparency under the initiative as soon as feasible.
- CBI governance and reserves management:
  - Staff urges the CBI to address all recommendations of the IMF’s SAR and the external audit report of its 2007 financial statements.
  - It is particularly important to speed up the adoption of reserves management guidelines.

*Source: IMF staff report (content unit _cr08303).*

### 35.      Staff recommends that the first review under the SBA be completed. In view of

### Staff recommends that the first review under the SBA be completed

### Staff recommendation and program assessments
- Staff recommends that the first review under the SBA be completed.
- Rationale: authorities’ strong commitment to the program and the policies and measures described in the SMEFP.
- Staff supports establishment of quantitative performance criteria for end-September and end-December 2008.
- Staff believes Iraq is making best efforts to reach bilateral agreements on arrears to official non-Paris Club creditors and that the authorities have been negotiating in good faith to resolve remaining arrears to private creditors, consistent with the Fund’s policy on lending into arrears.
- Staff supports completion of the financing assurances review.

### Economic growth and prices (selected projections and estimates)
- Real GDP (percentage change): -0.7 6.2 1.3 1.5 7.1 9.0 7.3
- Non-oil real GDP (percentage change): 12.0 7.5 0.0 -2.0 3.0 3.0 5.0
- GDP per capita (US$): 1,124 1,720 2,115 2,108 2,321 3,198 3,516
- GDP (US$ million): 31,378 49,457 62,574 62,375 70,597 97,246 109,831
- Oil production (In mbpd): 1.9 2.0 2.0 2.0 4 2.2 2.3 2.5
- Oil exports (In mbpd): 1.4 1.4 1.55 1.59 1.7 1.8 1.9
- Iraq oil export prices (US$ pb): 43.95 55.65 58.86 33.05 57.09 98.4 106.0
- Consumer price inflation (percentage change; end of period): 31.6 64.8 25.0 4.7 12.0 14.0 10.0
- Exchange rate (dinar per US$; period average): 1/ 1,469 1,467 1,264 1,255 ... 1,195 ...

### Public finance (selected aggregates, percent of GDP where indicated)
- Total government debt (in billions of US$): 111.5 99.4 101.4 102.3 48.7 43.0 44.9
- Government revenue and grants (percent of GDP): 107.3 80.4 64.7 75.0 67.5 79.0 75.1
- Government oil revenue (percent of GDP): 76.7 65.2 58.9 67.6 57.1 71.5 71.4
- Government non-oil revenue (percent of GDP): 2.7 2.7 2.9 3.8 8.4 6.0 3.6
- Grants (percent of GDP): 27.9 12.5 2.9 3.7 2.0 1.5 0.2
- Expenditure (percent of GDP): 100.8 69.4 63.2 61.5 75.9 76.2 61.6
  - Current expenditure (percent of GDP): 81.0 52.4 49.4 49.0 52.0 50.1 42.1
  - Capital expenditure (percent of GDP): 19.8 17.0 12.3 11.9 23.7 25.9 18.1
- Overall fiscal balance (including grants; percent of GDP): 6.5 11.0 1.5 13.5 -8.4 -2.8 13.5
- Primary fiscal balance (percent of GDP): 6.7 11.6 2.2 14.3 -7.5 3.5 14.7
- Gross borrowing/use of external assets (percent of GDP): 6.4 -2.3 -1.0 -3.1 8.5 -3.4 -13.5
- Residual or financing gap/surplus (percent of GDP): 4.5 1.3 0.0 -1.3 0.0 0.0 0.0
- External assets held abroad (In US$ million): 6,203 8,624 10,367 12,584 5,119 16,463 30,816
- Tax revenue/non oil GDP (In percent): 2.8 1.9 2.0 3.6 2.3 3.8 3.8

### Monetary indicators and central bank
- Growth in reserve money (percent): 12.0 29.0 33.0 73.9 16.5 39.0 17.8
- Gross CBI foreign exchange assets/Reserve money (percent): 129.4 150.3 137.5 124.4 150.2 136.8 171.8
- Gross reserves (In US$ million): 12,016 20,037 26,909 31,455 34,318 50,369 67,607
- In months of imports of goods and services: 5.8 9.5 8.0 7.7 9.5 13.5 14.4
- Policy interest rate (end of period): 3/ 7.0 16.0 20.0 20.0 ... 16.0 ...

