## _cr16225 — Iraq: First and Second Reviews of the Staff‑Monitored Program and Request for a Three‑Year Stand‑By Arrangement (selected excerpts) ## Source details **Canonical URL:** [_cr16225 — Iraq: First and Second Reviews of the Staff‑Monitored Program and Request for a Three‑Year Stand‑By Arrangement (selected excerpts)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16225.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16225.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16225.pdf.json) --- ### Program objectives and scope - SBA amount referenced: 891.3 million (about US$1.24 billion at the time of approval). - Stand‑By Arrangement (SBA) requested: SDR 3.831 billion (about US$5.4 billion, or 230 percent of quota). - Program aims to: - Address the urgent balance of payments need. - Bring spending in line with lower global oil prices. - Ensure debt sustainability. - Protect the poor, strengthen public financial management, enhance financial sector stability, and curb corruption. - SMP status: IMF completed first and second reviews of the Staff‑Monitored Program (SMP) approved on January 12, 2016; SMP performance was broadly satisfactory. ### Context, shocks, and humanitarian impact - Dual shocks: ISIS attacks and a sharp drop in global oil prices (around 50 percent since mid‑2014). - Humanitarian and displacement statistics: - Internally displaced persons: over 4 million (about 3.7 million cited in April 2016). - People in need of humanitarian assistance: around 10 million (some 27 percent of the population). - Syrian refugees in Iraq: 250,000 (246,000 cited). - Survey: 48 percent of Iraqis (equal to 18 million people) wish to emigrate. - Real economy outcomes: - Real GDP contracted by 2.4 percent in 2015 despite a 13 percent (12.8 percent) increase in oil production. - Non‑oil real GDP contraction in 2015: -18.7 (‑19 percent cited elsewhere). - January–May 2016 oil production: 4.4 mbpd (KRG and North and Midland Oil Companies 0.8 mbpd; federal government exported 3.3 mbpd at an average price of $29 per barrel). ### Outlook and macro projections (selected) - Growth and production projections (Real GDP percentage change): - 2015: -2.4; 2016 (prog.): 10.3; 2017 (proj.): 0.5; 2018: 0.7; 2019: 2.0; 2020: 1.9; 2021: 2.0. - Non‑oil real GDP (percentage change): - 2015: -18.7; 2016 (prog.): -5.0; 2017: 0.0; 2018: 2.0; 2019: 3.0; 2020: 4.0; 2021: 4.0. - Oil production (mbpd): 3.5 (2015); 4.2 (2016 prog.); 4.2 (2017 proj.); 4.2 (2018 proj.); 4.3 (2019 proj.); 4.3 (2020 proj.); 4.4 (2021 proj.). - Iraq oil export prices (US$ pb): 47.5 (2015); 34.5 (2016 prog.); 40.3 (2017 proj.); 42.5 (2018 proj.); 44.6 (2019 proj.); 46.4 (2020 proj.); 47.5 (2021 proj.). - Fiscal and balance‑sheet objectives: - Budget deficit projected to fall from 14 percent of GDP in 2015 to less than 1 percent of GDP by 2021 (subject to implementation). - Public debt projected to be stabilized by 2018; public debt peaks at 85 percent of GDP in 2018 (projected path: 63.9 (2015); 79.0 (2016 prog.); 84.0 (2017 proj.); 85.2 (2018 proj.); 83.1 (2019 proj.); 79.3 (2020 proj.); 74.9 (2021 proj.)). - Balance of payments projected to return to surplus by 2021. - Reserves and current account: - Gross reserves (US$ billion): 53.4 (2015); 42.7 (2016 prog.); 40.1 (2017 proj.); 39.3 (2018 proj.); 35.4 (2019 proj.); 31.5 (2020 proj.); 31.6 (2021 proj.). - Current account (percent of GDP): -6.4 (2015); -11.0 (2016 prog.); -9.2 (2017 proj.); -5.9 (2018 proj.); -4.5 (2019 proj.); -3.3 (2020 proj.); -1.3 (2021 proj.). ### Financing request, gap, and donor support - External financing gap (2016–19): $18.1 billion. - Identified financing for 2016–19: $11.989 billion; remaining financing gap for 2018–19: $6.100 billion. - SBA access and schedule: - SBA: SDR 3.831 billion (3,831 Millions of SDR; 230.3 Percent of Quota; 5,396 Millions of USD total). - Access front‑loaded: 48 percent during the first 12 months. - Proposed schedule: 455 Millions of SDR per purchase in early tranches (example dates: on or after July 7, 2016; Sept 15, 2016; Dec 15, 2016). - Major identified contributions (Text Table 3 excerpts, US$ billion by year 2016–19): - IMF: 1.917; 1.393; 1.393; 0.697; Total 5.400. - World Bank: 1.000; 1.000; 1.000; 0.000; Total 3.000. - Kuwait (postponement of war reparations): 0.000; 4.600; -4.600; 0.000; Total 0.000. - USA: 1.000 (full guarantee of Eurobond). - Other bilateral and multilateral pledges listed; Remaining financing gap: 0.000 (2016); 0.000 (2017); 5.500 (2018); 0.600 (2019); Total 6.100. ### Program pillars and key policy measures - Exchange rate and external pressures: - Maintain the exchange rate peg to the U.S. dollar as the key nominal anchor. - Gradually remove remaining exchange restrictions and multiple currency practice (MCP). - Increase sale of foreign exchange on the official market to reduce spreads; make weekly cash auction limits indicative by end‑2016. - Strengthen AML/CFT framework to stem illegal and speculative demand on foreign exchange. - Fiscal consolidation while protecting the poor: - Freeze expenditures in nominal terms at the aggregate level executed in 2015 to restore fiscal balance over the medium term. - 2016 fiscal program tightened: revised oil price assumption $34.5 per barrel (down from $45); planned expenditure reduced by ID 13 trillion (13 percent in nominal terms). - Main 2016 measures (exact values preserved): - Broadened wage tax base revenue: ID 300 billion ($250 million) in 2016; ID 600 billion ($500 million) from 2017 (full year effect). - Wage bill reduction: ID 3.0 trillion. - Pension payment reduction: ID 1.8 trillion. - Goods and services spending reduction: ID 2.2 trillion; electricity charges increase from ID 360 billion to ID 675 billion. - Transfers reduction: ID 2.4 trillion. - Non‑oil investment expenditure reduction: ID 3.6 trillion (oil investment kept at 2016 budget level). - 2016 deficit and financing mix: - Total deficit: ID 26 trillion. - Domestic bank financing: ID 16.6 trillion (ID 12.6 trillion refinanced at CBI discount window). - Public bond issuance: ID 5 trillion. - JICA budget support loan: $200 million. - Eurobond planned issuance: $1billion in H2 2016. - Project loans: U.S. government ($2.7 billion), JICA ($323 million), World Bank ($120 million), Italy ($66 million), Islamic Development Bank ($54 million). - Commitment: stop using arrears to finance spending in 2016 and beyond; zero ceiling on new external arrears; gradual pay down of outstanding arrears to IOCs by end‑2016 (PC). - Public Financial Management and anti‑corruption: - Strengthen public financial management legislation; report fiscal tables per IMF GFSM 2014. - Implement commitment control, cash management, Treasury Single Account (TSA) steps, and IFMIS road map by end‑June 2016. - Survey, audit and pay domestic arrears; limit stock of domestic arrears on non‑oil investment to ID 7.5 trillion (ceiling). - Anti‑corruption legislative actions: amendments to Commission on Integrity law to be forwarded by January 2017; Criminal Code amendments by December 2016 to criminalize illicit enrichment; further legislation by February 2017. - Financial sector stability: - Strengthen CBI legal framework and governance following safeguards assessment; new charter for Audit Committee by end‑October 2016; CBI law amendments by end‑December 2016. - Restructure state‑owned banks Rasheed and Rafidain based on external audits (audits to be submitted by end‑August 2016; restructuring plan by end‑December 2016). - Strengthen prudential standards, bank supervision, and introduce deposit insurance planning, credit registry, IBAN system, and minimum capital enforcement (ID 250 billion). ### Performance under SMP and program modalities - SMP performance: - Authorities met 3 out of 5 indicative targets at end‑December 2015 and end‑March 2016 (Non‑oil primary fiscal balance; Gross official reserves; Net domestic assets of the CBI). - Misses: social spending target missed by a small margin in Dec‑2015 and Mar‑2016; zero accumulation of external arrears target missed (external arrears to IOCs: $3.556 billion at end‑Dec‑2015; $4.670 billion at end‑Mar‑2016). - Structural benchmarks: all three SBs for first SMP review met; SB for draft financial management law not yet met. - SBA monitoring and conditionality: - Quarterly performance criteria (PC) and indicative targets (IT) set on non‑oil primary balance, gross international reserves, NDA of CBI, stock of total public debt, absence of new external arrears, stock of outstanding arrears to IOCs; IT on social spending (floor) and domestic arrears on non‑oil investment (ceiling). - PCs and ITs to have adjusters for KRG transfers and foreign financing outcomes (¶14–¶18 definitions). - External audits: CBI external auditor to audit GIR, NDA, and total public debt within two months after test dates. ### Key risks and stress tests - Main risks assessed as very high: - Further falls in oil prices. - Worsening of the ISIS conflict or broader security deterioration. - Political tensions (including Federal–KRG relations). - Weak administrative capacity and data reporting weaknesses. - Continued accumulation of arrears and deficiencies in CBI and state‑owned bank legal frameworks. - Debt and reserve stress tests and scenarios (selected results): - Gross financing needs: 29 percent of GDP in 2016. - Total public debt projected: 79 percent (2016); peak at 85 percent (2018); decline to 75 percent (2021) under recommended adjustment. - External debt (percent of GDP): 47.7 (2016); 49.6 (2017); 49.1 (2018); 44.8 (2019); 39.2 (2020); 33.1 (2021). - Stress test examples: - Growth shock (lower real GDP by one standard deviation): debt ratio peaks at 105 percent of GDP in 2018, declining to 93 percent in 2021. - Primary balance shock (worsen by 4 percent of GDP in 2017–18): debt ratio rises to 93 percent in 2018 and 82 percent by end of forecast. - Combined shock: debt rises to 117 percent of GDP in 2018–19, declining to 113 percent at end of horizon. - External DSA stress tests: - Non‑interest current account shock: external debt rises to 56 percent of GDP in 2018. - One‑time real depreciation of 30 percent in 2016: external debt rises to 80 percent of GDP in 2017. - Mitigants: - One third of gross financing needs is rollover of short‑term debt by state‑owned banks obtaining central bank credit, limiting non‑rollover risk. - Two thirds of external debt classified as legacy arrears could be restructured on Paris Club terms (80 percent NPV reduction) with large effect on debt ratios if implemented. ### Banking sector exposure and reforms - Banking sector concentration and capitalization: - Rasheed and Rafidain account for 80 percent of banking sector assets; three SOBs (Rafidain, Rasheed, TBI) account for around 90 percent of system assets. - Minimum capital requirement: ID 250 billion ($214 million); Rasheed and Rafidain capitals equal to, respectively, half and one fifth of this minimum. - State‑owned banks are severely undercapitalized and largely illiquid after quasi‑fiscal operations. - Reform steps: - International auditors appointed for Rasheed and Rafidain; audit reports due end‑August 2016; restructuring plan by end‑December 2016. - CBI to strengthen prudential regulations and supervision with METAC and World Bank assistance; enforce minimum capital, upgrade liquidity and CAR rules, and compile financial stability indicators by end‑December 2016. - Measures to strengthen AML/CFT, staffing and resources for Financial Intelligence Unit, and adopt supervisory tools by specified dates (examples: adopt AML/CFT preventive regulations by end‑August 2016; adopt risk‑based onsite inspection procedures by end‑January 2017). ### Public Financial Management, arrears, and reforms - Immediate PFM actions (selected with exact timelines and amounts preserved): - Approve new Financial Management law in line with IMF/World Bank comments (SB). - Report fiscal tables in compliance with IMF GFSM 2014 (SB); publish quarterly fiscal tables starting January 1, 2017. - Survey, audit and pay domestic arrears; Ministry of Planning survey: domestic arrears on non‑oil investment spending amounted to ID 7.5 trillion ($6.4 billion or 4 percent of GDP) at end‑February 2016. - Create Cash Flow Management Unit by end‑June 2016; adopt IFMIS road map by end‑June 2016; sign IFMIS contract by end‑February 2017; IFMIS progressive roll‑out by end‑June 2020. - Issue two‑year bonds in provisional amount of ID 2.5 trillion at 5 percent to repay part of ID 7.5 trillion domestic arrears on non‑oil investment (subject to audit). - Commit to ceilings on domestic arrears and upgrade conditionality as monitoring capacity improves. - Commitment control and TSA actions: constitute working group to assess TSA by end‑December 2016; phased TSA development strategy by end‑March 2017; incorporate government cash operations into TSA during 2017–18. ### Key fiscal and social protection measures (quantified) - Adjustment requirement: about 11 percent of non‑oil GDP (ID 4.3 trillion, or $3.6 billion) over 2016–19. - PIH sustainable non‑oil primary deficit: 31 percent of non‑oil GDP (total adjustment of 23 percentage points from 2015). - Selected 2016 fiscal measures (exact values repeated): - Broadened wage tax base: ID 300 billion ($250 million) in 2016; ID 600 billion ($500 million) from 2017. - Wage bill reduction: ID 3.0 trillion. - Pension payment reduction: ID 1.8 trillion. - Goods and services spending reduction: ID 2.2 trillion; electricity charges: from ID 360 billion to ID 675 billion. - Transfers reduction: ID 2.4 trillion. - Non‑oil investment expenditure reduction: ID 3.6 trillion. - Social spending protection: health, education, social safety net transfers, and assistance for internally displaced persons and refugees to be protected and maintained above a floor (IT). ### Monitoring, reporting, and TMU specifics - Program monitoring period: June 2016–June 2019. - Exchange rate for monitoring: Iraqi dinar (ID) 1,180 per U.S. dollar ($). - Data reporting requirements and lags specified for weekly, monthly, and quarterly indicators (examples preserved: CBI gross FX reserves weekly reported no later than 2 weeks after reference week; fiscal monthly reporting no later than two months after reference month; GDP reported no later than twelve weeks after quarter). - Definitions and adjusters for PCs and ITs specified (central government non‑oil primary balance, gross international reserves, NDA, arrears definitions, debt definition as in ¶11). ### Staff appraisal and recommendation - Staff view: authorities’ policies are appropriate—fiscal consolidation (mostly through capital expenditure retrenchment while protecting social spending) and maintaining the peg to the U.S. dollar. - Balance of risks: tilted to the downside; very high downside risks from lower oil prices, security deterioration, political tensions, administrative weaknesses, and data reliability issues. - Staff recommendation: completion of the first and second reviews of the SMP and approval of the three‑year SBA (staff believes MEFP policies adequate to address present balance of payments and budget needs and achieve debt sustainability). *International Monetary Fund. Iraq: First and Second Reviews of the Staff‑Monitored Program and Request for a Three‑Year Stand‑By Arrangement (selected excerpts — content unit _cr16225).* ### 891.3 million (about US$1.24 billion at the time of approval). ### _cr16225 - 891.3 million (about US$1.24 billion at the time of approval). ### Program objectives and scope - SBA amount referenced: 891.3 million (about US$1.24 billion at the time of approval). - The Stand-By Arrangement (SBA) aims to: - Address the urgent balance of payments need. - Bring spending in line with lower global oil prices. - Ensure debt sustainability. - Protect the poor, strengthen public financial management, enhance financial sector stability, and curb corruption. - The IMF completed first and second reviews of the Staff-Monitored Program (SMP) approved on January 12, 2016. ### Context, shock, and humanitarian impact - Iraq faces a double shock: ISIS attacks and a sharp drop in global oil prices. - Humanitarian and displacement statistics: - Internally displaced persons: over 4 million. - People in need of humanitarian assistance: around 10 million (some 27 percent of the population). - Syrian refugees in Iraq: 250,000. - Survey finding: 48 percent of Iraqis (equal to 18 million people) wish to emigrate. - Real economy outcomes: - Real GDP contracted by 2.4 percent in 2015, despite a 13 percent increase in oil production. - Non-oil economy contraction in 2015: -19 percent. ### Outlook and macro projections (selected) - Fiscal and balance sheet objectives: - Budget deficit projected to fall from 14 percent of GDP in 2015 to less than 1 percent of GDP by 2021 (subject to implementation of programmed fiscal consolidation). - Public debt projected to be stabilized by 2018. - Balance of payments projected to return to surplus by 2021. - Financing request and gap: - To close a financing gap of $18.1 billion during 2016–19, the authorities requested a three-year SBA with access to IMF credit amounting to SDR 3.831 billion (about US$5.4 billion, or 230 percent of quota). - Financing assurances in place to fully close the financing gap for the next 18 months. ### Program pillars and key policy measures - Managing external pressures: - Maintain the exchange rate peg to the U.S. dollar as the key nominal anchor. - Gradually remove remaining exchange restrictions. - Strengthen the AML-CFT framework to stem illegal and speculative demand on foreign exchange. - Implementing fiscal consolidation while protecting the poor: - Continue fiscal consolidation, mostly through capital expenditure retrenchment, while protecting social spending (health, education, food and agricultural subsidies, transfers to internally displaced people and refugees). - Design and implement deeper revenue and expenditure reforms to hold the lid on the non-oil primary balance and achieve debt sustainability. - Implement the budget-sharing agreement with the Kurdistan Regional Government (KRG). - Strengthening public financial management and curbing corruption: - Strengthen public financial management legislation. - Report fiscal tables in compliance with international standards. - Enhance commitment controls and cash management. - Conduct regular surveys and audits to monitor and curb arrears. - Reform public investment management and improve debt management with technical assistance. - Monitoring financial risks and preserving financial sector stability: - Strengthen the legal framework of the Central Bank of Iraq following the Fund’s safeguards assessment. - Restructure state-owned banks that dominate the banking system. - Strengthen prudential standards and bank supervision with external consultants. - Implement measures to prevent money-laundering, counter the financing of terrorism, and strengthen anti-corruption legislation. ### Performance under SMP and modalities - SMP started in November 2015 to establish policy credibility and pave the way to a financing arrangement; performance was broadly satisfactory. - The peg to the U.S. dollar is being maintained as a policy anchor. - The fiscal adjustment envisaged for 2016–19 is judged appropriate, but the composition should be improved over time to allow more efficient investment expenditure. - Existing arrears: - Accumulation of large external arrears to international oil companies and domestic