## Iraq — 1. Iraq's Program Relations with the IMF ## Source details **Canonical URL:** [Iraq — 1. Iraq's Program Relations with the IMF](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13217.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13217.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13217.pdf.json) --- ### Background: structural characteristics and macroeconomic legacy - Iraq’s proven reserves are approximately 143 billion barrels. - GDP per capita rose from $1,300 in 2004 to $6,300 in 2012. - The non-oil sector represents only 46 percent of the economy. - Government and state-owned enterprises employ approximately half of the labor force. - The population relies heavily on government employment or transfers; the public sector is viewed as the main vehicle to distribute oil wealth. - Non-oil activity (services, construction, transport, and a small agricultural sector) is highly dependent on government spending. - The new GDP series (Iraq Central Statistics Office) raises GDP significantly (from $114 billion to $180 billion for 2012). ### Past IMF program engagement — key findings - Fund engagement since 2004 helped maintain macroeconomic stability and build institutions through post-conflict assistance and Stand-By Arrangements. - The two-year 2010 SBA of SDR 2.37 billion (200 percent of quota) disbursed about SDR 1 billion; extensions permitted but insufficient progress precluded completion of later reviews before expiration in February 2013. - Program successes and shortfalls: - Safeguarded CBI reserves from fiscal financing and protected central bank independence in 2010–11. - Enforcement of exchange restrictions starting in 2011 led to a multiple currency practice and nonobservance of two related performance criteria. - Higher-than-expected oil revenues led authorities to exceed overall fiscal balance targets in 2010–11, but composition of spending was worse than planned with slippages in current spending and persistent PFM weaknesses. - Missed end-2010 and 2011 performance criteria on current spending and the continuous performance criterion on external arrears. - Structural reform progress mixed: steps on PFM (introduction of the chart of accounts), transparency (EITI-compliant in December 2012), bank supervision (co-sourcing with Ernst & Young), international reserve management (introduction of investment guidelines), and central bank safeguards; limited traction on broader reforms like state-owned bank restructuring. ### Social and labor outcomes - Unemployment officially estimated at 11 percent in 2011; actual levels likely considerably higher, especially among youth. - 41 percent of the population under 15 years. - Poverty affected 22.9 percent of the population (2008 data), with 40 percent of poverty in rural areas. - Iraq ranked 131st in the UNDP Human Development Index. - Business environment weak: poor governance, inefficient judiciary, inconsistent regulations, insufficient security; foreign direct investment in non-oil sectors low relative to regional oil exporters. ### Recent macroeconomic developments (findings) - Political situation deteriorated since U.S. troop withdrawal in December 2011; increased sectarian undertones, cabinet boycotts since early 2012, limited parliamentary meetings in 2013, high tensions with KRG. - Security remained critical in 2013; March recorded the highest number of casualties of the past three years. - Growth and oil sector: - Economic growth accelerated from 5.9 percent in 2010 to over 8.4 percent in 2012. - Oil production averaged 3 million barrels per day (mbpd) in 2012, the highest in the last 30 years. - Staff expects growth to rise to 9 percent in 2013 as oil production increases to about 3.3 mbpd and non-oil activity picks up. - Inflation and monetary aggregates: - Inflation declined from about 6 percent at end-2011 to 3.6 percent at end of last year; expected to increase only slightly in 2013. - Broad money declined sharply in 2012 after strong growth in 2010–11; foreign currency deposits now 25 percent of the total. - Credit growth remained high at over 60 percent in 2012, driven in large part by loans to state-owned enterprises. - Exchange rate and reserves: - Real exchange rate appreciating over the past three years; broadly in line with fundamentals. - CBI international reserves rose from $61 billion at end-2011 to $70 billion at end-2012 (over nine months of imports, 33 percent of GDP). - Fiscal reserves at the Development Fund for Iraq (DFI) increased from $16.5 billion to $18 billion (six months of salaries and pensions, 8.5 percent of GDP). - Fiscal performance and risks: - Fiscal surpluses reached almost 5 percent in 2011 and 4 percent of GDP in 2012 due to higher oil revenues and under-execution of the investment budget. - Fiscal discipline weakened with poor budget planning and execution, large off-budget spending (3 percent of GDP in 2012), low investment execution rates, and serious deficiencies in fiscal reporting. - Directed loans from state-owned banks Rasheed and Rafidain to unviable SOEs continued; total stock of these loans reached 3.5 percent of GDP at end-2012. - Exchange market distortions: - CBI enforcement of exchange restrictions in late 2011 and new restrictions increased demand for foreign exchange and produced a multiple currency practice. - Spread between official rate and parallel market rate rose from below 2 percent historically to over 8 percent in April 2013. - 2013 budget risks: - The March 2013 final budget includes large unfunded commitments which, if fully executed, would imply a deficit of 13 percent of GDP, deplete fiscal reserves, and result in a financing gap of 7 percent of GDP. - Draft pension and public-sector wage laws under preparation may increase fiscal liabilities. ### Medium-term outlook (staff projections) - Assumption: implementation of sound macroeconomic policies and gradual progress on structural reform. - Oil production and growth: - Oil production projected to rise gradually by about 400–500 thousand barrels per day (tbpd) per year, reaching 5.7 mbpd by 2018. - Non-oil sector projected to grow by about 5 6 percent and reach 51 percent of GDP in 2018. - Overall growth projected to remain above 8 percent over the medium term. - Inflation and real exchange rate: - Domestic inflation projected at 5–6 percent and to be higher than inflation in trading partners. - Fiscal buffers and reserves: - Fiscal reserves targeted to double from about six months of salaries and pensions at end-2012 to 12 months by end-2018. - Oil exports expected to support strong current account surpluses and boost CBI reserves to $104 billion by end-2018 (eight months of imports). ### Risks, spillovers, and policy recommendations - Main risks: - (a) inadequate policy implementation; - (b) a deteriorating political and security situation; - (c) a larger-than-projected decline in global oil prices; - (d) delays in developing Iraq’s oil fields and oil export capacity. - Possible macroeconomic consequences: - Lower oil revenues; deterioration in the fiscal position; pressures to use CBI reserves for fiscal purposes leading to depreciation pressures; higher inflation. - Policy measures to mitigate risks and outward spillovers: - Strengthen fiscal institutions and oil revenue management. - Improve monetary policy transmission. - Reduce the economy’s dependence on the oil sector. - Urgently build up sufficient fiscal buffers given high sensitivity of Iraq’s fiscal and external performance to oil price fluctuations. - Political economy note: - Authorities agree buffers are essential but stressed that containing current spending will be difficult without broad political consensus. - Outward spillovers: - Mostly related to the impact of the oil sector on global markets. ### Low-oil-price scenario (tail risks) — modeled impact - Scenario modeled: fall in oil prices 15 percent below the World Economic Outlook (WEO) baseline in 2013 (downside emerging markets Global Risk Assessment Matrix (G-RAM) scenario). - Comparative tail risk: a much larger fall in oil prices of the magnitude of the 40 percent oil price shock of 2008–09. - Projected policy response in absence of other instruments: - Worsening of the fiscal balance (use of fiscal buffers). - Tightening spending, mainly investment expenditure (as in late 2008 response). - Lower CBI and DFI reserves throughout the medium term. - Tail-risk implications (40 percent drop): - Complete depletion of fiscal buffers held at the DFI in less than one year. - Additional tightening including on current spending. - Depreciation pressures following the sudden drop in oil revenues. ### Selected economic indicators (2010–18) — exact series values - GDP Growth, percent: - 2010: 5.9 - 2011: 8.6 - 2012: 8.4 - 2013 (Prel.): 9.0 - 2014 (Proj.): 9.0 - 2015 (Proj.): 8.3 - 2016 (Proj.): 9.0 - 2017 (Proj.): 8.4 - 2018 (Proj.): 8.3 - CPI inflation (end of period), percent: - 2010: 3.3 - 2011: 6.0 - 2012: 3.6 - 2013 (Prel.): 5.0 - 2014–2018 (Proj.): 5.5, 5.5, 5.5, 5.5, 5.5 - General government balance, excl. grants, percent of GDP: - 2010: P-7.2 - 2011: 3.9 - 2012: 4.1 - 2013 (Prel.): 1.6 - 2014 (Proj.): 2.2 - 2015 (Proj.): 3.0 - 2016 (Proj.): 3.6 - 2017 (Proj.): 3.7 - 2018 (Proj.): 3.8 - Current account, percent of GDP: - 2010: 3.0 - 2011: 12.5 - 2012: 7.0 - 2013 (Prel.): 3.8 - 2014–2018 (Proj.): 2.9, 4.0, 4.5, 4.1, 4.3 - Fiscal financing needs, in US$ billion, excl. grants: - 2010: 11.4 - 2011: -8.2 - 2012: -10.1 - 2013 (Prel.): -4.3 - 2014 (Proj.): -6.5 - 2015 (Proj.): -9.6 - 2016 (Proj.): -12.9 - 2017 (Proj.): -14.4 - 2018 (Proj.): -16.5 - Gross reserves, in US$ billion: - 2010: 50.6 - 2011: 61.1 - 2012: 70.3 - 2013 (Prel.): 80.1 - 2014 (Proj.): 84.9 - 2015 (Proj.): 90.5 - 2016 (Proj.): 95.5 - 2017 (Proj.): 99.3 - 2018 (Proj.): 103.7 ### Oil sector outlook and spillovers - Iraq projected contribution to global production: staff expects Iraq to contribute over 2.2 mbpd in additional oil production through 2017. - This represents 20 percent of the expansion in global production capacity and the biggest increase within OPEC. - IEA expects demand to increase from 90 mbpd in 2012 (Iraq met about 3 percent) to about 96 mbpd by 2017. - Global capacity expected to rise to approximately 102 mbpd in 2017, with OPEC producing about 37 mbpd. - Two principal channels for spillovers: - Weaker-than-expected global demand → excess production → weaker oil prices. - Delays in developing Iraq’s export capacity → upward pressure on international oil prices. - Regional implication: planned pipeline through Jordan to diversify export routes and become a larger regional supplier. ### Fiscal policy findings and recommendations - Vulnerabilities and objectives: - Breakeven oil price of $102 per barrel in 2012. - High level of current spending makes adjustment to external shocks difficult without disproportionate cuts to investment. - Budget is main transmission channel of oil market volatility