Selected Central Bank (CBI) balance sheet highlights (In billions of Iraqi dinars)
- Net foreign exchange assets (selected): 17,078 25,954 38,218 31,695 41,151 50,096 53,763 58,459 40,859 86,458
- Reserve money (levels): 13,698 17,665 30,728 23,492 36,657 37,996 40,495 42,722 27,364 50,331
  - Currency issued: 10,257 11,917 15,632 14,970 17,242 17,898 19,287 20,662 17,249 24,342
  - Banks reserves: 3,442 5,749 15,095 8,522 19,415 20,098 21,208 22,061 10,114 25,989
- Reserve money (annual growth, in percent): 12.0 29.0 73.9 33.0 92.3 90.3 42.1 39.0 16.5 17.8
- Gross foreign exchange assets (in millions of U.S. dollars): 12,016 20,037 31,455 26,909 34,122 41,921 45,659 50,396 34,318 67,578
- Net foreign exchange assets (in millions of U.S. dollars): 11,578 19,588 31,455 26,413 34,122 41,921 45,658 50,396 34,049 67,578

### Banking sector and monetary aggregates
- Summary balance sheet of deposit money banks (selected)
  - Net foreign assets (Dec): -5,699 -3,215 -1,493 -3,215 -2,490 -2,395 -3,215
  - Net Domestic Assets (Dec): 11,331 12,087 16,064 20,202 15,890 34,233 29,559
  - Demand deposits (Dec): 3,796 6,682 11,303 12,740 9,883 23,879 19,758
  - Time deposits (Dec): 1,835 2,190 3,268 4,247 3,516 7,960 6,586
- Monetary survey highlights (In billions of Iraqi dinars)
  - Net foreign assets (Dec): 11,379 22,739 36,726 28,480 38,661 56,064 37,644 83,816
  - Broad money (Dec): 14,746 19,842 28,805 30,766 28,504 49,562 42,358 73,186
  - Currency outside banks (Dec): 9,113 10,968 14,232 13,779 15,103 17,724 16,014 20,881

### Balance of payments (selected, In millions of U.S. dollars)
- Trade balance: 5,049 10,378 7,671 17,828 1,690 22,908 35,398
- Exports (total): 23,106 29,915 34,134 37,914 36,335 65,487 74,445
  - Crude oil exports: 22,517 29,195 33,280 37,143 35,369 64,617 73,511
- Imports: -18,058 -19,537 -26,464 -20,087 -34,645 -42,578 -39,047
- Income, net: -4,444 -3,661 -3,200 -3,409 -3,243 -3,366 1,054
- Services, net: -5,740 -5,164 -4,198 -4,175 -5,234 -5,746 -4,880
- Transfers, net: 7,835 5,085 964 1,084 4,522 3,139 -2,191
  - Private, net (incl. NGOs): 212 368 790 637 4,873 4,873 1,302
  - Official: 7,623 4,718 174 448 -351 -1,734 -3,493
- Current account (In millions of U.S. dollars): 2,700 6,639 1,237 11,328 -2,264 16,935 29,381
- Overall balance (In millions of U.S. dollars): 1,911 7,969 6,202 10,609 6,706 18,079 16,530
- Central bank reserves (In US$ million): 12,016 20,037 26,909 31,455 34,318 50,369 67,607
- External assets held abroad (In US$ million): 6,203 8,624 10,367 12,584 5,119 16,463 30,816
- GDP (US$ million): 31,378 49,457 62,574 62,375 70,597 97,246 109,831
- Non-oil GDP (US$ million): 11,856 21,027 30,761 27,060 37,076 33,571 35,990

### Quantitative performance criteria and indicative targets (under the SBA, 2007–08)
- Net international reserves of the CBI (floor; in millions of U.S. dollars): amount at 6/30/07 revised to 20,635; (Actual) 10,820 13,487 ...
- Lending to the government and the private sector by the CBI (ceiling): 3/ 5,230 ...
- Central government total financing (ceiling) — cumulative flow from beginning of calendar year: ... 7,600 2,200 3,750 [1,250] [-1,300]; (Actual) -7,894 -9,080 ...
- Government wage and pension bill (ceiling) — cumulative flow: ... 10,100 2,750 5,500 [10,250] [14,200]; (Actual) 8,324 2,385 ...
- Government imports of petroleum products (ceiling): ... 400 100 200 300 400; (Actual) 195 108 ...
- New medium-and long-term nonconcessional external debt (ceiling; in millions of U.S. dollars): ... 500 500 500 500 500; (Actual) 0 0 ...
- External arrears on existing/rescheduled debt and new borrowing (in millions of U.S. dollars; ceiling): ... 0 0 0 0 0; (Actual) 0 0 ...
- Indicative target — Revolving government credit to the State Oil Marketing Organization (ceiling): ... 400 400 400 400 400; (Actual) 400 400 ...
- Notes: 1/ Technical Memorandum of Understanding will provide precise definitions. 2/ Amount at 6/30/07 revised from 21,045. 3/ Rolling over t-bills does not constitute new lending. 4/ Flows for 2007 and 2008 are cumulative starting 1/1/2007 and 1/1/2008, respectively. 5/ Excluding salaries paid by ministries of defense and interior. 6/ Concessionality defined as loans with a grant element of 35 percent or higher. 7/ To be monitored on a continuous basis.