arrears in 2015 was described as unfortunate. - Recommendation: pay down existing arrears after validating them and implement controls to prevent further arrears to international oil companies and domestic suppliers. ### Key risks - Risks identified as very high, primarily from: - Further falls in oil prices. - Worsening of the ISIS conflict. - Political tensions. - Weak administrative capacity. - Other risks to financial stability and reform implementation include continued accumulation of arrears and deficiencies in the legal framework of the Central Bank and state-owned banks. ### Selected quantitative indicators (as reported) - Membership and quota: - Iraq became a member of the IMF on December 27, 1945 and has an IMF quota of SDR 1,663.80 million (about US$2.32 billion). - 2015 economic outcomes and projections (selected from Table 1): - Real GDP (percentage change): -2.4 (2015); 10.3 (2016, prog.); 0.5 (2017, proj.); 0.7 (2018, proj.); 2.0 (2019, proj.); 1.9 (2020, proj.); 2.0 (2021, proj.). - Non-oil real GDP (percentage change): -18.7 (2015); -5.0 (2016, prog.); 0.0 (2017, proj.); 2.0 (2018, proj.); 3.0 (2019, proj.); 4.0 (2020, proj.); 4.0 (2021, proj.). - GDP per capita (US$): 4,514 (2015); 4,161 (2016, prog.); 4,395 (2017, proj.); 4,542 (2018, proj.); 4,745 (2019, proj.); 4,962 (2020, proj.); 5,164 (2021, proj.). - Oil production (mbpd): 3.5 (2015); 4.2 (2016, prog.); 4.2 (2017, proj.); 4.2 (2018, proj.); 4.3 (2019, proj.); 4.3 (2020, proj.); 4.4 (2021, proj.). - Iraq oil export prices (US$ pb): 47.5 (2015); 34.5 (2016, prog.); 40.3 (2017, proj.); 42.5 (2018, proj.); 44.6 (2019, proj.); 46.4 (2020, proj.); 47.5 (2021, proj.). - Overall fiscal balance (including grants, percent of GDP): -14.3 (2015); -14.7 (2016, prog.); -11.1 (2017, proj.); -6.0 (2018, proj.); -3.6 (2019, proj.); -1.8 (2020, proj.); -0.6 (2021, proj.). - Total government debt (in percent of GDP): 63.9 (2015); 79.0 (2016, prog.); 84.0 (2017, proj.); 85.2 (2018, proj.); 83.1 (2019, proj.); 79.3 (2020, proj.); 74.9 (2021, proj.). - Gross reserves (in US$ billion): 53.4 (2015); 42.7 (2016, prog.); 40.1 (2017, proj.); 39.3 (2018, proj.); 35.4 (2019, proj.); 31.5 (2020, proj.); 31.6 (2021, proj.). - Current account (percent of GDP): -6.4 (2015); -11.0 (2016, prog.); -9.2 (2017, proj.); -5.9 (2018, proj.); -4.5 (2019, proj.); -3.3 (2020, proj.); -1.3 (2021, proj.). - Memorandum item: - Development Fund of Iraq/MoF US$ account (in US$ billions): 2.4 (2015); 2.4 (2016, prog.); 2.4 (2017, proj.); 2.4 (2018, proj.); 2.4 (2019, proj.); 2.4 (2020, proj.); 2.4 (2021, proj.). ### Key policy recommendations (from Executive Board statement and staff) - Reduce overall spending to a sustainable level by freezing expenditures in nominal terms at the aggregate level executed in 2015 to restore fiscal balance over the medium term. - Protect social spending. - Overhaul Public Financial Management (PFM) to prevent accumulation of arrears and improve quality of spending. - Initiate restructuring of state-owned banks that dominate the banking system. - Strengthen the legal framework of the Central Bank of Iraq, implement controls to prevent arrears, and strengthen AML-CFT and anti-corruption legislation. *International Monetary Fund. Iraq: First and Second Reviews of the Staff-Monitored Program and Request for a Three-Year Stand-By Arrangement (selected excerpts).* ### 4. In response to escalating protests against the lack of progress to address widespread ### 4. In response to escalating protests against the lack of progress to address widespread ### Political and Federal–KRG Context - Prime Minister Abadi proposed a cabinet reshuffle in response to escalating protests about corruption, inefficiency, and low quality of government services; negotiations among political parties have been ongoing since March 2016. - Relations between the federal government in Baghdad and the KRG remain tense: - The KRG leadership announced a referendum on Kurdish independence. - A high-level KRG delegation met with the federal government to discuss resumption of the budget-sharing agreement. - Under the budget-sharing agreement, revenue from oil extracted in the KRG accrues to the federal government and the federal government makes transfers to the KRG equivalent to 17 percent of non-sovereign spending in the federal budget. - At the level of oil prices in the 2016 budget, net flows would be in favor of the KRG since the oil revenue budgeted from KRG (ID 11 trillion in the 2016 budget) is lower than the transfers budgeted to the KRG (ID 13 trillion in the 2016 budget, Table 3). - Both parties are considering netting out the KRG oil receipts (which the KRG plans to have audited by international audit companies starting on July 1st, 2016) with the budgetary transfers to which the KRG would be eligible under the arrangement (MEFP, ¶19). ### Recent Economic Developments: Growth, Inflation, and Oil - 2015 outcomes and early-2016 data: - Real GDP contracted by 2.4 percent in 2015 despite a 13 percent increase in oil production. - The non-oil economy contracted by 19 percent in 2015 due to the war with ISIS and fiscal consolidation. - January–May 2016 oil production: 4.4 mbpd, of which KRG and North and Midland Oil Companies estimated to have produced 0.8 mbpd, and the federal government exported 3.3 mbpd at an average price of $29 per barrel. - 2015 average CPI: 1.4 percent (likely underestimated because CPI excludes areas occupied by ISIS, previously inhabited by about 20 percent of the population); April 2016 CPI increased by 1.9 percent year-on-year. ### Fiscal Developments and Financing in 2015–Q1 2016 - Fiscal outcomes: - Fiscal deficit widened to 14.3 percent of GDP in 2015. - Adjusted non-oil primary expenditure was cut by 30 percent in real terms in 2015, mainly investment spending. - Adjusted non-oil primary balance (NOPB) reduced by 13 percent of non-oil GDP relative to 2014. - Financing the 2015 deficit: - Issuance of Treasury bills subscribed and loans by state-owned banks Rasheed and Rafidain equivalent to 9.8 percent of GDP; 44 percent of this was refinanced at the discount window of the Central Bank of Iraq (CBI). - Drawdown of government deposits: 2 percent of GDP. - Accumulation of domestic arrears: 2.8 percent of GDP. - Accumulation of external arrears: 2.2 percent of GDP. - Two loans of $1.2 billion each from the IMF and the World Bank. - First quarter 2016: - Fiscal deficit amounted to 2.4 percent of (annual) GDP. - Non-oil primary deficit: 5.6 percent of GDP. - Prioritization of wages, pensions, transfers, and interest reduced spending on goods and services and non-oil investment. - Oil investment continued, financed mainly by accumulation of arrears to IOCs. ### Balance of Payments, Reserves, Monetary Indicators, and Markets - Current account and reserves: - Current account deficit widened to 6.4 percent of GDP in 2015. - Financing included drawdown of $10 billion of commercial banks’ foreign exchange assets and $13 billion of official foreign exchange reserves. - Gross official foreign exchange reserves: $53 billion at end-2015 (10 months of imports); $50 billion at end-March 2016. - Reserves represented 195 percent of the standard reserve adequacy (RA) metric at end-2015 (above the 100–150 percent adequacy range). - Reserves were 125 percent of the adjusted RA metric for oil exporters at end-2015 (within the adequacy range). - Note: large errors and omissions ($17 billion or 10.8 percent of GDP) in the balance of payments suggest the true current account deficit may have been wider in 2015. - Money and exchange market developments: - Broad money contracted by 9 percent in 2015. - Spread between official and parallel exchange rates increased from 3 percent on average in December to about 9 percent in May 2016 as CBI decreased auction volumes of foreign exchange. - Yield on Iraqi dollar bonds maturing in 2028: rose from 6 percent in June 2014 to 12 percent in December 2015, receded to 11 percent in May 2016. ### Performance Under the Staff-Monitored Program (SMP) - Overall assessment: broadly satisfactory given the oil price shock and security situation. - Indicative targets: - Authorities met 3 out of 5 indicative targets both at end-December 2015 and end-March 2016 on: - Non-oil primary fiscal balance, - Gross official reserves, - Net domestic assets of the CBI. - Misses: - Social spending target missed by a small margin in December 2015. - Target on zero accumulation of external arrears missed: authorities accumulated $3.6 billion of arrears to IOCs at end-December 2015, rising to $4.7 billion at end-March 2016. - Authorities committed to pay all outstanding arrears to IOCs by end-September 2016 (performance criterion—PC, MEFP, Table 3) and to not accumulate new external arrears (continuous PC). - Structural benchmarks: - All three SBs for the first SMP review met: - Ministry of Planning survey: domestic arrears on non-oil investment spending amounted to ID 7.5 trillion ($6.4 billion or 4 percent of GDP) at end-February 2016. - Ministry of Finance and CBI compiled list of all bank accounts controlled by the Ministry of Finance: money deposited amounted to ID 9.3 trillion (5 percent of GDP) at end-2015. - State-owned banks Rasheed and Rafidain appointed an external auditor to audit 2014 financial statements according to international standards. - The SB for approval of a draft financial management law by the Minister of Finance (for the SMP 2nd review) had not yet been met; preparatory work ongoing with IMF technical assistance and it is a SB for the first review of the SBA (MEFP, Table 5). ### Outlook and Projections (Key Scenarios and Figures) - Major revisions and assumptions: - Nominal GDP revised downwards in 2015 due to deeper contraction of non-oil real GDP (-19 percent rather than -8 percent). - Iraqi oil prices revised downwards consistent with lower global oil price outlook; Iraqi oil prices have been $7 lower than the Average Petroleum Spot Price so far in 2016. - Iraqi oil production (4.2 mbpd) forecast to stay close to January–May 2016 level over the next five years because increasing production would require doubling oil investment, deemed infeasible. - 2016 scenario assuming fiscal consolidation (freezing nominal expenditure at 2015 executed level): - Fiscal deficit can be limited to 14.7 percent of GDP in 2016. - Current account deficit limited to 11.0 percent of GDP in 2016. - Fiscal deficit financed mainly by domestic financing and external financing catalyzed by the SBA. - Proposed fiscal retrenchment projected to cause a further 5 percent contraction of non-oil real GDP in 2016. - With past and ongoing oil investment approved in the 2016 budget, oil production should increase by 20 percent, implying overall real GDP growth of 10 percent in 2016. - Medium-term baseline (subject to policy and security outcomes): - Programmed increase in oil price and continued fiscal consolidation would reduce fiscal deficit to less than 1 percent of GDP and bring the balance of payments into surplus by 2021. - Public debt would peak at 85 percent of GDP in 2018. - Gross official foreign exchange reserves would bottom out at $31 billion (5.1 months of imports of goods and services) in 2020. - Foreign exchange reserves expected to remain broadly adequate over the forecast horizon provided fiscal adjustment, external support, and oil price/production assumptions hold. - Risks: - Downside: escalation of conflict with ISIS; worsening security in the south; further decline in oil prices; shortfall in projected financing or oil production—would necessitate larger indirect monetary financing and faster drawdown of official reserves. - Upside: each $1 increase in oil prices would increase annual oil revenue by $1.3 billion (Text Table 1). - Program rule: additional revenue from higher-than-programmed oil prices would be saved to reduce reliance on reserve buffers; policy to be revisited if oil prices were consistently above program assumptions. ### Economic Policy Framework and Objectives - Program objectives: - Achieve debt sustainability and preserve external stability while protecting social spending to maintain social cohesion. - Maintain the exchange rate peg and protect social spending (health and education; food and agricultural subsidies; transfers to internally displaced people and refugees). - Strengthen public financial management and financial sector stability and development. - Managing external pressures: - Authorities committed to maintaining the Iraqi Dinar’s peg to the U.S. dollar (MEFP, ¶13) as a key nominal anchor in an uncertain environment. - Authorities consider devaluation inadvisable because it would likely trigger a spike in inflation (most food and consumer items are imported) and have little impact on oil exports. - Exchange system reforms and removal of restrictions: - Authorities will gradually remove remaining exchange restrictions and multiple currency practice (MCP) (MEFP, ¶14) to move toward acceptance of obligations under Article VIII. - First step: Council of Ministers to approve and introduce to parliament an amendment of the Investment Law, or the CBI to issue clarifying implementing regulations, to remove the limitation on transfer of investment proceeds that gives rise to an exchange restriction (SB, Table 5). - Second step: CBI will increase sale of foreign exchange for valid current exchange transactions on the official market to reduce the spread between official and parallel exchange rates. - By end-2016, weekly limits on purchase of cash at weekly foreign currency auctions to be made indicative so banks can obtain additional cash for legitimate travel expenses based on appropriate documentation. *IRAQ INTERNATIONAL MONETARY FUND* ### 17. In order to maintain macroeconomic stability, the government will continue to ### _cr16225 - 17. In order to maintain macroeconomic stability, the government will continue to ### Fiscal consolidation objectives and strategy - The government will continue to implement a large fiscal consolidation to bring spending to a sustainable level given the much lower level of oil revenue (MEFP, ¶¶15–16; Text Table 2 and Tables 3–6). - Required actions: - (i) a sizable further reduction in the adjusted non-oil primary balance (PC, MEFP, Table 3), of about 11 percent of non-oil GDP (ID 4.3 trillion, or $3.6 billion) over 2016–19; - (ii) a large increase in mostly domestic but also external financing over the short run that will remain compatible with debt sustainability in the medium run (¶22). - The ongoing consolidation is bringing the non-oil primary balance closer to a level aligned with sustainable public spending under the permanent income hypothesis (PIH). - Under the PIH, with the present path of oil prices, the “sustainable” level of the non-oil primary deficit is 31 percent of non-oil GDP, implying total adjustment of 23 percentage points from the 2015 level. ### 2016 fiscal program and budget adjustments - The 2016 fiscal program is significantly more restrictive than the budget approved by parliament but very close in nominal terms to the budget executed in 2015 (MEFP, ¶20; Text Table 2 and Tables 3–6). - Oil price assumptions and adjustments: - 2016 budget built with oil price assumption of $45 per barrel. - Government revised 2016 oil price assumption to $34.5 per barrel and reduced planned expenditure by ID 13 trillion (13 percent in nominal terms). - Prior action met: Council of Ministers’ approval and presentation to parliament of a quarterly budget execution report reflecting the change and measures to keep execution in line with the SBA (PA, MEFP, Table 5). - Main measures to achieve the 2016 program: - Broadened tax base on wages for non-military personnel to include base salary, supplemental pay, bonuses, overtime and other allocations (excluding allocations for wife and children); projected additional revenue of ID 300 billion ($250 million) in 2016 and ID 600 billion ($500 million) from 2017 (full year effect). - Reduce the wage bill by ID 3.0 trillion relative to the budget through natural attrition, delaying hiring, reducing discretionary benefits, and revising military/security wages in light of absences without leave. - Reduce pension payments by ID 1.8 trillion relative to the budget by enforcing rules preventing multiple pensions, pensions without minimum contribution period, or below legal pensionable age. - Reduce spending on goods and services by ID 2.2 trillion, while accommodating an increase in electricity charges from ID 360 billion to ID 675 billion (progressive tariff increase excluding the first 600 kilowatt monthly consumption tranche). - Reduce transfers by ID 2.4 trillion compared to the budget, including less replenishment of PDS food stocks due to higher-than-programmed stocks at end-2015. - Reduce non-oil investment expenditure by ID 3.6 trillion via prioritizing ongoing projects and delaying others; oil investment expenditure kept at 2016 budget level. - Distributional and regional considerations: - The revised program assumes protection of social spending: health, education, social safety net transfers, and assistance for internally displaced persons and refugees (MEFP, IT, Tables 3 and 4). - Wage, pension, and other cuts assume significant burden sharing by the Kurdistan Regional Government (KRG); KRG share in non-oil primary expenditure reduced from 15 percent in the 2016 budget to 13 percent in the adjusted fiscal program (Table 3). ### 2016 financing plan and implications - 2016 deficit and financing mix: - 2016 deficit of ID 26 trillion will be mostly financed by domestic bank financing (ID 16.6 trillion), with ID 12.6 trillion refinanced at the discount window of the CBI. - Issuance of bonds aimed at the general public including the Iraqi Diaspora: ID 5 trillion. - External financing sources: loans by the IMF, the World Bank, G7 countries and the European Union; JICA budget support loan of $200 million; Eurobond issuance in second half of 2016 of $1billion. - Project loans: U.S. government ($2.7 billion), JICA ($323 million), World Bank ($120 million), Italy ($66 million), Islamic Development Bank ($54 million). - Financing consequences and commitments: - Domestic financing, 60 percent of which is indirect monetary financing, will lead to a sharp increase in public debt and contribute to a large foreign exchange reserves drawdown to finance government imports. - If oil revenue is higher than programmed, the government commits to save the excess to reduce indirect monetary financing by the CBI; similarly, if external financing is higher than programmed, the government commits to save the excess to reduce indirect monetary financing (TMU, ¶¶15–16). ### Arrears policy and investment implications - The government will stop using arrears to finance spending in 2016 and beyond (MEFP, ¶¶22 and 25, and Table 3). - Program includes a zero ceiling on new external arrears (PC), gradual pay down of outstanding arrears to IOCs by end-2016 (PC, ¶12) and ceilings on the stock of domestic arrears on non-oil investment (IT). - Scope of conditionality on domestic arrears will be widened to all spending and strengthened to a PC at a future program review once monitoring capacity improves. - Rationale: supports adequate and timely investment in the oil sector to ensure projected oil production path, which finances bulk of imports and public spending. ### Medium-term reforms to restore sustainability (2017–19 and beyond) - Revenue and expenditure reforms: - Continue to hold a tight lid