to the domestic economy. - Fiscal policy should build fiscal buffers to insulate priority spending, create space for countercyclical policy, and increase fiscal space for social spending and investment by rationalizing low-priority current spending. - DFI functions as de facto oil stabilization fund; current legal framework precludes CBI lending to government and Iraq lacks access to international capital markets. - 2013 authorities’ plan and staff view: - Authorities plan limited fiscal consolidation in 2013, limiting subsidies growth, rationalizing transfers to state-owned enterprises and the PDS, and containing public-sector employment growth. - Authorities viewed an overall surplus of 1.6 percent of GDP in 2013 (staff suggestion) as reasonable, down from an estimated surplus of 4 percent in 2012. - Non-oil balance projected to remain broadly constant, posting a deficit of 73 percent of non-oil GDP. - Under this stance, fiscal buffers at the DFI would cover about six months of salaries and pensions (equivalent to a negative shock of $19 in oil prices, or 500 tbpd in export volumes). - Medium-term strategy: - Continued streamlining of current spending could result in sustained fiscal surpluses and double fiscal buffers by end-2018 to 12 months of wages and salaries. - By end-2018, buffers would allow Iraq to withstand a negative shock of $36 in oil prices (magnitude of 2008–9 crisis), or a decline in exports by 2 mbpd. - Procedural rule recommendation: - Adopt procedural rules (preferably by law) to formulate annual budget: establish baseline oil scenario, identify financing sources, set realistic discretionary spending path, assess fiscal risks. - Consider a simple formula to set oil price assumptions based on a moving average of past prices to build fiscal buffers (Iraq not yet ready for a numerical fiscal rule based on structural balances). - Institutional reforms: - Strengthen fiscal institutions: single treasury account, full implementation of Integrated Financial Management Information System (IFMIS), improved spending controls, debt management, and fiscal reporting. - Progress noted: adoption of chart of accounts; became full EITI member in December 2012. ### Long-term fiscal sustainability (PIH / MPIH insights) - PIH findings: - Baseline medium-term policies, if implemented, would be broadly consistent with long-term fiscal sustainability. - Projected non-oil primary expenditures are significantly higher than benchmark PIH expenditure level in 2013–2016 but converge by 2017–2018. - MPIH interpretation: - Frontloading of investment can be modeled as a scaled-up spending period followed by scaling down to preserve long-term wealth. - Credible spending rationalization in public-sector employment, subsidies, and transfers is critical to sustaining long-term fiscal health. ### Monetary, exchange rate, and financial policy recommendations - Monetary framework and constraints: - Underdeveloped financial system, high bank liquidity, administered interest rates → weak monetary transmission channels. - Principal CBI instrument is foreign exchange intervention; effectiveness hampered by CBI regulations. - Exchange rate policy: - De facto fixed exchange rate has served as an anchor; authorities intend to continue it in the foreseeable future. - Staff encourages creating conditions for a possible future move to a more flexible exchange rate to allow predictable gradual appreciation when appropriate. - Foreign exchange market distortions and AML/CFT: - Controls introduced in 2011 increased spread between official auction and parallel market rate. - Staff recommends liberalizing the foreign exchange market and improving AML/CFT regime in line with MENA-FATF and FATF standards to eliminate distortions, reduce spreads, and accept obligations under Article VIII over time. - Staff notes AML/CFT standards focus on customer due diligence and suspicious transaction reporting to an independent Financial Intelligence Unit rather than ex-ante controls on FX transactions. - Foreign asset management: - Maintain separate CBI reserves (liquid, prudent guidelines) and fiscal reserves held in DFI. - Low execution rates of public investment and weak absorptive capacity argue against accelerating domestic spending of foreign assets. - If DFI reserves grow beyond recommended fiscal buffers, consider modifying DFI structure to allow more active management of excess fiscal reserves. - A separate sovereign wealth fund (SWF) not appropriate at this stage given governance and capacity constraints. ### Financial system reform and state-owned banks - Restructuring of state-owned banks Rasheed and Rafidain has been lagging since 2006. - CBI has recently “impressed new momentum to the clean-up of the banks’ balance sheets from pre-2003 assets and large valuation losses.” - Next steps called for: - A rigorous audit of the balance sheets. - Formulation of plans for their recapitalization, which is likely needed. - Long-run requirement: Rasheed and Rafidain must stop lending to the government or on its behalf for sustainable commercial operations. - Financial system facts and constraints: - Total banking assets estimated at 77 percent of GDP (regional comparison: 130 percent). - Total credit about 29 percent of GDP (regional comparison: 55 percent). - Credit to the private sector estimated at about 15 percent of GDP. - Rasheed and Rafidain hold 71 percent of the system’s deposits. - Rasheed and Rafidain described as “very liquid” but “likely not solvent.” ### Developing the private banking sector and supervision priorities - Options to level the playing field: - Open market for trade finance for government imports. - Allow private banks to honor customers’ checks to the government. - Supervisory measures: - Strengthen banking supervision through better staffing, training, and co-sourcing. - Extend supervisory perimeter to include state-owned banks. - Competitiveness depends on modernization of operations and stronger governance. ### Employment, demographics, and private-sector constraints - Labor facts: - Oil sector employs an estimated 80,000 workers out of a total of about 8 million in the labor force. - About 40 percent of the workforce is in the public sector, up from 31 percent in 2007. - Job creation weak, averaging around 1 percent a year. - Female participation in the labor force is 13 percent. - Official unemployment in some provinces at 20 percent. - Medium-term demographic pressure: - Employment creation in 2013–18 will likely not be strong enough to absorb the 2.1 million total new entrants in the labor force estimated by the ILO, leading to a rise in the unemployment rate. - 2013 illustrative numbers: - ILO projects about 300,000 new entrants in the labor force in 2013. - Authorities expect the public sector to hire about 150,000 new employees in 2013. - Only 130,000 are projected to be taken in by the private sector in 2013. - Business environment constraints: - Since 2003 no major reform to create an enabling environment for the private sector. - Iraq ranks 165 out of 183 in the World Bank’s 2012 Doing Business rankings. - Weak areas: starting a business, access to credit, trading across borders, enforcement of contracts, resolving insolvency. - Poor infrastructure—particularly electricity—constitutes a major hurdle. - Private companies face competition from many subsidized SOEs with favorable access to public bank financing. ### Economic reform agenda — priority areas - Energy sector: - Hydrocarbon law delayed due to central government–KRG disagreements. - Needed: investment in electricity production, restructuring of electricity producers, imposition of adequate tariffs, remove distortionary fuel subsidies to producers. - State-owned enterprises: - Launch comprehensive triage of SOEs: operational restructuring, governance reform, recapitalization of rehabilitable firms, closure of unviable enterprises. - Business environment and governance: - Streamline and make regulation consistent and business-focused. - Agriculture: - Revival depends on reform of the PDS which contributed to decline of domestic production through large food imports. - Financial and fiscal sector reform integral to broader agenda. ### Data issues and statistics - Macroeconomic statistics “broadly adequate for surveillance” but significant data gaps and lags due to capacity constraints, security issues, and lack of coordination with sub-national entities. - CPI: - Based on the HBS 2007; monthly CPI compiled for all-Iraq and each governorate; covers only urban areas. - Staffing and computer hardware/software inadequate. - Monetary and financial statistics: - Progress in depository corporations survey components; CBI reports IFS data with a lag of more than three months; latest reported data marked “preliminary.” - Balance of payments and IIP: - BOP statistics available 2005–2011 in BPM6 format; annual IIP statement compiled; timeliness remains a concern. - External trade statistics: - Serious problems of timeliness and poor quality; customs form for imports exists but is not used at border points; coverage excludes Kurdistan and smuggling not estimated. - Government finance statistics: - Provision of fiscal data for program monitoring satisfactory despite security situation; Iraq does not report GFS for publication in the GFSY or IFS. - Selected macroeconomic indicators and staff projections (2010–2013) — exact values reproduced where provided in prior sections. ### Staff appraisal — main findings and policy recommendations - Recent macro performance: - Authorities maintained macroeconomic stability over the past two years despite security and political challenges. - Achievements: fiscal surpluses, increased oil exports, low inflation, and sizable external reserves. - Progress under the 2010 SBA uneven; only two reviews completed. - Challenges and risks: - Large oil reserves create potential but also risk of natural resource curse: weak governance, rent-seeking behavior, loss of competitiveness, stunted non-oil private sector. - Fiscal policy recommendations (2013 and medium-term): - Continuous rationalization of current spending, including public employment, energy subsidies, the PDS, and transfers to SOEs to create fiscal space for investment and buffers. - Reform public financial management by introducing IFMIS and a single treasury account, eliminating off-budgetary spending and investment rollovers, and shutting down quasi-fiscal operations of banks Rafidain and Rasheed. - Start with procedural fiscal rules (including a formula to set oil price assumptions in the budget) and build capacity for formal numerical fiscal rules that de-link oil revenues from the budget. - Exchange rate and foreign exchange policy: - Staff welcomes CBI’s objective to liberalize the FX market and simplification of regulations; urges immediate further measures to liberalize fully the supply of foreign exchange to lower the exchange rate spread, remove distortions, eliminate rents, and ultimately comply with Article VIII. - Strengthen the AML/CFT framework in line with MENA/FATF recommendations and FATF standards. - Staff does not recommend approval of the exchange restrictions and the multiple currency practice listed in the Informational Annex. - Reserves and fiscal institutions: - Current two-tier architecture (prudent CBI reserves; DFI as de-facto stabilization fund) is appropriate. - Maintain high level of liquid reserves given uncertainty and low administrative capacity. - Banking sector and private sector development: - Reform of state-owned banks should be combined with development of private banks by ensuring a level-playing field and more rigorous supervision. - Growth, employment, and data: - Need sustained high and inclusive growth to reduce poverty and provide opportunities; boost non-oil private-sector activity. - Improve quality and timeliness of economic data. *Iraq — 1. Iraq's Program Relations with the IMF (IMF staff report excerpt).