### Structural measures, performance criteria, and benchmarks
- Prior action for completion of the first review: Adoption of a supplementary budget consistent with program objectives.
- Structural performance criteria (status):
  - Avoid administrative measures limiting participation in CBI's regular auction of foreign exchange other than AML/CFT screening — Continuous — Met.
  - Enact amendments to the pension law to make it fiscally sustainable — December 31, 2007 — Met.
  - Completion by external auditor of audit of CBI net international reserves data reported to the IMF as at December 31, 2007, including full count of gold and foreign exchange holdings — March 31, 2008 — Met.
  - Completion by external auditor of audit of the CBI 2007 financial statements in accordance with International Standards on Auditing — June 30, 2008 — Met.
- Structural benchmarks (selected deadlines and statuses):
  - Reconciliation in CBI accounts of local banks’ current accounts, intra-branch accounts, and suspense accounts — March 31, 2008 — Partially met 1/.
  - Adoption of reserves management guidelines by the CBI — March 31, 2008 — Underway.
  - Completion of operational and financial audits of Rasheed and Rafidain banks based on 2006 accounts — May 31, 2008 — Met on July 10.
  - Incorporate new weights in the CPI based on the 2007 household expenditure survey — May 31, 2008 — Underway.
  - Submission to the Board of Supreme Audit of final accounts of the Federal Budget for year ending December 31, 2007 — June 30, 2008 — Underway.
  - Completion of census of all public service employees (central government and military) — June 30, 2008 — Delayed 2/ (expected in September 2008).
  - Adoption of an action plan for modernizing the government's financial management system — July 31, 2008 — Underway.
  - Completion of prudential regulations for commercial banks — July 31, 2008 — Partially met 3/ (nine key regulations finalized).
  - Publication of COFE audit reports and first semi-annual COFE report covering January–June 2008 to the Council of Ministers — September 15, 2008.
  - Development of periodic adjustment mechanism for fuel prices to prevent re-emergence of direct budget subsidies — September 30, 2008.
  - Adoption of operational restructuring program for Rafidain bank — September 30, 2008.
  - Adoption of operational and financial restructuring programs for Rasheed bank — September 30, 2008.
  - Submission to the Council of Representatives and publication of audited accounts of the Federal Budget for year ending December 2007 — November 15, 2008.
- Footnotes: 1/ Reconciliation progress detail noted. 2/ Census expected in September 2008. 3/ Nine key regulations have been finalized.

### Availability of purchases under the SBA (scheduled access)
- Amounts and dates (SDR; percent of quota):
  - May 15, 2008: SDR 368,404,000 — 31.00 percent of quota — Condition: Completion of the first review and observance of end-March 2008 performance criteria.
  - August 15, 2008: SDR 35,652,000 — 3.00 percent of quota — Condition: Observance of end-June 2008 performance criteria.
  - November 15, 2008: SDR 35,652,000 — 3.00 percent of quota — Condition: Completion of second review and observance of end-September 2008 performance criteria.
  - February 15, 2009: SDR 35,652,000 — 3.00 percent of quota — Condition: Observance of end-December 2008 performance criteria.
- Total access: SDR 475,360,000 — 40.00 percent of quota.

### Indicators of Fund credit and outstanding obligations (selected)
- Disbursements of Fund credit (SBA): 0.0 prior years, 439.7 in 2008, 35.7 in 2009 (in millions of SDRs in table context).
- Total access and outstanding Fund credit (SDR basis; table context):
  - EPCA outstanding: 297.1 (SDR millions)
  - SBA outstanding projections reflect increases in 2008–09 (table entries).
- Total obligations (selected years, millions of SDRs and percent metrics) and memorandum items provided in table format (see table for full year-by-year breakdown).

*Sources: Iraqi authorities and Fund staff estimates and projections.*

### 1.      Iraq has received substantial debt reduction from official and private creditors, but the

### _cr08303 - 1.      Iraq has received substantial debt reduction from official and private creditors, but the

### External debt stock and projections
- Latest estimates (assuming debt reduction comparable to the Paris Club agreement applied to non-Paris Club creditor’s claims in 2008):
  - Stock of external debt at end-2006: $99.4 billion (201 percent of GDP).
  - Stock of external debt at end-2007: $102 billion (164 percent of GDP).
- Projected external debt without the third stage of debt reduction:
  - By 2013: $43 billion (almost 25 percent of GDP).
- Projected external debt with the third stage of debt reduction (expected in 2008):
  - By 2013: about $33.6 billion (19 percent of GDP).
- Medium-term projection assumption:
  - New debt disbursements are mostly from multilateral creditors and Japan.