on the non-oil primary balance and achieve debt sustainability (MEFP, ¶¶23–24). - Audit Development Fund for Iraq and Successor Account 300/600 at the CBI by an international auditor to ensure oil revenues reach the Treasury (SB, MEFP, Table 5). - Conduct diagnostics of tax and customs codes and administrations to increase non-oil tax revenue. - Implement a hiring freeze in sectors other than security, health and education; Board of Supreme Audit (BSA) to audit wage and pension recipient payrolls to identify and cancel payments to ghost workers and ghost pensioners. - Reform public pension system in discussion with the World Bank to improve financial sustainability, equity and efficiency. - Reform electricity sector: gradually increase prices above cost, improve electricity sales revenue collections, reduce distribution losses, and invest to capture gas currently flared for electricity production to reduce natural gas imports. - Set up a proxy means testing database with World Bank assistance to improve targeting of state transfers to poor households. - Reform 176 state-owned non-financial enterprises (SOEs): set up a database to monitor fiscal risks of non-financial SOEs to design and implement restructuring strategy. ### Debt sustainability and risk assessment - Projected public debt path conditional on recommended adjustment: - Public debt projected to decline from 85 percent of GDP in 2018 to 75 percent of GDP by 2021 (Annex I). - Risks and mitigating factors: - Implementation challenges of fiscal plans, high level of external debt, and large gross financing needs pose risks. - Mitigants: gross financing needs largely rollover of short-term debt by state-owned banks receiving credit from the central bank, limiting non-rollover risk; two thirds of external debt are legacy arrears to be restructured on Paris Club terms. - Iraq’s external debt stock of $67 billion at end-2015 includes $41 billion of unresolved external arrears to non-Paris Club creditors accumulated under the pre-2003 regime. - Negotiations ongoing to implement debt relief on same terms as Paris Club creditors (80 percent NPV reduction); even with such markdown, concerns remain due to high gross financing needs (29 percent of GDP in 2016). ### Strengthening Public Financial Management (short-run measures) - Immediate PFM measures (MEFP, ¶¶25–26): - Ministry of Finance to approve a new draft of the Financial Management law in line with World Bank and IMF comments (Council of State, SB; MEFP, Table 5). - Ministry of Finance to report fiscal tables in compliance with the IMF Government Finance Statistics Manual 2014 (SB; MEFP, Table 5). - Ministry of Finance to survey, audit and pay domestic arrears; monitor accumulation of domestic arrears on current spending and non-oil investment on a regular basis; prepare plans for orderly payment including independent audit by the BSA and repayment schedules aligned with financing capacity; observe ceiling on stock of outstanding domestic arrears on non-oil investment and strengthen conditionality on other domestic arrears over time. - Steps to move to a Treasury Single Account (TSA): regular surveys of bank accounts controlled by the Ministry of Finance and all federal spending units; create a Cash Flow Management Unit to develop cash flow forecasts; set up a Cash Management Committee to oversee financing and monitor inflows/outflows; gradually incorporate government-related cash operations in the TSA in sync with audits and restructuring of Rasheed Bank and Rafidain Bank and liquidity situation of other banks (¶25). - Design and implement a commitment control system for budget execution consistent with IMF technical assistance: monthly budget execution report, cash rationing by spending unit, improved recording of commitments, prohibition of commitments beyond quarterly allocations (SB, MEFP, Table 5). - Design and implement an Integrated Financial Management Information System (IFMIS) with World Bank TA; adopt by end-June 2016 a road map detailing core functional requirements. - Ministry of Planning to implement Public Investment Management (PIM) reform with World Bank assistance; first step: publish on Ministry of Planning website a detailed inventory of public investment projects with minimum cost of US$10 million that have been subject to a feasibility study. - Ministry of Finance to strengthen debt management with JICA technical assistance; first step: seek assistance to strengthen debt recording system. ### Anti-corruption legislative measures - Strengthening legislation (MEFP, ¶26): - Council of Ministers will approve and forward to parliament by January 2017 draft amendments to the 2011 law establishing the Commission on Integrity to strengthen governance, accountability, oversight, independence, and provide powers in line with the United Nations Convention against Corruption (UNCAC); include requirements for a comprehensive asset declaration regime for senior public officials, family members, and associates (SB, MEFP, Table 5). - Council of Ministers will adopt and forward to parliament by December 2016 amendments to the Criminal Code to criminalize illicit enrichment, bribery in the private sector, and obstruction of justice (in line with UNCAC). - Council of Ministers will adopt and forward before parliament by February 2017 draft legislation (being finalized by the Commission on Integrity) related to access to information, conflict of interest, asset recovery, and protection of whistleblowers and witnesses. ### Key fiscal and macro figures (as presented) - Adjustment requirement: about 11 percent of non-oil GDP (ID 4.3 trillion, or $3.6 billion) over 2016–19. - PIH sustainable non-oil primary deficit: 31 percent of non-oil GDP (total adjustment of 23 percentage points from the 2015 level). - 2016 revised oil price assumption: $34.5 per barrel (down from $45 per barrel used in October 2015 budget). - Selected 2016 fiscal measures (exact values): - Broadened wage tax base revenue: ID 300 billion ($250 million) in 2016; ID 600 billion ($500 million) from 2017 (full year). - Wage bill reduction: ID 3.0 trillion. - Pension payment reduction: ID 1.8 trillion. - Goods and services spending reduction: ID 2.2 trillion. - Electricity charges increase: from ID 360 billion to ID 675 billion. - Transfers reduction: ID 2.4 trillion. - Non-oil investment expenditure reduction: ID 3.6 trillion. - 2016 deficit financing breakdown: - Total deficit: ID 26 trillion. - Domestic bank financing: ID 16.6 trillion (ID 12.6 trillion refinanced at CBI discount window). - Public bond issuance: ID 5 trillion. - JICA budget support loan: $200 million. - Eurobond planned issuance: $1billion in H2 2016. - Project loans: U.S. government ($2.7 billion), JICA ($323 million), World Bank ($120 million), Italy ($66 million), Islamic Development Bank ($54 million). - Debt and reserves: - External debt stock at end-2015: $67 billion, including $41 billion unresolved external arrears to non-Paris Club creditors. - Gross financing needs: 29 percent of GDP in 2016. - Projected public debt: 85 percent of GDP in 2018, declining to 75 percent of GDP by 2021 under recommended adjustment. *Source: Iraqi authorities; and Fund staff estimates and projections (from the provided text).* ### 25. The crisis is increasing the exposure of the state-owned banks, which dominate the ### 25. The crisis is increasing the exposure of the state-owned banks, which dominate the ### Banking sector exposure and condition - Rasheed and Rafidain account for 80 percent of banking sector assets. - Rasheed’s and Rafidain’s capitals are only equal to, respectively, half and one fifth of the minimum required capital of ID 250 billion ($214 million). - The two largest state-owned banks are severely undercapitalized and largely illiquid following years of quasi-fiscal operations. - With credit from the CBI (¶¶7 and 19), banks will have sufficient liquidity to finance the budget deficit in 2016 (Tables 8–9) and earn a significant return that will contribute to their profitability. - Treasury bills earn a real annual interest rate of about 4 percent. - The exposure of state-owned banks to sovereign risk is increasing and the quality of their credit to the economy has been deteriorating owing to the contraction in non-oil GDP. ### Reforms, audits, and CBI governance - Rasheed Bank and Rafidain Bank have appointed international auditors to audit their latest financial statements (¶12). - Based on audit results, the Ministry of Finance will prepare a plan to restructure these two banks. - The CBI will prepare regulatory changes to strengthen prudential standards and bank supervision, with support from external consultants and the IMF Middle East Technical Assistance Center. - Building on the safeguards assessment conducted by the IMF in December 2015, the government will strengthen the legal framework of the CBI to provide for independent oversight of the CBI’s operations (MEFP, ¶30). - The Governing Council of the CBI will, by end-October 2016, approve a new charter for the Audit Committee prohibiting Central Bank of Iraq executive representation on the committee (SB, MEFP, Table 5). - The Council of Ministers will, by end-December 2016, approve and introduce to parliament amendments to the Law on the CBI to strengthen CBI governance and the internal control framework, in line with the IMF safeguards assessment's recommendations (SB, MEFP, Table 5). - The external auditor of the CBI will audit program monetary data at test dates (¶29). ### AML/CFT and anti-corruption measures - The government will implement reforms to strengthen the anti-money laundering and combating the financing of terrorism (AML/CFT) framework (MEFP, ¶31). - First step: adopt a by-law to set up a mechanism to comply with relevant United Nations Security Council resolutions related to terrorism and terrorism financing and Recommendation 6 of the Financial Action Task Force on Money Laundering and Terrorism Financing (FATF) (SB, MEFP, Table 5). - Steps to strengthen anti-corruption legislation include: a more independent Commission on Integrity, the criminalization of all corruption acts, and implementation of a comprehensive asset declaration regime for senior public officials, their family members and associates. ### SBA access, financing package, and program modalities - The SBA would provide access to SDR 3.8 billion (about $5.4 billion, or 230 percent of quota) and be subject to quarterly reviews (MEFP, ¶32 and Tables 3 and 5; Table 10). - The external financing gap during 2016–19 is estimated at $18.1 billion, for which donors have been identified for $12.0 billion, including the Fund for $5.4 billion (Text Table 3). - Based on current projections, the financing gap is closed for 2016–17, and the remaining gap for 2018–19 amounts to about $6.1 billion. - Access to Fund resources would be front-loaded (48 percent during the first 12 months). - Authorities may request additional external financial support from Paris Club creditors through a net present value-neutral debt service rescheduling during the program period (MEFP, ¶17), or possibly from a further postponement of the war reparation payment to Kuwait. - The SBA will set: - Quarterly PCs on the non-oil primary balance, the stock of total public debt, the stock of net domestic assets of the CBI, official foreign exchange reserves, the absence of new external arrears and the stock of outstanding arrears to IOCs (MEFP, Table 3). - Quarterly IT on social spending (a floor) and the stock of outstanding domestic arrears on non-oil investment (a ceiling). - PA and a few SB (MEFP, Table 5). - External audits: the external auditor of the CBI will audit the stocks of net domestic assets and official foreign exchange reserves within two months after the test dates; an external auditor will also audit the stock of public debt within the same deadline. - The IMF Statistics Department provides technical assistance to ensure fiscal data reporting in compliance with the IMF Government Finance Statistics Manual 2014. - PCs on the stock of net domestic assets of the CBI and official foreign exchange reserves will have adjusters allowing more/less indirect monetary financing and use of reserves in case foreign financing is lower/higher than programmed, with an asymmetric cap on the additional monetary financing to protect foreign exchange reserves. - The PC on the non-oil primary balance will have an adjuster that will tighten the target in case the transfers to the KRG (¶5) are less than programmed. - Each program review will set a few structural benchmarks essential for program success. - Once the programmed fiscal adjustment is completed, and with oil prices recovering along the projected path, the budgetary position is expected to be sustainable without external financial support. ### Financial contributions to fill the financing gap, 2016–19 (Text Table 3 excerpts) - Total initial financing gap (2016–19): 4.917 8.363 3.503 1.306 18.089 (In US$ billion; annual columns: 2016 2017 2018 2019 Total: 2016-19) - Identified financing: 4.917 8.363 -1.997 0.706 11.989 - IMF: 1.917 1.393 1.393 0.697 5.400 (Three-Year Stand-By Arrangement.) - World Bank: 1.000 1.000 1.000 0.000 3.000 (Development Policy Loans or Policy Based Guarantees.) - Kuwait: 0.000 4.600 -4.600 0.000 0.000 (Postponement of war reparation payment by one year.) - USA: 1.000 0.000 0.000 0.000 1.000 (Full guarantee by the U.S. Government of Eurobond issued by the Government of Iraq.) - Germany: 0.000 0.560 0.000 0.000 0.560 - Japan: 0.000 0.300 0.200 0.000 0.500 - France: 0.450 0.000 0.000 0.000 0.450 - UK: 0.430 0.000 0.000 0.000 0.430 - Italy: 0.000 0.400 0.000 0.000 0.400 - Canada: 0.120 0.010 0.010 0.010 0.149 - European Union: 0.000 0.100 0.000 0.000 0.100 - Remaining financing gap: 0.000 0.000 5.500 0.600 6.100 - Sources: Iraqi authorities, IMF staff, World Bank staff, Kuwaiti authorities, G7 country authorities, and European Commission. ### Program risks and mitigation - Key downside risks: - Agreement between the KRG and Iraqi authorities (¶5) may not resume, possibly causing wider political fragmentation and weakening program implementation. - Difficulties in reducing the wage bill and stemming the build-up of arrears. - Weak authorities’ track record under the last SBA and in the context of prior actions for the recent purchase under the RFI, despite progress under the SMP (¶12). - Very difficult security situation in territories occupied by ISIS, tensions with the KRG over independent oil sales, and social tensions nationwide may hinder political support for fiscal consolidation and reforms. - Frequent changes to reported macroeconomic indicators and weaknesses in data provision for program monitoring. - Program mitigation measures: - Use of technical assistance and external auditors for data provision related to three out of six PC (¶29). - External audits and technical assistance to strengthen fiscal reporting and data reliability. - Despite planned measures, reliability of data provision for program monitoring will remain uncertain, especially in the near term. - Iraq’s capacity to repay the Fund: - Total outstanding Fund credit would peak at 16 percent of gross official reserves, 11 percent of exports of goods and services, and 7 percent of external public debt (Table 11). ### Staff appraisal, macroeconomic outlook, and policy recommendations - Iraq faces a double shock from ISIS attacks and the sharp drop in global oil prices. - Non-oil real GDP contracted by 19 percent and real GDP contracted by 2.4 percent in 2015 owing to strong oil production located in areas under control of the Iraqi government and the KRG. - Real GDP is projected to grow by 10.3 percent in 2016 owing to a 20 percent increase in oil production. - Authorities’ policies are appropriate: fiscal adjustment (mostly through capital expenditure retrenchment while protecting social spending) and maintaining the peg to the U.S. dollar. - International reserves are at a broadly adequate level and can help cushion projected decline in oil export revenues conditional on fiscal adjustment, oil price recovery, donor support delivery, and maintenance of oil production. - Fiscal adjustment size for 2016–19 is appropriate, but composition needs improvement: current expenditure (oversized payroll and unsustainable pension system) and reforms to the electricity sector, subsidies, and state-owned enterprises should be prioritized to make room for effective investment expenditure; oil investment needs protection. - Some indirect central bank financing of the government is unavoidable given large financing needs; direct avoidance would require a higher-than-programmed adjustment that could threaten social and political balance. - The accumulation of domestic and external arrears to partly finance the 2015 budget was unfortunate; authorities must prevent recurrence, pay international oil companies on time, strengthen PFM to accurately record and pay down arrears after validating them, and prevent new domestic arrears. - PFM overhaul needed elements: a sound PFM law, comprehensive fiscal and debt reporting, commitment control, a Treasury Single Account, an Integrated Financial Management Information System, and Public Investment Management reforms. - State-owned banks need restructuring: audits according to international standards must be followed by design and implementation of restructuring plans for Rasheed and Rafidain. - The budget-sharing agreement with the KRG should be implemented; proposals to net oil revenue originated in KRG and transfers to KRG in the federal budget should be examined promptly to improve both federal government and KRG capacity to address ISIS attacks and the oil-price shock. - Balance of risks for the SBA is tilted to the downside; downside risks are very high (further downward oil price shocks, extension of conflict with ISIS, political tensions, administrative weaknesses, data reporting weaknesses, difficulty in reducing the wage bill, and preventing arrears). - Mitigation includes fiscal adjustment measures that avoid the most politically sensitive cuts, delivery of technical assistance, external audits for three out of six PC, and continued engagement to strengthen reporting; higher-than-programmed oil prices could be an upside. *Source: IMF staff report (content unit _cr16225).