## _cr15235 ## Source details **Canonical URL:** [_cr15235](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15235.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15235.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15235.pdf.json) --- ### Humanitarian conditions and living standards - Over three million have been displaced internally since mid-2014. - Close to 10 million Iraqis need humanitarian assistance. - Living conditions deteriorated; government ability to provide basic public goods and services highly curtailed. - Health infrastructure damage: - 14 major hospitals dysfunctional or destroyed. - Over 170 health facilities dysfunctional or destroyed. - Food security and utilities: - Food security at risk given destruction to agricultural, livestock and irrigation systems. - Water, power, and sanitation cuts reportedly widespread. - Social support and casualties: - Four-fifths of households reportedly receiving no PDS rations in April. - According to Iraq Body Count, casualties since beginning of 2015 climbed to over 7,300; 17 thousand reported deaths during 2014. - Displacement and refugees: - More than 2.9 million IDPs expected to need nonfood assistance through the remainder of 2015. - About a quarter of a million Syrian refugees in Iraq; 60 percent women and children. - Government humanitarian response and support: - Ministry of Displacement and Migration smart cards allow families to withdraw about $336 monthly. - Government set up a $500 million Reconstruction Fund. - U.N. launched a $500 million humanitarian response plan targeting over 5.5 million Iraqis over six months. - Kuwait donation: $300 million (for Iraq and Yemen). ### Fiscal pressures, 2015 outcomes, and measures - Revenues expected to decline by 21 percent in 2015 due to full-year effect of oil price decline. - Government deficit outcomes: - Even with adjustment, government deficit expected to rise to 17 percent of GDP (staff projection). - Final budget approved by Parliament would deliver a deficit of ID 46 trillion (23 percent of GDP) based on staff assumptions. - 2015 budget law approved by Parliament envisaged a deficit of 11.5 percent of GDP (footnote in source). - 2015 fiscal measures: - New measures amounting to ID 27 trillion (13 percent of GDP) introduced (taxation on cars, internet, mobile telephony, higher custom tariff schedule, spending cuts). - Additional measures planned amounting to 6 percent of GDP: increase electricity tariffs (ID 2.5 trillion for 2015) and rationalize capital budget (ID 9 trillion) by end-July. - Resulting spending envelope would decline to 58 percent of GDP (reduction of 4 percentage points of GDP in spending compared to 2014, adjusting for KRG transfer); deficit would fall to 17 percent of GDP. - Financing composition and gaps: - Drawdown of SDR allocation and the RFI purchase equivalent to SDR 594.2 million (about $830 million). - Eurobonds planned for $6 billion over two years; issuance this year of at least $2 billion tentatively scheduled. - World Bank financing of $350 million urgent reconstruction financing and possible Development Policy Loan (total of $1–1.5 billion in 2015). - Even with these sources, a residual financing gap of about 7 percent of GDP remained in 2015. - Identified financing table excerpts (selected exact figures from source tables): Revenue: 80.9 / 82.9 / 82.9 (trillion ID / percent of GDP variants); Expenditure: 154.3 / 129.4 / 117.8; Deficit: 73.4 / 46.5 / 34.9 (trillion ID / percent of GDP variants). - Public debt implications: - Total debt projected to rise from 39 percent of GDP in 2014 (10 percent domestic) to 69 percent of GDP in 2015 (33 percent domestic). - DSA projects convergence to 48 percent of GDP in 2020 under baseline. - Recommendation: develop a debt management strategy; issue Eurobonds and domestic bonds to increase debt management capacity and deepen financial system. ### Macroeconomic projections and medium-term outlook - 2016 projections (staff baseline and assumptions): - Non-oil economy projected to recover by about 2 percent (assuming conflict begins to resolve in 2016). - Total GDP expected to grow by about 8 percent in 2016. - Current account deficit projected to lower to around 7 percent of GDP. - CBI international reserves projected to fall to $41 billion by end-year (5.5 months of imports). - Government deficit projected to improve to around 10 percent of GDP in 2016. - Baseline medium-term outlook (2016–20) assumptions: - GDP growth recover to around 7.5 percent on average during 2016–20. - Non-oil sector growth stabilize at about 4 percent on average during 2017–20. - Inflation expected to remain low at 3 percent. - Fiscal position improve from 2016, moving to surplus from 2019. - CBI international reserves expected to decline until 2016–17, rebound in 2018, reaching $60 billion in 2020 (5 months of next year’s imports). - Current account expected to return to surplus in 2017 and remain at about 2 percent of GDP during 2018–20. - Key macro time series excerpts (2013–2020): - Real GDP (percent change): 13.9; 6.6; -2.1; 0.5; 7.6; 8.1; 7.6; 7.5; 7.1. - Oil production (mbpd): 3.0; 3.0; 3.1; 3.4; 3.8; 4.3; 4.7; 5.1; 5.5. - Iraq oil export prices (US$ pb): 106.7; 102.9; 97.0; 54.7; 62.0; 67.1; 69.9; 71.0; 71.5. - Gross reserves (US$ billion, end of period): 69.3; 77.8; 66.7; 50.0; 41.0; 41.3; 45.4; 52.7; 60.2. ### Downside risks and scenario analysis - Main downside risks: - Domestic: entrenchment or escalation of the conflict; political tensions threatening reforms or the KRG revenue-sharing agreement; poor fiscal policy implementation; intensification of foreign exchange restrictions. - External: further decline in oil prices or weakening world demand; adverse regional security developments. - Staff adverse (Oil Price Shock) scenario: - Assumes a 20 percent decline of oil prices in 2016 converging only gradually; causes significant drop in growth and pressures on external and fiscal accounts. - Under the Oil Price Shock, Real GDP growth sequence shown: 0.5 2.2 7.4 7.3 7.3 7.1 (presented sequence). - Primary balance under the Oil Price Shock sequence: -16.2 -18.4 -7.9 -3.6 0.6 4.9 (presented sequence). - Debt dynamics: debt-to-GDP would increase to around 86 percent of GDP in 2016–2018 and then fall to 71 percent of GDP towards the end of the forecast period. - Stress-test combined shock: - Combined shock components and impact: debt-to-GDP ratio reaches 81 percent in 2016 and rises to 94 percent in 2020 in the combined shock scenario presented. ### Exchange rate, foreign exchange measures, and reserves - Authorities committed to maintain the peg with the US dollar to preserve a key nominal anchor. - Restrictive foreign exchange measures findings: - "The restrictive foreign exchange measures helped maintain reserves." - Effective depreciation and increase in parallel market rate contributed to lower demand for foreign exchange in 2015. - In the first half of the year foreign exchange sales were on average much lower in 2015 than in previous years. - Uncertainty on availability of foreign currency undermined confidence and impacted trade. - Reserve adequacy: - Projected level of international reserves at end-2015 exceeds conventional reserve adequacy indicators: almost seven months of imports of goods and services and 175 percent of the Fund’s ARA metric (as reported). - Reserves projected to decline further by end-2016 but expected to remain at over five months of imports. - CBI international reserves reported/projection excerpts: Gross foreign exchange assets (US$ million): 69,302; 77,823; 66,655; 50,000; 41,031 (2012–2016 series). - Exchange restrictions and MCP: - Iraq maintains three exchange restrictions and one MCP subject to Fund approval under Article VIII, Sections 2(a) and 3. - One new exchange restriction in 2015: weekly limits on cash purchases by financial institutions from the CBI ($300,000 per week for banks with capital of at least ID 250 billion; $150,000 per week for MTCs; $50,000 per week for MEBs). - MCP arises from absence of mechanism to ensure official and parallel market rates do not deviate by more than two percent; average spread around 10 percent in May 2015 (other references cite spreads varying over time). - CBI reserve management: - CBI plans to centralize management of international reserves; long-term objective to move management back to Baghdad. - With IMF technical assistance, CBI updated 2008 reserve management guidelines. ### Banking sector, supervision, and AML/CFT - Banking structure and vulnerabilities: - End-2014 deposits 22 percent of GDP; credit to private sector 7 percent of GDP. - Largest state-owned banks, Rasheed and Rafidain, account for 90 percent of banking sector assets; severely undercapitalized and largely illiquid after years of quasi-fiscal operations. - Private banks mainly engaged in trade finance. - Operational weaknesses and data quality: - Lack of automated banking systems; reporting not up to IFRS; audits often poor quality. - NPLs likely increasing; available NPL series (selected reported figures): NPL/total loans Total: 2.3 1.8 6.7 6.9 7.6 (series as presented). - Banking indicators excerpts: Banking assets (percent of GDP) 66.2 75.1 77.0 86.9 (series as presented). - Supervision and restructuring actions: - CBI extended contract with Ernst & Young; co-train inspectors; on-site inspections carried out for 15 out of 50 private banks. - CBI hired 35 additional staff in supervision department; promoting IT core banking system implementation. - Authorities intend to speed up restructuring of state-owned banks; MOF and CBI reviewed MOU implementation and set a timetable. - Staff recommendation: audit banks’ balance sheets by an international company; legal clean-up of legacy losses; revise draft law on state-owned banks to ensure arms-length relationship between MOF and bank management. - AML/CFT and anti-corruption risks: - "Money laundering, terrorist financing and governance issues risk undermining the Iraqi financial system." - FATF identified Iraq with AML/CFT strategic deficiencies; as of FATF June 2015 assessment weaknesses remain. - ISIS financing risks include appropriation of cash at state-owned banks, exploitation of oil fields, extortion of salary payments. - Policy priorities: adopt draft AML/CFT law under consideration by parliament; develop AML/CFT national strategy; strengthen financial intelligence unit and CBI AML supervision; adopt anti-corruption strategy; strengthen asset declaration regime; enhance procurement transparency. ### Structural reforms and public financial management priorities - Revenue diversification measures (medium term) suggested: excises on big-ticket items (e.g., cars); a low-rate General Sales Tax (GST); property tax; consolidation of stamp taxes and fees. - Short/medium-term spending measures: review public employment and ghost workers; reduce subsidies (energy and PDS); rationalize and prioritize public investment. - PFM priority reforms (short term): stronger MOF role in budget process; GFS-consistent budget classification; monthly cash-flow projections with CBI; reconciliation of government financial flows and stocks; establish a Treasury Single Account (TSA); integrated financial management information system (IFMIS). - Subsidies and savings estimates (Box 4 excerpts): - Energy subsidies cost ID 33 trillion in 2013 (over 12 percent of GDP). - PDS cost 1.8 percent of GDP in 2014; excluding one-fifth of those currently eligible would bring savings of around 0.5 percent of GDP. - Fuel subsidies direct cost roughly ID 5 trillion a year (2.5 percent of GDP); raising pump prices to 80 percent of import price would deliver ID 5 trillion (2.5 percent of GDP) in savings. - Electricity subsidy bill estimated at roughly ID 10 Trillion (5 percent of GDP); new progressive tariff structure estimated to bring savings of ID 5–7 trillion (3–4 percent of GDP). ### Rapid Financing Instrument (RFI) request, safeguards, and program elements - RFI access and requests: - Authorities requested RFI financing of 50 percent of quota: SDR 594.2 million (about $839 million) in Letter of Intent dated July 9, 2015. - Supplementary request in Appendix I: purchase of 75 percent of quota (SDR 891.3 million, $1.242 billion) to be channeled to the budget. - Purpose and safeguards: - Purpose: partly finance the budget, reflect fiscal BOP need, support central bank independence. - As part of RFI access, authorities commit to an updated Safeguards Assessment of the CBI and to sign MOUs formalizing financial relations (CBI—state-owned banks; state-owned banks—MOF). - Authorities set a cap of ID 19 trillion to CBI liquidity operations in 2015 (prior action). - Program elements in the Letter of Intent: - Fiscal adjustment: measures undertaken and planned to contain the deficit in 2015; assumed fiscal position returns to sustainable path with decreasing deficits in 2016–18 and small surplus in 2019 under full implementation. - Financing: RFI engagement expected to facilitate World Bank lending and Eurobond issuance. - Structural reform: use crisis opportunity to improve fiscal management, liberalize the FX market gradually, strengthen financial system, and diversify the economy. - Staff support and conditions: - Staff supports RFI purchase equivalent to SDR 594.2 million (50 percent of quota) and in Appendix I supports 75 percent of quota. - Prior actions for purchase under the RFI (selected): Cabinet approval of new progressive electricity tariff schedule (scheduled completion five business days before Board date); sign MOUs between CBI and state-owned banks and between state-owned banks and MOF (scheduled completion five business days before Board date). ### Risk assessment and staff recommendations - Main program risks and likelihood (staff RAM): - Protracted conflict: Likelihood High; Impact High. Mitigation: implement RFI policies, seek international support, preserve social spending. - Political fragmentation: Likelihood High; Impact High. Mitigation: frontload reforms, diversify revenue. - Poor policy implementation: Likelihood High; Impact High. Mitigation: adopt forward-looking framework, maintain peg, outline timetable to remove restrictions, intensify CBI communication. - Energy price risks: Likelihood Medium; Impact Medium–High. Mitigation: strengthen PFM, accelerate revenue diversification. - Staff recommendations and priorities: - Implement consolidation measures and identify adequate financing sources, relying if needed on indirect CBI support within limits. - Continue consolidation in 2016 and beyond; 2015 measures bring savings of about 4 percent of GDP in 2016. - Develop stronger debt management strategies and deepen government securities market. - Build fiscal buffers, improve oil revenue management, reform banking sector, remove impediments to business environment, and reduce dependence on oil sector. - Restore security as a precondition for diversification and reconstruction goals. - Strengthen banking supervision; press ahead with restructuring of Rasheed and Rafidain banks. - Bring AML/CFT and anti-corruption frameworks in line with international standards; adopt draft AML/CFT law under examination by parliament. *Source: IMF staff report chapter and accompanying excerpts contained in the provided content unit.