### Debt service profile and timing of repayments
- Paris Club agreement timing and implications:
  - Repayment of the remaining debt stock would start in 2011 (based on the Paris Club agreement in 2004).
  - Interest payments accrued during 2005–10 are mostly capitalized.
- Debt service dynamics:
  - Debt service remains moderately large through 2008, when non-Paris Club creditors that have not yet provided debt relief are assumed to provide 80 percent debt reduction.
  - Debt service is projected to increase in 2011 because of Paris Club debt repayments.
- Simulation outcomes under shocks:
  - Under the combined shock scenario, Iraq would need to use resources from the Development Fund for Iraq and possibly to borrow from international markets to close the financing gaps (Appendix I, Table 2).

### Stress tests and shock scenarios
- Two oil shock simulations described:
  - Production shock: keeps oil production constant at 2.2 mbpd in 2008-13.
  - Price shock: lowers the oil export price by $25 per barrel during 2008–09 and by $30 per barrel during 2010–13.
  - Combined shock: simultaneous production and price shocks (described as important given baseline uncertainty).
- Specific scenario assumptions (as stated in Table 2 notes):
  - 7/ Assumes that oil production remains constant at 2.2 mbpd from 2008 onward.
  - 8/ Assumes that the oil price in 2008–13 is lower than the baseline by US$25 in 2008–09 and by US$30 in 2010–13.
  - 9/ Assumes that oil production remains at 2.2 mbpd and the oil price is lower than the baseline by US$25 in 2008–09 and by US$30 in 2010–13.

### Key quantified dynamics and indicators (selected figures from tables)
- Total debt (with third stage of debt reduction in 2008) by year (in billions of US$): 142.1 (2004), 122.6 (2005), 111.5 (2006), 99.3 (2007), 102.2 (2008), 33.0 (2009), 33.9 (2010), 35.4 (2011), 35.1 (2012), 34.5 (2013), 33.6 (memo).
- Total debt in percent of GDP (with third stage): 551.5 (2004), 475.7 (2005), 355.1 (2006), 200.8 (2007), 162.4 (2008), 35.6 (2009), 32.1 (2010), 29.8 (2011), 26.3 (2012), 23.3 (2013), 20.5 (memo).
- External debt (in percent of GDP) headline series (Table 2): 475.7 (2004), 355.3 (2005), 200.9 (2006), 164.0 (2007), 44.2 (2008), 40.9 (2009), 37.4 (2010), 32.4 (2011), 28.1 (2012), 24.7 (2013).
- Change in external debt (annual, in billions): -639.7 (2004), -120.4 (2005), -154.4 (2006), -36.9 (2007), -119.8 (2008), -3.3 (2009), -3.5 (2010), -5.0 (2011), -4.2 (2012), -3.4 (2013).
- Gross external financing need (in billions of US dollars): 14.3 (2004), -1.1 (2005), -4.5 (2006), -11.9 (2007), -16.4 (2008), -29.4 (2009), -29.2 (2010), -31.9 (2011), -38.8 (2012), -50.7 (2013).
- External debt service in percent of exports (accrued amount): 32.3 (2004), 22.2 (2005), 20.0 (2006), 12.8 (2007), 8.3 (2008), 2.8 (2009), 2.5 (2010), 4.7 (2011), 4.1 (2012), 3.5 (2013).

### Macroeconomic assumptions and outcomes (selected)
- Real GDP growth (in percent): 46.5 (2004), -0.7 (2005), 6.2 (2006), 1.5 (2007), 9.0 (2008), 7.3 (2009), 10.1 (2010), 9.4 (2011), 8.7 (2012), 8.2 (2013).
- GDP deflator in U.S. dollars (change in percent): 38.0 (2004), 22.7 (2005), 48.4 (2006), 24.3 (2007), 43.1 (2008), 5.3 (2009), 3.1 (2010), 3.4 (2011), 3.2 (2012), 1.7 (2013).
- Nominal external interest rate (in percent): 4.0 (2004), 4.1 (2005), 4.1 (2006), 4.9 (2007), 4.9 (2008), 4.9 (2009), 4.9 (2010), 4.8 (2011), 4.7 (2012), 4.3 (2013).
- Exports (growth in U.S. dollar terms, in percent): 91.7 (2004), 31.9 (2005), 29.0 (2006), 28.7 (2007), 70.4 (2008), 13.6 (2009), 13.9 (2010), 13.3 (2011), 12.0 (2012), 11.5 (2013).