* ### 1. Iraq's Program Relations with the IMF ___________________________________________________________6 ### 1. Iraq's Program Relations with the IMF ### Background: structural characteristics and macroeconomic legacy - Iraq’s proven reserves are approximately 143 billion barrels. - GDP per capita rose from $1,300 in 2004 to $6,300 in 2012. - The non-oil sector represents only 46 percent of the economy. - Government and state-owned enterprises employ approximately half of the labor force. - The population relies heavily on government employment or transfers; the public sector is viewed as the main vehicle to distribute oil wealth. - Non-oil activity (services, construction, transport, and a small agricultural sector) is highly dependent on government spending due to limited direct spillovers from the oil sector. - The new GDP series (Iraq Central Statistics Office) raises GDP significantly (from $114 billion to $180 billion for 2012). ### Findings on past IMF program engagement (Box 1) - Fund engagement since 2004 helped maintain macroeconomic stability and build institutions through post-conflict assistance and Stand-By Arrangements. - The two-year 2010 SBA of SDR 2.37 billion (200 percent of quota) disbursed about SDR 1 billion; extensions permitted but insufficient progress precluded completion of later reviews before expiration in February 2013. - Program successes and shortfalls: - Safeguarded CBI reserves from fiscal financing and protected central bank independence in 2010–11. - Enforcement of exchange restrictions starting in 2011 led to a multiple currency practice and nonobservance of two related performance criteria. - Higher-than-expected oil revenues led authorities to exceed overall fiscal balance targets in 2010–11, but composition of spending was worse than planned with slippages in current spending and persistent PFM weaknesses. - Missed end-2010 and 2011 performance criteria on current spending and the continuous performance criterion on external arrears. - Structural reform progress was mixed: steps taken on PFM (introduction of the chart of accounts), transparency (EITI-compliant in December 2012), bank supervision (co-sourcing with Ernst & Young), international reserve management (introduction of investment guidelines), and central bank safeguards; limited traction on broader reforms like state-owned bank restructuring. - Social and labor outcomes: - Unemployment officially estimated at 11 percent in 2011; actual levels likely considerably higher, especially among youth. - 41 percent of the population under 15 years. - Poverty affected 22.9 percent of the population (2008 data), with 40 percent of poverty in rural areas. - Iraq ranked 131st in the UNDP Human Development Index. - Business environment is weak: poor governance, inefficient judiciary, inconsistent regulations, insufficient security; foreign direct investment in non-oil sectors is low relative to regional oil exporters. ### Recent macroeconomic developments (findings) - Political situation deteriorated since U.S. troop withdrawal in December 2011; increased sectarian undertones, cabinet boycotts since early 2012, limited parliamentary meetings in 2013, high tensions with KRG. - Security remained critical in 2013; March recorded the highest number of casualties of the past three years. - Growth and oil sector: - Economic growth accelerated from 5.9 percent in 2010 to over 8.4 percent in 2012. - Oil production averaged 3 million barrels per day (mbpd) in 2012, the highest in the last 30 years. - Staff expects growth to rise to 9 percent in 2013 as oil production increases to about 3.3 mbpd and non-oil activity picks up. - Inflation and monetary aggregates: - Inflation declined from about 6 percent at end-2011 to 3.6 percent at end of last year; expected to increase only slightly in 2013. - Broad money declined sharply in 2012 after strong growth in 2010–11, reflecting political tensions and a shift from dinar deposits to foreign currency deposits (foreign currency deposits now 25 percent of the total). - Credit growth remained high at over 60 percent in 2012, driven in large part by loans to state-owned enterprises. - Exchange rate and reserves: - Real exchange rate appreciating over the past three years; broadly in line with fundamentals (Appendix 1). - CBI international reserves rose from $61 billion at end-2011 to $70 billion at end-2012 (over nine months of imports, 33 percent of GDP). - Fiscal reserves at the Development Fund for Iraq (DFI) increased from $16.5 billion to $18 billion (six months of salaries and pensions, 8.5 percent of GDP). - Fiscal performance and risks: - Fiscal surpluses reached almost 5 percent in 2011 and 4 percent of GDP in 2012 due to higher oil revenues and under-execution of the investment budget. - Fiscal discipline weakened with poor budget planning and execution, large off-budget spending (3 percent of GDP in 2012), low investment execution rates, and serious deficiencies in fiscal reporting. - Authorities continued directing loans from state-owned banks Rasheed and Rafidain to unviable SOEs; total stock of these loans reached 3.5 percent of GDP at end-2012. - Exchange market distortions: - CBI enforcement of exchange restrictions in late 2011 and new restrictions increased demand for foreign exchange and produced a multiple currency practice. - Spread between official rate and parallel market rate rose from below 2 percent historically to over 8 percent in April 2013. - 2013 budget risks: - The March 2013 final budget includes large unfunded commitments which, if fully executed, would imply a deficit of 13 percent of GDP, deplete fiscal reserves, and result in a financing gap of 7 percent of GDP. - Draft pension and public-sector wage laws under preparation may increase fiscal liabilities. ### Medium-term outlook (staff projections) - Assumption: implementation of sound macroeconomic policies and gradual progress on structural reform; authorities broadly agreed but noted policy implementation challenges given political, spending, and security constraints. - Oil production and growth: - Oil production projected to rise gradually by about 400–500 thousand barrels per day (tbpd) per year, reaching 5.7 mbpd by 2018. - Non-oil sector projected to grow by about 5 6 percent and reach 51 percent of GDP in 2018. - Overall growth projected to remain above 8 percent over the medium term. - Inflation and real exchange rate: - Strong oil export revenues expected to raise nontradable prices and cause appreciation of the real exchange rate. - Domestic inflation projected at 5–6 percent and to be higher than inflation in trading partners. - Fiscal buffers and reserves: - Containment of current spending growth would allow ramp-up of investment spending and build-up of fiscal buffers. - Fiscal reserves targeted to double from about six months of salaries and pensions at end-2012 to 12 months by end-2018. - Oil exports expected to support strong current account surpluses and boost CBI reserves to $104 billion by end-2018 (eight months of imports). ### Risks, spillovers, and policy recommendations - Main risks to the macroeconomic outlook: - (a) inadequate policy implementation; - (b) a deteriorating political and security situation; - (c) a larger-than-projected decline in global oil prices; - (d) delays in developing Iraq’s oil fields and oil export capacity. - Possible macroeconomic consequences of risks: - Lower oil revenues; deterioration in the fiscal position; pressures to use CBI reserves for fiscal purposes leading to depreciation pressures; higher inflation. - Policy measures to mitigate risks and outward spillovers: - Strengthen fiscal institutions and oil revenue management. - Improve monetary policy transmission. - Reduce the economy’s dependence on the oil sector. - Urgently build up sufficient fiscal buffers given high sensitivity of Iraq’s fiscal and external performance to oil price fluctuations. - Political economy note: - Authorities agree buffers are essential but stressed that containing current spending will be difficult in the current fragile social context without broad political consensus. - Outward spillovers: - Mostly related to the impact of the oil sector on global markets. *Iraq — 1. Iraq's Program Relations with the IMF (IMF staff report excerpt)* ### 8. A low-case scenario modeling a temporary decline in oil prices stemming from a ### _cr13217 - 8. A low-case scenario modeling a temporary decline in oil prices stemming from a ### Low-oil-price scenario and macroeconomic impact - Scenario modeled: fall in oil prices 15 percent below the World Economic Outlook (WEO) baseline in 2013 (downside emerging markets Global Risk Assessment Matrix (G-RAM) scenario). - Comparative tail risk: a much larger fall in oil prices of the magnitude of the 40 percent oil price shock of 2008–09. - Projected policy response in absence of other instruments: - Worsening of the fiscal balance (use of fiscal buffers). - Tightening spending, mainly investment expenditure (as in late 2008 response). - Lower CBI and DFI reserves throughout the medium term. - Tail-risk implications (40 percent drop): - Complete depletion of fiscal buffers held at the DFI in less than one year. - Additional tightening including on current spending. - Depreciation pressures following the sudden drop in oil revenues. ### Iraq: Selected economic indicators (2010–18) — key series and exact values - GDP Growth, percent: - 2010: 5.9 - 2011: 8.6 - 2012: 8.4 - 2013 (Prel.): 9.0 - 2014 (Proj.): 9.0 - 2015 (Proj.): 8.3 - 2016 (Proj.): 9.0 - 2017 (Proj.): 8.4 - 2018 (Proj.): 8.3 - CPI inflation (end of period), percent: - 2010: 3.3 - 2011: 6.0 - 2012: 3.6 - 2013 (Prel.): 5.0 - 2014–2018 (Proj.): 5.5, 5.5, 5.5, 5.5, 5.5 - General government balance, excl. grants, percent of GDP: - 2010: P-7.2 - 2011: 3.9 - 2012: 4.1 - 2013 (Prel.): 1.6 - 2014 (Proj.): 2.2 - 2015 (Proj.): 3.0 - 2016 (Proj.): 3.6 - 2017 (Proj.): 3.7 - 2018 (Proj.): 