* ### 1. Humanitarian Conditions in Iraq _________________________________________________________________6 ### 1. Humanitarian Conditions in Iraq _________________________________________________________________6 ### Humanitarian impact and living conditions - Over three million have been displaced internally since mid-2014. - Close to 10 million Iraqis (or almost one third of the population) are deemed to need humanitarian assistance. - Living conditions across the country have deteriorated, and the government’s ability to provide basic public goods and services is highly curtailed. - Destruction to physical infrastructure is hampering access to—and services provided by—schools and hospitals due to lack of medical facilities, supplies and healthcare assistance: - 14 major hospitals and over 170 health facilities are reportedly dysfunctional or destroyed. - Food security is at risk given destruction to agricultural, livestock and irrigation systems. - Water, power, and sanitation cuts are reportedly widespread. - Poverty rates have risen in conflict areas given escalating inflation due to supply disruptions. - Support through the Public Distribution System (PDS) is limited, with four-fifths of households reportedly receiving no rations in April. - According to Iraq Body Count, the number of casualties since the beginning of 2015 has climbed to over 7,300, following 17 thousand reported deaths during 2014. ### Displacement, refugees, and vulnerable populations - More than 2.9 million Internally Displaced Persons (IDPs) are expected to need nonfood assistance (including shelter) throughout the remainder of 2015, mostly in the center and south of Iraq. - Iraq has also received about a quarter of a million Syrian refugees. - Refugees—60 percent of whom are women and children—mostly reside in the north, including the Kurdistan Regional Government where they have been granted residency status including rights to work. - Delivering aid to affected areas is challenging because of restrictions to access and limited security. ### Government response and international assistance - The government response is constrained by the budgetary crisis but is receiving support from the international community. - The government is struggling to meet rising humanitarian spending needs: - Outlays on socio-economic infrastructure have been delayed or postponed, and payment of salaries in some regions has been delayed. - The Ministry of Displacement and Migration has started rolling out new smart cards to IDPs allowing families to withdraw about $336 as monthly financial assistance. - The government has also set up a $500 million Reconstruction Fund. - International support: - The U.N. launched a $500 million humanitarian response plan for Iraq in Brussels in June 2015, targeting over 5.5 million Iraqis over a six month period. - The U.N. also recently welcomed a $300 million donation from Kuwait as a humanitarian response for both Iraq and Yemen. ### Economic and fiscal constraints that affect humanitarian response - The insurgency and the collapse in oil prices constitute a "double shock" undermining fiscal space and service delivery: - Oil exports represented almost 100 percent of total exports in 2014. - Oil sector GDP was more than 50 percent of the total in 2014. - Oil exports constituted over 93 percent of government revenues in 2014. - The government response is constrained by the budgetary crisis, including depleted buffers: - Assets of the Development Fund for Iraq have been almost fully depleted by end-2014. - The government accumulated external arrears to International Oil Companies (IOCs) of $6.8 billion (repaid in the first half of 2015) and ID 2.3 trillion (1 percent of GDP) to domestic contractors. ### Key statistics from the chapter - Displacement and assistance needs: - Over three million internally displaced since mid-2014. - Close to 10 million Iraqis need humanitarian assistance. - More than 2.9 million IDPs expected to need nonfood assistance through the remainder of 2015. - Health infrastructure damage: - 14 major hospitals dysfunctional or destroyed. - Over 170 health facilities dysfunctional or destroyed. - Food and social support: - Four-fifths of households reportedly receiving no PDS rations in April. - Casualties: - Over 7,300 casualties since the beginning of 2015; 17 thousand reported deaths during 2014. - Refugees: - About a quarter of a million Syrian refugees in Iraq; 60 percent women and children. - Government assistance and funds: - IDP smart-card monthly assistance: about $336 per family. - Government Reconstruction Fund: $500 million. - U.N. humanitarian response plan: $500 million targeting over 5.5 million Iraqis over six months. - Kuwait donation: $300 million (for Iraq and Yemen). - Fiscal and oil sector dependency: - Oil exports ≈ almost 100 percent of total exports (2014). - Oil sector GDP > 50 percent of total GDP (2014). - Oil exports ≈ over 93 percent of government revenues (2014). - Development Fund for Iraq assets almost fully depleted by end-2014. - External arrears to IOCs: $6.8 billion (repaid H1 2015). - Domestic contractor arrears: ID 2.3 trillion (1 percent of GDP). *Source: IMF staff report chapter "1. Humanitarian Conditions in Iraq" (excerpts).* ### 11. Fiscal pressures are intensifying this year. Revenues are expected to decline by 21 percent ### _cr15235 - 11. Fiscal pressures are intensifying this year. Revenues are expected to decline by 21 percent ### Fiscal pressures and 2015 outcomes - Revenues are expected to decline by 21 percent this year due to the full-year effect of the oil price decline. - Government spending cannot be easily compressed in light of large security and humanitarian expenditures. - Even with the large adjustment in spending that is underway, the government deficit is expected to rise to 17 percent of GDP. - The 2015 budget process: - Initial draft sought to balance weakening oil revenues with pent-up spending requests from 2014, rising security and humanitarian needs, and the resumption of the transfer to the KRG. - After consultations, new measures amounting to ID 27 trillion (13 percent of GDP) were introduced, including taxation on cars, internet, and mobile telephony, a higher custom tariff schedule, and further spending cuts. - The final budget approved by Parliament would deliver a deficit of ID 46 trillion (23 percent of GDP) based on staff’s oil export and price projections and taking into account payments to IOCs for 2015 that had not been adequately budgeted. - The 2015 budget law approved by Parliament envisaged a deficit of 11.5 percent of GDP (footnote in source). ### Macroeconomic projections for 2016 and medium term - 2016 projections and outlook: - Oil production and exports will continue to grow in line with the revised medium term projections. - Assuming that the conflict with ISIS will start to be resolved in 2016, the non-oil economy is projected to recover by about 2 percent. - Total GDP is expected to grow by about 8 percent. - The current account deficit is projected to lower to around 7 percent of GDP. - CBI international reserves are projected to fall to $41 billion by end-year (5.5 months of imports). - The government deficit is projected to improve to around 10 percent of GDP in 2016. - Baseline medium-term outlook (2016–20) assumptions: - GDP growth should recover to around 7.5 percent on average during 2016–20, driven by expansion in oil production. - Non-oil sector growth is expected to stabilize at about 4 percent on average during 2017–20. - Inflation is expected to remain low at 3 percent. - Fiscal position should improve from 2016 thanks to ramp-up in oil export volumes and continued fiscal discipline, moving to surplus from 2019. - Capital spending would increase gradually to accommodate reconstruction and investment needs. - International reserves of the CBI are expected to decline until 2016–17, then rebound in 2018, reaching $60 billion in 2020 (5 months of next year’s imports). - Current account expected to return to surplus in 2017 and remain at about 2 percent of GDP during 2018–20. - Intergenerational equity: - A non-oil primary deficit of no more than 50 percent of non-oil GDP would be needed to ensure adequate saving of oil revenues for future generations (PIH framework). - Projected medium-term fiscal path would converge to the PIH-consistent non-oil primary balance by 2023–25. ### Downside risks and scenario analysis - Main downside risks: - Domestic: entrenchment or escalation of the conflict; political tensions threatening reforms or the KRG revenue-sharing agreement; poor fiscal policy implementation; intensification of foreign exchange restrictions. - External: further decline in oil prices or weakening world demand; adverse regional security developments. - Staff adverse scenario: - A 20 percent decline of oil prices, converging only gradually to the baseline, would cause a significant drop in growth and put pressure on external and fiscal accounts. - Authorities’ view: - Authorities broadly agreed with staff’s macroeconomic outlook but were more optimistic about oil sector expansion and oil prices, citing plans for large investment in oil production and export infrastructure. ### Fiscal policy response, financing, and debt implications - 2015 fiscal adjustment and measures: - The government introduced measures amounting to ID 27 trillion (13 percent of GDP); final budget implied ID 46 trillion (23 percent of GDP) deficit under staff assumptions. - Additional measures amounting to 6 percent of GDP planned: increase electricity tariffs (ID 2.5 trillion for 2015) and rationalize capital budget (ID 9 trillion) by end-July. - Resulting spending envelope would decline to 58 percent of GDP (a reduction of 4 percentage points of GDP in spending compared to 2014, adjusting for the KRG transfer) and the deficit would fall to 17 percent of GDP. - Financing strategy and gaps: - Fiscal buffers in the DFI almost completely depleted by end-2014; government borrowing from state-owned banks supported by the CBI via discounting of government bonds for about 9 percent of GDP in 2015. - Identified financing sources include: - Drawdown of the SDR allocation and the RFI purchase equivalent to SDR 594.2 million (about $830 million). - Eurobonds planned for $6 billion over two years, with issuance this year of at least $2 billion tentatively scheduled for the summer. - World Bank financing of $350 million in urgent reconstruction financing and a possible Development Policy Loan (total of $1–1.5 billion in 2015). - Even with these sources, a residual financing gap of about 7 percent of GDP remained in 2015. - Government considered tapping the domestic bond market and loans from international partners; limits to further current spending cuts were noted as politically and socially constrained. - Table summary (selected exact figures from source tables): - Fiscal Adjustment in 2015 (In trillion of Iraqi Dinars / In percent of GDP): Approved Budget No-adjustment Scenario RFI Adjustment Scenario — Revenue: 80.9 / 82.9 / 82.9; Oil: 72.1 / 72.1 / 72.1; Non-oil: 8.8 / 10.8 / 10.8; Expenditure: 154.3 / 129.4 / 117.8; Deficit: 73.4 / 46.5 / 34.9. - Financing the Budget Deficit, 2015–16 (In trillion Iraqi dinars / In percent of GDP) (selected lines): Financing, of which: 34.9 / 23.5 / 17.2 / 10.2; Domestic financing: 26.2 / 2.2 / 12.9 / 1.0; T-bills o/w CBI purchases: 26.2 / 3.0 / 12.9 / 1.3 with CBI purchases 19.0 / 0.0 / 9.3 / 0.0; Financing gap: 18.3 / 22.0 / 9.0 / 9.6; IMF: 1.0 / 0.0 / 0.5 / 0.0; World Bank: 1.7 / 0.6 / 0.9 / 0.3; Eurobond: 2.3 / 2.3 / 1.1 / 1.0; Other unidentified: 13.3 / 19.1 / 6.5 / 8.3. - Use of indirect CBI financing: - Authorities consider CBI support for the banking sector a liquidity intervention allowed by the 2004 CBI law. - Staff warned discounting large volumes of government securities could undermine CBI independence and credibility and weaken incentives for fiscal discipline, but recognized lack of alternatives given infeasible levels of further spending cuts. - Public debt implications: - Borrowing to finance the 2015 budget deficit is projected to raise total debt from 39 percent of GDP in 2014 (of which 10 percent of GDP is domestic debt) to 69 percent of GDP in 2015 (of which 33 percent of GDP is domestic debt). - DSA indicates risks increase but debt remains sustainable and is projected to converge to 48 percent of GDP in 2020. - Recommendation: develop a debt management strategy; issuance of Eurobonds and domestic bonds to increase debt management capacity, develop government securities market, deepen financial system, and reduce reliance on T-bills. ### External and exchange rate policy - Exchange rate policy: - Authorities committed to maintain the peg with the US dollar to preserve a key nominal anchor. - EBA-Lite suggests the real effective exchange rate is broadly in line with fundamentals. - Authorities argued against accommodating external shocks through exchange rate flexibility because of large proportion of foreign-currency denominated government spending and dollarization of the economy. - External pressures and reserves: - Restrictive measures increased the spread between official and parallel market exchange rates. - CBI international reserves projected to fall to $41 billion by end-2016 (5.5 months of imports), then rebound to $60 billion in 2020. ### Policy recommendations and priorities - Immediate priorities: - Introduce consolidation measures and identify adequate financing sources, relying if needed on indirect CBI support. - Medium-term policy focus: - Continue consolidation efforts in 2016 and beyond; measures introduced in 2015 bring savings of about 4 percent of GDP in 2016. - Consider additional fiscal consolidation given limited domestic borrowing and uncertainty about further indirect CBI support; staff projects a residual gap of about 8 percent of GDP in 2016 even counting World Bank support and Eurobond issuance. - Develop stronger debt management strategies to ensure sustainability while minimizing costs and risks. - Build fiscal buffers, improve oil revenue management, reform the banking sector, remove impediments to the business environment, and reduce dependence on the oil sector. - Recognize that restoring security is a precondition to achieving diversification and reconstruction goals. *Source: IMF staff report (canonical source URL provided with the content).