* ### 43. Staff recommends completion of the first and second reviews of the SMP and ### _cr16225 - 43. Staff recommends completion of the first and second reviews of the SMP and ### Staff recommendation - Staff recommends completion of the first and second reviews of the SMP and approval of this request for a three-year SBA. - Staff believes the policies laid out in the MEFP are adequate to deal with the present and urgent balance of payments and budget needs triggered by the ISIS attacks and the collapse in oil prices and achieve debt sustainability. ### Macroeconomic outlook (selected indicators from Table 1 and Table 2) - Real GDP (percentage change)7.6-0.41.5-2.410.610.30.50.72.01.92.0 - Non-oil real GDP (percentage change)12.4-5.1-8.0-18.70.0-5.00.02.03.04.04.0 - GDP deflator (percentage change)0.0-4.7-24.1-27.0-5.3-13.27.85.35.05.24.7 - GDP per capita (US$)7,0216,4924,9004,5144,9424,1614,3954,5424,7454,9625,164 - GDP (in ID trillion)273.6259.5200.9185.1210.3177.1191.8203.4217.9233.8249.6 - GDP (in US$ billion)234.6222.5172.3158.7178.3150.1162.6172.4184.7198.1211.5 - Oil production (mbpd)3.03.13.43.54.14.24.24.24.34.34.4 - Iraq oil export prices (US$ pb)102.997.050.147.545.034.540.342.544.646.447.5 - Consumer price inflation (percentage change; end of period)3.11.63.02.33.02.02.02.02.02.02.0 ### Fiscal position (selected from Tables 3–6) - Government revenue and grants (percent of GDP)42.240.230.734.338.836.238.738.538.237.336.1 - Government oil revenue (percent of GDP)38.638.027.431.234.632.034.434.233.932.931.5 - Expenditure (percent of GDP)48.045.845.148.549.050.849.844.541.839.136.7 - Current expenditure (percent of GDP)30.626.532.730.336.838.438.133.431.228.926.9 - Capital expenditure (percent of GDP)17.419.312.518.212.212.411.711.110.610.29.8 - Overall fiscal balance (including grants, percent of GDP)-5.8-5.6-14.5-14.3-10.2-14.7-11.1-6.0-3.6-1.8-0.6 - Non-oil primary fiscal balance (percent of non-oil GDP)-67.6-58.7-52.1-51.6-56.3-53.3-50.2-46.4-42.5-38.5-34.8 - Total government debt (in percent of GDP)31.233.561.763.966.079.084.085.283.179.374.9 - Total government debt (in US$ billion)73.174.6106.3100.2117.7118.5136.5146.9153.5157.1158.4 - Security-related expenditure (military and police equipment and salaries, percent of GDP)16.416.615.615.017.916.516.215.915.615.315.0 ### External sector and balance of payments (selected from Tables 7) - Trade balance (US$ billion)22.516.6-3.5-0.22.8-4.71.72.24.05.68.8 - Exports (US$ billion)89.884.046.449.359.445.653.356.259.361.665.1 - Imports (US$ billion)-67.3-67.4-50.0-49.5-56.6-50.3-51.5-54.0-55.3-56.0-56.3 - Current account (US$ billion)3.2-1.7-12.0-10.2-9.8-16.5-15.0-10.1-8.4-6.6-2.7 - Current account (percent of GDP)1.4-0.8-7.0-6.4-5.5-11.0-9.2-5.9-4.5-3.3-1.3 - Gross international reserves (end of period, US$ billion)77.866.751.153.442.542.740.139.335.431.531.6 - GIR (in months of imports of goods and services)10.812.78.49.96.87.87.06.75.95.15.0 - Overall balance (US$ billion)-3.1-23.4-13.9-14.7-11.0-15.4-12.0-5.1-4.4-2.3+1.8 ### Monetary and financial sector (selected from Tables 8–9) - Broad money (in ID billions)89,37992,638101,66784,272113,44491,55097,771106,796114,674123,350136,137 - Broad money (percentage growth)15.93.69.7-9.011.68.66.89.27.47.610.4 - Reserve money (annual growth, percent)12.6-9.60.1-12.62.1-3.52.89.27.47.610.4 - CBI total financing of the budget deficit (percent of GDP / percent of non-oil GDP) figures cited across tables (examples): CBI total financing of the budget deficit (percent of GDP)1.5 1.4 7.6 5.5 3.3 7.1 3.3 1.8 1.8 1.1 1.0; (percent of non-oil GDP)2.9 2.5 12.0 8.2 6.9 10.3 5.0 2.7 2.7 1.6 1.5 - Net foreign assets of CBI (ID billions)88,54476,56357,67563,33248,32550,69447,64546,75342,16137,49737,651 - Gross foreign exchange assets (in millions of U.S. dollars)77,82366,65551,10053,37542,51742,66540,08139,32535,43431,48131,612 ### IMF financing: proposed SBA schedule and Fund credit indicators (Tables 10–11) - Proposed Schedule of Reviews and Purchases under the Stand-By Arrangement, 2016–19 (select lines): - On or after July 7, 2016 — Executive Board approval of the SBA arrangement. Amount of Purchase:455 Millions of SDR; 27.3 Percent of Quota; 639 Millions of USD - On or after September 15, 2016 — Observance of the continuous and end-June 2016 performance criteria, and completion of the first review under the arrangement. Amount of Purchase:455 Millions of SDR; 27.3 Percent of Quota; 639 Millions of USD - On or after December 15, 2016 — Observance of the continuous and end-September, 2016 performance criteria, and completion of the second review under the arrangement. Amount of Purchase:455 Millions of SDR; 27.3 Percent of Quota; 639 Millions of USD - Total under the SBA arrangement:3,831 Millions of SDR; 230.3 Percent of Quota; 5,396 Millions of USD - Indicators of Fund Credit (Table 11, select totals): - Disbursements of Fund credit (SBA and RFI) 2015–21:891136598798649200 (in millions of SDRs, by year as listed) - Outstanding Fund credit (SBA and RFI) (values listed as sequences in Table 11) - Obligations (SBA and RFI) 432543216368512511217 (in millions of SDRs, by year as listed) ### Key operational notes and adjustments (from source footnotes) - Does not reflect KRG production during 2013 and 2014. - Includes arrears in total government debt figures. - Starting 2014 includes US$ account balances from oil revenues; starting Q3 2015, SDRs and reserve position in the Fund are excluded from the definition per instruction from the Central Bank of Iraq. - Development Fund of Iraq/MoF US$ account balances were moved from the Federal Reserve Bank of New York to the CBI as a US$ account in May 2014. - Adjusted non-oil fiscal figures are adjusted to account for a full year estimate of federal government transfers to the Kurdistan Regional Government in 2014 and 2015, for which actual transfers were made for only 2 and 5 months, respectively. - Five percent of oil exports as mandated by U.N. Security Council Resolution 1483 to finance war reparations to Kuwait is reflected in war reparations entries. *Sources: Iraqi authorities; and Fund staff estimates and projections.* ### 1. Total financing requirements ### 1. Total financing requirements ### Summary of financing flows (table values) - 1. Total financing requirements: -22.0, -18.0, -10.4, -6.6 - 2. Total available financing: 17.1, 9.6, 6.9, 5.3 - Domestic: 18.2, 8.9, 6.4, 8.5 - T-bills and bonds: 17.0, 11.0, 8.5, 8.5 - o/w CBI purchases: 10.7, 5.4, 3.1, 3.4 - Other 1/: 1.2, -2.1, -2.1, 0.0 - External: -1.2, 0.7, 0.5, -3.1 - Project financing: 0.8, 0.7, 0.7, 0.5 - Eurobond: 1.0, 1.0, 1.0, 0.0 - JICA: 0.2, 0.0, 0.0, 0.0 - U.S. loan: 2.7, 0.0, 0.0, 0.0 - Other 2/: -5.8, -1.0, -1.2, -3.6 ### Financing gaps - 3. Initial Financing gap: 4.9, 8.4, 3.5, 1.3 - of which Identified financing 3/: 4.9, 8.4, -2.0, 0.7 - of which SBA: 1.9, 1.4, 1.4, 0.7 - 4. Remaining financing gap: 0.0, 0.0, 5.5, 0.6 ### Memorandum items (reserves and exchange) - Gross International Reserves (Billions of U.S. Dollars): 42.7, 40.1, 39.3, 35.4 - Months of imports: 7.8, 7.0, 6.7, 5.9 - Exchange rate, average: 1180.0, 1180.0, 1180.0, 1180.0 *Source: IMF staff estimates and projections.* ### Reserve Adequacy Indicators, 2013–19 (selected values) - Reserves in USD billion 1/: 77.8, 66.7, 53.4, 42.7, 40.1, 39.3, 35.4 - Reserves in months of imports of goods and services: 10.8, 12.7, 9.9, 7.8, 7.0, 6.7, 5.9 - Reserves in percent of external debt service coming due: 3,615, 3,536, 673, 903, 413, 515, 383 - Reserves in percent of reserve money: 123.9, 117.3, 107.5, 90.1, 82.4, 74.0, 62.1 - Reserves in percent of broad money: 101.5, 83.9, 73.9, 55.0, 48.4, 43.5, 36.5 - Reserves in percent of the IMF RA metric 2/ 3/: 259, 224, 195, 162, 138, 133, 114 - Reserves in percent of the adjusted IMF RA metric 4/: ..., ..., 125, 128, 108, 103, 88 ### Public and external debt outlook (summary findings) - Total debt as a share of GDP: - Projected to rise to 79 percent in 2016. - Projected to peak at 85 percent in 2018. - Projected to fall to 75 percent of GDP in 2021. - External debt: - Projected to increase to 48 percent of GDP in 2016. - Projected to peak at 50 percent of GDP in 2017. - Projected to decline to 33 percent of GDP at the end of the forecast period. - Drivers and composition: - Decline in international oil prices and conflict with ISIS expected to result in a large fiscal deficit in 2016 and beyond. - New borrowing to finance the deficit will increase public debt sharply in 2016 and more gradually thereafter. - One third of gross financing needs are rollover of short-term debt by state-owned banks. - 57 percent of the external debt consists of legacy arrears of $41 billion assumed not settled during the projection period. - Domestic debt projected to rise from 21 percent of GDP in 2015 to 31 percent of GDP in 2016. - Projected external debt in 2016 of $72 billion includes the $41 billion stock of external arrears. ### Changes since prior DSA - End-2015 debt to GDP estimate revised downwards from 69 to 64 percent of GDP due to reduced staff estimates of domestic debt; offset in part by upward revision of debt to Paris Club creditors. - Outlook for 2016 and beyond worsened due to further decline in oil prices since late 2015. - In 2016 gross financing needs expected to amount to 29 percent of GDP and debt to 79 percent of GDP, exceeding low-risk thresholds of 15 percent and 70 percent respectively. ### Risk mitigation factors - One third of financing need is rollover of short-term debt held by state-owned banks that obtain credit from the central bank, limiting risk of non-rollover. - If external arrears were restructured on Paris Club terms (reducing net present value by 80 percent), reducing external arrears to 20 percent of the original US$41 billion would lower debt-to-GDP from 79 to 57 percent in 2016 and peak at 66 percent in 2018 before declining to 59 percent at the end of the forecast horizon. ### Stress-test scenarios and impacts - Growth shock: - If projected real GDP rates are lowered by one standard deviation (implying lower real growth by 5 percentage points in 2017 and 2018), the debt ratio would peak at 105 percent of GDP in 2018 before gradually declining to 93 percent in 2021. - Primary balance shock: - Worsening of the primary balance by 4 percentage points of GDP in 2017 and 2018 would increase the debt ratio to 93 percent in 2018 and 82 percent towards the end of the forecast period. - Real interest rate shock: - Increasing real interest rates by 10 percentage points would raise the debt ratio to 87 percent of GDP in 2019 and to 84 percent in 2021. - Real exchange rate shock: - A one-off real depreciation of 10 percent (20 percent nominal depreciation) would alter the debt to GDP path only slightly. - Combined shock: - Combination of the above shocks would increase debt to 117 percent of GDP in 2018 and 2019 and debt would decline to 113 percent of GDP towards the end of the forecast horizon. *Source: IMF staff estimates and projections.* ### 6. Stress tests in the external DSA suggest that Iraq’s external debt ratio is also sensitive ### 6. Stress tests in the external DSA suggest that Iraq’s external debt ratio is also sensitive to shocks ### Key stress-test findings - General conclusion: While external debt rises only marginally under interest rate or growth shocks, it increases substantially under a current account shock and a real depreciation. - Non-interest current account shock: - Scenario: Increase in the current account excluding interest payments by half a standard deviation in each year from 2017 onwards. - Impact: External debt would rise to 56 percent of GDP in 2018 before edging down to 50 percent in 2021. - Real depreciation shock: - Scenario: One-time real depreciation of 30 percent in 2016. - Impact: External debt would rise to 80 percent of GDP in 2017 but decline to 53 percent by 2021. - Combined shock: - Scenario: One quarter standard deviation shock to the real interest rate, the growth rate and the current account. - Impact: External debt would rise to 54 percent in 2018 and 43 percent towards the end of the projection period. - Interest-rate shock methodology note: - Standard DSA interest-rate shocks are based on GDP deflators rather than CPI inflation. - For Iraq, the standard methodology generates an excessively large shock; it was adapted to a more moderate 10 percent increase in the real rate. ### Baseline external debt path and related indicators (selected series from the External DSA, 2011–21) - Baseline external debt (in percent of GDP): - 2011: 32.8 - 2012: 27.7 - 2013: 25.3 - 2014: 25.9 - 2015: 42.3 - 2016: 47.7 - 2017: 49.6 - 2018: 49.1 - 2019: 44.8 - 2020: 39.2 - 2021: 33.1 - Change in external debt (in percent of GDP): - 2011: -11.1 - 2012: -5.1 - 2013: -2.4 - 2014: 0.6 - 2015: 16.4 - 2016: 5.5 - 2017: 1.9 - 2018: -0.5 - 2019: -4.3 - 2020: -5.6 - 2021: -6.0 - Identified external debt-creating flows (sum of current account deficit excluding interest, net non-debt creating capital inflows, and automatic debt dynamics): - 2011: -24.2 - 2012: -12.9 - 2013: -5.8 - 2014: 0.1 - 2015: 15.0 - 2016: 7.2 - 2017: 8.4 - 2018: 3.8 - 2019: 1.4 - 2020: -0.2 - 2021: -2.2 - Current account deficit, excluding interest payments (in percent of GDP): - 2011: -12.4 - 2012: -7.0 - 2013: -1.6 - 2014: 0.5 - 2015: 6.1 - 2016: 10.6 - 2017: 8.4 - 2018: 5.0 - 2019: 3.7 - 2020: 2.7 - 2021: 0.8 - External debt-to-exports ratio (in percent): - 2011: 73.9 - 2012: 62.2 - 2013: 63.7 - 2014: 65.3 - 2015: 126.8 - 2016: 148.1 - 2017: 142.5 - 2018: 141.4 - 2019: 130.3 - 2020: 116.2 - 2021: 97.9 - Gross external financing need (in billions of US dollars): - 2011: -21.9 - 2012: -13.7 - 2013: -2.2 - 2014: 3.3 - 2015: 11.6 - 2016: 23.9 - 2017: 18.4 - 2018: 18.3 - 2019: 14.4 - 2020: 14.5 - 2021: 13.1 ### Additional scenario and assumption highlights - Historical and alternative scenarios are presented alongside the baseline to assess realism and tail risks (e.g., historical averages, constant primary balance). - Key macroeconomic baseline assumptions (selected): - Real GDP growth (in percent): 2016: -2.4; 2017: 10.3; 2018: 0.5; 2019: 0.7; 2020: 2.0; 2021: 1.9 - GDP deflator in US dollars (change in percent): 2016: -27.0; 2017: 8.9; 2018: 21.7; 2019: -14.3; 2020: 7.8; 2021: 5.3 - Nominal external interest rate (in percent): 2016: 1.0; 2017: 0.9; 2018: 1.9; 2019: 1.9; 2020: 1.9; 2021: 1.6 - Growth of exports (US dollar terms, in percent): 2016: -40.0; 2017: 13.9; 2018: 34.8; 2019: -8.5; 2020: 17.0; 2021: 5.8 - Growth of imports (US dollar terms, in percent): 2016: -26.7; 2017: 13.4; 2018: 19.0; 2019: 2.3; 2020: 2.3; 2021: 4.3 *Source: IMF staff.* ### 3. Second, world oil prices have fallen by about 50 percent since mid-2014, causing a huge ### _cr16225 - 3. Second, world oil prices have fallen by about 50 percent since mid-2014, causing a huge ### External shock and macroeconomic impact - World oil prices have fallen by about 50 percent since mid-2014, causing a huge external shock to Iraq’s balance of payments and budget revenue, which depend predominantly on oil export receipts. - Impacts reported: - Strong deterioration of the current account balance. - Drain on international foreign exchange reserves. - A large budget deficit and financing gap. ### Government response: fiscal adjustment, SMP, and SBA request - Since early 2015 the government has implemented a large fiscal adjustment. - A Staff‑Monitored Program (SMP) was started and approved in December 2015 to demonstrate good performance and move to a possible IMF financing arrangement. - SMP performance (as reported): - Met three of five indicative targets at end-December 2015 and March 2016. - Met all three structural benchmarks for the first review of the SMP. - The government requests a three‑year Stand‑By Arrangement (SBA) with access of SDR 3,831 million (230 percent of our quota). - Commitments under the SBA/MEFP for 2016–19 include: - Gradually bring expenditure down to the new lower level of oil revenues and achieve debt sustainability. - Execute only 85 percent of the level of non‑oil primary expenditure authorized in the 2016 budget because oil prices have been substantially lower than the $45 oil price per barrel assumed in the 2016 budget. - Protect social spending and maintain such spending above a floor during the SBA. - Implement measures on foreign exchange policy, public financial management, banking supervision, anti‑money laundering, countering the financing of terrorism, and anti‑corruption. ### Humanitarian and security context (MEFP background) - ISIS attacks have increased internally displaced persons to an estimated 3.7 million people in April 2016. - Close to 10 million Iraqis (or almost one third of the population) need humanitarian assistance. - Iraq hosts 246,000 Syrian refugees; refugees are 60 percent women and children and mostly reside in the north including the Kurdistan Region. - Government adopted a comprehensive plan focused on six pillars: security, stabilization and reconstruction; integrity and transparency; executive actions; legislation; selection/appointment of senior administration employees; activation of lending for housing, manufacturing and agricultural projects. - The plan aims to improve the budget and increase revenues by ID 20–33 trillion annually in the medium and long term. Initial administrative steps to start before July 2016. ### Recent macroeconomic developments (2015–mid‑2016) - Real GDP contracted by 2.4 percent in 2015. - Oil production grew 12.8 percent in 2015 (all in areas under government and KRG control). - Non‑oil production estimated to have contracted by 18.7 percent. - January–May 2016 production and prices: - Iraq produced 4.4 mbpd in January–May 2016. - Production in the Kurdistan Region and North and Midland Oil Companies estimated at 0.8 mbpd. - Federal government exported 3.3 mbpd at an average price of $29 per barrel compared to $45 assumed in the 2016 budget. - Inflation: - 2015 average consumer price inflation (CPI) was 1.4 percent (likely underestimated because CPI excludes ISIS‑occupied areas). - April 2016 CPI was 1.9 percent, year‑on‑year. - External and reserve developments: - Current account deficit widened to 6.4 percent of GDP in 2015. - Official foreign exchange reserves were used by $13 billion and fell to $53.4 billion (9.9 months of imports of goods and services) at end‑2015. - Fiscal outcomes 2015: - Fiscal deficit increased to 14.3 percent of GDP in 2015. - Fiscal consolidation reduced the adjusted non‑oil primary balance by 13.5 percent of non‑oil GDP and adjusted non‑oil primary spending by 30 percent in real terms (mainly via cuts in non‑oil investment, goods and services and transfers). - Deficit financing composition (2015): - Issuance of T‑bills subscribed and loans by state‑owned banks Rasheed, Rafidain and Trade Bank of Iraq (TBI) equivalent to 9.8 percent of GDP (44 percent refinanced at the CBI discount window). - Two loans of $1.2 billion each from the IMF and the World Bank. - Drawdown of government deposits in the CBI and state‑owned banks of ID 3.7 trillion, 2.0 percent of GDP. - Accumulation of arrears to domestic suppliers of ID 5.2 trillion or 2.8 percent of GDP at end‑December 2015 and to international oil companies (IOCs) of ID 4.1 trillion or 2.2 percent of GDP. - Q1 2016 fiscal stance: - Fiscal deficit amounted to 2.4 percent of GDP. - Non‑oil primary deficit was 5.6 percent of GDP due to significantly less oil revenue and prioritization of wages, pensions, transfers, and interest. - Oil investment execution continued, financed by accumulation of arrears to IOCs. - Exchange rate and market indicators: - Spread between official and parallel exchange rates increased from 3 percent on average in December 2016 to about 9 percent in May 2016 while the CBI decreased auction volumes. - Yield on Iraqi $ bonds maturing in 2028 increased from 7.5 percentage in May 2015 to 12.5 in January 2016 and then fell to about 11.0 percent in May 2016. - External assistance announcements: - January 2016: U.S. announced a $2.7 billion loan for sales of military equipment to Iraq. - February 2016: Germany announced a project loan of €500 million for Iraq. ### Performance under the Staff‑Monitored Program (SMP) - Overall assessment: broadly satisfactory. - End‑December 2015 (three of five indicative targets met): - Non‑oil primary balance remained above the programmed floor by ID 5.2 trillion ($6.1 billion) due to under‑execution of wage/pension expenditure, goods and services and transfers despite over‑execution of investment and underperformance of non‑oil revenue. - Stock of gross reserves of the CBI exceeded the