### Debt-reduction process and creditor relations
- Status of creditor negotiations and outcomes reported:
  - Debt relations with 57 countries resolved to date.
  - Bilateral debt agreement with Russia signed in February 2008.
  - Bilateral agreements with eleven non-Paris Club official creditors have been signed in total.
  - United Arab Emirates announced full cancellation of Iraq’s debt on July 7, 2008.
  - Negotiations ongoing with several other non-Paris Club official creditors, notably China.
- Private creditors:
  - Bulk of claims resolved through debt and cash exchanges that closed in 2006.
  - Reopened commercial debt-restructuring registration January 30–March 15 of the year; in May, 110 claimants were invited to tender claims, of which 84 claimants did so.
  - Most remaining commercial claims to be resolved as part of ongoing liquidation of the London branch of Rafidain Bank.

### Program implementation and policy measures (from Letter of Intent and SMEFP)
- SBA and review:
  - The Executive Board of the IMF approved a request for a Stand-By Arrangement (SBA) for Iraq on December 19, 2007, in support of the economic program for 2008.
  - Iraq met all quantitative performance criteria set for end-March 2008, except the government imports of petroleum products (kerosene) criterion, missed by a small margin.
  - All structural performance criteria have been met.
  - Request for completion of the first review under the SBA and establishment of quantitative performance criteria for end-September and end-December 2008 as proposed in the SMEFP.
- Fiscal and monetary policy stance and measures:
  - Preparation of a supplementary budget to step up reconstruction and partially reverse decline in real wages of civil servants; wage increases to be implemented gradually in 2008 and 2009.
  - Decision to step up rate of appreciation of the dinar and maintain a tight monetary policy stance.
  - Intent to implement further adjustments of official fuel prices and to develop, in consultation with the Fund and the World Bank, an automatic adjustment mechanism for domestic fuel prices.
- Recent economic developments noted:
  - Crude oil output in January–May 2008: 2.3 mbpd (compared to 2.04 mbpd in 2007).
  - Oil exports in January–May 2008 averaged 1.8 mbpd (compared to 1.5 mbpd in 2007).
  - Total real GDP growth estimated at about 1½ percent in 2007.
  - Consumer price inflation about 5 percent by end-2007 (from 65 percent in 2006); core inflation about 12½ percent in June 2008.
  - Fiscal outturn for 2007: surplus of some 13½ percent of GDP (compared to programmed surplus of 1.5 percent).
  - Balance in the Development Fund for Iraq (DFI) increased by almost $4 billion to $12.6 billion at end-2007.
  - Since November 2006 the dinar appreciated by 18¾ percent vis-à-vis the U.S. dollar, to ID 1,195 per dollar at end-June 2008.
  - Net international reserves reached $38.3 billion at end-April 2008.
  - Central Bank of Iraq reduced policy interest rate from 20 percent at end-2007 to 16 percent as of July 1, 2008.

*Source: IMF staff report and attachments as provided in the content unit.*

### 10.      For the remainder of 2008, we intend to speed up the reconstruction of the Iraqi

### _cr08303 - 10.      For the remainder of 2008, we intend to speed up the reconstruction of the Iraqi

### Macroeconomic outlook and objectives
- Real GDP growth is expected to increase to 9 percent in 2008, driven by the ongoing expansion of oil output.
- Crude oil production is expected to reach on average at least 2.3 mbpd, higher than projected at the outset of the program, provided the recent reduction in violence takes hold.
- Inflation target for 2008: contain inflation at 14 percent.
- Net international reserves of the CBI are expected to increase to about $44 billion by end-2008.
- Policy priority: preserve an appropriate balance between fiscal and monetary policies to increase production while keeping inflation low and to avoid renewed inflationary pressures from an excessively expansionary fiscal stance.

### Fiscal policy and reforms
- 2008 budget adopted by the Council of Representatives on February 12 was broadly in line with the program except for a contingency allocation of ID 1.7 trillion earmarked to increase civil service wages and allowances through separate legislation.
- Law on Government Employee Salaries enacted on May 4, 2008 (retroactive to January 1); excludes employees at the Presidency, the Prime Minister’s Office, and the ministries of defense and interior.
- Civil service wage changes:
  - Total civil service salary increase for 2008 will be capped at ID 2.9 trillion.
  - Total civil service wage bill in 2008 projected at ID 10.0 trillion.
  - Result: increase in the civil service wage bill much larger than budgeted.
- Supplementary budget provides for:
  - Significant increase in public investment and priority current spending.
  - Additional allocations for security, in-kind Public Distribution System (PDS), additional fuel imports for electricity generation, and reduction of payment arrears to oil companies.
  - Increased investment budgets for oil, electricity, water and sanitation, education, health, agricultural sectors, and provincial levels.
- Fiscal outcome and cash-management measures:
  - Policies and much higher-than-foreseen oil revenues should result in an overall fiscal surplus of ID 3.3 trillion (2.8 percent of GDP).
  - Plan to reduce large outstanding government deposits with commercial banks.
  - Regular bi-weekly treasury bill issuance in the order of ID 150-200 billion to maintain a benchmark for market interest rates and develop a secondary market.
- Public financial management modernization:
  - Action plan under development covering investment budgeting, budget execution and control, procurement policies, cash management, and the accounting framework (structural benchmark).
  - IFMIS (Iraq Financial Management Information System) development with USAID; expected fully operational starting with the 2009 budget.
  - Submission of the final accounts of the Federal Budget for 2007 to the Board of Supreme Audit (structural benchmark).
- Civil service census and payroll reform:
  - Census of public service employees delayed (structural benchmark for end-June); target completion by end-September 2008.
  - On this basis, adopt an action plan to eliminate ghost workers and computerize the payroll before year-end as a first step for comprehensive civil service reform.
- Technical assistance requests:
  - Seek Fund and World Bank assistance to help the Ministry of Trade prepare an action plan to streamline the PDS as of early 2009.