* ### 25. The restrictive foreign exchange measures helped ### _cr15235 - 25. The restrictive foreign exchange measures helped ### Foreign exchange measures and reserves - Findings - "The restrictive foreign exchange measures helped maintain reserves." - "The effective depreciation of the exchange rate and the increase in the parallel market rate contributed to lower demand for foreign exchange this year." - "In the first half of the year foreign exchange sales were on average much lower in 2015 than in previous years." - "Uncertainty on the availability of foreign currency undermined confidence and impacted trade." - "Authorities saw this as a useful side-effect of the measures to the extent it avoided pressure on international reserves, which actually increased slightly in the first five months of the year." - Reserve adequacy and projections - "The level of international reserves still appears adequate (Annex I)." - "Compared to the 2013 Article IV report, the projected external position is much weaker." - "The projected level of international reserves at end-2015 exceeds conventional reserve adequacy indicators, at almost seven months of imports of goods and services and 175 percent of the Fund’s reserve adequacy (ARA) metric." - "Reserves are projected to decline further by end-2016, but they are expected to remain at over five months of imports." - Foreign exchange liberalization stance - "The authorities are adopting a cautious approach to foreign exchange liberalization." - Since the last Article IV consultation: "Iraq has removed most of the exchange restrictions previously maintained." - One new exchange restriction identified: "arising from the weekly limits on cash purchases by financial institutions from the CBI." - "Iraq continues to maintain a Multiple Currency Practice (MCP), which arises from the absence of a mechanism to ensure that the official exchange rate and the parallel market exchange rate do not deviate by more than two percent (see Informational Annex)." - CBI intentions and actions: "The CBI confirmed its intention to remove the remaining exchange restrictions and the MCP, in line with Iraq’s objective of accepting Article VIII obligations." - Other removals and commitments: "The authorities also removed the advance customs duty and income tax payment because of their negative impact on market volatility. They also committed to removing the weekly limits on cash transactions, once external conditions allow." - Staff recommendations: "the CBI set the appropriate pace of liberalization on the basis of the volumes of auction sales and the behavior of the spread, which could be a good gauge of depreciation pressures." "Staff underlined that AML/CFT concerns should be best addressed through the improvement of the relevant legislative and institutional framework." - Reported CBI foreign exchange sales (as presented) - Raw excerpted figures as reported: - "201320142015 1/ Annual Cash11.814.5 Transfers42.137.0 Total53.951.5 Monthly average Cash1.01.2 Transfers3.53.1 Total4.54.3 Source: Central Bank of Iraq. 1/ For six months." - Standalone numbers shown: "0.4 2.6 3.1 CBI Foreign Exchange Sales (In billions of U.S. dollars) 2.6 15.8 18.3" ### CBI reserve management and governance - Findings and plans - "The CBI plans to centralize the management of international reserves." - "Currently, CBI reserves are mainly managed through the Federal Reserve Bank of New York and other central banks." - "The CBI has as a long-term objective to move management of its reserves back to Baghdad, which will require planning and implementation of concrete steps." - Staff advice and technical work - "Staff supported the CBI’s intentions, but recommended to adopt a very gradual approach hinging on the build-up of adequate capacity at the CBI." - "With technical assistance from the Fund the CBI updated the 2008 guidelines for reserve management to bring them in line with the CBI Law and address quantitatively all key reserve management strategic objectives, such as Strategic Asset Allocation, credit risk limits, or liquidity needs." - "The next challenge for the CBI will be to effectively implement this new framework." ### Monitoring financial risks and banking sector stress - Crisis impact and banking sector structure - "The crisis is putting the banking system under stress, prompting the authorities to increase financial system monitoring and push ahead with the reform of state-owned banks." - "The crisis will delay the development of the banking sector." - Key indicators and structure: - "With end-2014 deposits of 22 percent of GDP and credit to the private sector of 7 percent of GDP, the banking system remains underdeveloped due to lack of competitiveness, dominance of state-owned banks, and limited business opportunities." - "The largest state-owned banks, Rasheed and Rafidain, which account for 90 percent of banking sector assets, are severely undercapitalized and largely illiquid following years of quasi-fiscal operations." - "Private banks’ activities are mainly limited to trade finance transactions." - Operational weaknesses and data quality - "There is a lack of automated banking systems, reporting practices are not up to International Financial Reporting Standards (IFRS), and audits of financial statements are often of poor quality." - "Nonperforming loans (NPL) are likely increasing due to the effects of the conflict and the external shock, and data quality remains poor." - NPL data caveat: "NPL data should be treated with caution as Iraq does not compile Financial Soundness Indicators (FSI) that are in line with international standards." - Selected banking indicators excerpt (as reported) - "2011201220132014Mar-15 Banking assets (in percent of GDP)66.275.177.086.9..." - "State bank assets (in percent of GDP)60.468.269.378.5..." - "Credit to private sector (in percent of GDP)5.45.96.47.0..." - "Credit to private sector (annual growth)34.628.215.54.5..." - "NPL/total loans State Owned1.31.01.41.61.5 Private0.90.75.35.46.0 Total2.31.86.76.97.6" - "Share of NPL (in percent) State Owned41417978 80 Private59592122 20" - "Deposits in percent of GDP21.118.320.121.7..." - "Source: Central Bank of Iraq. Selected Banking Indicators" - Fiscal pressures and bank liquidity - "The fiscal crisis risks worsening the financial condition of the state-owned banks." - "The ballooning financing needs of the government—even though partially alleviated by CBI refinancing—are putting additional stress on the state-owned banks, in particular Rasheed and Rafidain banks." - "The banks have long suffered from extensive quasi-fiscal operations—such as loans to state owned enterprises to pay employee salaries—and as a result are illiquid and likely insolvent, despite a recent, modest increase in their capital." - Policy action noted: "the CBI recently started allowing all commercial banks to substitute half of their reserve requirement held as liquidity at the CBI with government securities." - Staff view: "this measure can be detrimental to banks’ liquidity and welcomed the authorities’ intentions to reverse it as soon as market liquidity conditions allow." - Supervision and restructuring - "The CBI is stepping up the monitoring and supervision of the banking sector." - Supervisory actions: "collaboration with Ernst and Young (E&Y) to co-train inspectors and support the implementation of the CAMEL system (on-site inspections have already been carried out for 15 out of 50 private banks)" and "requested Fund technical assistance to improve supervision regulatory framework and practices." - "The CBI also hired 35 additional staff in the supervision department. It is promoting the implementation of information technology (IT) core banking system in their operations." - On state-owned bank restructuring: "The authorities intend to speed up the restructuring process of these banks... The MOF and the CBI recently reviewed the implementation of the MOU, assessed the banks’ end-2014 financial stance, and set a timetable to fulfill unimplemented items." - Staff recommendations: "a more ambitious approach, which could start with an audit of the banks’ balance sheets by an international company, to be conducted in parallel to the legal clean-up of legacy losses." Also: "a revision of the draft law on state-owned banks to ensure arms-length relationship between the MOF and bank management would also support state-owned banks." ### AML/CFT and anti-corruption risks (Box 3) - Key risks and context - "Money laundering, terrorist financing and governance issues risk undermining the Iraqi financial system." - "These threats are very high in Iraq, and are compounded by major vulnerabilities of the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework underlined by the 2012 World Bank assessment report adopted by the Middle East and North Africa Financial Action Task Force (MENAFATF)." - Findings and international assessments - "Iraq faces serious corruption, money laundering (ML) and terrorist financing (FT) risks that may undermine the financial system and the wider economy. Surveys suggest that the perception of corruption is very high in Iraq." - "The operations of ISIS increase the risks of terrorism financing. ISIS relies on funding from a wide range of sources including the appropriation of cash held at state-owned banks, exploitation of oil fields, and extortion of part of salary payments of Iraqi government employees." - "The Financial Action Task Force (FATF) identified Iraq as a jurisdiction with AML/CFT strategic deficiencies. In October 2013, Iraq made a high-level political commitment to work with the FATF and MENAFATF to address these weaknesses based on an agreed action plan, but they remain as of the FATF June 2015 assessment." - "Due to lack of sufficient progress in improving its AML/CFT regime, Iraq might be subject to countermeasures that could impede its access to global financial markets." - Policy priorities and recommendations - "A risk-based approach to the implementation of these measures would assist in mitigating the main ML/FT risks." - Priority actions: "adopt the draft AML/CFT law—now under consideration by parliament—to bring it in line with the revised standards and allocate resources for its effective implementation." - Institutional strengthening: "develop an AML/CFT comprehensive national strategy and strengthen the existing key stakeholders—including the financial intelligence unit and the CBI AML supervision (including banks having branches under ISIS control)." - "Targeted financial sanctions in line with the United Nations Security Council resolutions should be used to prevent and suppress terrorism and terrorist financing." - Anti-corruption measures: "adopting an anticorruption strategy, strengthening the asset declaration regime, and enhancing the transparency of the procurement system." ### Structural reform priorities (excerpt) - Fiscal framework and revenue diversification - "Weak policy implementation underlines the need to strengthen the fiscal framework." - Need to reduce fiscal dependency on oil and rebuild capacity to react to shocks. - Revenue diversification measures (medium term): consider "excises on big-ticket items, such as cars; (ii) a low-rate General Sales Tax (GST), less efficient but simpler to administer than a Value Added Tax; (iii) property tax, e.g., on real estate; (iv) consolidation of stamp taxes and fees." - "The non-oil revenue measures undertaken in the context of the 2015 budget, while bringing small yields, are an important first step to strengthen revenue collection." - Streamlining spending and PFM strengthening - Short/medium-term spending measures: "review of public employment and ghost workers; (ii) reduction of subsidies, in particular in the energy sector and the Public Distribution System (Box and Selected Issues Paper); and (iii) rationalization and prioritization of public investment." - PFM priority reforms (short term): "a stronger role of the MOF in managing the budget process; GFS-consistent budget classification; preparation of monthly cash-flow projections in coordination with the CBI; reconciliation of government financial flows and stocks; establishment of a Treasury Single Account (TSA); and a simple and robust integrated financial management information system (IFMIS)." - Restoring DFI architecture (medium term): "maintaining the legal framework establishing the independence of the central bank, and, in parallel, restoring a government-owned, CBI-managed DFI when the fiscal situation allows for the reconstitution of fiscal buffers." - Subsidy reform highlights (Box 4) - "Subsidies in Iraq are concentrated in food, fuel, and electricity." - Energy subsidy cost and potential savings: "energy subsidies... cost the government ID 33 trillion in 2013 (over 12 percent of GDP)." - PDS cost and targeting: "the cost of the PDS still stood at 1.8 percent of GDP in 2014." "Excluding one-fifth of those currently eligible... would bring savings of around 0.5 percent of GDP." - Fuel subsidies direct cost: "direct costs of energy subsidies for fuel products are roughly ID 5 trillion a year (2.5 percent of GDP)." "Raising pump prices would bring large savings: an increase of fuel prices to 80 percent of import price would deliver ID 5 trillion (2.5 percent of GDP) in savings." - Electricity subsidy cost and tariff reform savings: "government electricity subsidy bill, estimated at roughly ID 10 Trillion (5 percent of GDP)." "The authorities will soon introduce a new, more progressive tariff structure, with much higher rates levied on top end consumers which is estimated to bring savings of ID 5–7 trillion (3–4 percent of GDP)." - Pump prices reported: "Diesel ID 40 0 / Liter [ $ 0. 