programmed floor by $274 million. - Net domestic assets of the CBI remained below the programmed ceiling by ID 13 trillion. - Social spending was slightly under the programmed floor by ID 1.0 trillion because of cash constraints at year‑end. - External arrears exceeded their zero ceiling by $3.556 billion at end‑December 2015 (amount of valid bills issued by IOCs outstanding for more than three months). - End‑March 2016 (preliminary estimates): - Three indicative targets met and two missed: - Stock of gross reserves of the CBI exceeded the programmed floor by $7 billion. - Net domestic assets of the CBI remained below the programmed ceiling by ID 19 trillion. - Non‑oil primary balance remained above the programmed floor by ID 10 trillion ($8.5 billion) owing to under‑execution of non‑oil primary spending items. - Social spending was under the programmed floor by ID 1.6 trillion because of cash constraints (government commits to catch up with international aid assistance by year‑end). - External arrears to IOCs increased to $4.670 billion at end‑March 2016. - Government committed to gradually pay arrears to IOCs by September ‑2016 and not to accumulate new arrears after June 30, 2016 under the SBA (performance criterion—PC on stock of arrears outstanding to IOCs and continuous PC on zero accumulation of new external arrears). - Structural benchmarks (SB) for first SMP review met: - Ministry of Planning completed a survey of domestic arrears on investment spending accumulated by all ministries at end‑February 2016. - Ministry of Finance and CBI compiled a list of all bank accounts controlled by the Ministry of Finance and all spending/sub‑spending units of the central government in CBI, state‑owned and commercial banks at end‑December 2015; total deposits ID 9.3 trillion (ID 2.9 trillion at CBI, ID 3.7 trillion at Rasheed Bank, ID 2.5 trillion at Rafidain Bank, ID 0.2 trillion at TBI, zero in other banks). - Rasheed Bank and Rafidain Bank appointed Ernst and Young to audit their 2014 financial statements according to international standards. - SB for the second review of the SMP not yet met: progress on drafting amendments to the draft Financial Management Law to be approved by the Minister of Finance (SB for first review of the SBA). ### Outlook, financing gap, and scenarios (2016–19) - Further decline in projected Iraqi oil prices from $45.0 to $34.5 in 2016 (and by a similar magnitude in future years) opened a large financing gap of $14 billion a year without further measures or financing. - With additional fiscal adjustment of about 3 percent of non‑oil GDP per year in 2016 and beyond compared to the SMP (and additional use of foreign exchange reserves): - Financing gap would be reduced to $4.9 billion in 2016 and $13.2 billion during 2017–19, which could be filled by the IMF, the World Bank, and donors. - Proposed fiscal retrenchment in 2016: - Reduction in the adjusted non‑oil primary deficit by 3 percent of non‑oil GDP compared to the 2016 budget. - Projected macro effects: - Ongoing war and fiscal retrenchment projected to lead to a 5 percent contraction of non‑oil GDP in 2016. - Assuming current oil production levels and ongoing oil sector investment, average oil output in 2016 expected to increase by 21 percent over last year’s average. - Overall real GDP expected to grow by 10.3 percent in 2016. - Current account deficit would widen to 11 percent of GDP in 2016 owing to the drop in oil prices, but improve over the medium term as oil prices recover, structural reforms are implemented, and territories are retaken from ISIS. - Increase in oil prices and fiscal consolidation (to be continued after the program period) would bring overall fiscal deficit down to less than 1 percent of GDP in 2021 and the balance of payments back into surplus by 2021. - Public debt would peak at 85 percent of GDP in 2018. - Gross official foreign exchange reserves would bottom out at $31.5 billion (5.1 months of imports of goods and services) in 2020. ### Foreign exchange policy (MEFP commitments) - Government committed to maintaining the peg with the U.S. dollar as a key nominal anchor. - CBI actions: - Increase sale of foreign exchange for valid current exchange transactions on the official market to reduce the spread between official and parallel exchange rates. - Gradually remove remaining exchange restrictions and multiple currency practice (MCP) to eliminate exchange rate distortions and move toward acceptance of obligations under Article VIII of the IMF’s Articles of Agreement. - First step: Council of Ministers will approve and introduce to parliament an amendment of the Investment Law, or the CBI will issue clarifying implementing regulations, to remove the limitation on transfer of investment proceeds that gives rise to an exchange restriction (SB Table 5). - Second step: By end‑2016, make weekly limits on purchase of cash at weekly foreign currency auctions indicative, allowing banks to obtain additional cash for clients’ legitimate travel expenses above those limits based on appropriate documentation. - CBI will publicize this policy via a press conference and on its external website. ### Fiscal policy (MEFP commitments) - Objective: maintain macroeconomic stability and achieve debt sustainability by bringing spending in line with available resources in 2016–19. - Required actions: - A sizable reduction in the adjusted non‑oil primary balance (performance criterion, Table 3) of about 11 percent of non‑oil GDP (ID 4.3 trillion, or $3.6 billion) over 2016–19. - A large increase in mostly domestic but also external financing in the short run consistent with medium‑term debt sustainability. - Social protection: - Government will protect social spending (health, education, and transfers supporting the social safety net, internally displaced, and refugees) (IT, Table 3). - External debt strategy: - Renew discussions with Iraq’s non‑Paris Club creditors toward which unresolved external arrears amount to $41 billion that were accumulated under the pre‑2003 Saddam regime. - Those arrears constitute most of the total external debt stock, which amounted to $67 billion at end‑2015. - Negotiations will seek implementation of debt relief on the same terms as with Paris Club creditors, i.e., an 80 percent net‑present‑value reduction. - Government will also examine with the Paris Club the possibility of requesting a net‑present‑value neutral rescheduling of remaining Paris Club claims. *Source: Memorandum on Economic and Financial Policies (MEFP) and accompanying SMP/SBA material in the provided PDF content.* ### 18. To ease the cash constraint in 2017, the authorities have agreed with the government of Kuwait ### _cr16225 - 18. To ease the cash constraint in 2017, the authorities have agreed with the government of Kuwait ### Cash-relief arrangement and KRG budget-sharing - Agreed with the government of Kuwait on a further postponement of the payment of overdue war reparations to Kuwait amounting to $4.6 billion (ID 5.4 trillion or 4.3 percent of non-oil GDP) beyond 2017. - Federal Government and the KRG are considering netting out the KRG oil receipts (to be audited by international audit companies starting on July 1st, 2016) against budgetary transfers under the budget sharing arrangement. - The performance criterion on the non-oil primary balance for the Federal Government will have an adjuster in case the budget sharing agreement with the KRG is not implemented (TMU, ¶14). ### Fiscal program in 2016 — targets and prior actions - Non-oil primary deficit capped at no more than ID 65.2 trillion (53.3 percent of non-oil GDP) in 2016 (compared to ID 76.7 trillion (56.3 percent of non-oil GDP) in the 2016 budget). - Prior actions (PA): Council of Ministers’ approval and circulation to parliament of a quarterly budget execution report reflecting the revised projection and approval by the Minister of Finance and dissemination of a spending plan to spending units in line with the SBA macroeconomic framework. - Key implementation measures to achieve the fiscal program: - Collect at least ID 7.4 trillion (6.1 percent of non-oil GDP) in non-oil revenue in 2016, compared to ID 8.8 trillion (6.5 percent of non-oil GDP) in the 2016 budget, despite non-oil growth revised to -5 percent (from zero in the budget). - Increase in personal income tax revenue through a reduction of exemptions expected to yield ID 0.3 trillion in 2016 (¶23). - Contain non-oil primary expenditure to ID 72.6 trillion (59.4 percent of non-oil GDP) compared to ID 85.5 trillion (62.8 percent of non-oil GDP) in the 2016 budget, through: - Reduction of the wage bill by ID 3.0 trillion (natural attrition, delaying hiring, reducing discretionary benefits, revising wages of military and security personnel); still allows for an increase in the wage bill by ID 3 trillion compared to 2015. - Reduction of pension payments by ID 1.8 trillion through enforcement of existing rules; still allows an increase in pension payments by ID 1 trillion compared to 2015. - Reduction in goods and services by ID 2.2 trillion, while increasing electricity charges from ID 360 billion to ID 675 billion (fivefold electricity tariff increase decided by the Council of Ministers, ¶24); still room for an increase in goods and services by ID 1.9 trillion compared to 2015 excluding electricity charges. - Reduction of transfers by ID 2.4 trillion, including less spending to replenish PDS food stocks; still allows an increase in transfers by ID 4.5 trillion compared to 2015, and an increase of social safety net transfers by ID 1.8 trillion, including PDS by ID 0.2 trillion. - Reduction of non-oil investment expenditure by a further ID 3.6 trillion through prioritization and delays, implying a cut of non-oil investment expenditure by ID 7.3 trillion compared to 2015. - KRG burden sharing: transfers to KRG reduced from ID 13.1 trillion in the 2016 budget to ID 9.8 trillion in the revised fiscal program for 2016. ### Financing composition for 2016 - To finance the non-oil primary fiscal deficit (ID 65.2 trillion), interest payments (ID 2.8 trillion) and oil investment expenditure (ID 14.7 trillion), sources are: - Oil revenue: ID 56.6 trillion. - Domestic financing: ID 21.5 trillion. - Treasury bills: ID 14.9 trillion (most up to ID 12.6 trillion refinanced by commercial banks at the CBI discount window). - National bonds for the general public: ID 5 trillion. - Drawdown of government deposits in the banking sector: ID 4 trillion. - Central bank indirect monetary financing amount to be revisited at first review depending on success in raising domestic financing by other means; excess oil revenue above programmed amount to be saved to reduce indirect monetary financing by the CBI. - External financing: ID 4.5 trillion. - Loans and instruments listed in original program: IMF under the SBA ($1.9 billion), World Bank Development Policy Loan ($1 billion), U.S. guaranteed bond ($1 billion), World Bank loans guaranteed by France ($450 million), the United Kingdom ($430 million) and Canada ($120 million), JICA budget support loans ($200 million), Eurobond issuance in last quarter of 2016 ($1 billion). - Project loans: U.S. government ($2.7 billion, ¶11), Germany (€167 million — the €500 million disbursed over three years, ¶11), JICA ($323 million), World Bank ($120 million), Italy ($66 million), Islamic Development Bank ($54 million). ### Arrears and commitment on arrears - Government will not resort to accumulation of arrears to finance the deficit. - Commitments: - Zero ceiling on new external arrears to external creditors after June 30, 2016 (continuous PC, Table 1). - Gradual elimination of existing stock of outstanding arrears to IOCs by end-2016 (¶11). - Regular inventories of domestic arrears and paying down existing ones after proper audit (¶25, third bullet). ### Revenue reforms (measures and timelines) - Broaden tax base of wages: Council of Ministers approved inclusion of all salaries and wages of non-military government employees above grade 2 (base salary, supplemental pay, bonuses, overtime, other allocations excluding allocations for wife and children) in taxable base (PA, Table 5). - Expected yield: ID 0.3 trillion in 2016 and ID 0.6 trillion in 2017 (when implemented for full year). - Audit financial statements of the Development Fund for Iraq and Successor Account 300/600 at the CBI to check that all oil revenue reaches the treasury. - Ministry of Finance to have transactions of foreign exchange account 300/600 audited by an international audit company every six months and post audit reports on its external website within six months after end of each audited semester (SB, Table 5). - Tax and customs code diagnostics: by end-September 2016, Ministry of Finance to prepare tax policy measures with IMF and World Bank technical assistance to increase tax and customs revenue; measures could include introduction of a value added tax or sales tax, a personal income tax on pension earners, excise taxes. Government will introduce tax policy measures to increase non-oil tax revenue in the 2017 draft budget. - Tax and customs administration diagnostics: by end-December 2016, propose strategy to strengthen tax and customs administration with IMF and World Bank assistance. Customs Administration to propose by end-August 2016 a strategy to implement the UNCTAD ASYCUDA information system. ### Expenditure reforms (measures and quantified impacts) - Wages and pensions control: - Implement hiring freeze in sectors other than security, health and education in 2016. - Audits by Board of Supreme Audit (BSA) of wage and pension recipients by end-August 2016 to identify and cancel ghost workers and ghost pensioners (two SB, Table 5). - Change public pension system parameters by end-December 2016 as proposed by the World Bank. - Electricity sector reform: - Implement progressive electricity tariff schedule designed by Ministry of Electricity in 2015; could yield nearly ID 2.2 trillion (1.8 percent of non-oil GDP) in additional revenue for electricity sector; additional revenues to finance off-budget investment and repay bank loans of electricity companies. - Tariff increase will not increase tariff for consumption below 600 kilowatts per month to shield the poorest. - Reduce gas flaring by using gas for electricity production; World Bank estimates about ID 1.4 trillion ($1.2 billion, or 1.1 percent of non-oil GDP) in budget savings per year with an upfront cost of $0.5 billion starting in 2017. - Ministry of Oil actions: paid 2015 arrears to Basra Gas Company (BGC) amounting to $204 million; will pay outstanding 2016 arrears of $140 million by end-May; will pay estimated remaining 2016 gas purchase from BGC amounting to $700 million within contractual 45 day-period after billing; will use at least $145 million of its investment budget in 2016 to finance gas flaring-reducing investment project at the BGC. - Contextual figures: 2015 total electricity consumption 42 TWh; revenue ID 0.8 trillion; cost of producing electricity with oil at $5 per barrel amounted to ID 5 trillion. Tariff increase potential: increase electricity sales to ID 3 trillion and reduce gap with production cost to ID 2 trillion. Central government consumption 4.5 TWh; tariff increase raises its electricity bill from ID 73 billion in 2015 to ID 675 billion in 2016 (compared to ID 360 billion in the 2016 budget). Credits for electricity consumption revised upwards in revised fiscal program for 2016 (¶20). - Food Public Distribution System (PDS) reform: - MOLSA setting up a Proxy Means Testing (PMT) database with World Bank assistance to determine eligibility for cash transfers and to target PDS to poor households based on welfare scores. - Moving to a more targeted PDS could yield annual savings of up to ID 1.8 trillion (1.4 percent of non-oil GDP). - State-owned enterprises (SOEs) reform: - 176 non-financial SOEs in Iraq with over 550,000 employees; 30 to 50 percent estimated excess labor. - Poor reporting limits understanding of SOEs’ fiscal cost. With World Bank assistance, government started a database to monitor fiscal risks of non-financial SOEs and will elaborate restructuring measures on occasion of future SBA reviews. ### Public Financial Management (PFM) reforms and controls - Financial Management law: Minister of Finance to approve a new draft in line with World Bank and IMF comments. Draft to include prior Ministry approval of multi-year commitments; two sets of budget execution reports (cash basis and gradually more accrual elements); codification of intention not to invest surplus oil revenues in domestic assets (SB, Table 5). - Improve Government Finance Statistics (GFS) reporting: - Ministry of Finance to send fiscal reporting tables at end-December 2015, end-March 2016 and end-June 2016 in compliance with IMF GFSM 2014 (SB for first review, Table 5). - Publish quarterly fiscal reporting tables in compliance with IMF GFSM 2014 with a quarter lag on the Ministry of Finance external website starting January 1, 2017. - Survey, audit and pay domestic arrears: - Complete survey of all domestic arrears (payments due more than 90 days) at end-June 2016, covering (i) current spending (salaries, pensions, goods and services and capital purchases) managed by Ministry of Finance; and (ii) non-oil investments managed by Ministry of Planning. Ministry of Finance to elaborate a consolidated report (SB for first review, Table 5). - Prepare plans for orderly payment after independent audit by BSA and repay in line with financing capacity. Revised fiscal program includes issuance of two-year bonds in provisional amount of $2.5 trillion carrying an interest rate of 5 percent to repay part of the ID 7.5 trillion in domestic arrears on non-oil investment identified by Ministry of Planning (¶11); amount to be set based on BSA audits by end-August 2016 and financing capacity. - Observe a ceiling on accumulation of domestic arrears on non-oil investment as surveyed by the Ministry of Planning (IT, Table 5). This IT to be widened to include all domestic arrears on occasion of future reviews and upgraded to a PC on zero accumulation of domestic arrears once reliable monitoring is in place. - Treasury Single Account (TSA) and cash management: - Ministry of Finance and CBI compiled list of all bank accounts controlled by Ministry and spending units in CBI, state-owned and commercial banks at end-December 2015 (¶11). - Actions and timelines: - Constitute working group (Ministry of Finance, CBI, Al Rasheed, Rafidain Banks and TBI) to assess payment/settlement systems and develop plan for TSA by end-December 2016. - Develop strategy, design and action plan for phased TSA development by end-March 2017. - Create a Cash Flow Management Unit (CMU) by end-June 2016 to develop cash flow forecasts (with IMF technical assistance): 12-month rolling revenue cash forecasts by end-September 2016; 12-month rolling expenditure cash forecasts for larger spending units by end-December 2016; build in-year cash planning and scenario analysis capacity throughout 2017. - Set up a Cash Management Committee (CMC) by end-December 2016 to oversee timely financing of the budget, monitor inflows/outflows in TSA, monitor macro-fiscal/monetary situation, ensure coordination and information sharing; chaired by most senior official of Ministry of Finance and include Debt Management Department, Budget Department, Treasury, Ministry of Oil, large spending units, and the CBI. - Gradually incorporate all government-related cash operations in TSA through zero-balance operations during 2017–18, in line with audits and restructuring of Rasheed and Rafidain Banks (¶28) and liquidity considerations of banks holding government accounts. - Closing dates for 2016 budget execution: - Commitments for ordinary operating expenditures and non-oil capital expenditures: November 30, 2016. - Commitments for other expenditures: December 20, 2016. - Payment orders: December 31, 2016. - Payment order processing by accountants, payment authorization, and regularization of expenditures: January 31, 2017. - End-of-year circular to be sent by end of September 2016 specifying deadlines for expenditure commitments and validation. - Commitment control system: - Prepare monthly budget execution report from spending units. - Implement cash rationing for each spending unit. - Improve recording of commitments: Ministerial decisions requiring all spending units to record existing commitments; Ministry of Finance to produce report of all recurrent and investment commitments (by project) in coordination with Ministry of Planning (two SB, Table 5). - Prohibit any commitment beyond quarterly allocations. - Design templates required for a manual commitment control system. *IMF country report excerpt (selected paragraphs 18–25) from the supplied content unit.