3.8 - Current account, percent of GDP: - 2010: 3.0 - 2011: 12.5 - 2012: 7.0 - 2013 (Prel.): 3.8 - 2014–2018 (Proj.): 2.9, 4.0, 4.5, 4.1, 4.3 - Fiscal financing needs, in US$ billion, excl. grants: - 2010: 11.4 - 2011: -8.2 - 2012: -10.1 - 2013 (Prel.): -4.3 - 2014 (Proj.): -6.5 - 2015 (Proj.): -9.6 - 2016 (Proj.): -12.9 - 2017 (Proj.): -14.4 - 2018 (Proj.): -16.5 - External financing needs, in US$ billion: - 2010: 4.6 - 2011: -11.2 - 2012: -3.6 - 2013 (Prel.): -2.5 - 2014 (Proj.): -5.9 - 2015 (Proj.): -9.0 - 2016 (Proj.): -12.3 - 2017 (Proj.): -13.8 - 2018 (Proj.): -15.9 - Public debt, percent of GDP: - 2010: 52.2 - 2011: 40.6 - 2012: 34.9 - 2013 (Prel.): 17.3 - 2014 (Proj.): 14.4 - 2015 (Proj.): 11.9 - 2016 (Proj.): 9.8 - 2017 (Proj.): 8.1 - 2018 (Proj.): 6.5 - External debt, percent of GDP: - 2010: 45.0 - 2011: 33.8 - 2012: 28.3 - 2013 (Prel.): 11.9 - 2014 (Proj.): 10.0 - 2015 (Proj.): 8.5 - 2016 (Proj.): 7.2 - 2017 (Proj.): 6.1 - 2018 (Proj.): 5.2 - Gross reserves, in US$ billion: - 2010: 50.6 - 2011: 61.1 - 2012: 70.3 - 2013 (Prel.): 80.1 - 2014 (Proj.): 84.9 - 2015 (Proj.): 90.5 - 2016 (Proj.): 95.5 - 2017 (Proj.): 99.3 - 2018 (Proj.): 103.7 - Gross reserves, in months of imports: - 2010: 10.6 - 2011: 9.5 - 2012: 9.3 - 2013 (Prel.): 9.7 - 2014–2018 (Proj.): 9.4, 9.2, 8.8, 8.4, 8.1 ### Oil sector outlook and spillovers - Iraq projected contribution to global production: staff expects Iraq to contribute over 2.2 mbpd in additional oil production through 2017. - This represents 20 percent of the expansion in global production capacity and the biggest increase within OPEC. - Global demand and capacity context: - IEA expects demand to increase from 90 mbpd in 2012 (Iraq met about 3 percent) to about 96 mbpd by 2017. - Global capacity expected to rise to approximately 102 mbpd in 2017, with OPEC producing about 37 mbpd. - Two principal channels for spillovers: - Weaker-than-expected global demand → excess production → weaker oil prices. - Delays in developing Iraq’s export capacity → upward pressure on international oil prices. - Regional implications: - Planned pipeline through Jordan to diversify export routes and become a larger regional supplier. ### Fiscal policy findings and recommendations - Vulnerabilities and objectives: - Breakeven oil price of $102 per barrel in 2012. - High level of current spending makes adjustment to external shocks difficult without disproportionate cuts to investment. - Budget is main transmission channel of oil market volatility to the domestic economy. - Fiscal policy should build fiscal buffers to insulate priority spending, create space for countercyclical policy, and increase fiscal space for social spending and investment by rationalizing low-priority current spending. - DFI functions as de facto oil stabilization fund; current legal framework precludes CBI lending to government and Iraq lacks access to international capital markets. - 2013 authorities’ plan and staff view: - Authorities plan limited fiscal consolidation in 2013, limiting subsidies growth, rationalizing transfers to state-owned enterprises and the PDS, and containing public-sector employment growth. - Authorities viewed an overall surplus of 1.6 percent of GDP in 2013 (staff suggestion) as reasonable, down from an estimated surplus of 4 percent in 2012. - Non-oil balance projected to remain broadly constant, posting a deficit of 73 percent of non-oil GDP. - Under this stance, fiscal buffers at the DFI would cover about six months of salaries and pensions (equivalent to a negative shock of $19 in oil prices, or 500 tbpd in export volumes). - Medium-term strategy: - Continued streamlining of current spending could result in sustained fiscal surpluses and double fiscal buffers by end-2018 to 12 months of wages and salaries. - By end-2018, buffers would allow Iraq to withstand a negative shock of $36 in oil prices (magnitude of 2008–9 crisis), or a decline in exports by 2 mbpd. - Significant consolidation would require broad consensus across government and population. - Procedural rule recommendation: - Adopt procedural rules (preferably by law) to formulate annual budget: establish baseline oil scenario, identify financing sources, set realistic discretionary spending path, assess fiscal risks. - Consider a simple formula to set oil price assumptions based on a moving average of past prices to build fiscal buffers (Iraq not yet ready for a numerical fiscal rule based on structural balances). - Institutional reforms: - Strengthen fiscal institutions: single treasury account, full implementation of Integrated Financial Management Information System (IFMIS) to improve spending controls, debt management, and fiscal reporting. - Progress noted: adoption of chart of accounts; became full EITI member in December 2012. ### Long-term fiscal sustainability (PIH / MPIH insights) - Use of Permanent Income Hypothesis (PIH) model to assess long-term fiscal sustainability based on natural resource wealth. - PIH findings: - Baseline medium-term policies, if implemented, would be broadly consistent with long-term fiscal sustainability. - Projected non-oil primary expenditures are significantly higher than benchmark PIH expenditure level in 2013–2016 but converge by 2017–2018. - Modified PIH (MPIH) interpretation: - Frontloading of investment can be modeled as a scaled-up spending period followed by scaling down (increase in public-sector savings) to preserve long-term wealth. - Credible spending rationalization in public-sector employment, subsidies, and transfers is critical to sustaining long-term fiscal health. ### Monetary, exchange rate, and financial policy recommendations - Monetary framework and constraints: - Underdeveloped financial system, high bank liquidity, administered interest rates → weak monetary transmission channels. - Principal CBI instrument is foreign exchange intervention; effectiveness hampered by CBI regulations. - Exchange rate policy: - De facto fixed exchange rate has served as an anchor; authorities intend to continue it in the foreseeable future. - Staff encourages creating conditions for a possible future move to a more flexible exchange rate to allow predictable gradual appreciation when appropriate. - Foreign exchange market distortions and AML/CFT: - Authorities have limited foreign exchange supply due to money laundering and terrorism financing concerns; controls have increased spread between official auction and parallel market rate. - CBI has simplified some regulations but has not eliminated all exchange restrictions and multiple currency practice. - Staff recommends liberalizing the foreign exchange market and improving AML/CFT regime in line with MENA-FATF and FATF standards to eliminate distortions, reduce spreads, and accept obligations under Article VIII over time. - Staff notes AML/CFT standards focus on customer due diligence and suspicious transaction reporting to an independent Financial Intelligence Unit rather than ex-ante controls on FX transactions. - Foreign asset management: - Current two-tier architecture recommended: maintain separate CBI reserves (liquid, prudent guidelines) and fiscal reserves held in DFI. - Low execution rates of public investment and weak absorptive capacity argue against accelerating domestic spending of foreign assets. - If DFI reserves grow beyond recommended fiscal buffers, consider modifying DFI structure to allow more active management of excess fiscal reserves. - A separate sovereign wealth fund (SWF) not considered appropriate at this stage given governance and capacity constraints. *Sources: Iraqi authorities; and Fund staff estimates and calculations.* ### 18. Efforts to modernize the financial system have hinged on the reform of state- ### _cr13217 - 18. Efforts to modernize the financial system have hinged on the reform of state- ### Financial system reform and state-owned banks - Restructuring of state-owned bank giants Rasheed and Rafidain has been lagging since its launch in 2006. - The CBI has recently “impressed new momentum to the clean-up of the banks’ balance sheets from pre-2003 assets and large valuation losses.” - Next steps called for: - A rigorous audit of the balance sheets. - Formulation of plans for their recapitalization, which is likely needed. - Long-run requirement: Rasheed and Rafidain must stop lending to the government or on its behalf for sustainable commercial operations. ### Financial System Development (Box 4) — key facts and constraints - Total banking assets in Iraq are estimated at 77 percent of GDP, compared to 130 percent in the Middle East and North Africa region. - Total credit is about 29 percent of GDP, compared to 55 percent in the region. - Credit to the private sector is estimated at only about 15 percent of GDP. - State-owned banks dominate the financial sector; the 50 private banks are small and focused on trade-related business. - Banks Rasheed and Rafidain hold 71 percent of the system’s deposits. - Together with the Trade Bank of Iraq (established in 2003), these banks have a symbiotic relationship with the government characterized by: - Extension of credit to the government. - Frequent execution of quasi-Treasury operations. - Almost complete monopoly over government transactions. - Historic lax supervision and shareholder control. - Rasheed and Rafidain are described as “very liquid” but “likely not solvent,” with net worth difficult to assess due to lack of transparency and persistence of pre-2003 items on their balance sheets. ### Developing the private banking sector — options and supervisory priorities - Options to level the playing field with state-owned banks include: - Opening up the market for trade finance for government imports. - Allowing private banks to honor customers’ checks to the government. - Essential supervisory measures: - Ongoing operational strengthening of banking supervision centered on better staffing, training and co-sourcing. - Extension of the supervisory perimeter to include state-owned banks. - Competitiveness of private banks depends on: - Modernization of operations (many banks still lack a core banking system). - Strengthening of governance structures. ### Employment — current situation and projections - Labor force and employment structure: - Oil sector employs an estimated 80,000 workers out of a total of about 8 million in the labor force. - About 40 percent of the workforce is in the public sector, up from 31 percent in 2007. - Job creation has been weak, averaging around 1 percent a year. - Female participation in the labor force is 13 percent. - Official unemployment in some provinces at 20 percent. - Medium-term demographic pressure: - Fund’s labor template uses conservative assumptions and average growth-employment elasticity estimates of MENA oil producers. - Employment creation in 2013–18 will likely not be strong enough to absorb the 2.1 million total new entrants in the labor force estimated by the International Labor Organization (ILO), leading to a rise in the unemployment rate. - 2013 illustrative numbers: - ILO projects about 300,000 new entrants in the labor force in 2013. - Authorities expect the public sector to hire about 150,000 new employees in 2013. - Only 130,000 are projected to be taken in by the private sector in 2013. - Figure context (descriptive): - Unemployment Rate Projections, 2012 — 2018 use two scenarios: “Assuming average historical growth (5.4%)” and “Assuming average projected growth (8.6%).” ### Business environment and constraints on private-sector employment creation - Since 2003 no major reform to create an enabling environment for the private sector. - Key impediments: - Security problems, pervasive red tape, and poor governance. - Iraq ranks 165 out of 183 in the World Bank’s 2012 Doing Business rankings. - Weak areas include: starting a business, access to credit, trading across borders, enforcement of contracts, resolving insolvency. - Poor infrastructure—particularly electricity—constitutes a major hurdle. - Private companies face competition from many state-owned enterprises that are subsidized, staffed, and enjoy favorable treatment in government contracts and access to public bank financing. ### Economic reform agenda — priority areas - Broad statement: Inclusive growth requires progress on structural reforms; Iraq remains largely a resource-rich transition economy. - Key areas for reform (listed in source): - Energy sector: - A hydrocarbon law has been long delayed mainly because of disagreements between the central government and the KRG. - Needed: Investment in electricity production, restructuring of electricity producers, imposition of adequate tariffs. - Remove distortionary fuel subsidies to producers. - State-owned enterprises: - SOEs absorb large transfers from the government; many are inactive. - Authorities should launch a comprehensive triage of SOEs leading to operational restructuring, governance reform, and recapitalization of those that can be rehabilitated and closure of unviable enterprises. - Business environment and governance: - Regulation should be streamlined, made more consistent, and focused on assisting private-sector operators. - Agriculture: - Revival depends on reform of the PDS, which has contributed to the decline of domestic production through large food imports. - Financial and fiscal sector reform is identified as part of the broader agenda. ### Data issues - Macroeconomic statistics are “broadly adequate for surveillance.” - Significant data gaps and lags in publication due to capacity constraints, security issues, and lack of coordination with sub-national entities. - Authorities committed to strengthening data quality with Fund technical assistance. ### Staff appraisal — main findings and policy recommendations - Recent macro performance: - Authorities maintained macroeconomic stability over the past two years despite security and political challenges. - Achievements: fiscal surpluses, increased oil exports, low inflation, and sizable external reserves. - Progress under the 2010 SBA uneven; only two reviews completed. - Challenges and risks: - Large oil reserves create potential but also a risk of the natural resource curse: weak governance, rent-seeking behavior, loss of competitiveness, stunted non-oil private sector. - Fiscal policy recommendations: - Ensure sustainability and address oil revenue volatility. - From 2013 and over the medium-term: continuous rationalization of current spending, including public employment, energy subsidies, the PDS, and transfers to state-owned enterprises to create fiscal space for investment and buffers. - Reform public financial management by introducing IFMIS and a single treasury account, eliminating off-budgetary spending and investment rollovers, and shutting down the quasi-fiscal operations of banks Rafidain and Rasheed. - Fiscal rules: start with procedural rules (including a formula to set oil price assumptions in the budget) and aim to build capacity to adopt formal numerical fiscal rules that de-link oil revenues from the budget. - Exchange rate and foreign exchange policy: - Staff welcomes CBI’s objective to liberalize the foreign exchange market and simplification of market regulations. - Staff urges immediate further measures to liberalize fully the supply of foreign exchange to lower the exchange rate spread, remove distortions, eliminate rents, and ultimately comply with Article VIII of the Fund’s Articles of Agreement. - Authorities encouraged to refrain from introducing any new regulation that could lead to a breach of obligations under Article VIII. - Strengthen the AML/CFT framework in line with MENA/FATF recommendations and FATF standards. - Staff does not recommend approval of the exchange restrictions and the multiple currency practice listed in the Informational Annex. - Exchange rate regime: - The stable exchange rate has provided a valuable anchor and “remains appropriate for the foreseeable future.” - In the medium term, create conditions to facilitate moving to a more flexible exchange rate. - Reserves and fiscal institutions: - Current two-tier architecture—prudent management of CBI reserves and use of the DFI as de-facto oil stabilization fund—is appropriate. - Maintain a high level of liquid reserves given uncertainty and low administrative capacity. - Continue reliance on the DFI to provide oil revenue transparency and help stabilize government spending. - Banking sector and private sector development: - Staff welcomes progress in banking sector supervision and state-owned bank restructuring. - Reform of state-owned banks should be combined with development of private banks by ensuring a level-playing field and more rigorous supervision. - Growth and employment: - Iraq needs sustained high and inclusive growth to reduce poverty and provide opportunities. - Growth prospects hinge on a prudent policy mix, enhancing service delivery, rebuilding infrastructure—particularly electricity—and strengthening the business environment. - Boosting non-oil private-sector activity is crucial as the public-sector employment model is reaching its limits. - Data quality: - Efforts are needed to improve the quality and timeliness of economic data, as weaknesses hamper analysis and policy formulation. *Source: IMF staff report excerpt (content unit _cr13217 - 18).* ### 36. Staff recommends that the next Article IV Consultation with Iraq take place on the ### 36. Staff recommends that the next Article IV Consultation with Iraq take place on the standard 12-month cycle. ### Economic growth and prices - Real GDP (percentage change): 5.9 8.6 8.4 9.0 9.0 8.3 9.0 8.4 8.3 - Non-oil real GDP (percentage change): 9.7 5.7 6.3 6.0 6.0 6.0 6.0 6.0 6.0 - GDP per capita (US$): 4,278 5,529 6,305 6,708 7,106 7,501 8,036 8,601 9,229 - GDP (in US$ billion): 135.5 180.6 212.5 233.3 254.9 277.4 306.1 337.3 372.4 - Oil production (mbpd): 2.38 2.65 2.95 3.33 3.74 4.15 4.66 5.16 5.70 - Oil exports (mbpd): 1.91 2.17 2.42 2.70 3.05 3.45 3.85 4.30 4.75 - Iraq oil export prices (US$ pb): 74.2 103.6 106.7 102.6 97.6 93.3 90.4 88.7 87.5 - Consumer price inflation (percentage change; end of period): 3.3 6.0 3.6 5.0 5.5 5.5 5.5 5.5 5.5 - Consumer price inflation (percentage change; average): 2.4 5.6 6.1 4.3 5.5 5.5 5.5 5.5 5.5 - Core price inflation (percentage change; end of period): 3.3 7.0 4.2 5.0 5.0 5.0 5.0 5.0 5.0 ### Public finance: revenues, expenditures, and fiscal balances - Government revenue and grants (percent of GDP): 46.4 49.5 48.2 46.4 45.7 45.5 44.8 44.6 44.1 - Government oil revenue (percent of GDP): 40.0 46.0 44.6 44.4 43.6 43.4 42.5 42.2 41.7 - Government non-oil revenue (percent of GDP): 3.5 2.5 4.1 2.0 2.1 2.2 2.3 2.4 2.4 - Expenditure (percent of GDP): 50.7 44.6 44.1 44.8 43.5 42.5 41.2 40.9 40.3 - Current expenditure (percent of GDP): 35.5 31.6 30.6 30.1 28.9 26.6 24.9 24.3 23.6 - Capital expenditure (percent of GDP): 15.2 13.0 13.5 14.7 14.6 16.0 16.3 16.6 16.7 - Primary fiscal balance (percent of GDP): -3.8 5.6 4.5 2.3 2.8 3.5 4.1 4.1 4.0 - Overall fiscal balance (including grants; percent of GDP): -4.3 4.9 4.1 1.6 2.2 3.0 3.6 3.7 3.8 - Non-oil primary fiscal balance (percent of non-oil GDP): -76.0 -84.6 -73.1 -73.6 -69.1 -68.3 -64.9 -62.7 -60.2 Table-level fiscal account details (selected, in trillions of ID unless otherwise indicated) - Revenues and grants (2014–18): 73.6 104.6 119.4 126.1 135.8 147.3 159.9 175.4 191.6 - Crude oil export revenues (2014–18): 59.9 93.4 109.4 117.9 126.7 137.0 148.0 162.3 176.9 - Expenditures (2014–18): 80.3 94.3 109.4 121.8 129.3 137.6 147.0 161.0 175.0 - Investment expenditures (2014–18): 24.1 27.4 33.6 40.0 43.3 51.7 58.0 65.3 72.4 - Balance (including grants; 2014–18): -6.8 10.3 10.1 4.3 6.5 9.6 12.9 14.4 16.5 - External assets held abroad (end-period, 2010–18, US$ billions): 8.7 19.3 21.1 22.0 25.6 32.5 43.8 56.7 71.6 ### Monetary sector and central bank - Reserve money (2010–13 end-period, in billions of ID): 54,740 60,155 57,833 62,619 61,563 65,663 70,714 - Reserve money (annual growth, percent): 15.2 9.9 16.9 14.3 8.8 9.2 7.7 - Currency issued (annual growth, percent): 13.8 16.9 17.2 18.4 19.3 11.3 15.3 - Gross foreign exchange assets (in millions of US$): 50,639 61,085 58,127 64,485 61,272 70,327 80,076 - Policy interest rate (end of period): 6.0 6.0 6.0 6.0 6.0 6.0 6.0 - Monetary survey (selected, in billions of ID): Net foreign assets: 64,319 71,759 70,473 77,506 74,975 85,930 97,298; Broad money: 53,658 74,044 73,481 72,399 73,419 77,088 87,748 ### External sector and balance of payments - Trade balance (US$ billions; 2012–18 projections): 9.0 33.9 31.5 29.0 30.0 31.5 33.4 35.5 39.4 - Trade balance (percent of GDP): 6.6 18.8 14.8 12.4 11.8 11.4 10.9 10.5 10.6 - Exports (US$ billions): 51.4 79.6 94.1 101.6 109.1 118.1 127.6 139.9 152.6 - Crude oil exports (US$ billions): 51.2 79.4 93.8 101.1 108.6 117.5 127.0 139.2 151.7 - Imports (US$ billions): -42.4 -45.7 -62.6 -72.6 -79.1 -86.6 -94.2 -104.5 -113.2 - Private sector imports (US$ billions): -27.8 -29.6 -39.3 -42.2 -47.4 -50.0 -55.2 -63.1 -68.3 - Government imports (US$ billions): -14.7 -16.1 -23.3 -30.3 -31.7 -36.6 -39.0 -41.4 -44.9 - Current account (US$ billions): 4.1 22.5 14.9 8.9 7.5 11.2 13.7 13.8 16.2 - Current account (percent of GDP): 3.0 12.5 7.0 3.8 2.9 4.0 4.5 4.1 4.3 - Financial account (percent of GDP): 3.1 2.6 -1.0 1.8 1.1 1.0 1.0 1.0 1.0 - Errors and omissions (US$ billions): -4.9 -6.1 -3.1 0.0 0.0 0.0 0.0 0.0 0.0 - Overall balance (US$ billions): 2.3 19.0 10.8 10.8 8.6 12.2 14.7 14.8 17.2 - Development Fund for Iraq balance (end period, US$ billions): 7.4 16.5 18.1 18.9 21.9 27.8 37.4 48.4 61.2 - Central bank's Gross International Reserves (end period, US$ billions): 50.6 61.1 70.3 80.1 84.9 90.5 95.5 99.3 103.7 - Reserves in months of imports: 10.6 9.5 9.3 9.7 9.4 9.2 8.8 8.4 8.1 ### Appendix I: External sector analysis — key findings and vulnerabilities - The current account balance