343 ] Kerosene ID 15 0 / Liter [ $ 0. 129 ] Gasoline ID 45 0 / Liter [ $ 0. 386]" *Source: IMF staff report excerpts as presented in the supplied content unit.* ### 35. Iraq’s transition to a market economy is incomplete. Iraq still presents elements of a ### Iraq’s transition to a market economy is incomplete. Iraq still presents elements of a ### Transition economy features and agreed priorities - Findings: - Financial sector dominated by large state-owned banks; pervasive state-owned enterprises (SOEs); business environment not conducive to growth. - Restrictions placed on private banks have put them at a huge disadvantage compared to state-owned banks. - The Central Bank of Iraq (CBI) is finalizing regulations to introduce a credit bureau with assistance from the United States Agency for International Development (USAID), and is considering establishing a deposit insurance scheme. - Short/medium-term measures to level the playing field for private banks: - Public entities can now accept letters of guarantees and certified checks issued by private banks. - The Ministry of Finance is allowed to open letters of credit with private banks up to $10 million ($6 million previously). - The threshold to collect state fees by private banks has been increased. - Government is allowing SOEs to open accounts, make deposits, and pay salaries through private banks (noted concern: this could weaken SOE governance and the Ministry of Finance’s control over SOE liquidity). - Staff welcomed steps but noted the deposit insurance scheme needs careful design, following best practice, to ensure adequate capitalization and minimize contingent fiscal liabilities. - Medium-term SOE reform: - There are 176 SOEs employing more than 500,000 workers; most are inefficient and loss-making and burden the public sector. - Authorities prepared a study envisaging systematic cost-benefit assessment of each enterprise to decide on closure, privatization, or maintaining state ownership after proper restructuring. - Success depends on rigorous, depoliticized assessment, strict transparent criteria based on international accounting standards, realistic but relatively rapid timelines, tight budgets, and minimized use of public resources for pre-privatization preparation (restructuring and recapitalization). ### Business environment and governance - Findings: - Iraq ranks 156th out of 189 in the 2015 World Bank Doing Business ranking, down from 151st in 2014. - Ranks particularly low in: starting a business; access to credit; trading across borders; enforcement of contracts; resolving insolvency. - Procedures and cost of land registration and construction permits need streamlining. - Major upgrading needed for road networks, communication, other infrastructure, and particularly production and distribution of electricity. - Poor governance in the public sector, weak rule of law and judicial systems hinder effective anti-corruption frameworks. ### More inclusive growth - Findings: - Job creation has been weak, averaging around 1 percent a year; the oil sector absorbs only about 1 percent of the labor force. - Unemployment: 11 percent at end-2014. - Youth unemployment: 20 percent at end-2014. - Women unemployment: 21 percent at end-2014. - Female participation in the labor force: 13 percent. - Geographic disparities: unemployment up to 20 percent in some provinces. - Poverty trends: - Headcount poverty rate: 23.6 percent in 2007; 19.8 percent in 2012; rising to 23 percent at end-2014. - Poverty concentrated in rural areas: on average 30 percent at end-2013. - Iraq ranked 120th in the 2013 Human Development Index. - Poor suffer shortages of electricity and housing, low school enrollment, limited access to water and sanitation. - Policy priorities: - Medium term: create conditions to compensate a shrinking government role in job creation; reduce generous public pay structure; promote economic diversification and non-oil private sector growth; reform labor legislation and vocational and education systems to increase labor force flexibility, improve working conditions, enhance protection for private jobs, and match skills with market demand. - Short/medium term: improve social safety nets; move away from public sector employment and universal subsidy systems toward targeted social safety nets; authorities strengthening social safety nets with World Bank support. ### Purchase under the Rapid Financing Instrument (RFI) and program elements - Immediate balance of payments and budget impacts (2015 baseline): - Oil export revenues decline by 28 percent compared to 2014. - Budget revenues decline by 21 percent compared to 2014. - International reserves decline by 25 percent compared to 2014. - RFI request and financing: - Authorities requested Fund financing under the RFI for 50 percent of quota. - Purchase of 50 percent of quota is equivalent to SDR 594.2 million, about $839 million. - Purpose: partly finance the budget, reflect fiscal component of balance of payments need, and support central bank independence. - To safeguard Fund resources, a Memorandum of Understanding will be signed between the CBI and the Ministry of Finance establishing responsibilities and procedures related to the use of resources provided under the RFI for support of the government of Iraq. - Three program elements in the Letter of Intent: - Fiscal adjustment: - Measures undertaken and planned would contain the deficit in 2015. - Assuming full-year impact of some measures (e.g., electricity tariff increases, a prior action), further rationalizing of the investment budget and deepening of other reforms starting next year, the fiscal position would return to a sustainable path with decreasing deficits in 2016–18 and a small surplus in 2019. - Financing: - Stepped-up engagement with the Fund through RFI may facilitate lending from the World Bank and reassure investors, increasing likelihood of a successful Eurobond issuance. - Residual financing shortfall after potential financing sources is consistent with the RFI, which does not require full financing for the program period. - Structural reform: - Authorities view the crisis as an opportunity to lay the ground for a structural reform plan to improve fiscal management, gradually liberalize the foreign exchange market, strengthen the financial system, and diversify the economy. - Measures to protect CBI independence and liquidity: - Authorities commit to draft MOUs to formalize financial transactions between the MOF, commercial banks, and the CBI (prior action). - Authorities set a cap of ID 19 trillion to CBI liquidity operations in 2015. ### Debt, exposures, and safeguards - Fund exposure and debt projections: - With the proposed purchase and outstanding purchases of the 2010 SBA, the Fund’s exposure to Iraq in 2015 will reach $0.9 billion or 1.8 percent of gross international reserves and 1.4 percent of total external debt. - Iraq’s debt profile will increase mainly due to large domestic borrowing, including related to indirect CBI financing in 2015 and especially in 2016. - Projected medium-term external debt is higher than in the 2013 Article IV baseline because of the conservative assumption that non-Paris Club debt will not be restructured before 2020. - Despite steep increase in debt in 2015–16 and downside risks, Iraq’s debt is expected to remain sustainable over the medium-term. - Safeguards: - As part of the RFI request, authorities commit to undertake an updated Safeguards Assessment in the Letter of Intent. - Most recent assessment of the CBI was completed in 2010. - The CBI continues to maintain important safeguards, including annual external audit by a reputable audit firm and publication of the CBI’s audited financial statement. - Preparations for the updated Assessment will start as soon as possible given logistical and technical complications. ### Risks to the program and staff recommendations - Main risks: - Worsening of the security situation: a serious military setback could weaken economic management and raise social and political tensions. - Further fall in oil prices: continued volatility could push prices lower during 2015 with adverse consequences for exports and budget revenues. - Weak implementation of the program: politically and socially sensitive fiscal measures might proceed more slowly than envisaged. - Staff recommendations and views: - Implement policies rigorously and front-load priority reforms to the extent possible. - Adopt a forward-looking framework, ideally under a Staff Monitored Program (SMP), to mitigate implementation risk and build a track record of sound policies. - Avoid buildup of domestic or external arrears; consider further fiscal measures if financing proves insufficient. - Indirect central bank financing, subject to a well-defined limit, is appropriate at this juncture; staff welcomes the cap to CBI support and intentions to formalize financial relations between government, the CBI, and state-owned banks. - Support the fixed exchange rate peg by satisfying all bona fide demand for foreign currency for current international transactions; staff welcomes elimination of advance custom duty and income tax payment applied to foreign exchange transactions and urges authorities to meet such demand and minimize parallel market volatility. - Do not recommend approval of the three exchange restrictions and the MCP described in paragraph 27 and the Informational Annex due to lack of a timetable to remove such measures. - Strengthen banking supervision; press ahead with restructuring of Rasheed and Rafidain banks. - Bring AML/CFT and anti-corruption frameworks in line with international standards and effectively implement them; adopt draft AML/CFT law under examination by parliament to address Iraq’s listing by the Financial Action Task Force. - Continue work to improve the quality and availability of economic data, particularly fiscal and balance of payments statistics; IMF stands ready to provide further technical assistance. - Staff support: - Staff supports the authorities’ request for an RFI with access equivalent to SDR 594.2 million (50 percent of quota). - Policies in the Letter of Intent are deemed adequate to deal with present and urgent balance of payments and budget needs triggered by the ISIS insurgency and the collapse in oil prices. *Source: IMF staff report excerpt contained in the provided content unit.* ### 57. It is proposed that the next Article IV consultation take place on the standard ### _cr15235 - 57. It is proposed that the next Article IV consultation take place on the standard ### Macroeconomic outlook and growth - Real GDP (percentage change): 13.9; 6.6; -2.1; 0.5; 7.6; 8.1; 7.6; 7.5; 7.1 (2013–2020 row). - Non-oil real GDP (percentage change): 15.0; 10.2; -8.8; -11.2; 2.0; 3.0; 4.0; 5.0; 5.0 (2013–2020). - GDP deflator (percentage change): 2.7; 0.1; -1.8; -22.4; 5.1; 3.6; 2.6; 1.7; 1.3 (2013–2020). - GDP per capita (US$): 6,693; 6,957; 6,520; 4,960; 5,470; 5,971; 6,421; 6,843; 7,241 (2013–2020). - GDP (in US$ billion): 218.0; 232.5; 223.5; 174.4; 197.3; 220.9; 243.7; 266.4; 289.1 (2013–2020). - Oil production (mbpd): 3.0; 3.0; 3.1; 3.4; 3.8; 4.3; 4.7; 5.1; 5.5 (2013–2020). - Oil exports (mbpd): 2.4; 2.4; 2.5; 3.1; 3.3; 3.6; 3.8; 4.1; 4.4 (2013–2020). - Iraq oil export prices (US$ pb): 106.7; 102.9; 97.0; 54.7; 62.0; 67.1; 69.9; 71.0; 71.5 (2013–2020). - Consumer price inflation (end of period): 3.6; 3.1; 1.6; 3.0; 3.0; 3.0; 3.0; 3.0; 3.0 (2013–2020). - Consumer price inflation (average): 6.1; 1.9; 2.2; 2.1; 3.0; 3.0; 3.0; 3.0; 3.0 (2013–2020). ### National accounts and saving–investment - Gross domestic investment (percent of GDP): 22.1; 27.0; 26.1; 29.8; 27.3; 25.8; 26.0; 25.2; 25.9 (2013–2020). - Public investment (percent of GDP): 13.2; 17.6; 19.0; 21.6; 19.7; 18.6; 19.1; 18.3; 19.1 (2013–2020). - Gross domestic consumption (percent of GDP): 69.4; 69.5; 74.7; 78.5; 77.1; 73.3; 72.0; 72.6; 72.3 (2013–2020). - Gross national savings (percent of GDP): 28.8; 28.3; 23.3; 21.3; 20.4; 26.4; 27.9; 27.4; 27.8 (2013–2020). - Saving - Investment balance (percent of GDP): 6.7; 1.3; -2.8; -8.6; -6.9; 0.6; 1.9; 2.2; 1.9 (2013–2020). ### Public finance — levels and projections - Government revenue and grants (percent of GDP): 47.0; 42.6; 40.1; 40.8; 43.3; 44.4; 45.0; 44.8; 46.6 (2013–2020). - Government oil revenue (percent of GDP): 43.4; 39.0; 37.8; 35.9; 38.7; 40.0; 40.7; 40.6; 42.4 (2013–2020). - Government non-oil revenue (percent of GDP): 4.0; 3.6; 2.3; 4.8; 4.6; 4.4; 4.3; 4.2; 4.2 (2013–2020). - Expenditure (percent of GDP): 42.9; 48.4; 45.4; 57.9; 53.5; 47.5; 46.0; 43.7; 43.1 (2013–2020). - Current expenditure (percent of GDP): 29.7; 30.9; 26.4; 36.4; 33.9; 28.9; 27.0; 25.4; 24.0 (2013–2020). - Capital expenditure (percent of GDP): 13.2; 17.6; 19.0; 21.6; 19.7; 18.6; 19.1; 18.3; 19.1 (2013–2020). - Primary fiscal balance (percent of GDP): 4.5; -5.5; -5.0; -16.2; -8.9; -1.2; 0.8; 2.8; 5.0 (2013–2020). - Overall fiscal balance (including grants, percent of GDP): 4.1; -5.8; -5.3; -17.2; -10.2; -3.2; -1.0; 1.1; 3.5 (2013–2020). - Non-oil primary fiscal balance (percent of non-oil GDP): -64.0; -68.7; -60.0; -66.6; -61.8; -59.0; -58.6; -55.6; -55.4 (2013–2020). - Tax revenue/non-oil GDP (percent): 2.1; 2.0; 1.8; 3.6; 3.8; 3.8; 3.8; 3.8; 3.8 (2013–2020). ### Public debt and government accounts - Total government debt (percent of GDP): 34.7; 31.9; 38.9; 68.5; 72.6; 67.6; 62.3; 55.9; 48.0 (2013–2020). - Total government debt (US$ billion): 75.7; 74.3; 87.0; 119.5; 143.2; 149.4; 151.8; 149.0; 138.7 (2013–2020). - External government debt (percent of GDP): 27.7; 25.5; 28.8; 36.5; 35.0; 30.8; 26.5; 22.8; 19.8 (2013–2020). - Development Fund of Iraq/MoF US$ account (in US$ billions): 18.1; 6.5; 0.9; 1.0; 1.0; 1.0; 1.0; 1.0; 6.8 (2013–2020). ### Monetary and financial indicators - Growth in reserve money (percent): 8.3; 12.6; -9.6; -1.0; -6.5; 10.0; 10.0; 10.0; 10.1 (2013–2020). - Growth in broad money (percent): 3.4; 16.7; 3.6; 17.5; 8.7; 13.5; 12.7; 11.1; 10.3 (2013–2020). - Policy interest rate (end of period): 6.0; 6.0; 6.0 (values shown). - Broad money (levels, Dec): 77,142; 89,379; 92,638; 108,813; 118,268 (2012–2016 Dec). - Credit to the economy (percentage growth): 71.5; 14.7; 11.2; -6.0; 7.8 (2012–2016 Dec). ### Central Bank balance sheet (selected) - Net foreign assets (ID billions, Dec): 78,410; 88,544; 76,563; 56,862; 46,466 (2012–2016). - Reserve money (ID billions, Dec): 65,055; 73,259; 66,231; 65,550; 61,279 (2012–2016). - Currency in circulation (ID billions, Dec): 35,785; 40,630; 39,884; 42,849; 44,877 (2012–2016). - Gross foreign exchange assets (in millions of U.S. dollars): 69,302; 77,823; 66,655; 50,000; 41,031 (2012–2016). - Net foreign assets (in millions of U.S. dollars): 65,905; 74,589; 64,331; 47,435; 38,519 (2012–2016). - Exchange rate (end of period): 1,166; 1,166; 1,166 (values shown). ### External sector and balance of payments - Trade balance (US$ billion): 31.3; 22.2; 14.7; -2.3; 5.0; 15.6; 20.0; 22.3; 24.4 (2012–2020). - Exports (US$ billion): 94.2; 89.5; 83.7; 62.1; 75.6; 87.5; 98.4; 107.2; 121.8 (2012–2020). - Crude oil exports (US$ billion): 93.8; 89.3; 83.4; 61.9; 75.3; 87.2; 97.9; 106.6; 121.1 (2012–2020). - Imports (US$ billion): -62.9; -67.3; -69.0; -64.4; -70.5; -71.9; -78.4; -84.9; -97.4 (2012–2020). - Current account (US$ billion): 14.5; 3.0; -6.2; -15.0; -13.6; 1.2; 4.5; 5.8; 5.6 (2012–2020). - Current account (percent of GDP): 6.7; 1.3; -2.8; -8.6; -6.9; 0.6; 1.9; 2.2; 1.9 (2012–2020). - Overall balance (US$ billion): 9.7; -2.9; -16.9; -23.2; -15.5; 0.2; 4.2; 7.4; 7.4 (2012–2020). - Gross reserves (US$ billion, end of period): 69.3; 77.8; 66.7; 50.0; 41.0; 41.3; 45.4; 52.7; 60.2 (2012–2020). - Gross reserves (in months of imports): 9.8; 10.4; 9.9; 6.8; 5.5; 5.1; 5.1; 5.2; 5.2 (2012–2020). ### External financing requirements and financing gap (2015–17) - Gross financing requirements (US$ billion): 23.2; 10.0; -0.4 (2015–2017). - External current account deficit (excluding official transfers) (US$ billion): 15.0; 9.0; -1.2 (2015–2017). - Debt amortization (including Fund repurchases) (US$ billion): 8.3; 1.0; 0.9 (2015–2017). - Available financing (US$ billion): 16.0; 3.4; -0.4 (2015–2017). - Change in GIR (+ decline) (US$ billion): 16.7; 9.0; -0.2 (2015–2017). - Financing gap (US$ billion): 7.2; 6.6; 0.0 (2015–2017). - Financing sources listed for bridging gap: IMF 0.8; 0.0; 0.0 (2015–2017); World Bank 1.5; 0.5; 0.0 (2015–2017); Eurobond 2.0; 2.0; 0.0 (2015–2017); other (unidentified) 2.8; 4.1; 0.0 (2015–2017). - Memorandum items: Fiscal deficit in percent of GDP 17.2; 10.2; 3.2 (2015–2017). Current account deficit (US$ billion) 15.0; 13.6; -1.2 (2015–2017). Current account deficit in percent of GDP 8.6; 6.9; -0.6 (2015–2017). CBI gross international reserves 50.0; 41.0; 41.3 (2015–2017). Reserves in months of prospective imports 6.8; 5.5; 5.1 (2015–2017). ### Indicators of Fund credit - Disbursements of Fund credit (SBA and RFI, in millions of SDRs): 0.0; 0.0; 0.0; 594.2; 0.0; 0.0; 0.0; 0.0; 0.0 (2012–2020). - Obligations (SBA and RFI, millions of SDRs): 12.0; 123.1; 506.5; 426.7; 37.4; 0.0; 74.3; 297.1; 222.8 (2012–2020). - Outstanding Fund credit (SBA and RFI, in millions of SDRs): 1,069.6; 958.2; 460.5; 631.3; 594.2; 594.2; 519.9; 222.8; 0.0 (2012–2020). - Outstanding Fund credit in percent of IMF quota: 90.0; 80.6; 38.8; 53.1; 50.0; 50.0; 43.8; 18.8; 0.0 (2012–2020). ### Central government fiscal accounts (ID trillions, 2014–20) - Revenues and grants (ID trillions): 119.4; 115.4; 104.4; 82.9; 99.6; 114.3; 127.9; 139.1; 157.3 (2014–2020). - Crude oil export revenues (ID trillions): 109.4; 104.1; 97.1; 72.1; 87.8; 101.6; 114.2; 124.3; 141.2 (2014–2020). - Expenditures (ID trillions): 109.0; 131.2; 118.2; 117.8; 123.1; 122.5; 130.8; 135.8; 145.4 (2014–2020). - Current expenditures (ID trillions): 75.5; 83.7; 68.8; 74.0; 77.9; 74.5; 76.6; 78.8; 81.0 (2014–2020). - Salary and pension (ID trillions): 34.9; 41.1; 40.3; 41.3; 41.8; 43.0; 44.3; 45.6; 47.0 (2014–2020). - Investment expenditures (ID trillions): 33.6; 47.6; 49.4; 43.9; 45.2; 48.0; 54.2; 57.0; 64.4 (2014–2020). - Balance (including grants, ID trillions): 10.4; -15.8; -13.8; -34.9; -23.5; -8.1; -2.9; 3.3; 11.9 (2014–2020). - Financing (ID trillions): -9.3; 16.6; 13.1; 34.9; 23.5; 8.1; 2.9; -3.3; -11.9 (2014–2020). ### Memoranda and special items - Security-related expenditure (military and police equipment and salaries, percent of GDP): 16.7; 16.4; 16.6; 19.0; 19.2; 19.8; 20.8; 21.9; 22.9 (2012–2020 sequence shown). - Development Fund of Iraq (excluding military equipment escrow accounts): 21.1; ...; 7.6; ... (table entry). - MOF US$ account at CBI (denominated in IDs): ......; 1.0; 1.2; 1.2; 1.2; 1.2; 1.2; 7.9 (mem. items). - Notes in source: 1/ Does not reflect KRG production during 2013 and 2014. 2/ Reflects KRG exports through State Organization for Marketing Oil (SOMO). 3/ Reflects the balances of the Development Fund of Iraq which were moved from the Federal Reserve Bank of New York to the CBI as a US$ account (US$ balances from oil revenues) in May 2014. 4/ Starting 2014 includes US$ account balances from oil revenues. 5/ Positive means appreciation. ### Narrative excerpt - Appendix I. Letter of Intent (dated July 9, 2015): "With this letter, we request financial assistance from the IMF at an utmost difficult time in our country’s history. Iraq is facing a mortal terrorist threat, while the economy has been hit by the collapse in oil prices." *Source: IMF staff estimates and projections as presented in the provided content unit.* ### 1. The terrorist attack by the so-called ISIS has put Iraq in great danger. The Iraqi security ### The terrorist attack by the so-called ISIS has put Iraq in great danger. ### Security and humanitarian impact - The terrorist attack has resulted in the loss of thousands of lives and caused a dramatic humanitarian crisis. - More than 3 million people have been displaced in the northern regions since June 2014. - Iraq is sheltering 250 thousand Syrian refugees. - Nearly half of the internally displaced persons are children, facing difficult conditions and serious health risks. - The refugee crisis is putting great pressure on Iraq’s infrastructure system and public services. - The war has destroyed public and private assets and infrastructure, hampered economic activity in the non-oil sector, and undermined domestic and external trade. ### Macroeconomic performance and projections - Overall, GDP declined by 2.1 percent in 2014, and is expected to grow modestly by 0.5 percent in 2015. - Non-oil economy: non-oil activity in the four provinces collapsed in 2014 and remains very low; non-oil GDP growth declined by almost 9 percent in 2014 (compared to 10 percent growth in 2013). Non-oil activity is expected to decline further in 2015 due to conflict, lower private investment and FDI, and limited government spending. - Inflation: inflation at end-2014 was 1.6 percent, declining to 0.5 percent in April 2015 (estimates exclude four governorates because of the security situation). - External shock: world oil prices fell by 40 percent in the space of a few months, causing a large external shock to the balance of payments and budget revenues. ### Oil sector performance and outlook - Main conflict impact: suspension of oil exports through the pipeline to Ceyhan due to continued sabotage. - Southern fields account for about 90 percent of production; production and exports increased despite conflict. - Oil production rose by 4.5 percent from 2013 to 2014, reaching 3.11 million barrels per day (mbpd). - Oil exports increased by 5.3 percent to 2.52 mbpd in 2014. - 2015 conservative projections: production should rise to 3.45 mbpd (11 percent over 2014) and exports to 3.1 mbpd (23 percent). - Projection basis: agreement between the Federal Government and the Kurdistan Regional Government envisaging contribution from northern fields (including Kirkuk) of 550 thousand barrels per day (bpd), on average. ### External balances and reserves - Oil export revenues: from $89 billion in 2013 to $83 billion in 2014 and expected to decline to $62 billion in 2015. - Current account: turned negative in 2014 to a deficit of 2.8 percent of GDP; expected to deteriorate to almost 8.6 percent of GDP in 2015. - Net capital outflows in 2015 are forecast to increase the balance of payments deficit, partly due to settlement of arrears with IOCs contracted in 2014. - International reserves (including the DFI) declined from $84 billion at end-2013 to $67 billion at end-2014, and are expected to fall to $50 billion by end-2015. - Reserves are not expected to decline below 6 months of imports and 85 percent of the deposit base in 2015. - Operational change: the Development Fund for Iraq was closed as a foreign account in May 2014 and replaced with a government account in dollars at the CBI; foreign exchange receipts from oil exports are collected directly in CBI accounts abroad with equivalent amounts credited to the government account in Baghdad. ### Fiscal developments, measures, and financing - 2014 budget was not approved due to political situation; government contained the deficit at slightly above 5 percent of GDP (down from nearly 6 percent of GDP in 2013). - Accumulated arrears in 2014: $6.8 billion in arrears on investment spending and IOCs, and ID 2.3 trillion ($2.0 billion) to domestic contractors. - Initial draft 2015 budget envisaged 33 percent expenditure growth; revised and approved budget: spending envelope of ID 117.8 trillion (58 percent of GDP) and a deficit of ID 24 trillion (12 percent of GDP). - Non-oil tax measures published end-May and to be implemented starting on August 1; full application of 2010 Customs Law tariff schedule to start in August (technical delays noted). - Temporary measures: 5 percent advance custom duty and a 3 percent advance income tax on purchases of foreign exchange for imports were introduced in March and removed in June due to market volatility. - Electricity tariff reform finalized by the Ministry of Electricity; expected annual savings of ID 5–7 trillion (Prior Action); Cabinet to approve tariff reform soon. - Fuel sector: domestic fuel prices increased in past years; plans to improve distribution, encourage international companies, and adopt fuel cards for gasoline, gasoil, and LNG to be rolled out by year-end. - Deficit containment: expect deficit to be contained to around ID 35 trillion (17 percent of GDP) in 2015, including taking into account an additional $10 billion payments to the IOCs. - 2016: expected deficit reduction to about 10 percent of GDP due to fiscal measures and higher oil revenues. ### Financing strategy and remaining gaps - Financing sources: - Loans from the Trade Bank of Iraq for $2 billion. - Placement of a total of ID 8.4 trillion of T-bills with state-owned banks Rasheed and Rafidain (of which ID 4 trillion made possible by a CBI regulation allowing substitution of 50 percent of the reserve requirement with government securities). - Drawing on 2009 SDR allocation at the IMF. - Tasked three investment banks to prepare the issuance of $6 billion; plan to issue the first tranche of $2 billion in the coming months. - Seeking IMF support via RFI purchase for $0.8 billion. - Seeking World Bank Development Policy Loan and emergency reconstruction assistance for a total of $2 billion. - CBI liquidity support: - CBI has discounted government securities for about ID 5 trillion to facilitate commercial bank lending to the government. - CBI may consider discounting up to an additional 14 trillion in the secondary market in 2015, possibly through longer-term bonds; this support will be formalized via MOUs (CBI—state-owned banks; state-owned banks—MOF) as a Prior Action. - Residual financing gap: ID 13 trillion, expected to be filled with domestic and foreign sources. ### Debt management and public financial management - Debt outlook: external debt expected to remain broadly unchanged at about $64 billion in 2015 (37 percent of GDP), despite additional 2015 borrowing, due to planned settlement of arrears of US$ 6.8 billion to IOCs. - Non-Paris Club creditors account for about $40 billion; progress in negotiations expected to conclude agreements this year for rescheduling at terms comparable to the 2004 Paris Club agreement. - Full rescheduling of this debt at these terms would reduce it to $9.3 billion. - Commitment to stay current on external payment obligations to IOCs. - PFM strengthening: - Working with the World Bank on introduction of an integrated financial management and information system (IFMIS). - Shura Council examining a new public financial management law to introduce a Treasury Single Account; IMF and World Bank technical assistance planned. ### Exchange rate, foreign exchange market, and financial sector policies - Exchange rate policy: maintained the peg to the U.S. dollar. - Exchange rate spread developments: spread between official and parallel rates fell from 8 percent in May 2013 to below 1 percent in November 2014; increased to 16 percent in mid-June 2015. - Market interventions and measures: - Removal of the advance customs duty and presumptive income tax and reduction of the advance deposit requirement to five days in June had a calming effect on the FX market. - A circular issued in February 2015 further liberalizes the foreign exchange market; rigorous implementation expected to reduce the spread. - Reserve management: amended 2008 reserve management guidelines; working towards active reserve management at the CBI in Baghdad with IMF technical assistance. - Financial sector impacts and measures: - Banking sector suffered from physical destruction, disrupted economic activity, and trade disruptions affecting import financing. - Growth in credit to private sector fell from 16 percent in 2013 to 5 percent in 2014 and is expected to contract by 2 percent in 2015. - Expectation of increased nonperforming loan (NPL) ratios due to falling business confidence and physical destruction/robberies. - Stepping up surveillance and improving financial reporting and monetary data with IMF technical assistance; improving Financial Soundness Indicators to international standards. - Banking sector development measures: Cabinet examining deposit insurance law (fully funded by government and participating commercial banks); Credit Information Bureau forthcoming to support credit assessment; public entities allowed to open accounts and pay salaries through private banks starting May (to level playing field and deepen intermediation). - Restructuring of state-owned banks Rasheed and Rafidain is underway; Executive Committee for Restructuring analyzing inherited debt and war losses and urging implementation of MOU provisions. *Source: Letter of Intent and accompanying text describing Iraq’s 2015 policies and requests for IMF Rapid Financing Instrument support.