### Monetary and exchange rate policies
- CBI policy stance:
  - CBI will tighten policy stance to help curb inflationary pressures arising from planned fiscal expansion.
  - Rate of appreciation of the dinar will be increased to about ½ percent per month during the second half of the year; pace to be stepped up if needed to achieve the inflation target.
  - Policy interest rate to be kept positive in real terms (measured against core inflation).
- Reserves, accounting, and institutional strengthening:
  - External audit of CBI net international reserves at end-December 2007 and audit of CBI 2007 financial statements completed as planned (structural performance criteria).
  - Work underway, with IMF technical assistance, toward adoption of new reserves management guidelines (structural benchmark).
  - Progress in reconciliation of CBI accounts: improved reconciliation of local banks’ current accounts; continuing efforts on suspense accounts and CBI intra-branch accounts.
  - Frequency of reconciliation of the CBI’s account at the Federal Reserve Bank in New York for interest earned on U.S. Treasury bills increased to once a month.
  - Plans to establish a register of outstanding off-balance sheet commitments (letters of credit and guarantees).
  - Intend, with external consultants, to establish a modern internal audit function meeting central bank law requirements.
- Exchange regime and IMF obligations:
  - Commitment to maintaining a liberal exchange system.
  - Authorities have responded to follow-up questions in the ongoing review of exchange laws and regulations and are ready to implement the Fund’s recommendations.
  - Intend to accept the obligations of Article VIII, Sections 2(a), 3, and 4, of the IMF’s Articles of Agreement as soon as possible.
  - In the meantime, will avoid imposing restrictions on the making of payments and transfers for current international transactions.

### Structural policies and sectoral reforms
- Oil sector transparency and metering:
  - Meters at the Basra export terminal certified by an internationally reputable firm and fully operational.
  - Metering system for the Khor Al-Amyah export terminal ordered and to be installed in the second half of 2008.
  - Comprehensive custody-transfer system metering project ongoing; about 200 meters installed to date.
  - Computerized tracking system for oil transports by road initiated.
  - COFE prepared to take over IAMB responsibilities for the DFI by end-2008; COFE will continue IAMB practice of publishing mandated audit reports and will present first semi-annual report, including recommendations, to the Council of Ministers by mid-September 2008 (structural benchmark).
  - Iraq has joined the Extractive Industries Transparency Initiative and requested technical assistance to speed up implementation.
- Banking sector reform:
  - Financial and operational audits of Rafidain and Rasheed banks completed (structural benchmark), albeit with a slight delay.
  - Develop restructuring plans for Rafidain and Rasheed banks to be adopted by end-September 2008 (structural benchmark).
  - BSA has started reconciliation of foreign debt held by both banks and cleaning up large suspense accounts; results to be reflected in 2007 financial statements.
  - Restructuring Oversight Committee developing strategies for three smaller specialized state-owned banks; diagnostic reviews to start by end-July 2008.
  - Completion status of prudential regulations:
    - Nine key regulations finalized (structural benchmark) including licensing requirements, capital adequacy, loan classification and provisioning, large exposures, and liquidity.
    - Work on remaining regulations expected to be completed in coming months.
  - Next steps: implement banking supervision practices according to international standards, change commercial banks’ accounting system in line with International Financial Reporting Standards, and prepare financial soundness indicators for commercial banks.

### Other issues (debt, statistics)
- External claims and debt resolution:
  - Continue efforts to resolve outstanding external claims consistent with the 2004 Paris Club agreement.
  - Endeavor to finalize negotiations on a debt agreement with China as soon as possible.
  - Official contacts with other non-Paris Club creditor countries ongoing to seek early conclusion of debt agreements.
  - Settlement phase of commercial claims as part of the liquidation of the London branch of Rafidain Bank expected to begin by September 2008.
- Statistical improvements:
  - 2007 household survey covering all governorates completed.
  - Using household survey results to update CPI weights (structural benchmark for end-May).
  - Efforts to extend geographical coverage of the CPI to the Kurdish Region and to incorporate data from the two CBI branches located there into monetary statistics.
  - Monetary and balance of payments data being published in the IMF’s International Financial Statistics since March and July, respectively.
  - Working toward participating in the General Data Dissemination System in the course of next year.