is in a structural surplus driven exclusively by oil exports; averaged 6 percent of GDP over 2005–12. Main risk: volatility in oil revenues (export volumes and prices). - Financial balance is in a structural small surplus; averaged 4 percent of GDP over 2005–12, driven by government borrowing projected to taper off from 2012. - Large negative errors and omissions (averaging -3 percent of GDP over 2005–12) suggest possible unrecorded private capital outflows. - The international investment position is estimated to be positive and improving; as of end-2011 authorities’ data show a positive net IIP of about $13 billion. With public sector foreign financial assets close to $90 billion, commercial banks’ net asset position around $5 billion, and external debt of $60 billion, the net international investment position likely strengthened at end-2012. - The exchange rate is broadly in line with fundamentals. The oil sector is very competitive; the non-oil tradable sector is small. ### Reserve adequacy assessment and stress test - CBI reserves at end-2012: $70 billion (about one-third of GDP); assessed as adequate for balance of payments stability with large margins. - Staff alternative scenario: a 15 percent drop in oil prices below the baseline in 2013 — CBI reserves would be adequate to absorb this shock; reserves would remain at 2013 levels through end-2015, after which accumulation resumes. - Reserve adequacy metrics (2012–18): - Reserves in USD billion: 70.3 80.1 84.9 90.5 95.5 99.3 103.7 - Reserves in months of imports: 9.3 9.7 9.4 9.2 8.8 8.4 8.1 - Reserves in percent of debt service coming due (excluding short-term debt): 4,632 3,104 3,444 3,766 4,075 4,345 4,540 - CBI NFA in percent of reserve money: 121.8 129.2 127.3 125.1 119.9 113.4 107.1 - CBI NFA in percent of broad money: 103.7 104.1 102.1 100.7 96.4 91.0 86.1 - Implication: Reserves could cover complete dollarization of the economy in principle; a large part of deposits are owned by government agencies and SOEs, reducing vulnerability to confidence crises. ### Key policy implications and recommendations (implied by analysis) - Maintain prudent reserve accumulation given dependence on a single export (oil) and regional political/security risks. - Strengthen recording of private capital flows to reduce large negative errors and omissions and improve data on external positions. - Manage fiscal policy to sustain positive primary and overall fiscal balances while preserving investment expenditures and external asset accumulation. - Continue monitoring and stress-testing reserve adequacy against oil-price shocks (e.g., 15 percent price shock) given the centrality of oil revenues to the balance of payments. *International Monetary Fund staff report (Iraq) — selected tables and Appendix I: External Sector Analysis.* ### 7. The real effective exchange rate has appreciated over the last three years. Since the ### 7. The real effective exchange rate has appreciated over the last three years. ### Exchange rate movements and measurement - From end-2009 to end-2012: - The real effective exchange rate appreciated 12 percent. - The nominal effective exchange rate appreciated 7 percent. - Higher inflation in Iraq relative to its trading partners contributed to a 5 percent real appreciation over this period. - At end-2012 the real effective exchange rate was about the level of end-2008. - Foreign exchange market structure and parallel market: - The central bank is the main source of funds to the foreign exchange market. - Foreign exchange auction regulations led to a widening of the spread between the official and parallel foreign exchange rates from mid-2011 onwards. - Using parallel market foreign exchange rates, the real appreciation from end-2009 to end-2012 was 8 percent. - The share of foreign currency transacted on the parallel market has varied over time but is likely to be relatively small. - The weighted real effective exchange rate is therefore likely to be closer to the rate based on the official exchange rate than that based on the parallel market exchange rate. ### Competitiveness - Oil sector: - The oil sector is extremely competitive. - The cost of producing oil is below $5 per barrel. - At these cost levels, neither the real exchange rate level nor international oil price volatility has any effect on the oil sector’s competitiveness. - Non-oil sector: - The internationally-contestable segment of the non-oil sector is uncompetitive. - Evidence: lack of any non-oil export sector and extreme dependence on imports for consumption and investment goods; even food products are mostly imported despite past importance of agriculture as a source of exports. - Structural constraints limit the potential response of non-oil tradables to exchange rate depreciation: - Inadequate public sector service delivery (e.g., security, electricity, rule of law). - Aggressive public sector hiring driving up reservation wages of certain categories of skilled labor. - It is not likely that a more depreciated exchange rate would increase the non-oil tradable sector given these deeper problems. ### CGER quantitative assessment and limitations - A quantitative assessment of the real exchange rate using the CGER methodology is problematic. - Data limitations restrict the quantitative methodology. - Iraq’s turbulent recent history makes it difficult to anchor the analysis to a recent representative period where macro aggregates were in equilibrium. - Of the three standard CGER methodologies (macroeconomic balance approach, equilibrium real exchange approach, and external sustainability approach), constraints limit quantitative analysis to the external sustainability approach. ### External sustainability approach findings - The external sustainability approach confirms broad alignment of the exchange rate with fundamentals. - Estimates using this methodology suggest the current account norm is a surplus of 3 percent of GDP. - Under staff’s baseline medium term projection, the average current account surplus is 4 percent of GDP. - Therefore, the estimated undervaluation of the real exchange rate is close to 10 percent. - Given large margins of error, these calculations suggest the real exchange rate is in line with economic fundamentals. ### Medium-term outlook for the real exchange rate - Major determinants: - In the short run, the international price of oil is a major determinant of the real exchange rate. - During 2009 the oil price collapse forced a depreciation of the real exchange rate; as oil prices recovered, so did the real exchange rate. - In the medium term, the real exchange rate is heavily influenced by the level of oil production in addition to the international oil price. - As oil production is currently ramping up, the equilibrium real exchange rate may be appreciating notwithstanding weakening oil prices. - Offsetting concerns: - The current spread between the official and parallel exchange rates may be suggestive of underlying fragilities that could warrant a real depreciation of the official rate. ### Relevant fiscal, external, and financial context (selected quantitative points from accompanying sections) - External debt and obligations: - As of end-2012, total external debt was $60 billion (28 percent of GDP). - As of end-2012, total restructured and new external debt amounted to $18.2 billion (8.5 percent of GDP). - Under staff’s baseline, by end-2018 total external debt is projected to be $20.9 billion (5.6 percent of GDP). - External debt service is projected at about $2–3 billion annually over the medium term. - The debt service to exports ratio will double from 1.5 percent in 2013 to 3 percent in 2014 and thereafter gradually revert back to 1.5 percent. - Public sector domestic obligations and assets: - Total domestic obligations increased from ID 5.2 trillion at end-2009 to ID 16.2 trillion at end-2012 (6.5 percent of GDP). - Obligations composed of: T-bills held by the banking system and bank loans totaling ID 7.5 trillion; government-guaranteed loans by state-owned banks to state-owned enterprises totaling ID 8.6 trillion. - Public sector commercial bank deposits were ID 40.5 trillion at end-2012. - Under the staff’s baseline (rolling over T-bills, no new borrowing and no new government-guaranteed loans), domestic obligations will decline to ID 5.7 trillion (1.3 percent of GDP) by end–2018. ### Risk considerations linked to exchange rate and external sustainability - Inadequate policy implementation, particularly in fiscal policy, foreign exchange management, and management of CBI reserves (particularly if CBI independence is undermined). - Likelihood: High. - Expected impact: High. - Potential outcomes: large increases in current spending leading to monetary financing, use of central bank reserves for fiscal purposes, higher inflation, currency depreciation; intervention in foreign exchange auctions resulting in shortage of foreign exchange and loss of confidence in CBI support for the exchange rate, ultimately leading to pressures to depreciate the dinar. - Deteriorating political and security situation domestically and regionally. - Likelihood: High. - Expected impact: High. - Potential outcomes: attacks on oil infrastructure reducing oil production capacity and exports; lower growth in the non-oil sector; worsening fiscal stance given oil accounts for over 90 percent of government revenues. - Delays in developing oil fields and export capacity (due to security, political instability, technical factors). - Likelihood: Medium. - Expected impact: High. - Potential outcomes: lower fiscal revenues, possible fiscal crisis, and potential exchange rate depreciation. - Oil price decline triggered by a deeper than expected slowdown in Emerging Markets. - Likelihood: Medium. - Expected impact: High. - Potential outcomes: lower fiscal revenues, possible fiscal crisis, and potential exchange rate depreciation. *Source: IMF staff analysis in the cited chapter.