* ### 26. We are taking measures to strengthen banking supervision. The CBI has recently extended ### _cr15235 - 26. We are taking measures to strengthen banking supervision. The CBI has recently extended ### Banking supervision measures - The CBI has recently extended its contract with Ernst & Young to assist in improving off-site and on-site supervision practices and to train employees. - The CBI has hired 35 new contractual staff to strengthen enforcement in the banking supervision department. - The CBI is paying increased attention to bank reporting to detect potential problems at early stage, and intends to enhance and modernize the banking supervision. - The banking supervision department is stepping up monitoring of state-owned banks Rasheed and Rafidain, which are of systemic importance in line with the CBI’s duties of supervising the entire banking sector. ### Safeguards over foreign exchange reserves - The CBI remains the exclusive authority in charge of foreign exchange reserves. - As part of the RFI access request, the authorities commit to completing an updated safeguards assessment of the CBI. - The CBI will provide Fund staff all requested information needed for the assessment, including the most recent external audit report and the authorization to speak with its external auditor. - The CBI stands ready to receive a safeguards mission as soon as needed. - The authorities commit to prepare and implement an action plan with regard to recommendations from the safeguards assessment. - The authorities agree to update the Memorandum of Understanding between the CBI and the Ministry of Finance dated February 17, 2011, covering management of foreign exchange reserves and the channeling of IMF budget support under the RFI to the Ministry of Finance. ### Policy commitments, conclusion, and publication authorizations - The authorities believe the policies set forth in the letter are adequate to address the present and urgent balance of payments problem and will take any further measures that may become appropriate. - The authorities intend to maintain close policy dialogue with the Fund to strengthen Iraq’s balance of payments, refrain from measures that would compound balance of payments difficulties, and maintain macroeconomic stability. - The government does not intend to: - impose new, or intensify existing, restrictions on the making of payments and transfers for current international transactions; - introduce new, or intensify existing, trade restrictions for balance of payments purposes; - enter into bilateral payments agreements inconsistent with Article VIII of the Fund’s Articles of Agreement. - The government of Iraq and the CBI authorize the Fund to publish this letter and the staff report relating to this request. *Signed by Hoshyar Mahmoud Zebari (Minister of Finance of Iraq) and Ali Mohsen Ismail Al Allaq (Acting Governor of the CBI).* ### Prior actions for a Purchase under the Rapid Financing Instrument (selected) - Approval by the Cabinet of Ministers of the new, strongly progressive electricity tariff schedule - Scheduled completion date: Five business days before the Board date - Macroeconomic justification: Improve delivery of electricity and contain energy subsidies for annual savings of ID 5–7 trillion - Sign separate MOUs between (i) the CBI and the state-owned banks and (ii) the state-owned banks and the MOF, laying out (i) terms of repayment of the securities used for CBI financial support to the banks, and (ii) the government’s commitment to provide amounts needed to repay principal and interest on the bonds. - Scheduled completion date: Five business days before the Board date - Macroeconomic justification: Limit negative effects of indirect CBI financing to the government on CBI credibility and the pegged exchange rate arrangement through formalization of financial relations between the government, the CBI, and the state-owned banks. ### Risk Assessment Matrix — main risks, likelihood, impact, mitigation - Protracted conflict - Likelihood of realization in the next three years: High - Expected economic impact: High - Expected effects: weigh on the budget, depress confidence, affect non-oil activity, possibly disrupt oil production in the south - Policies to minimize impact: - Pursue implementation of policies agreed under the RFI. - Seek further financial support from international community. - Preserve social spending. - Political fragmentation - Likelihood: High - Expected impact: High - Expected effects: weaken policy implementation and capacity to fight ISIS; collapse of KRG deal could lower oil exports - Policies to minimize impact: - Frontload policy and reform implementation. - Accelerate diversification of government revenues through non-oil tax instruments. - Poor policy implementation - Likelihood: High - Expected impact: High - Expected effects: hinder fight against ISIS, reduce resilience to oil market shocks, lower medium-term growth; FX restrictions could cause FX market volatility - Policies to minimize impact: - Adopt forward-looking policy framework. - Maintain peg with the dollar. - Outline timeline to gradually eliminate any new restriction. - Intensify CBI communication with the public and markets. - Risks to energy prices - Likelihood: Medium - Expected impact: Medium–High - Expected effects: shortfalls in oil revenues compress fiscal space and delay return to fiscal surpluses; revenues could be affected by supply disruptions - Policies to minimize impact: - Strengthen PFM to increase resilience. - Accelerate diversification of government revenues through non-oil tax instruments. - Heightened regional fragmentation/state failure leading to sharp rise in oil prices - Likelihood: Medium - Expected impact: High - Policies to minimize impact: - Pursue implementation of policies agreed under the RFI. - Seek further financial support from international community. - Preserve social spending. (Note: RAM likelihood categories defined by staff: “low” <10 percent, “medium” 10–30 percent, “high” 30–50 percent.) ### External assessment — reserves and exchange rate - External position assessment: remains sustainable despite recent worsening from the collapse in oil prices; should recover with planned ramp-up of oil production and sound fiscal policies. - Fiscal adjustment in 2015 assumed to continue over medium term, allowing resumption of fiscal surpluses from 2019. - Adequacy of international reserves - Reserve accumulation strong during 2010–2013, then declined from 2014. - Reserves continue to exceed conventional measures of reserve adequacy and reserve buffers are projected to remain adequate over the medium run. - A cross-country comparison indicates current CBI reserves as a percentage of GDP are comparable to other oil exporting countries. - Reserve Adequacy Indicators for Selected Countries, 2014 (as presented) - Reserves in USD billion 1/: 77.8 66.7 50.0 41.0 41.3 45.4 52.7 60.2 - Reserves in months of imports of goods and services: 10.4 9.9 6.8 5.5 5.1 5.1 5.2 5.2 - Reserves in percent of debt service coming due: 2,790 756 2,656 1,955 821 823 1,107 2,847 - Reserves in percent of reserve money: 123.9 117.3 88.9 78.1 71.4 71.4 75.4 78.2 - Reserves in percent of broad money: 101.5 83.9 53.6 40.5 35.8 35.0 36.6 37.8 - Reserves as a percent of the new IMF ARA metric 2/: 262.9 226.8 175.0 ...... - (Footnotes: 1/ Starting 2014 includes US$ account balances from oil revenues. 2/ Reserves within 100–150 percent of the new ARA metric are considered adequate.) - Exchange rate assessment - NEER appreciated by 27 percent cumulatively from end 2012 until April 2015. - REER appreciated by 16 percent over the same period due to negative inflation differentials declining over the years. - Falling oil prices have translated into a large negative terms of trade shock over the medium term. - EBA-Lite results for 2015: - Projected current account balance (in percent of GDP): -8.6 - Estimated current account norm (in percent of GDP): -7.8 - Current account gap: -0.8 - REER gap (misalignment): 3.5 - Interpretation: REER is broadly in line with fundamentals, implying a slight overvaluation of Iraq’s REER by 3.5 percent, but results should be treated with caution given uncertainties. ### Public and external debt sustainability (DSA) — baseline and projections - Key baseline projections and drivers - Public debt projected to increase to 69 percent of GDP in 2015 and peak around 73 percent of GDP in 2016 due to additional borrowing to finance large fiscal deficits and conservative assumptions about rescheduling non-Paris Club debt. - Domestic debt stock expected to more than double in 2015. - Public debt projected to fall to 48 percent of GDP by end 2020 under the baseline fiscal consolidation and growth assumptions. - 2014–2015 specifics and financing composition - Domestic debt estimated to increase from 10 percent of GDP in 2014 to 33 percent of GDP in 2015. - External debt projected to increase to about 37 percent of GDP, up from 29 percent of GDP in 2014, due to planned Eurobonds, funding from the IMF and the World Bank, and other external financing assumed to fill part of the fiscal gap. - Staff conservatively assumes non-Paris Club debt will not be rescheduled over the projection period. - Realism and risks - Forecasting is hampered by severe data weaknesses; historic forecasts show optimism for real GDP and primary balance. - Over the medium-term, growth expected to average 7-8 percent (downward revision from 2013 projections). - Iraq remains highly dependent on oil export receipts and vulnerable to oil price volatility. - Shocks and stress tests — standardized scenarios and impacts - Growth shock - Shock: baseline real GDP growth profile reduced by one standard deviation over recent 9-year period. - Result: average growth of 5.8 percent over 2016–20 vs baseline 7.6 percent. - Impact: public debt ratio increases by 6 percentage points of GDP in 2016 and 15 percentage points in 2017, bringing debt ratio to 61 percent of GDP by 2020; on average debt path 13 percentage points higher than baseline over 2016–2020. - Primary balance shock - Shock: increases noninterest expenditure to GDP by about 4 percent of GDP in 2016 and 2017 (excluding revenue effects); assumes interest rate increase of 25 bps for each 1 percent of GDP deterioration in the primary balance. - Impact: increases public debt to GDP by 4 percentage points in 2016; raises total public debt to 58 percent of GDP by 2020. - Interest rate shock - Shock: large increase in nominal interest rates relative to baseline throughout the projection period. - Impact: slows debt reduction; public debt ratio reaches 68 percent of GDP in 2020. - Real exchange rate shock - Shock: one-time 4 percent depreciation in the real exchange rate. - Impact: small external debt stock implies total debt-to-GDP ratio increases by 1 percentage point of GDP on average over the medium term; gross financing correspondingly higher. - Combined shock - Components: lower GDP growth by 4.5 percentage points in 2016 and 2017; higher nominal interest rates (around 20 percent on average); 4 percent real exchange rate depreciation; increases in noninterest expenditure to GDP by about 4 percent of GDP. - Impact: debt-to-GDP ratio reaches 81 percent in 2016 and rises to 94 percent in 2020; gross financing needs increase accordingly. *Italic: Source document content as provided in the IMF staff report section.* ### 4. Oil price shock. This scenario models the effect of a decline in real GDP growth as a ### 4. Oil price shock. This scenario models the effect of a decline in real GDP growth as a ### Scenario description - Oil prices are assumed to fall by 20 percent in 2016 and to converge only gradually to the baseline over the medium run. - Real GDP growth would drop by more than 5 percentage points in 2016 but the effect of the shock would gradually phase out in the following years. - The path of government revenues, the fiscal balance and financing needs would also be altered. ### Macroeconomic impacts (selected projections under the Oil Price Shock) - Real GDP growth: - Oil Price Shock: 0.5 2.2 7.4 7.3 7.3 7.1 (as presented in the sequence "Real GDP growth0.52.27.47.37.37.1") - Baseline for comparison (from figures): 0.5 7.6 8.1 7.6 7.5 7.1 (as presented in the sequence "Real GDP growth0.57.68.17.67.57.1") - Inflation (GDP deflator, in percent) under the Oil Price Shock: -22.4 5.1 3.6 2.6 1.7 1.3 (as presented in the sequence "Inflation-22.45.13.62.61.71.3") - Effective interest rate under the Oil Price Shock: 2.0 2.1 3.1 3.2 3.2 3.3 (as presented in the sequence "Effective interest rate2.02.13.13.23.23.3") - Primary balance under the Oil Price Shock: -16.2 -18.4 -7.9 -3.6 0.6 4.9 (as presented in the sequence "Primary balance-16.2-18.4-7.9-3.60.64.9") ### Fiscal and debt outcomes - Debt dynamics: - Debt to GDP in this scenario would increase to around 86 percent of GDP in 2016-2018 and then fall to 71 percent of GDP towards the end of the forecast period. - Selected baseline and related indicators (as presented in table rows and figures): - Nominal gross public debt (sequence shown): 86.5 31.9 38.9 68.5 72.6 67.6 62.3 55.9 48.0 (as presented in "Nominal gross public debt86.531.938.968.572.667.662.355.948.0") - Public gross financing needs (sequence shown): -1.1 5.4 4.3 22.3 23.9 18.3 22.8 26.1 21.8 5 (as presented in "Public gross financing needs-1.15.44.322.323.918.322.826.121.85") - Real GDP growth (baseline sequence): 11.3 6.6 -2.1 0.5 7.6 8.1 7.6 7.5 7.1 (as presented in "Real GDP growth (in percent)11.36.6-2.10.57.68.17.67.57.1") - Inflation (GDP deflator, baseline sequence): 16.0 0.1 -1.8 -22.4 5.1 3.6 2.6 1.7 1.3 (as presented in "Inflation (GDP deflator, in percent)16.00.1-1.8-22.45.13.62.61.71.3") - Change in gross public sector debt, cumulative (sequence shown): -27.5 -2.8 7.0 29.6 4.0 -4.9 -5.4 -6.4 -8.0 9.0 (as presented in "Change in gross public sector debt-27.5-2.87.029.64.0-4.9-5.4-6.4-8.09.0") - Identified debt-creating flows (sequence shown): -23.7 3.7 6.6 24.1 0.8 -4.8 -5.5 -6.6 -8.1 -0.2 (as presented in "Identified debt-creating flows-23.73.76.624.10.8-4.8-5.5-6.6-8.1-0.2") ### Stress-test specific entries (from DSA figures and tables) - Real GDP Growth Shock scenario (sequence shown): 0.5 3.2 3.6 7.6 7.5 7.1 (as presented in "Real GDP growth0.53.23.67.67.57.1") - Primary Balance Shock scenario (sequence shown for primary balance): -16.2 -12.6 -5.1 -0.2 0.8 2.8 5.0 (as presented in "Primary balance-16.2-12.6-5.1-0.21.82.85.0") - Real Interest Rate Shock: Effective interest rate sequences shown up to 15.4 (as presented in "Effective interest rate2.02.18.89.912.514.1") - Combined Shock and other alternative scenarios are presented in the DSA figures (with sequences for debt and financing needs consistent with the above entries). *Source: IMF staff.