### Program monitoring, performance criteria, and benchmarks
- Monitoring framework: quarterly quantitative performance criteria and an indicative target; additional quantitative performance criteria set for end-September and end-December 2008.
- Performance through end-June 2008:
  - All quantitative performance criteria set for end-June have been met except for the performance criterion on the government wage and pension bill because payment of the civil service salary increase started in June rather than in the second half of the year.
  - Authorities requested a waiver for non-observance of this performance criterion; staff supports the waiver in light of revised fiscal targets.
- Selected numerical and institutional targets and outcomes (as presented in the program tables and text):
  - Net international reserves of the CBI (floor): (Actual) 10,820 at 6/30/07; 13,487 at 12/31/07.
  - Government wage and pension bill (ceiling, cumulative flow from beginning of year): program targets for 2008 include 5,500 and 11,650 and 14,400 (table entries). (Actual) 8,324 and 2,385 for earlier observations.
  - Central government total financing (ceiling): program flows include 7,600; 2,200; 3,750; -2,400; -3,200 (table entries).
  - Government imports of petroleum products (ceiling): program values ...400;100;200;300;400 (table entries). (Actual)195;108 for earlier observations.
  - New medium- and long-term nonconcessional external debt (ceiling) in millions of U.S. dollars: 500;500;500;500;500 (table entries). (Actual)00 for earlier observations.
  - Indicative target: Revolving government credit to the State Oil Marketing Organization (ceiling) program values ...400;400;400;400;400. (Actual)400;400 for earlier observations.
- Structural performance criteria and benchmarks status highlights:
  - Prior action for completion of the first review: Adoption of a supplementary budget consistent with program objectives — Met.
  - Structural performance criteria met: completion by external auditor of audits of CBI net international reserves (reporting as at December 31, 2007) and CBI 2007 financial statements — Met.
  - Structural benchmarks underway, partially met, or delayed include: regular reconciliations in CBI accounts (partially met), adoption of reserves management guidelines (underway), incorporation of new CPI weights based on 2007 household expenditure survey (underway), submission to BSA of final accounts for 2007 (underway), completion of census of public service employees (Delayed; expected in September 2008), completion of prudential regulations for commercial banks (Partially met; nine key regulations finalized), publication of COFE audit reports and presentation of first semi-annual COFE report to Council of Ministers by September 15, 2008 (planned), development of fuel price adjustment mechanism by September 30, 2008 (planned), adoption of operational restructuring programs for Rafidain and Rasheed banks by September 30, 2008 (planned), and submission to the Council of Representatives and publication of audited accounts of the Federal Budget for the year ending December 2007 by November 15, 2008 (planned).

*International Monetary Fund — IRAQ: First Review Under the Stand-By Arrangement and Financing Assurances Review—Supplementary Information (August 29, 2008).*

### 3.      Consumer price inflation remained subdued in July. Consumer prices increased

### _cr08303 - 3.      Consumer price inflation remained subdued in July. Consumer prices increased

### Consumer prices and inflation
- Consumer prices increased by 1.9 percent in July, largely because of higher fuel and transportation prices.
- The CPI fell by 1.4 percent in July (year-on-year), after declining by 6.3 percent in June.
- Annual core inflation (excluding fuel and transportation) increased to 13.6 percent in July, from 12.4 percent in June.

### Exchange rate and monetary policy
- The Central Bank of Iraq (CBI) has gradually appreciated the dinar, in line with the policy outlined in the staff report.
- On August 28, 2008 the exchange rate of Iraqi dinar stood at ID 1,184 per U.S. dollar, compared to ID 1,195 per U.S. dollar on June 30, 2008.
- The dinar has appreciated by 19½ percent since November 2006, when the CBI started to appreciate the currency to counter dollarization and reduce inflation.
- The CBI intends to increase the rate of appreciation of the dinar to about ½ percent per month during the second half of the year, and to keep the policy interest rate positive in real terms to signal its firm commitment to containing inflation.
- The CBI Board of Directors approved new reserves management guidelines on August 4, 2008 (structural benchmark).

### Oil production and exports
- In January-June 2008, crude oil production averaged 2.3 million barrels per day (mbpd), in line with the program target.
- On average, crude oil exports during January-June reached 1.86 mbpd, above the projected level of 1.8 mbpd for the year as a whole.
- Progress noted on oil-metering systems and participation in the Extractive Industries Transparency Initiative; extension of metering recommended to all oil sector activities to strengthen transparency.