* ### Appendix 3 to the December 2015 FAD technical assistance report (by end-June 2016); ### _cr16225 - Appendix 3 to the December 2015 FAD technical assistance report (by end-June 2016) ### Commitment control and training - Conduct training for spending units on the new system, including a clear definition of commitments (by end-August 2016). - Require all spending units to record all existing commitments (by end-September 2016). - Ministry of Finance to produce a report of all recurrent and investment commitments (by project) in coordination with the Ministry of Planning as at end-December 2016. - Ensure that commitment control functionality is designed in the Integrated Financial Management Information System (IFMIS) by end-July 2016. - Test the commitment functionality in the IFMIS pilot sites (in line with IFMIS pilot plans) by end-2018. ### Design and implementation of IFMIS (with World Bank assistance) - First step: Ministry of Finance to adopt, by end-June 2016, a road map detailing core functional requirements, such as: - the chart of accounts, - multi-year expenditure tracking; - carry-over of resources from one year to the next; - management of advances and cash management arrangements. - Second step: Ministry of Finance to take necessary steps to hire a company to develop the IFMIS: - publish the final standard bidding documents on its web site by end-July 2016; - sign the contract with the selected IFMIS vendor by end-February 2017. - Third step: Ministry of Finance to develop, test and accept the IFMIS by end-November 2018. - Final step: progressive roll-out of the IFMIS to pilot sites including the Ministry of Finance, the Ministry of Planning, the Ministry of Interior, the Ministry of Construction, Housing and General Municipalities, and the Baghdad and Babil Governorates by end-June 2020. ### Public Investment Management (PIM) reform (with World Bank assistance; Decree 445 of October 18, 2015) - Design the organizational structure of the PIM Central Unit at the federal Ministry of Planning (by April 2016) and make this structure fully operational (by end-December 2016). - Make and publish on the Ministry of Planning website a detailed inventory at both ministry and governorate levels of the portfolio of public investment projects (on-going and new projects with a minimum cost of US$10 million), having a feasibility study made through cost–benefit analysis and expenditure efficiency (by end-June 2016). - Conduct a capacity needs assessment for the PIM Central Unit at the federal Ministry of Planning and in the two IFMIS pilot governorates of Baghdad and Babel (by end-November 2016). - Conduct training for the PIM Central Unit in line with the recommendations of the capacity needs assessment with a preliminary focus on the Logical Framework Approach and the Integrated Project Appraisal at a basic level (by end-2017). ### Audit of budget execution - The BSA will submit its report of the execution of the 2015 budget to parliament before the government submits the draft 2017 budget to parliament. ### Strengthening debt management - Strengthen capacity of the Public Debt Directorate with technical assistance support from the Japanese International Cooperation Agency (JICA). - Starting in October 2015, a workshop was held with support from a debt management expert from JICA. - Follow-up with a package of training programs consisting of a series of seminars and practical trainings for strengthening the capacity of the Public Debt Directorate. - Some training courses may be held in cooperation with neighboring countries and international financial institutions. - As a first step, the Public Debt Directorate will seek assistance to strengthen its debt recording systems. ### Anti-Corruption Measures - Council of Ministers to approve—after review by the Shura Council and forward to the parliament by January 2017—draft amendments to the 2011 law establishing the Commission on Integrity to strengthen governance, accountability and oversight, and independence, and provide it with powers in line with the United Nations Convention Against Corruption (SB, Table 5). The draft amendments will include: - clarity regarding the institution’s mandate (objectives, functions, powers); - clear governance and oversight and an accountability structure; - operational and financial autonomy; - eligibility criteria for appointments; - clear and transparent rules and procedures for dismissal, and protection for its management and staff; - requirements to set-up a comprehensive asset (in Iraq and abroad) declaration regime for senior public officials, their family members, and associates, and a requirement to publish the asset declaration. - Council of Ministers to adopt and forward to the parliament by December 2016 amendments to the Criminal Code to criminalize all corruption acts including illicit enrichment, bribery in the private sector, and obstruction of justice (in line with UNCAC requirements). - Council of Ministers to adopt and forward to the parliament by February 2017 several draft legislations being finalized by the Commission on Integrity to strengthen the legislative anti-corruption framework, related to access to information, conflict of interest, asset recovery, and protection of whistleblowers and witnesses (in line with UNCAC requirements). ### Banking supervision and sector structure (as of December 31, 2015) - There were 56 banks operating in Iraq including: - 7 state-owned banks (SOB) of which one is an Islamic bank, - 32 Iraqi private banks, of which 6 are Islamic banks, - 17 foreign branches, of which 5 are Islamic banks. - The SOBs dominate the financial sector and account for the bulk of assets and credits. - Three SOBs—Rafidain Bank, Rasheed Bank and Trade Bank of Iraq (TBI)—account for around 90 percent of the banking system’s assets. ### Restructuring Rafidain Bank and Rasheed Bank - Financial positions of Rasheed Bank and Rafidain Bank are fragile following years of quasi-fiscal operations. - Ministry of Finance appointed international auditors to audit their latest financial statements according to international standards, in cooperation with the Executive Committee for the restructuring of these banks and the World Bank. - Auditors will submit their audit reports to the Ministry of Finance by end-August 2016. - Ministry of Finance will, by end-December 2016, elaborate a restructuring plan for these two banks, in cooperation with the Executive Committee for the restructuring of these banks and the World Bank, in light of the results of the aforementioned audits. ### CBI reform measures to enhance banking sector stability - Review and assess CBI prudential regulations with assistance of the IMF Middle East Technical Assistance Center (METAC) and the World Bank. - Strengthen banking supervision including for AML/CFT, with IMF and World Bank technical assistance. - Compile and publish financial stability indicators, elaborated with IMF technical assistance (by end-December 2016). - Enforce the minimum capital requirement of banks of ID 250 billion ($214 million), a level to which all private banks except one have increased their capital. - Contract a consultant to assist the CBI in rating banks; 17 banks have already been rated: three banks rated “satisfactory”, eight banks rated “fair” and six banks “marginal”. - Contract a consultant to assist the CBI in upgrading the prudential regulations on “Liquidity” and “Capital Adequacy Ratio”. - Prepare a Deposit Insurance Scheme which stipulates the establishment of a corporation to be licensed by the CBI, of which banks will have the opportunity to take a share in the capital. - Contract a private firm to provide the CBI with a credit registry system for sharing information among banks on their common existing and potential borrowers. - Issue a banking law for financial institutions offering Islamic services. - Penalize, financially and administratively, banks and non-bank financial institutions for any non-compliance with laws and regulations in force. - Introduce the international bank account number (IBAN) system in Iraq. ### Strengthening CBI governance and safeguards - Build on the safeguards assessment conducted by the IMF in December 2015 to strengthen the legal framework of the CBI to provide for independent oversight of the CBI’s operations. - Governing Council of the CBI to approve a new charter for the Audit Committee prohibiting Central Bank of Iraq executive representation on the committee (by end-October 2016) (SB, Table 5). - Council of Ministers to approve and introduce to parliament amendments to the Law on the Central bank of Iraq to strengthen CBI governance and the internal control framework, in line with the IMF safeguards assessment's recommendations (by end-December 2016) (SB, Table 5). - Proposed CBI Law amendments should, specifically: - specify external auditor selection criteria and timely appointment (i.e. before the end of the fiscal year for which the financial statements need to be audited); - shift the authority to appoint the external auditor from the Ministry of Finance to the CBI; - provide for multi-year appointment terms for the external auditor; - provide for timely publication of audited financial statements; - establish an audit committee, including its mandate and composition, and representation on the CBI Board; - change the CBI Board’s composition to a non-executive majority; - strengthen the autonomy of the chief internal auditor; - require market-based rates for lender of last resort operations. - The proposed amendments should be developed in consultation with the IMF. ### Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) measures - Government to implement reforms to strengthen the AML/CFT framework to improve integration of the domestic financial system into the global economy, lower transaction costs, improve governance, reduce the size of the informal sector, disrupt ISIS funding, and reduce the terrorist threats it poses. - First step: - Government to adopt a by-law to set up a mechanism to comply with the relevant United Nations Security Council resolutions related to terrorism and terrorism financing in line with Recommendation 6 of the Financial Action Task Force on Money Laundering and Terrorism Financing (FATF) by end-August 2016 (SB, Table 5). - CBI to, by end-August 2016, adopt regulations imposing AML/CFT preventive measures for licensed entities to implement the 2015 law in line with the relevant FATF Recommendations. - Second step: - CBI to develop supervisory capacity to enhance compliance by licensed entities with AML/CFT obligations. - Adopt risk-based AML/CFT onsite inspection procedures by end-January 2017. - Adopt tools for AML/CFT offsite monitoring of licensed entities by end-April 2017. - Allocate 5 experienced supervisors by end-March 2016 to properly cover AML/CFT issues during onsite examinations and ensure effective implementation. - Recruit 5 additional experienced supervisors by end-January 2017. - Financial, human, and technical resourcing for Financial Intelligence Unit (AML Bureau): - CBI, in coordination with the AML/CFT Council, to provide the Financial Intelligence Unit (AML Bureau) with all necessary financial, human, and technical resources to ensure a fully operational and effectively functional unit. - CBI to provide an appropriate budget to the AML Bureau by end-December 2016. - AML Bureau to recruit 5 additional experienced financial analysts by end-March 2017 to analyze suspicious transactions reports and disseminate them on a timely basis to law enforcement agencies. - AML Bureau to recruit 5 additional experienced financial analysts by end-March 2018. - Note: As per May 2016, the FIU has 7 analysts. - Government to adopt a comprehensive cash-couriers’ regulation to implement the requirement of Article 34–35 of the AML/CFT Law and in line with FATF Recommendation by end-December 2016. - Customs Administration to take appropriate measures to effectively implement the regulation to detect physical cross-border transportation of currency and bearer negotiable instruments suspected to be related to terrorist financing, money laundering or associated predicate offenses, or that are falsely disclosed. *Appendix 3 to the December 2015 FAD technical assistance report (by end-June 2016).* ### 31. The program will have quarterly reviews and set quarterly PC on the non-oil primary balance, the ### _cr16225 - 31. The program will have quarterly reviews and set quarterly PC on the non-oil primary balance, the ### Program reviews, timing, and monitoring - The program will have quarterly reviews and set quarterly performance criteria (PC) on: - the non-oil primary balance, - the stock of total public debt, - the stock of net domestic assets of the CBI, - official foreign exchange reserves, - the absence of new external arrears, - the stock of outstanding arrears to IOCs, - two indicative targets (IT) on social spending and the stock of outstanding domestic arrears on non-oil investment. - Quarterly reviews will start in June 2016 (Table 3). - Each program review will set a few structural benchmarks (SB) essential for program success (Table 5 lists the items for the first, second and third reviews). - Scheduled review completion dates: - First review: on or after September 15, 2016. - Second review: on or after December 15, 2016. - Third review: on or after March 15, 2017. ### Quantitative performance criteria and indicative targets (overview) - Performance criteria (PC) include: - a floor on the stock of gross international reserves of the Central Bank of Iraq (CBI); - a ceiling on net domestic assets of the CBI; - a floor on the central government non-oil primary balance; - a ceiling on the stock of outstanding arrears to international oil companies (IOCs); - a continuous ceiling on new external payments arrears on any existing, rescheduled and new debt of the central government and/or the CBI; - a ceiling on the total gross public debt (domestic and foreign). - Indicative targets (IT) include: - a floor on the central government social spending; - a ceiling on the stock of outstanding domestic arrears on non-oil investment expenditure. ### Selected reported program figures (examples from Tables) - Stock of gross international reserves of the CBI (floor; eop stock, in millions of U.S. dollars) — examples shown: - 51,100; 53,433; 53,707 — Met. - 43,064; 43,640; 50,567 — Met. - 38,945; 37,849; 42,517. - Net domestic assets of the CBI (ceiling; eop stock) — examples shown: - 12,956; 9,487; -3,441 — Met. - 22,029; 21,349; 2,549 — Met. - 27,186; 28,912; 23,677. - Central government non-oil primary balance (floor) (cumulative from January 1) — examples shown (in parentheses denote deficits): - (68,801); (68,969); (63,674) — Met. - (20,949); (20,949); (9,927) — Met. - (39,365); (58,621); (76,705). - Social spending (floor) (cumulative from January 1) — examples shown: - 17,456; 16,494; Not Met. - 4,355; 2,789; Not Met. - 8,710; 13,829; 18,949. - New external arrears on existing / rescheduled debt and new borrowing (in millions of U.S. dollars; ceiling) — examples shown: - 0; 3,556 — Not Met. - 0; 4,670 — Not Met. - 0; 0; 0. - Memorandum item: Iraq oil export price (US$ / barrel, average for the quarter) — examples shown: - 39.56; 40.57; 41.5; 24.9; 43.6; 45.8; 49.1. - Table 3 (Performance Criteria and Indicative Targets under the Stand-By Arrangement, 2016–17) examples: - Gross international reserves of the CBI: 39,298; 34,910; 42,665; 41,051; 39,881; 39,008; 40,081 (floor; eop stock, in millions of U.S. dollars). - Net domestic assets of the CBI: 13,122; 17,200; 7,184; 9,303; 11,028; 12,438; 11,781 (ceiling; eop stock). - Central government non-oil primary balance (floor): (32,918); (49,145); (65,156); (15,995); (31,990); (47,985); (63,980) (cumulative from January 1). - Gross public debt (domestic and foreign) (ceiling; eop stock): 137,483; 142,208; 143,584; 147,708; 152,942; 162,213; 167,278. - New external arrears on existing / rescheduled debt and new borrowing (in millions of U.S. dollars; ceiling) (continuous): 2,300; 0; 0; 0; 0; 0; 0. - Stock of outstanding arrears to international oil companies (ceiling): 3,600; 0; 0; 0; 0; 0; 0. - Indicative target — Social spending (floor) (cumulative from January 1): 7,434; 12,619; 18,228; 2,876; 7,434; 12,619; 18,228. - Stock of outstanding domestic arrears on non-oil investment (ceiling): 7,500; 7,500; 7,500; 7,500; 7,500; 7,500; 7,500. - Memorandum item — Transfer to the Kurdistan Regional Government (cumulative from January 1): 3,852; 6,841; 9,828; 2,452; 4,908; 7,367; 9,828. - External Financing (cumulative from January 1): (1,655); (5,660); (1,375); (314); (628); (527); 835. - International contributions to fill the financing gap (cumulative from January 1): -; 1,508; 5,797; 704; 1,761; 8,011; 9,904. - Iraq oil export price (US$ / barrel, average for the quarter): 35.7; 37.5; 39.9; 40.3; 40.3; 40.3; 40.3. ### Social spending composition (selected cumulative figures, in billions of Iraqi dinars) - Total Social spending (floor): 17,456; 16,494; 4,355; 2,789; 8,710; 7,434; 13,829; 12,619; 18,949; 18,228. - Social Safety Net: 1,215; 1,104; 496; 0; 991; 765; 1,487; 1,215; 1,982; 1,800. - Public Distribution System (PDS - food subsidies): 2,250; 1,503; 556; 0; 1,112; 450; 1,667; 900; 2,223; 1,485. - Wheat and rice subsidy: 1,604; 1,102; 396; 0; 792; 270; 1,188; 630; 1,585; 1,080. - Assistance and subsidy to Iraqi refugees: 192; 0; 0; 0; 0; 0; 95; 0; 189; 0. - Assistance and subsidy to internally displaced persons: 900; 720; 0; 3; 0; 33; 445; 450; 889; 900. - Farmer subsidies: 457; 405; 0; 0; 0; 45; 226; 180; 452; 405. - Health Ministry and Environment Ministry - wages: 2,546; 2,591; 668; 637; 1,335; 1,260; 2,003; 1,889; 2,671; 2,520. - Higher Education Ministry - wages: 2,035; 2,186; 564; 446; 1,128; 1,035; 1,691; 1,553; 2,255; 2,070. - Lower Education Ministry - wages: 6,258; 6,882; 1,676; 1,703; 3,352; 3,149; 5,027; 4,724; 6,703; 6,300. - Health Ministry and Environment Ministry - goods and services: 324; 864; 1,350. - Higher Education Ministry - goods and services: 25; 65; 99. - Lower Education Ministry - goods and services: 77; 149; 219. (Note: the