* ### Section 2, and currently maintains three exchange restrictions and one multiple currency practice ### _cr15235 - Section 2, and currently maintains three exchange restrictions and one multiple currency practice ### Exchange restrictions: overview and evolution - Iraq maintains three exchange restrictions and one multiple currency practice (MCP) subject to Fund approval under Article VIII, Sections 2(a) and 3. - Two of four exchange restrictions identified in 2009 have been removed; two remain. - All exchange restrictions identified in 2012 have now been removed. - One new exchange restriction was identified in 2015. ### 2009 measures and status - Prior to March 2009 Iraq maintained a generally open current and capital accounts; access to foreign exchange from the Central Bank of Iraq (CBI) auction became subject to various limits starting in 2009. - Two 2009 exchange restrictions removed (arose from CBI circulars now nullified): - Requirement to submit a tax certificate and a letter of nonobjection stating that the companies do not owe any taxes to the government before non-Iraqi companies may transfer proceeds of current international transactions out of the country. - Requirement that before non-Iraqis may transfer proceeds in excess of ID 15 million out of Iraq, banks are required to give due consideration of legal obligations of these persons with respect to official entities, which must be settled before allowing any transfer. - Two 2009 exchange restrictions remain in place: - Requirement to pay all obligations and debts to the government before proceeds of investments of investors, and salaries and other compensation of non-Iraqi employees may be transferred out of Iraq. - An Iraqi balance owed to Jordan under an inoperative bilateral payments agreement. ### 2012 measures and removal timeline - In 2012 the Fund identified five additional exchange restrictions and a multiple currency practice (MCP). - In 2013 four of these five exchange restrictions were removed as the relevant circulars were nullified. These removed measures were: - Requirement to submit a tax clearance certificate that all taxes (even unrelated to the transaction) have been paid before foreign exchange for payment and transfer of certain current international transactions can be purchased in the auction. - Limitation that corporates can purchase foreign exchange in the auction for import transactions only. - Limit of US$75,000 a week on the availability of foreign exchange cash in the auction for money transfer companies (MTCs) and money exchange bureaus (MEBs). - Limit of US$4 million a week on the availability of foreign exchange cash in the auction for banks. - In 2015 the final exchange restriction identified in 2012, arising from the limit on individual purchases of cash foreign exchange, was removed: - Originally a US$5,000 limit on individual purchases of cash foreign exchange, imposed by Circular No. 19 of October 1, 2012. The CBI reports this limit is now only indicative due to the repeal of previous circulars, and therefore no longer gives rise to an exchange restriction. Communication to banks was by informal electronic message. ### New and remaining 2015 exchange restrictions - The 2015 Article IV mission identified one new exchange restriction arising from weekly limits on purchases of cash by financial institutions from the CBI. - The recent weekly limits (raised) are: - $300,000 per week for banks with capital of at least ID 250 billion. - $150,000 per week for MTCs. - $50,000 per week for MEBs. - Note: Similar limits on the availability of foreign exchange in the CBI auction for banks, MTCs, and MEBs were originally imposed beginning in 2010 and previously found to give rise to exchange restrictions; those earlier measures were later removed. - One exchange restriction maintained for security reasons should be notified to the IMF under the framework of Decision 144–(52/51). ### Multiple Currency Practice (MCP) - The MCP was identified by the Fund in 2012 and remains in place in 2015 despite evolution of measures limiting availability of foreign exchange. - The MCP arises from official action to limit the purchase of foreign exchange, with no mechanism to ensure exchange rates in the official auction and in the market do not deviate from each other by more than two percent. - The average spread between the official and market rates was around 10 percent in May 2015. ### Other measures discussed and removed - The advance deposit requirement for purchase of foreign exchange (originally identified in 2014) no longer gives rise to an exchange restriction because the authorities assert it is for assessing bona fides within a “normal” 5-day limit. Background timeline for the advance deposit requirement: - Originally imposed by Circular No. 2/24 (Jan. 25, 2014): deposit one week prior to date of purchase. - Changed to 15 days by the February 2015 circular. - Changed to 10 days on May 25, 2015 by a verbal instruction of the CBI. - Changed to five days in June 2015. - Most provisions of the January 2014 circular were nullified by Circular No. 9/3/26 of February 2015; the advance deposit requirement continues in force by virtue of paragraphs b (wire sales) and h (cash sales) of the February 2015 circular. - A new exchange restriction discussed by the mission (requirement for importers to pay a portion of custom duties and income tax at time of purchase of foreign exchange) was cancelled in June 2015 and thus removed. ### Article IV consultation and publication - Iraq is on the standard 12-month consultation cycle. - The last Article IV consultation was concluded on May 13, 2013. - The staff report (IMF Country Report No. 13/217) was published on July 19, 2013. ### Technical assistance and statistical capacity issues (high-level findings) - Data provided to the Fund have serious shortcomings that significantly hamper surveillance; macroeconomic statistics have suffered from years of neglect and recent turmoil. - Central Statistics Organization (CSO) lacks adequate technical expertise and resources; Central Bank of Iraq (CBI) statistical capacity is slightly better but hampered by interagency data sharing and data collection responsibilities. - National accounts: - CSO compiles annual and quarterly national accounts at current and constant (2007) prices; annual GDP by activity available for 2003–13, quarterly GDP up to Q3 2014. - National accounts follow the 1968 SNA; with STA assistance CSO is moving toward 1993 SNA concepts. - Base year updated to 2007. - Quality is poor due to lack of comprehensive source data; quarterly GDP estimates rely on crude oil output, electricity, rent of dwellings, and government expenditure. - Price statistics: - Monthly CPI for all-Iraq (including Kurdistan) compiled based on HBS 2007; CPI covers urban areas only. - Starting June 2014 official CPI data do not include the four conflict-affected provinces. - Quarterly PPI compiled within two months of the reference quarter; index based in 2007 and needs updating. - Government finance statistics: - Provision of fiscal data for program monitoring has been satisfactory despite security situation; coverage of the Kurdish region remains sketchy. - In March 2015 STA discussed a work plan to improve frequency and timeliness of fiscal reporting and migration to GFSM 2014. - Iraq resumed reporting government finance statistics for publication in the Government Finance Statistics Yearbook (GFSY). - Monetary and financial statistics: - Progress on depository corporations survey components, but quality and timeliness hampered by lack of staff capacity at commercial banks. - Monetary statistics do not cover the northern region (Kurdistan); CBI reports IFS data with a lag of more than three months; latest ODCs data marked “preliminary.” - Iraq has not yet compiled financial soundness indicators (FSIs); CBI requested STA technical assistance in 2015. - External sector statistics: - Balance of payments statistics available for 2005–2013 in BPM6 format; CBI compiles an annual IIP statement. - Data quality marginally improved but timeliness is a concern; coverage problems and deviations from methodologies persist. - External trade statistics have serious problems of timeliness and poor quality; new customs import form not used at border due to security and lack of Customs Department resources. - Coverage excludes the northern region (Kurdistan); private sector imports captured only if paid through the Iraqi banking system; nonoil exports amount to the equivalent of 3–5 percent of total exports. - Data standards: - Iraq is a GDDS participant; most metadata not updated since October 2002 except real sector and socio-demographic metadata. - At authorities’ request STA conducted an SDDS assessment and provided a draft action plan that could lead to SDDS subscription. - No data ROSC is available. *Source: IMF staff report text (Section 2 and surrounding sections) provided in the content unit.* ### APPENDIX I. TABLE OF COMMON INDICATORS REQUIRED FOR SURVEILLANCE ### APPENDIX I. TABLE OF COMMON INDICATORS REQUIRED FOR SURVEILLANCE ### Key data indicators and reporting qualities (table highlights, as of June 2015) - Exchange Rates: Date of latest observation 24/6/2014; Date received 24/6/2015; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 23/4/2014; Date received 4/2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4-6 week lag. - Reserve/Base Money: Date of latest observation 31/12/2014; Date received 4/2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4-6 week lag. - Broad Money: Date of latest observation 31/12/2014; Date received 4/2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4-6 week lag. - Central Bank Balance Sheet: Date of latest observation 31/12/2014; Date received 4/2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4-6 week lag. - Consolidated Balance Sheet of the Banking System: Date of latest observation 31/12/2014; Date received 1/4/2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q, 4-6 week lag. - Interest Rates: Date of latest observation 23/4/2014; Date received 4/2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4-6 week lag. - Consumer Price Index: Date of latest observation 30/4/2014; Date received 29/5/2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 3 week lag. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation 03/2015; Date received 26/5/2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication N/A. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation 03/2015; Date received 26/5/2015; Frequency of Data M; Frequency of Reporting M; Frequency of Publication N/A. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 12/2014; Date received 1/6/2015; Frequency of Data N/A; Frequency of Reporting N/A; Frequency of Publication N/A. - External Current Account Balance: Date of latest observation 12/2014; Date received 1/6/2015; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Memo: 9 month lag. - Exports and Imports of Goods and Services: Date of latest observation 12/2014; Date received 1/6/2015; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Memo: 9 month lag. - GDP/GNP: Date of latest observation 3/2014; Date received 5/2014; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Memo: 3 month lag. - Gross External Debt: Date of latest observation 12/2014; Date received 1/6/2015; Frequency of Data N/A; Frequency of Reporting N/A; Frequency of Publication N/A. - International Investment Position: Date of latest observation 12/2014; Date received 6/1/2015; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Memo: 9 month lag. ### Supplementary financing request and macro-fiscal implications - Revised request under the Rapid Financing Instrument (RFI): - Authorities request a purchase of 75 percent of quota (SDR 891.3 million, $1.242 billion), to be channeled to the budget. - Previous request in Letter of Intent dated July 9, 2015: 50 percent of quota (SDR 594.2 million, $828.9 million). - Additional Fund financing relative to the staff report: about $413 million (0.2 percent of GDP). - Staff assessment of financing: - Higher access strengthens Fund support but does not close the balance of payments or budget gaps. - Increased access does not significantly alter staff’s assessment of Iraq’s capacity to repay the Fund. - Prior actions: - MOUs between the state-owned banks and the Ministry of Finance, and between the state-owned banks and the Central Bank of Iraq (CBI) have been signed (prior action). - Cabinet approval of the new electricity tariff schedule will not be implemented before the Board meeting. - Electricity tariff reform: - Expected fiscal savings from tariff reform: 2.4 percent of fiscal savings on an annual basis, or 1.2 percent of GDP for 2015. - Worst-case scenario if tariff reform is not implemented in 2015: - Government deficit would be 18.4 percent of GDP compared to 17.2 percent of GDP under the staff report baseline. - Unidentified financing gap would reach 7.5 percent of GDP compared to 6.3 percent of GDP under the baseline (adjusted to reflect a purchase of 75 percent of quota). - End-2015 public debt would reach 70 percent of GDP, compared to 68.5 percent of GDP under the baseline. - Authorities expect to implement the reform or introduce compensating measures; staff projects only marginal effects on 2016 and medium-term projections assuming implementation or compensation. - Compensatory fiscal measures and symbolic actions: - Cabinet approved a 40–50 percent cut in salaries for high-level government officials, ranging from the Prime Minister to department directors, and a reduction in salaries for members of parliament. - Measure is not expected to bring significant savings but has high symbolic value. ### External sector and reserves - Central Bank of Iraq international reserves: - CBI informed staff that international reserves were $65.5 billion at end-June 2015. - Staff projection (taking into account increased Fund financing): $50.4 billion at end-2015. - Foreign exchange market: - Parallel market spread has remained stable at about 4 percent as of July 21st. ### Staff recommendation and appraisal - Staff supports the request for a purchase of 75 percent of quota under the RFI. - Rationale: - Increased financing would better address the present and urgent balance of payments problem. - It would help reduce the gap arising from unidentified domestic and external financing. *Source: APPENDIX I. TABLE OF COMMON INDICATORS REQUIRED FOR SURVEILLANCE; STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION AND REQUEST FOR PURCHASE UNDER THE RAPID FINANCING INSTRUMENT—SUPPLEMENTARY INFORMATION AND SUPPLEMENTARY LETTER OF INTENT (As of June 2015).