* ### Appendix Table 2. Iraq: Public Sector Debt Sustainability Framework, 2008–2018 ### Appendix Table 2. Iraq: Public Sector Debt Sustainability Framework, 2008–2018 ### Baseline debt levels and composition - Public sector debt (percent of GDP) by year: - 2008: 71.6 - 2009: 84.3 - 2010: 52.2 - 2011: 40.6 - 2012: 34.9 - 2013: 17.3 - 2014: 14.4 - 2015: 11.9 - 2016: 9.8 - 2017: 8.1 - 2018: 6.5 - Foreign-currency denominated share (percent of GDP) by year: - 2008: 71.3 - 2009: 80.4 - 2010: 45.0 - 2011: 33.8 - 2012: 28.3 - 2013: 11.9 - 2014: 10.0 - 2015: 8.5 - 2016: 7.2 - 2017: 6.1 - 2018: 5.2 - Public sector debt-to-revenue ratio (percent) by year: - 2008: 127.0 - 2009: 182.6 - 2010: 112.6 - 2011: 82.0 - 2012: 72.3 - 2013: 37.3 - 2014: 31.5 - 2015: 26.2 - 2016: 22.0 - 2017: 18.1 - 2018: 14.8 ### Debt dynamics and flows - Change in public sector debt (percent of GDP) by year: - 2008: -41.2 - 2009: 12.7 - 2010: -32.1 - 2011: -11.7 - 2012: -5.7 - 2013: -17.5 - 2014: -2.9 - 2015: -2.4 - 2016: -2.1 - 2017: -1.8 - 2018: -1.5 - Identified debt-creating flows (percent of GDP) (sum of components) by year: - 2008: -34.9 - 2009: 27.6 - 2010: -7.0 - 2011: -16.2 - 2012: -9.2 - 2013: -5.4 - 2014: -4.1 - 2015: -4.5 - 2016: -5.1 - 2017: -4.9 - 2018: -4.8 - Primary deficit (percent of GDP) by year: - 2008: 0.5 - 2009: 12.4 - 2010: 3.8 - 2011: -5.6 - 2012: -4.5 - 2013: -2.3 - 2014: -2.8 - 2015: -3.5 - 2016: -4.1 - 2017: -4.1 - 2018: -4.0 - Revenue and grants (percent of GDP) by year: - 2008: 56.4 - 2009: 46.2 - 2010: 46.4 - 2011: 49.5 - 2012: 48.2 - 2013: 46.4 - 2014: 45.7 - 2015: 45.5 - 2016: 44.8 - 2017: 44.6 - 2018: 44.1 - Primary (noninterest) expenditure (percent of GDP) by year: - 2008: 56.9 - 2009: 58.6 - 2010: 50.2 - 2011: 43.9 - 2012: 43.7 - 2013: 44.1 - 2014: 42.9 - 2015: 42.0 - 2016: 40.7 - 2017: 40.5 - 2018: 40.1 ### Automatic debt dynamics (percent of GDP) and contributions - Automatic debt dynamics total by year: - 2008: -35.4 - 2009: 14.6 - 2010: -14.3 - 2011: -12.3 - 2012: -5.7 - 2013: -2.4 - 2014: -0.9 - 2015: -0.6 - 2016: -0.7 - 2017: -0.5 - 2018: -0.6 - Contribution from interest rate/growth differential (percent of GDP) by year: - 2008: -32.4 - 2009: 14.8 - 2010: -14.3 - 2011: -12.3 - 2012: -5.6 - 2013: -2.4 - 2014: -0.9 - 2015: -0.6 - 2016: -0.7 - 2017: -0.5 - 2018: -0.6 - Contribution from real interest rate (percent of GDP) by year: - 2008: -27.2 - 2009: 19.8 - 2010: -10.2 - 2011: -8.9 - 2012: -2.7 - 2013: 0.5 - 2014: 0.6 - 2015: 0.5 - 2016: 0.3 - 2017: 0.2 - 2018: 0.0 - Contribution from real GDP growth (percent of GDP) by year: - 2008: -5.3 - 2009: -5.0 - 2010: -4.1 - 2011: -3.4 - 2012: -2.9 - 2013: -2.9 - 2014: -1.4 - 2015: -1.1 - 2016: -1.0 - 2017: -0.8 - 2018: -0.6 - Contribution from exchange rate depreciation (percent of GDP) by year (partial values shown): - 2008: -3.0 - 2009: -0.2 - 2010: 0.0 - 2011: 0.0 - 2012: -0.1 - 2013: ... (table shows ellipses beyond this point) ### Other identified debt-creating flows and residuals - Other identified debt-creating flows (percent of GDP) by year: - 2008: 0.0 - 2009: 0.5 - 2010: 3.6 - 2011: 1.7 - 2012: 1.0 - 2013: -0.7 - 2014: -0.4 - 2015: -0.4 - 2016: -0.3 - 2017: -0.3 - 2018: -0.3 - Components of other identified debt-creating flows: - Privatization receipts (negative): 0.0 for all years shown - Recognition of implicit or contingent liabilities: 0.0 for all years shown - Other (off-budget bank financing) by year: - 2008: 0.0 - 2009: 0.5 - 2010: 3.6 - 2011: 1.7 - 2012: 1.0 - 2013: -0.7 - 2014: -0.4 - 2015: -0.4 - 2016: -0.3 - 2017: -0.3 - 2018: -0.3 - Residual, including asset changes (percent of GDP) by year: - 2008: -6.4 - 2009: -14.9 - 2010: -25.2 - 2011: 4.6 - 2012: 3.5 - 2013: -12.1 - 2014: 1.1 - 2015: 2.1 - 2016: 3.0 - 2017: 3.1 - 2018: 3.3 ### Gross financing need (percent of GDP and USD) - Gross financing need (percent of GDP) by year: - 2008: 0.9 - 2009: 9.7 - 2010: 3.9 - 2011: -4.6 - 2012: -3.8 - 2013: -1.8 - 2014: -2.0 - 2015: -2.8 - 2016: -3.4 - 2017: -3.5 - 2018: -3.7 - Gross financing need (in billions of U.S. dollars) by year: - 2008: 1.1 - 2009: 10.8 - 2010: 5.3 - 2011: -8.2 - 2012: -8.2 - 2013: -4.2 - 2014: -5.1 - 2015: -7.8 - 2016: -10.6 - 2017: -11.9 - 2018: -13.6 ### Scenario projections - Scenario with key variables at their historical averages 7/ (values listed partially): - 17.3 - 16.4 - 16.9 - 18.9 - 21.3 - 24.2 - -3.4 - Scenario with no policy change (constant primary balance) in 2013-2018 (values listed partially): - 17.3 - 14.9 - 13.6 - 13.2 - 13.1 - 12.9 - -1.2 ### Key macroeconomic and fiscal assumptions underlying baseline - Real GDP growth (in percent) by year: - 2008: 6.6 - 2009: 5.8 - 2010: 5.9 - 2011: 8.6 - 2012: 8.4 - 2013: 9.0 - 2014: 9.0 - 2015: 8.3 - 2016: 9.0 - 2017: 8.4 - 2018: 8.3 - Average nominal interest rate on public debt (in percent) 8/ by year: - 2008: 0.4 - 2009: 0.3 - 2010: 0.7 - 2011: 1.9 - 2012: 1.2 - 2013: 2.3 - 2014: 3.9 - 2015: 4.0 - 2016: 4.3 - 2017: 4.5 - 2018: 2.5 - Average real interest rate (nominal rate minus change in GDP deflator, in percent) by year: - 2008: -31.8 - 2009: 21.7 - 2010: -13.9 - 2011: -20.9 - 2012: -7.0 - 2013: 1.6 - 2014: 3.6 - 2015: 3.6 - 2016: 3.1 - 2017: 2.9 - 2018: 0.5 - Nominal appreciation (increase in US dollar value of local currency, in percent) by year (partial values shown): - 2008: 3.7 - 2009: 0.2 - 2010: 0.0 - 2011: 0.0 - 2012: 0.3 - 2013: ... (ellipses in table) - Inflation rate (GDP deflator, in percent) by year: - 2008: 32.2 - 2009: -21.4 - 2010: 14.6 - 2011: 22.8 - 2012: 8.1 - 2013: 0.7 - 2014: 0.2 - 2015: 0.5 - 2016: 1.2 - 2017: 1.6 - 2018: 2.0 - Growth of real primary spending (deflated by GDP deflator, in percent) by year: - 2008: 33.2 - 2009: 8.9 - 2010: -9.4 - 2011: -5.1 - 2012: 8.1 - 2013: 9.9 - 2014: 6.0 - 2015: 6.1 - 2016: 5.6 - 2017: 8.0 - 2018: 7.2 - Primary deficit (percent of GDP) repeated in assumptions: - 2008: 0.5 - 2009: 12.4 - 2010: 3.8 - 2011: -5.6 - 2012: -4.5 - 2013: -2.3 - 2014: -2.8 - 2015: -3.5 - 2016: -4.1 - 2017: -4.1 - 2018: -4.0 ### Methodological notes (as provided in table footnotes) - Footnote 1/: Indicates coverage of public sector (e.g., general government or nonfinancial public sector) and whether net or gross debt is used. - Footnote 2/: Automatic debt dynamics derived as [(r - π(1+g) - g + αε(1+r)) /(1+g+π+gπ)] times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; ε = nominal exchange rate depreciation (increase in local currency value of U.S. dollar). - Footnote 3/: Real interest rate contribution is derived from the denominator in footnote 2/ as r - π(1+g) and the real growth contribution as -g. - Footnote 4/: Exchange rate contribution derived from numerator in footnote 2/ as αε(1+r). - Footnote 5/: For projections, residual includes exchange rate changes. - Footnote 6/: Gross financing need defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. - Footnote 7/: Key variables in historical-averages scenario include real GDP growth; real interest rate; and primary balance in percent of GDP. - Footnote 8/: Average nominal interest rate derived as nominal interest expenditure divided by previous period debt stock. - Footnote 9/: Debt-stabilizing primary balance assumes key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. *Source: Appendix Table 2. Iraq: Public Sector Debt Sustainability Framework, 2008–2018 (from the IMF staff report informational annex).* ### 5. Data collection is reasonably comprehensive for current price data in the formal sector. ### 5. Data collection is reasonably comprehensive for current price data in the formal sector. ### Data collection and timeliness - Businesses employing more than 10 people must report calendar year data by the following October; small businesses must report by the following June. - Sizable penalties for noncompliance mean respondents usually meet deadlines; recent changes in the country create a risk that timeliness of data reporting will deteriorate. - There is a shortage of quarterly and monthly indicators of economic activity and a lack of timely data for services. - Quarterly GDP estimates are based on a limited number of indicators: crude oil output, electricity, rent of dwellings, and government expenditure. - For several industries, extrapolating from out-of-date benchmarks adversely affects data reliability. ### Consumer Price Index (CPI) - Based on the HBS 2007, COSIT compiles and disseminates a monthly CPI for all-Iraq (including Kurdistan) and for each governorate. - The CPI covers only urban areas in all governorates. - Staffing is inadequate in number; training has been received only during STA technical assistance missions. - Insufficient computer hardware and software hamper efficient CPI processing. - Recent TA missions provided hands-on training on CPI methodologies, adjustments for seasonality and quality changes. - Limited training provided on methods for constructing the producer price index (PPI) and the wholesale price index (WPI) and on documenting procedures and metadata; work is continuing. ### Monetary and financial statistics - Progress made in developing components and structure for compiling a depository corporations survey. - Data quality is hampered by: (i) lack of sufficiently trained staff and inadequate internal cooperation within the CBI; and (ii) difficulty collecting information on banking transactions in the northern region (Kurdistan). - The CBI introduced a new report form with more breakdowns by sector and type of financial instruments to collect data from commercial banks. - The CBI reports data for publication in the IMF’s International Financial Statistics with a lag of more than three months; latest reported data are marked “preliminary,” indicating problems with data collection and compilation. ### Balance of payments and International Investment Position (IIP) statistics - Balance of payments statistics are available to the Fund for 2005–2011 in BPM6 format. - The CBI compiles and disseminates an annual IIP statement. - Quality of recent years’ information has improved but timeliness remains a key concern. - Presentation is limited due to coverage problems and some deviations from internationally acceptable methodologies. - Issues regarding full recording of external debt data continue to impact coverage and timeliness of balance of payments and IIP statistics. - International reserves are compiled consistent with international methodologies and published in the IFS since end-2006. - A TA mission (February 2012) noted lack of data submission to the CBI from other government institutions and the private sector, particularly for external trade in goods and services and foreign direct investment. - The mission identified data reconciliation issues in BPM5 framework, including inconsistencies in classifications and recording of portfolio investment transactions and positions. - Mission recommendations included improved interagency cooperation on direct investment statistics and adapting the international transactions reporting system to BPM6 requirements. ### External trade statistics - External trade data suffer from serious problems of timeliness and poor quality. - A new customs form for imports exists but is not being used at the customs border due to the security situation and lack of Customs Department resources at border outlets. - Coverage of private sector imports is constrained: only goods paid through the Iraqi banking system are captured; imports under external payments arrangements (for example, imports for direct investment projects) are not recorded in the balance of payments. - Coverage excludes the northern region (Kurdistan); no estimates for smuggling are made. - Export data from the oil sector are received from the BOPSD at the CBI. - Nonoil export data, equivalent to the 3–5 percent of total exports, are compiled from the customs export form and provided to the CBI monthly for crosschecking. ### Government finance statistics and reporting - Despite the difficult security