TMU provides alternative definitions for inclusion/exclusion of goods and services in the social spending floor in ¶1–¶3 footnotes as referenced in the tables.) ### Prior actions and structural benchmarks (selected items and status) - Prior action (Preserve macroeconomic stability): Approval by the Council of Ministers and introduction to Parliament of amendments to the draft 2016 budget to bring it into line with the macroeconomic framework agreed under the Staff-Monitored Program. Status: Met. - Structural benchmark (1st review, Strengthen cash management): Completion by the Ministry of Planning of a survey of domestic arrears on investment spending at end-September 2015 with detailed information. Status: Met. - Structural benchmark (1st review, Strengthen cash management): Compilation by the Ministry of Finance and the CBI of a list of all bank accounts controlled by the Ministry of Finance and all spending and sub-spending units. Status: Met. - Structural benchmark (1st review, Strengthen financial sector stability): Appointment of one or several international auditors to audit the latest financial statements of Rasheed Bank and Rafidain Bank according to international standards. Status: Met. - Structural benchmark (2nd review, Strengthen public financial management): Approval by the Minister of Finance of a draft of the Financial Management law in line with World Bank and IMF comments. Status: Not Met. - Prior action (Preserve macroeconomic stability): Council of Ministers’ approval and circulation to parliament of a quarterly budget execution report reflecting the fiscal program under the Stand-By Arrangement. Status: Met. - Prior action (Increase non-tax revenue): Approval by the Council of Ministers of a decision to include all salaries and wages of non-military government employees from grade two upwards in the taxable base. Status: Met. - Structural benchmarks (1st review, Improve fiscal transparency and decrease current expenditure): Completion by the Ministry of Finance of fiscal reporting tables at end-December 2015, end-March 2016 and end-June 2016 in compliance with the IMF Government Finance Statistics Manual 2014; completion by the Board of Supreme Audit of audits of government wage earner payroll and pensioner payroll to identify ghost wage earners and ghost pensioners; and adoption by the Council of Ministers of a by-law to comply with relevant U.N. Security Council resolutions related to terrorism financing (FATF Recommendation 6). Statuses vary as listed in Table 5. - Additional 2nd- and 3rd-review structural benchmarks include requiring all spending units to record existing commitments; posting audited financial statements of the Development Fund for Iraq; approval of a new charter for the CBI Audit Committee; amendments to the Integrity Commission law; reporting of recurrent and investment commitments; CBI law amendments to strengthen governance; and amendment of the Investment Law or issuing clarifying implementing regulations to remove restrictions on transfer of investment proceeds. ### Technical Memorandum of Understanding (TMU) — definitions and monitoring rules (selected) - Coverage period of PCs and ITs: the period June 2016–June 2019 under the Stand-By Arrangement (SBA). - Exchange rate for monitoring: Iraqi dinar (ID) 1,180 per U.S. dollar ($) (will be used to convert U.S. dollar–denominated CBI assets and liabilities; SDRs and other foreign currencies converted at SDR-exchange rates prevailing as of May 19, 2016). - Central government definition for monitoring: includes the central administration, the Kurdistan Regional Government (KRG), and agencies included under Section 6 of the federal government budget (local boards, Iraqi media network, Iraqi national Olympic committee, Bait-Al-Hikma, Ammant Baghdad, Municipality institutions, General directorates of sewage and water). - Gross international reserves (GIR) of the CBI — definition: claims of the CBI on nonresidents controlled by the CBI, denominated in foreign convertible currencies, immediately and unconditionally available for balance of payments needs or intervention, and not earmarked; includes monetary gold, SDR holdings, Iraq’s reserve position in the IMF, foreign currency cash, holdings of non-resident equity and debt securities, and deposits in foreign currency abroad, including foreign exchange account of the government (300/600). Exclusions: assets pledged/collateralized/encumbered; claims on residents; precious metals other than monetary gold; assets in nonconvertible currencies; illiquid assets; claims on foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency. For program monitoring, foreign assets of the CBI shall be valued at program exchange rates (¶4). - Audit requirement: The external auditor of the CBI will audit the stocks of official foreign exchange reserves within two months after the test dates. - Net domestic assets (NDA) of the CBI — definition: includes net claims on the general government (gross claims minus general government deposits at the CBI), gross claims on other depository corporations; monetary policy instruments (term deposits and CBI bills held by other depository corporations); net claims on public nonfinancial corporations; and claims on the private sector. NDA exclude other items net (OIN). OIN is the net value of nonfinancial assets, capital and reserve accounts, IMF account adjustments, and provisions. - NDA audit requirement: The external auditor of the CBI will audit the stocks of net domestic assets within two months after the test dates. - Central government non-oil primary balance — definition: non-oil revenue minus non-oil primary expenditure measured on an accrual basis. Non-oil revenue is total revenue and grants excluding oil-related receipts (exports of crude oil and refined products, and transfers from oil-related state-owned enterprises). Non-oil primary expenditure is total expenditure, including off-budget spending approved by government decree, excluding (i) interest payments on domestic and external debt; and (ii) all oil-related spending (including war reparations). - Arrears outstanding to international oil companies (IOCs) — definition: bills of IOCs validated by the Ministry of Oil and due for more than three months after their invoice. - New external payments arrears on rescheduled debt and new external debt — program definition: - External payment arrears consist of external debt service obligations (principal and interest) falling due that have not been paid within the contractual grace period falling due after June 30, 2016. - The TMU adopts the debt definition in the Guidelines on Public Debt Conditionality in Fund Arrangements, Executive Board Decision No. 15688-(14/107) of December 5, 2014 (covers loans, suppliers’ credits, leases, arrears, penalties, and judicially awarded damages where they meet the debt definition). - For program purposes, external debt is defined based on the residency of the creditor. *Source: Excerpted content from the IMF staff-monitored program documents and Technical Memorandum of Understanding provided in the source material.* ### 11. The total public debt contracted or guaranteed by the central government is defined as ### _cr16225 - 11. The total public debt contracted or guaranteed by the central government is defined as ### Definition of total public debt (¶11) - The term “debt” is defined as in the preceding paragraph (¶10). - Total public debt is the sum of domestic and external debt, with external and domestic debt defined based on the residency of the creditor. - Total public debt excludes the debt contracted by the KRG. - Total public debt includes the claims of the CBI on the central government. - Total public debt includes the arrears as defined in ¶¶9 and 13 but excludes any repayment of domestic arrears on non-oil investment listed in the MEFP (in ¶25, third bullet point, second sub-bullet point) since the repayment of these arrears need to wait the results of the audit of their validity by the Board of Supreme Audit. - Total public debt excludes short-term supplier related credit (less than 90 days). - An external auditor will audit the total public debt contracted or guaranteed by the central government as defined in ¶11 within two months after the test dates. ### Social spending and arrears (¶12–13) - Social spending (Table 4 of the MEFP) is defined as the sum of: - expenditure on the social safety net, - the public distribution system, - wheat and rice subsidies, - assistance subsidies to Syrian refugees and the internally displaced, - farmer subsidies, - wage expenditure and goods and services of the health, environment and the higher and lower education ministries. - The annual targets will be set at 90 percent of the above expenditure in the budget agreed to under the SBA. - Expenditure will be measured at the time the Ministry of Finance transfers the money to the spending units. - The stock of outstanding domestic arrears on non-oil investment expenditure is the value of unpaid bills related to non-oil investment for more than 90 days after their invoice, as measured by the regular surveys of the Ministry of Planning. ### Adjustors (¶14–18) - ¶14: The floor on the central government non-oil primary balance and the ceiling on total public debt will be adjusted if the actual amount of the transfer of the central government to the KRG is less than the programmed amount. In that case: - the floor on the central government non-oil primary balance will be adjusted upwards, and - the ceiling on the total public debt will be adjusted downwards, - by the absolute amount of the difference. - ¶15: The ceilings on the stock of net domestic assets (NDA) of the CBI will be adjusted upwards in case foreign financing, defined as the sum of external financing and international contributions to fill the financing gap as indicated in Table 3 of the MEFP, is lower than programmed to a limit of ID 1.18 trillion. The size of the adjustment will be equal to the difference between the observed and programmed value of foreign financing and capped at the values enumerated in the previous sentence. - ¶16: The ceiling on the stock of net domestic assets (NDA) of the CBI will be adjusted downward in case foreign financing is higher than programmed. The size of the adjustment will be equal to the difference between the observed and programmed value of foreign financing. - ¶17: The floor on the stock of gross international reserves of the CBI will be adjusted downwards in case foreign financing is lower than programmed to a limit of $1 billion. The size of the adjustment will be equal to the difference between the observed and programmed value of foreign financing and capped at the values enumerated in the previous sentence. - ¶18: The floor on the stock of gross international reserves of the CBI will be adjusted upward in case foreign financing is higher than programmed. The size of the adjustment will be equal to the difference between the observed and programmed value of foreign financing. ### Provision of information to Fund staff — general (¶19) - To monitor developments under the SBA, the authorities agree to provide the Fund the information specified below after the approval of the SBA. - The economic adjustment program of the Iraqi authorities is designed with quarterly PCs and ITs and the actual outcome should be provided within eight weeks following the end of the quarter. - Many indicators should be provided with higher frequencies, as indicated below. ### Key Financial Indicators (reporting cadence and timeliness) - Weekly preliminary monetary and financial aggregates as in “Key Financial Indicators” including: - exchange rate data (daily), - currency in circulation, - transferable and other deposits held at commercial banks, - balances on government accounts at the CBI, - interest rates on loans and on deposits at commercial banks, - holdings of government securities, - credit outstanding to the public and private sectors. - The data, excluding exchange rates, should be reported no later than three weeks after the end of the reference period. ### Real sector (reporting cadence and timeliness) - Indicators of oil activity on crude oil and gas production and use, production and sales (export and domestic) of refined petroleum products, including heavy residuals, and associated prices (monthly). These data should be reported no later than two months after the end of the reference month. - Indicators of non-oil real economic activity (quarterly), including production of cement, fertilizers, and electricity, reported no later than two months after the end of the reference month. - Total GDP, reported no later than twelve weeks after the end of the reference quarter. - Consumer price index (CPI), including indices for main cities (monthly). These should be reported no later than a month after the end of the relevant month. ### Monetary and financial sector (reporting cadence and timeliness) - CBI gross foreign exchange reserves (weekly) and balances of the foreign exchange account of the government (300/600). This should be reported no later than 2 weeks after the end of the reference week. - The value of the CBI gross foreign exchange reserves at the end of each quarter as defined in ¶6 will be audited by the CBI’s external auditor and the audited value will be transmitted to the Fund within two months after each test date. - The monthly balance sheet of the CBI, with a month lag. - The value of the CBI net domestic assets at the end of each quarter as defined in ¶7 will be audited by the CBI’s external auditor and the audited value will be transmitted to the Fund within two months after each test date. - The monthly consolidated balance sheet of the other depository corporations (commercial banks), with an eight-week lag. - The monthly assets and liabilities of the central government (ministry of finance and line ministries) in the banking sector with an eight-week lag. - The depository corporations (monetary) survey of all commercial banks and the CBI (monthly), with an eight-week lag. - The latest balance sheet and income statement (quarterly) of the Trade Bank of Iraq as well as data on issued, implemented and outstanding Letters of Credit, with no more than a six-week lag. - The latest balance sheet and income statement (quarterly) of the Rasheed and Rafidain Banks. - Quarterly financial stability indicators of the banking system, distinguishing the state-owned banks and the private banks, with an eight-week lag. ### Fiscal sector (monthly reporting, no later than two months after reference month) - Detailed revenues, operating and capital expenditure, and financing items of consolidated fiscal and oil operations, and overall fiscal balance, including: - a) the execution of the Iraqi budget reported on a monthly basis; - b) transfers to and from the KRG reported on a monthly basis; - c) social spending as defined in ¶12 and total transfers (including in support of the social safety net—public distribution system—the internally displaced, and on refugees); - d) domestic payments arrears on non-oil investment expenditures, as documented by the survey of the Ministry of Planning, defined in ¶13; - e) payments and/or arrears in payments to international oil companies as defined in ¶9 on a quarterly basis with an eight-week lag; - f) disbursements of external assistance and loans including issuance of Eurobonds and loans from the Trade Bank of Iraq (TBI); - g) execution of letters of credit financed through the TBI or by other means; - h) all operations of account 300/600 and its sub-accounts; - i) other forms of multilateral and bilateral assistance, exceptional financing resources, and other financing resources (such as issuance of domestic or foreign bonds, loans securitized by futures oil revenue, etc); - j) balances of all government accounts held at the CBI and the commercial banks (including government and/or line ministry deposits, and those of spending and sub-sending units); - k) amounts related to all off-budget and on-budget advances; and - l) outstanding stock of government securities (including treasury bills) held at/by commercial banks, the CBI, and pension funds. ### Balance of payments (timeliness) - A preliminary quarterly balance of payments, compiled by the CBI, should be provided three months after the end of the reference quarter. - Foreign trade statistics (imports, exports, re-exports) (quarterly). This should be reported no later than eight weeks after the end of the reference quarter. - Amount of total imports of petroleum products financed from the budget and total value of imports of petroleum products on a quarterly basis starting with the first quarter of 2016. These data should be reported no later than eight weeks after the end of the reference quarter. - Detailed data on disbursement of external assistance (both project and budget financing) from all external creditors and donors and foreign debt amortization and interest payments made. These data should be reported on a monthly basis no more than eight weeks after the end of the reference month. ### Public debt reporting - Stock of public debt as defined in ¶11 on a quarterly basis with an 8 weeks lag audited by an external auditor. - List of short, medium, and long-term government or government-guaranteed external loans, contracted during each quarter, identifying for each loan: the creditor, the borrower (ultimate obligor), the amount and currency, the maturity and grace period, repayment terms, and interest rate (monthly). - Details on new debt rescheduling and debt relief agreements with bilateral, multilateral, and commercial creditors, including new outstanding amount and currency, schedule of payments (principal and interest), terms of agreement, repayment terms, and interest rate arrangements (quarterly). ### Structural reforms and other information (¶20–21) - Structural benchmarks comprise a critical component of the SBA. In accordance with agreed benchmarks (Table 5 of the MEFP), the authorities will prepare and send to the IMF staff reports, with appropriate documentation, documenting completion. - Other details on major economic and social measures taken by the government that are expected to have an impact on program sequencing (such as changes in legislation, regulations, or any other pertinent document) will be sent in a timely manner to IMF staff, for consultation or information. *Source: _cr16225 - 11. The total public debt contracted or guaranteed by the central government is defined as* ### Section 2, and currently maintains three exchange restrictions and one multiple currency practice ### Section 2, and currently maintains three exchange restrictions and one multiple currency practice ### Exchange restrictions and multiple currency practice - Iraq maintains three exchange restrictions subject to Fund approval under Article VIII, Sections 2(a) and 3: - 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. - Weekly limits on purchases of cash 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 money transfer companies (MTCs). - $50,000 per week for money exchange bureaus (MEBs). - One multiple currency practice (MCP) arises from official action to limit the purchase of foreign exchange, with no mechanism to ensure that exchange rates in the official auction and in the market do not deviate from each other by more than two percent. - Average spread between the official and market rates: - around 3 percent in December 2015. - about 9 