* ### 9. Staff urges the authorities to quickly implement the agreed tariff reform ### _cr15235 - 9. Staff urges the authorities to quickly implement the agreed tariff reform ### Staff recommendation on electricity tariff reform - Staff urges the authorities to quickly implement the agreed tariff reform (or equivalent contingency measures) given the large financing gap. - In light of the authorities’ weaker than previously envisaged policy capacity, and in accordance with the Fund’s Guidelines on Conditionality, staff recommends that the electricity tariff reform not be a prior action for the purchase under the RFI, thus giving the authorities more time to implement this measure. - The Supplementary Letter of Intent requests access of 75 percent of quota (equivalent to SDR891.3 million, or about US$1.242 billion) under the RFI and notes: "Cabinet approval of the new electricity tariff reform is not possible at the moment, but we commit to implement this measure as soon as possible or find compensatory fiscal measures." ### Fiscal and financing implications of the delay - "The delay in raising electricity tariffs increases the fiscal deficit and the financing gap, thus increasing the need for further fiscal adjustment in 2015-16." - The tariff reform is described as "macrocritical given the large residual financing gap and the current low level of tariffs in Iraq compared to other countries in the region." - Financing gap and related projected financing items (Table 7 and related tables): - Financing gap (2015): 8.0 (in billions of U.S. dollars) - Financing gap (2016): 6.6 (in billions of U.S. dollars) - Financing gap (2017): 0.0 (in billions of U.S. dollars) - Gross financing requirements (2015–17): 23.2, 10.0, -0.4 (in billions of U.S. dollars) - Available financing (2015–17): 15.2, 3.4, -0.4 (in billions of U.S. dollars) - Change in GIR (+ decline) (2015–17): 16.2, 9.0, -0.2 (in billions of U.S. dollars) - Identified external financing sources for 2015–17: - IMF: 1.2, 0.0, 0.0 (in billions of U.S. dollars) - World Bank: 1.5, 0.5, 0.0 (in billions of U.S. dollars) - Eurobond: 2.0, 2.0, 0.0 (in billions of U.S. dollars) - Other (unidentified): 3.3, 4.1, 0.0 (in billions of U.S. dollars) ### Implementation constraints and political economy - The delay in tariff reform "has turned out to be more challenging than expected." - The delay "reflects the authorities’ weaker than previously envisaged policy capacity, further undermined by the government’s focus on the ISIS conflict and the increasingly tense social and political situation." - The Supplementary Letter of Intent indicates the government’s commitment: "Cabinet approval of the new electricity tariff reform is not possible at the moment, but we commit to implement this measure as soon as possible or find compensatory fiscal measures." ### Operational/conditionality detail from the staff report - Staff proposes to remove electricity tariff reform as a prior action for the RFI purchase to accommodate capacity constraints while maintaining the macroeconomic rationale for the reform. - Table of prior action for the RFI (listed in the same content unit) identifies as the scheduled prior action (five business days before the Board date): - Sign separate MOUs between (i) the CBI and the state-owned banks and (ii) the state-owned banks and the MOF, laying out repayment terms of securities used for CBI financial support to the banks and the government’s commitment to provide the state-owned banks with the amounts needed to repay principal and interest on the bonds. - Macroeconomic justification: "Limit negative effects of indirect CBI financing to the government on the credibility of the CBI and the pegged exchange rate arrangement through formalization of the financial relations between the government, the CBI, and the state-owned banks." ### Key contextual macroeconomic indicators cited in the content unit (selected) - Request for RFI access: 75 percent of quota (equivalent to SDR891.3 million, or about US$1.242 billion). - GDP (US$ billion) projections (2014–20): 223.5, 174.4, 197.3, 220.9, 243.7, 266.4, 289.1 (exact sequence as presented). - Overall fiscal balance (including grants) (percent of GDP) (2014–20): -5.3, -18.4, -10.3, -3.2, -1.1, 1.0, 3.5 (exact sequence as presented). - Non-oil primary fiscal balance (percent of non-oil GDP) (2014–20): -60.0, -68.6, -61.8, -59.0, -58.6, -55.6, -55.4 (exact sequence as presented). - Development Fund of Iraq/MoF US$ account (in US$ billions): 18.1, 6.5, 0.9, 1.0, 1.0, 1.0, 1.0, 6.3 (exact values as presented). - Consumer price inflation (percentage change; average) (2014–20): 2.2, 2.1, 3.0, 3.0, 3.0, 3.0, 3.0 (exact sequence as presented). *Source: _cr15235 - 9. Staff urges the authorities to quickly implement the agreed tariff reform* ### 1. Iraq is facing a double shock resulting from the Islamic State of Iraq and Syria ### 1. Iraq is facing a double shock resulting from the Islamic State of Iraq and Syria (ISIS) conflict and the sharp drop in global oil prices ### Overview and economic impact - The country faces a double shock: the ISIS conflict and a sharp drop in global oil prices, compounding prolonged security and political difficulties. - Humanitarian and social impacts: - Over three million people displaced internally. - A quarter of a million Syrian refugees have sought shelter in Iraq. - Living conditions have markedly deteriorated and the government’s ability to provide basic public goods and services is severely hampered. - Economic and financial impacts: - The economy contracted by about 2 percent in 2014 despite solid growth in the oil sector. - Projected only a modest recovery in the year following 2014. - Fiscal and external positions expected to weaken considerably in 2015 relative to 2014, reflected in a 21 percent drop of budget revenues and 25 percent decline in international reserves. - Conflict effects on activity: - Extensive damage to infrastructure and productive assets, disruption of internal and external trade, and deterioration in investor confidence. ### Fiscal policies, measures, and reforms - Revised 2015 budget: - Introduced revenue-enhancing and expenditure-reducing measures that reduced the deficit by 13 percent of GDP. - Revenue measures introduced non-oil taxation: higher custom tariff schedule and sales taxes on cars, tobacco, alcohol, mobile telephony and internet usage; large expenditure cuts agreed with line ministries. - Additional measures under preparation: - Budgetary savings of about 5 percent of GDP through rationalization of the capital budget via rigorous prioritization. - An inter-ministerial committee chaired by the Deputy Prime Minister to examine project selection and procurement practices to improve selection (LOI ¶13) and implementation capacity and monitoring. - Electricity tariff reform: - Planned progressive tariff structure expected to deliver about 2.4 percent of fiscal savings on an annual basis. - Cabinet approval delayed due to political and social conditions related to the conflict; authorities commit to implement or find compensatory measures. - Symbolic wage cuts: - Cabinet decision of July 21, 2015: 50 percent reduction for the Prime Minister and his deputies and a 40 percent reduction for Ministers; effective August 1st, 2015. - Remaining fiscal pressures: - Large fiscal deficit expected to remain due to security and humanitarian spending needs and arrears on investment spending and to international oil companies accumulated the previous year. - Financing strategy and sources: - Loans from state-owned banks to be supported by the Central Bank of Iraq (CBI) via discount of government bonds for about 9 percent of GDP in 2015. - Additional sources sought include: drawdown of the SDR allocation and the RFI purchase, a $6 billion Eurobonds issuance over two years with an issuance this year of at least $2 billion, possible World Bank urgent reconstruction financing and potential Development Policy Loan, and domestic and foreign sources to fill remaining gaps. - Debt and state-owned enterprise (SOE) reform: - Prudent debt management: develop and deepen the domestic debt market with new instruments and strengthen public debt monitoring. - Progress in negotiations with non-Paris Club creditors; expect to conclude agreements consistent with the 2004 Paris Club agreement. - Initiative to reform SOEs: systematic cost-benefit assessment to decide closure, privatization, or restructuring. - Public financial management: - With World Bank support, work on an integrated financial management and information system. - Shura Council examining a new public financial management law to pave the way for a Treasury Single Account. - Continued reliance on Fund and World Bank technical assistance. ### Monetary, exchange rate, and financial sector policies and reforms - Exchange rate and central bank stance: - Authorities committed to maintaining the peg to the U.S. dollar as a key nominal anchor despite a deteriorating external position. - Measures to address illegal cash outflows and foreign exchange management: - Early 2015: CBI reduced volumes of cash currency sales and imposed a 15-day advance deposit requirement for foreign currency transactions. - Government introduced a 5 percent customs duty advance payment and a 3 percent presumptive income tax at time of request for foreign exchange to finance imports; these latter measures were soon removed. - Advance deposit requirement shortened to five days in June; spread between official and parallel exchange rates narrowed to about 6 percent by end-June. - Commitment to remove weekly limits on cash transactions once external conditions allow. - Reserve management: - CBI intensified reserve management; reserves, despite a recent decline, continue to exceed conventional adequacy indicators. - With Fund technical assistance, 2008 reserve management guidelines updated to align with the CBI Law and quantitatively address strategic asset allocation, credit risk limits, and liquidity needs. - Long-term goal to bring active management of international reserves to Baghdad. - Financial sector health and supervision: - Shocks expected to raise nonperforming loans due to falling business confidence, lower private activity, physical destruction, and robberies of some banking institutions at conflict onset. - Authorities stepped up monitoring and supervision, improving financial reporting and monetary data; working with the IMF to improve financial soundness indicators to internationally acceptable standards. - CBI extended contract with Ernst & Young to improve off-site and on-site supervision practices and co-train inspectors; CBI hired 35 new staff in the banking supervision department. - Increased monitoring and planned restructuring of state-owned banks Rasheed and Rafidain (systemic importance) (LOI ¶25). - Development of banking sector and market access: - Measures to level playing field between private and state-owned banks: - Public entities can accept letters of guarantees and certified checks issued by private banks. - Ministry of Finance can open letters of credit with private banks up to $10 million ($6 million previously). - Threshold to collect state fees by private banks increased. - Government allowing SOEs to open accounts, make deposits, and pay salaries through private banks. - With USAID support, CBI finalizing regulations to introduce a credit bureau and considering establishing a deposit insurance scheme. - Safeguards and transparency: - CBI maintains safeguards including annual external audit by a reputable firm and publication of audited financial statement. - As part of RFI access, authorities commit to completing an updated safeguards assessment of the CBI (LOI ¶27). ### Policy priorities and recommendations (implicit in authorities’ actions) - Maintain the U.S. dollar peg to preserve macroeconomic stability. - Implement fiscal consolidation while protecting essential security and humanitarian spending. - Implement revenue diversification measures to introduce non-oil taxation. - Prioritize and rationalize capital spending to achieve about 5 percent of GDP savings. - Implement electricity tariff reform to realize about 2.4 percent of fiscal savings or identify compensatory measures. - Secure diverse financing: state-bank financing supported by CBI (about 9 percent of GDP), SDR drawdown, RFI purchase, $6 billion Eurobonds program (with at least $2 billion issuance in the year of reference), and multilateral financing. - Deepen domestic debt markets and strengthen public debt monitoring; conclude negotiations with non-Paris Club creditors consistent with 2004 Paris Club agreement. - Reform SOEs through systematic cost-benefit assessment for closure, privatization, or restructuring. - Strengthen reserve management and bring active reserve management to Baghdad. - Strengthen banking supervision, develop credit infrastructure (credit bureau), and consider deposit insurance to support private sector intermediation. ### Conclusion - Iraq faces extreme stress from conflict and the oil price shock; authorities are implementing large-scale fiscal adjustment and financing measures, maintaining the dollar peg, and seeking Fund assistance under the Rapid Financing Instrument (RFI). - Authorities will maintain close dialogue with the Fund to preserve macroeconomic stability and appreciate international support. *Source: _cr15235 - 1. Iraq is facing a double shock resulting from the Islamic State of Iraq and Syria (ISIS) conflict and the sharp drop in global oil prices* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15235.pdf_