situation, provision of fiscal data for program monitoring has been satisfactory; infrequent submission delays occur and coverage of the Kurdish region remains sketchy. - STA (February 2005) with FAD and World Bank discussed a work plan for rehabilitating budgetary, accounting, and fiscal management information systems and building up reporting. - Issues to be addressed for developing government finance statistics (GFS) included establishing a macro-fiscal directorate-general, implementing classification mapping chart of accounts and budget classification onto GFSM 2001 format (significant progress made), and preparing preliminary GFS-compliant estimates for general government on a best-effort basis. - The Ministry of Finance set up a debt unit with external consultant support. - Iraq does not report government finance statistics for publication in the Government Finance Statistics Yearbook (GFSY) or IFS. - No fiscal statistics are published by the government beyond the summary of central government budgetary estimates and outturn. ### Selected macroeconomic indicators and staff projections (2010–2013) - Real GDP (percentage change): 2010 Actual 5.9; 2011 Actual 8.6; 2012 Prel. 8.4; 2013 Proj. 9.0. - Non-oil real GDP (percentage change): 2010 9.7; 2011 5.7; 2012 6.3; 2013 6.0. - GDP per capita (US$): 2010 4,278; 2011 5,529; 2012 6,305; 2013 6,708. - GDP (in US$ billions): 2010 135.5; 2011 180.6; 2012 212.5; 2013 233.3. - Oil production (mbpd): 2010 2.38; 2011 2.65; 2012 2.95; 2013 3.33. - Oil exports (mbpd): 2010 1.91; 2011 2.17; 2012 2.42; 2013 2.70. - Iraq oil export prices (US$ per barrel): 2010 74.2; 2011 103.6; 2012 106.7; 2013 102.6. - Consumer price inflation (percentage change; end of period): 2010 3.3; 2011 6.0; 2012 3.6; 2013 5.0. - Consumer price inflation (percentage change; average): 2010 2.4; 2011 5.6; 2012 6.1; 2013 4.3. - Core price inflation (percentage change; end of period): 2010 3.3; 2011 7.0; 2012 4.2; 2013 5.0. - Gross domestic investment (percent of GDP): 2010 21.4; 2011 19.3; 2012 20.3; 2013 21.1. - Of which: public investment (percent of GDP): 2010 15.2; 2011 13.0; 2012 13.5; 2013 14.7. - Gross domestic consumption (percent of GDP): 2010 77.9; 2011 66.9; 2012 70.8; 2013 73.2. - Of which: public consumption (percent of GDP): 2010 25.2; 2011 21.7; 2012 21.3; 2013 21.6. - Gross national savings (percent of GDP): 2010 24.4; 2011 31.8; 2012 27.3; 2013 24.9. - Of which: public savings (percent of GDP): 2010 10.8; 2011 17.7; 2012 18.1; 2013 17.1. - Saving – Investment balance (percent of GDP): 2010 3.0; 2011 12.5; 2012 7.0; 2013 3.8. - Government revenue and grants (percent of GDP): 2010 46.4; 2011 49.5; 2012 48.2; 2013 46.4. - Government oil revenue (percent of GDP): 2010 40.0; 2011 46.0; 2012 44.6; 2013 44.4. - Government non-oil revenue (percent of GDP): 2010 3.5; 2011 2.5; 2012 4.1; 2013 2.0. - Grants (percent of GDP): 2010 2.9; 2011 1.0; 2012 0.0; 2013 0.0. - Expenditure (percent of GDP): 2010 50.7; 2011 44.6; 2012 44.1; 2013 44.8. - Current expenditure (percent of GDP): 2010 35.5; 2011 31.6; 2012 30.6; 2013 30.1. - Capital expenditure (percent of GDP): 2010 15.2; 2011 13.0; 2012 13.5; 2013 14.7. - Primary fiscal balance (percent of GDP): 2010 -3.8; 2011 5.6; 2012 4.5; 2013 2.3. - Overall fiscal balance (including grants; percent of GDP): 2010 -4.3; 2011 4.9; 2012 4.1; 2013 1.6. - Non-oil primary fiscal balance (percent of non-oil GDP): 2010 -76.0; 2011 -84.6; 2012 -73.1; 2013 -73.6. - Tax revenue/non-oil GDP (percent): 2010 1.8; 2011 1.9; 2012 2.3; 2013 2.0. - Development Fund of Iraq (in US$ billions; end of period): 2010 7.4; 2011 16.5; 2012 18.1; 2013 18.9. - Total government debt (in US$ billions; end of period): 2010 70.8; 2011 73.4; 2012 74.1; 2013 40.4. - Of which external debt (in US$ billions; end of period): 2010 60.9; 2011 61.0; 2012 60.2; 2013 27.8. - Growth in reserve money (percent): 2010 15.2; 2011 9.9; 2012 9.2; 2013 7.7. - Growth in broad money (percent): 2010 14.8; 2011 38.0; 2012 4.1; 2013 13.8. - Policy interest rate (end of period): 2010 6.0; 2011 6.0; 2012 6.0. - Current account (percent of GDP): 2010 3.0; 2011 12.5; 2012 7.0; 2013 3.8. - Trade balance (percent of GDP): 2010 6.6; 2011 18.8; 2012 14.8; 2013 12.4. - Exports of goods (percent of GDP): 2010 37.9; 2011 44.1; 2012 44.3; 2013 43.5. - Imports of goods (percent of GDP): 2010 -31.3; 2011 -25.3; 2012 -29.5; 2013 -31.1. - Overall external balance (percent of GDP): 2010 1.7; 2011 10.5; 2012 5.1; 2013 4.6. - Gross reserves (in US$ billions): 2010 50.6; 2011 61.1; 2012 70.3; 2013 80.1. - In months oil imports of goods and services: 2010 10.6; 2011 9.5; 2012 9.3; 2013 9.7. - Exchange rate (dinar per US$; period average): 2010 1,170; 2011 1,170; 2012 1,166; 2013 -.-. - Real effective exchange rate (percent change): 2010 1.3; 2011 4.7; 2012 5.7; 2013 -.-. - Sources: Iraqi authorities; and IMF staff estimates and projections. - Memorandum notes: - Development Fund of Iraq excludes escrow account held abroad to purchase military equipment. - Total government debt assumes a debt reduction in 2013 by non-Paris Club official creditors, comparable to the Paris Club agreement. *Source: IMF staff report excerpt (Data collection and statistics; Public Information Notice No. 13/58, May 21, 2013).* ### 1. On behalf of the Iraqi authorities, I thank staff for their engagement and the constructive ### On behalf of the Iraqi authorities, I thank staff for their engagement and the constructive Article IV Consultation discussions. The authorities highly value the views of the Fund on Iraq’s economic policies and appreciate the valuable technical assistance they receive from staff in support of their stabilization and reform efforts. ### Economic performance and risks - GDP growth picked up to over 8 percent, reflecting higher oil production and buoyant growth in the non-oil economy. - Inflation remained low. - The fiscal balance recorded surpluses and sizable external reserves were accumulated. - Main risks and challenges: - A deteriorating political and security situation. - Volatility in oil prices. - Constraints in administrative capacity. ### Fiscal policies and reforms - 2013 fiscal stance and planning: - The authorities plan a more gradual fiscal consolidation than in the two previous years, with the fiscal surplus estimated at 1.6 percent of GDP. - They intend to put in place a medium-term fiscal strategy program that would cover more than three years. - With oil revenues soaring, political pressures to increase current spending are growing. - In March 2013 parliament approved a final budget that includes unfunded commitments, but implies a deficit that is less than in some previous years. - Actual execution of the budget will aim at meeting priority social and investment spending, while maintaining fiscal buffers. - Specific fiscal measures and objectives: - Limit spending growth in subsidies for energy producers. - Rationalize transfers to state-owned enterprises and to the universal Public Distribution System. - Contain the increase in public-sector employment. - Maintain fiscal buffers at the Development Fund for Iraq (DFI) at about six months of salaries and pensions. - Enable full execution of investment projects in the oil sector while keeping non-oil sector capital spending constant in nominal terms. ### Monetary and exchange rate policies - Exchange rate policy: - The authorities agree with staff that the stability of the exchange rate has provided a valuable anchor for inflation expectations in an uncertain environment. - They intend to maintain exchange rate stability in the foreseeable future. - Foreign exchange market measures: - In 2011, the central bank of Iraq (CBI) started limiting foreign exchange supply to address concerns related to money laundering and financing of terrorism, enforcing existing exchange restrictions and introducing new restrictions. - With the central bank the main source of funds to the foreign exchange market, foreign exchange auction regulations have led to a widening of the spread between the official and parallel foreign exchange rates. - In the absence of sufficient capacity of the financial sector to implement Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) preventive measures, the CBI finds it necessary to restrict the supply of foreign currency to restrain illicit uses of foreign exchange. - The CBI is committed to progressively liberalize the foreign exchange market as capacity to prevent AML/CFT is developed. - The CBI has recently taken steps to simplify foreign exchange market regulations, leading to the elimination of many exchange restrictions. - The CBI is working closely with staff on complying with Article VIII of the Fund’s Articles of Agreement, as well as eliminating the remaining exchange restrictions and the multiple currency practice. ### Structural reforms - Progress and constraints: - Continued capacity constraints, compounded by the difficult political and security situation, have slowed progress in structural reforms. - Progress was made in public financial management, with the adoption of a government Chart of Accounts. - The authorities confirmed their commitment to adopt a single treasury account. - They will pursue efforts to fully put in place an Integrated Financial Management Information System to improve budgeting, budget execution, spending controls, debt management, and fiscal reporting. - Banking sector and transparency: - Effective measures were taken to clean-up the balance sheets of the two largest state-owned banks, Rafidain and Rasheed, of legacy external debt, losses related to the war, valuation losses, and costs associated with issuing the new Iraqi currency. - Continued progress was made in improving transparency in the oil sector as Iraq became a full member of the Extractive Industries Transparency Initiative in December 2012. - Sovereign wealth fund and DFI assessment: - The authorities appreciate staff’s work on sovereign wealth fund options and concur with staff’s view that the DFI is a successful and transparent fiscal institution. - The DFI has been operating as a de facto stabilization fund, allowing the government to accumulate reserves through strong fiscal performance in boom years, and financing spending when oil revenues fall short. ### Growth prospects and development strategy - Staff and authorities’ assessment: - Growth prospects hinge on implementing a prudent policy mix, enhancing service delivery, rebuilding infrastructure and strengthening the business environment. - Promoting the non-oil private sector is crucial as the employment model based on the public sector is reaching its limits. - Planning: - The Ministry of Planning prepared a five-year National Development Plan following an extensive consultative process; the plan is now being discussed by the Cabinet. *IMF staff report excerpt (Iraq) — content as provided in the source PDF.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13217.pdf_