### Fiscal performance and public finances
- Preliminary fiscal data through June indicate a surplus of ID 6.9 trillion or about 6 percent of projected 2008 GDP.
- Most of the surplus was due to higher oil revenues, reflecting higher-than-expected export prices and volumes of crude oil.
- The balance in the Development Fund for Iraq increased from $12.6 billion at end-2007 to $23.6 billion at end-July 2008.
- On August 6, 2008 the Council of Representatives passed the supplementary budget for 2008, which is in line with the program objectives (a prior action for completion of the first review).
- The government’s wage and pension bill for 2008 as a whole is expected to remain within the fiscal program ceiling.
- The government increased official retail prices of jet fuel and LPG in June and July 2008, respectively, and plans to adjust gasoline and diesel prices early next year to reduce indirect fuel subsidies.
- The authorities intend to develop, in consultation with the Fund, an automatic fuel price adjustment mechanism to help reduce still sizable indirect fuel subsidies.

### Structural reforms, governance, and financial sector
- Authorities prepared a draft action plan for modernizing the government’s financial management system with assistance of the Fund and the World Bank (structural benchmark); formal adoption of the action plan is expected soon after a World Bank workshop on September 20.
- Completion of the census of all public service employees (central government and military) was delayed (expected in September 2008); adoption of an action plan to eliminate ghost workers and computerize the payroll planned before year-end.
- Completion of operational and financial audits of Rasheed and Rafidain banks based on their 2006 financial accounts was met on July 10; restructuring programs for both banks are to be adopted based on audit findings by September 30, 2008.
- A task force at the CBI is developing a comprehensive set of prudential regulations for commercial banks; nine key regulations have been finalized.
- The Iraqi Committee of Financial Experts will take over responsibilities of the International Advisory and Monitoring Board as audit and oversight body for the Development Fund for Iraq by year-end.
- Progress made on adoption of reserves management guidelines and implementation of IMF safeguards recommendations and external audits of CBI 2007 financial statements and net international reserves.

### Stand-By Arrangement (SBA) performance and review
- The Executive Board completed the first review of Iraq’s Stand-By Arrangement (SBA), designed to support the country’s economic program through March 2009.
- The SDR 475.36 million (about US$746.3 million) arrangement was approved in December 2007; it is being treated as precautionary by the authorities, and no purchase is planned.
- As part of the first review completion, the Board approved Iraq’s request for a waiver of an end-June 2008 quantitative performance criterion on the government wage and pension bill.
- Authorities reported they met all quantitative performance criteria for end-June 2008 except the government wage and pension bill (waiver requested because a supplementary budget adopted in consultation with Fund staff increased wages and allowances and payments began in June).
- Availability schedule of purchases under the SBA (2008–09): 
  - August 15, 2008: SDR 404,056,000 (34.00 percent of quota) — Completion of the first review and observance of end-June 2008 performance criteria.
  - November 15, 2008: SDR 35,652,000 (3.00 percent of quota) — Completion of second review and observance of end-September 2008 performance criteria.
  - February 15, 2009: SDR 35,652,000 (3.00 percent of quota) — Observance of end-December 2008 performance criteria.
  - Total access: SDR 475,360,000 (40.00 percent of quota).
- The authorities requested establishment of performance criteria for end-September and end-December 2008 and completion of the financing assurances review.

### Key numerical indicators and milestones (selected from tables and text)
- CPI change in July: 1.9 percent (monthly change).
- CPI year-on-year in July: -1.4 percent.
- CPI year-on-year in June: -6.3 percent.
- Annual core inflation in July: 13.6 percent.
- Annual core inflation in June: 12.4 percent.
- Exchange rates: ID 1,184 per U.S. dollar (August 28, 2008); ID 1,195 per U.S. dollar (June 30, 2008).
- Dinar appreciation since November 2006: 19½ percent.
- Crude oil production January-June 2008: 2.3 million barrels per day (mbpd).
- Crude oil exports January-June 2008: 1.86 mbpd.
- Projected exports for year: 1.8 mbpd.
- Preliminary fiscal surplus through June: ID 6.9 trillion (about 6 percent of projected 2008 GDP).
- Development Fund for Iraq balance: $12.6 billion at end-2007; $23.6 billion at end-July 2008.
- SBA amounts: SDR 404,056,000; SDR 35,652,000; SDR 35,652,000; Total SDR 475,360,000 (40.00 percent of quota). Approximate US dollar equivalent of total arrangement noted as about US$746.3 million in the press release.

*Source: IMF staff report and associated documentation (Press Release No. 08/199; Baghdad attachment and Statement by Executive Director for Iraq, September 3, 2008).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08303.pdf_