percent in May 2016. - In addition, one exchange restriction maintained for security reasons should be notified to the IMF under the framework of Decision 144–(52/51). ### Article IV Consultation - Upon approval of the new 36-month Stand-By Arrangement on July 7, 2016, Iraq was placed on the 24-month consultation cycle. - The last Article IV consultation was concluded on July 29, 2015, along with a request for purchase under the Rapid Financing Instrument. - The staff report (IMF Country Report No. 15/235) was published on August 18, 2015. ### Technical assistance, 2005–16 (departments, dates, and purposes) - FAD: - May 2010 — Public Financial Management - March 2012 — Public Financial Management (METAC) - May 2012 — Public Financial Management (METAC) - December 2012 — Public Financial Management (METAC) - May 2013 — Budget Functional Classification workshop (METAC) - March 2014 — Budget Classification (METAC) - June 2015 — Status of Public Financial Management Reforms (METAC) - November 2015 — Public Financial Management Law, budget execution and program-based budgeting - March 2016 — Public Financial Management Law - LEG: - April 2010 — Phase One of the Three-Phase AML/CFT Capacity Enhancement and Sustainability Training Program - July 2010 — Phase Two of the Three-Phase AML/CFT Capacity Enhancement and Sustainability Training Program - October 2012 — Article VIII acceptance and AML/CFT technical assistance - December 2012 — AML/CFT Legislative Drafting - May 2015 — Desk review of the draft AML/CFT Law - June 2015 — Article VIII acceptance - September 2015 — Desk review of the draft AML/CFT Law - MCM: - April 2010 — Islamic banking workshop - August 2010 — Reserve management - August 2010 — Remote assistance on liquidity management and treasury market development - December 2010 — Government Securities/Monetary Operations - January 2011 — Government Securities/Monetary Operations - January 2011 — Training on New Developed Regulations and Call Reports (METAC) - January 2011 — Training on Off-Site Supervision and Report Development (METAC) - April 2011 — Risk management workshop (stress testing) - May 2011 — Bank restructuring - May 2011 — Reserve management - July 2011 — Reserve management - September 2011 — Reserve management workshop - March 2012 — Bank restructuring - October 2012 — Article VIII acceptance - March 2014 — Assessment of Banking Needs (METAC) - April 2014 — Central Bank Reserve Management - May 2015 — Asset Management - November 2015 — Banking Supervision (METAC) - November 2015 — Prudential Regulations: Review and Assessment (METAC) - March 2016 — Seminar on Foreign Exchange Regimes and Controls (Joint LEG/MCM) - STA: - April 2010 — External Sector Statistics - July 2010 — Monetary and Financial Statistics - February 2012 — External Sector Statistics - March 2012 — National Accounts Statistics - May 2012 — Monetary and Financial Statistics - April 2013 — National Accounts Statistics - December 2013 — Balance of Payments Statistics - December 2014 — Balance of Payments Statistics (METAC) - March 2015 — Government Finance Statistics (ArabStat) - May 2015 — Government Finance Statistics - November 2015 — Consumer Price Index (METAC) - January 2016 — National Accounts Statistics (METAC) - March 2016 — Government Finance Statistics - March 2016 — External Sector Statistics - April 2016 — Financial Stability Indicators - INS: - January 2010 — Financial Programming and Policies ### Relations with the World Bank Group (as of April 2016) — Fund and Bank programs and coordination - World Bank work program items (selected titles and timing mentioned in source): - Systematic Country Diagnostic (February 2016) - Kurdistan Regional Government, Reimbursable Advisory Services: Economic Growth Diagnostic (December 2015/Feb/April/June 2016) - Assessment of Decentralization and Service Delivery in Iraq (November 2015) - Road Maps for reforming Customs and Taxation in Iraq (November 2015) - Kurdistan Regional Government Economic Reform Road Map (March 2016) - Iraq Energy Subsidies and Tariff Reforms (both Iraq and Kurdistan Regional Government) (September 2016) - Iraq Energy Sector Programmatic Technical Assistance: Deliverable Gas-to-Power Action Plan (December 2016) - Iraq Electricity Distribution Reform and Investment Project (December 2016) - World Bank technical assistance items and timing are listed (selected): Public Investment in Power Infrastructure TA (October 2015/February 2016), Public Financial Management (January 2016), and other sectoral and regional TA. - IFC investments/advisory items (selected): Power sector, Basic manufacturing and agribusiness, Telecom; advisory: United Bank for Investment restructuring, Construction reform project, Dairy sector development, Small and Medium Enterprises training with Business Edge, Corporate governance. - Fund work program in the next 12 months (selected macroeconomic policy reviews and timing as listed in source): - First Review of the Staff-Monitored Program and Discussion of a Stand-By Arrangement (March 2016) - First and Second Reviews of the Staff-Monitored Program and Request for a Three-Year Stand-By Arrangement (May 2016) - First Review of the Stand-By Arrangement (September 2016) - Second Review of the Stand-By Arrangement (December 2016) - Third Review of the Stand-By Arrangement (March 2017) - Fourth Review of the Stand-By Arrangement (June 2017) - Fund technical assistance planned (selected, with timing): - Public financial management (September 2016) - Fiscal accounts reporting (September 2016) - Tax Policy (September 2016) - Public Debt Statistics (September 2016) - Financial Soundness Indicators (November 2016) - Foreign Exchange (Article VIII Issues) (November 2016) - Bank Restructuring (November 2016) - AML/CFT: Law and Institutions (November 2016) - Coordination and data sharing: - Fund requests to Bank: Macroeconomic and financial data to be shared regularly (Ongoing basis). - Bank requests to Fund: Fiscal data to be shared regularly; coordination on macroeconomic policy; macroeconomic and financial data to be shared regularly, including any foreign exchange transaction; sector-specific data; consultations outcomes to be shared (Ongoing basis). ### Statistical issues (as of May 2016) — assessment, deficiencies, and planned improvements - General assessment: - Data provided to the Fund have serious shortcomings that significantly hamper surveillance. - Central Statistics Organization (CSO) lacks adequate technical expertise and resources; Central Bank of Iraq (CBI) statistical capacity is slightly better, but interagency data sharing and data collection responsibilities hamper progress on external sector statistics. - Since 2003, the Statistics Department (STA) has provided considerable technical assistance in all major datasets, including dissemination standards. - National Accounts: - CSO compiles annual and quarterly national accounts at current and constant (2007) prices, although expenditure estimates in constant prices are on the previous 1988 base. - National accounts follow the 1968 System of National Accounts (SNA). - Ongoing TA from STA and METAC is helping move toward implementing concepts of the 2008 SNA. - Household Budget Survey (HBS) conducted during 2007; base year moved to 2007. Household Social and Economic (HSES) Survey conducted for 2012; data being incorporated into planned rebasing to 2012. - Reduced regional coverage due to conflicts in four provinces has weakened GDP measures. - Price Statistics: - CSO compiles monthly CPI for all-Iraq (including Kurdistan) and for each governorate; index rebased to 2012 based on HSES. - CPI covers only urban areas; starting June 2014 official CPI data do not include the four conflict-affected governorates. - A quarterly PPI for manufacturing compiled on a 2012 base. - Government Finance Statistics: - Provision of fiscal data for program monitoring has been satisfactory despite security situation; infrequent submission delays occur and coverage of Kurdistan remains sketchy. - March 2015 STA mission discussed a work plan to improve frequency and timeliness of fiscal reporting and migration plan to GFSM 2014. - March 2016 STA follow-up mission assisted in setting up a reporting tool on quarterly statement of government operations for the budgetary central government. - Iraq resumed reporting government finance statistics for publication in the Government Finance Statistics Yearbook (GFSY). - Currently there are no fiscal statistics published by the government beyond summary estimates and outturn for the budgetary central government. - Monetary and Financial Statistics: - Notable progress in developing components and structure for compiling a depository corporations’ survey. - Quality and timeliness hampered by lack of staff capacity at commercial bank level and source data quality. - Most banks are using new report forms based on IMF’s Monetary and Financial Statistics Manual, but some banks continue to have reporting problems; old report forms still used to compile data for other depository corporations (ODCs). - Monetary statistics do not cover the northern region (Kurdistan). - CBI reports data to IFS with a lag of more than five months; latest reported data for ODCs are marked “preliminary.” - April 2016 mission on financial soundness indicators found departures from international standards in applying the residence concept, classifying state-owned enterprises, and other areas needing investigation. - Financial Sector Surveillance: - CBI requested TA in compiling FSIs following 2015 Spring Meetings; STA mission in April 2016 developed a framework. - CBI compiled and reported the 12 core FSIs and 7 of the 13 additional FSIs for the state banks and a similar set for private banks for the last three quarters of 2015 in late May 2016. - CBI agreed to report FSIs on a quarterly basis going forward, though some departures from international standards remain. - External Sector Statistics — Balance of Payments and IIP: - CBI compiles and reports annual and quarterly balance of payments in BPM6 format and an annual IIP. - Latest 2013–2015 balance of payments data submitted to STA not yet included in STA publications due to very large net errors and omissions. - March 2016 ESS mission noted errors and omissions could be attributed to: - lack of coverage/under-coverage of transactions related to production sharing agreements with foreign oil companies and long-term construction work by foreign companies in Iraq; - trade data for the Kurdistan region; - incomplete recording of counterpart entries for the net borrowing in the financial account of the balance of payments in 2013 and 2014, inconsistent with significant surpluses recorded in the current account. - Mission recommended enhancement of international transactions reporting system, estimation techniques for Kurdistan imports, and securing data on payments made by the Ministry of Oil to international oil companies. - International reserves compiled consistent with international methodologies and published in the IFS since end-2006. - External Trade Statistics: - Serious problems of timeliness and poor quality due to absence of reliable customs data. - A new customs form for imports exists but is not used at the customs border because of security situation and lack of Customs Department resources at border outlets. - Coverage of private sector imports constrained: only goods paid through the Iraqi banking system are captured; goods imported under external payments arrangements (e.g., imports for direct investment projects by international oil companies) are not recorded in the balance of payments. - External trade statistics exclude the northern region (Kurdistan); no estimates for smuggling are made. - Export data from the oil sector received from the BOPSD at the CBI. Nonoil export data (equivalent to 3–5 percent of total exports) compiled based on customs export form and provided monthly to CBI for crosschecking. - Data standards and quality: - Iraq is an e-GDDS participant; metadata updated in early 2016 available on the IMF’s Dissemination Standards Bulletin Board. - No data ROSC is available. ### Iraq: Table of Common Indicators Required for Surveillance (as of April 26, 2016) — selected timing, frequency, and lags (dates preserved) - Exchange Rates: - Date of latest observation: 6/2/2016; Date received: 5/25/2016; 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: 5/25/2016; Date received: 5/2016; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M, 4–6 week lag. - Reserve/Base Money: - Date of latest observation: 5/25/2016; Date received: 5/2016; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M, 4–6 week lag. - Broad Money: - Date of latest observation: 5/25/2016; Date received: 5/2016; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M, 4–6 week lag. - Central Bank Balance Sheet: - Date of latest observation: 3/31/2016; Date received: 5/2016; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M, 4–6 week lag. - Consolidated Balance Sheet of the Banking System: - Date of latest observation: 1/31/2016; Date received: 5/2016; Frequency: M; Frequency of Reporting: M; Frequency of Publication: Q, 4–6 week lag. - Interest Rates: - Date of latest observation: 5/25/2014; Date received: 5/2016; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M, 4–6 week lag. - Consumer Price Index: - Date of latest observation: 3/31/2016; Date received: 5/2016; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M, 3 week lag. - Revenue, Expenditure, Balance and Composition of Financing – General Government: - Date of latest observation: 03/2016; Date received: 5/2016; Frequency: M; Frequency of Reporting: M; Frequency of Publication: N/A. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: - Date of latest observation: 03/2016; Date received: 5/2016; Frequency: M; Frequency of Reporting: M; Frequency of Publication: N/A. - Stocks of Central Government and Central Government-Guaranteed Debt: - Date of latest observation: 12/2015; Date received: 3/2016; Frequency: N/A; Frequency of Reporting: N/A; Frequency of Publication: N/A. - External Current Account Balance: - Date of latest observation: 12/2015; Date received: 3/2016; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q, 9 month lag. - Exports and Imports of Goods and Services: - Date of latest observation: 12/2015; Date received: 3/2016; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q, 9 month lag. - GDP/GNP: - Date of latest observation: 3/2016; Date received: 4/2016; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q, 3 month lag. - Gross External Debt: - Date of latest observation: 12/2015; Date received: 3/2016; Frequency: 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: Q; Frequency of Reporting: Q; Frequency of Publication: Q, 9 month lag. *Source: IMF staff report text (Section 2 and attached statistical and institutional annexes) as provided in the content unit.* ### 1. Since mid-2014, the Iraqi economy has been severely hit by two shocks, the attacks ### Since mid-2014, the Iraqi economy has been severely hit by two shocks, the attacks ### Shocks, humanitarian impact, and macroeconomic outcomes - ISIS attacks and the sharp decline in global oil prices struck since mid-2014. - Humanitarian and social impacts: - Loss of thousands of lives. - About four million people displaced internally. - 27 percent of the country’s population—including about 250,000 Syrian refugees—to be in need of humanitarian assistance. - Marked deterioration in living conditions and extensive damage to infrastructure and assets. - Macroeconomic outcomes: - Real GDP contracted in 2015, notwithstanding a large increase in oil production. - Wide fiscal and balance of payments deficits emerged. ### Policy response and program engagement - Authorities’ programmatic response: - Large fiscal adjustment program initiated since early 2015. - Wide-ranging reforms announced by the Prime Minister in August 2015 focusing on enhancing security and reconstruction, promoting integrity and transparency, and activating lending for housing, manufacturing and agricultural projects. - Engagement in a Staff-Monitored Program (SMP) with the Fund in November 2015; performed satisfactorily under the SMP despite challenging conditions. - Request for a three-year Stand-By Arrangement (SBA) to maintain macroeconomic stability, protect social spending, manage external pressures, implement fiscal consolidation, achieve debt sustainability, strengthen public financial management, and preserve financial sector stability. ### Performance under the SMP - Indicative targets and outcomes: - Three out of the five indicative targets met at both end-December 2015 and end-March 2016. - The target on social spending was missed by only a small margin in December 2015. - The target on zero accumulation of external arrears was missed due to the government’s severe cash constraint; it is now the subject of two performance criteria under the requested SBA. - Structural benchmarks: - All three structural benchmarks for the SMP’s first review were met. - The structural benchmark for the second review (approval of a draft financial management law by the Minister of Finance) was not met; it will be a structural benchmark for the first review under the requested SBA and work toward it is carried out with Fund technical assistance. ### Fiscal strategy and 2016–19 economic and financial policies - Fiscal stance and objectives: - Commitment to gradually bring expenditures down in line with the new lower level of oil revenues and to strengthen revenues to achieve debt sustainability. - 2016 program will be significantly more restrictive than the budget approved by parliament. - Lower-than-budgeted execution is authorized under the country’s public financial management laws when revenue is less than what is assumed in the budget. - Measures to reach fiscal target: - Broaden the tax base on wages for non-military personnel. - Reduce the wage bill through natural attrition, delaying hiring of new staff and reducing discretionary benefits, among other measures. - Reduce pension payments by enforcing existing rules. - Temporarily reduce non-oil investment with a rigorous prioritization process to avoid delaying essential projects. - Protect social spending and maintain such spending above a given floor during the SBA, including spending on health and education, food and agricultural subsidies, and transfers to internally displaced people and refugees. - Preserve investment in the oil sector at the budgeted level. - Financing and monetary interaction: - A large fiscal deficit would remain in 2016, financed mainly by domestic financing and external financing catalyzed by the SBA. - Authorities are keen to avoid excessive indirect central bank financing; commit to reduce indirect monetary financing by the CBI if oil revenue or external financing are higher than programmed. - Timing of consolidation and deeper reforms: - Fiscal consolidation is front-loaded: half the fiscal adjustment envisaged over 2016–19 will be achieved in 2016–17. - Starting in 2017, the government intends to implement deeper fiscal reforms to achieve debt sustainability, including: - Reviewing the tax and customs codes and administrations to increase non-oil revenue. - Implementing a hiring freeze in sectors other than security, health, and education. - Having the Board of Supreme Audit audit the wage and pension recipients’ payrolls to eliminate ghost users. - Reforming the public pension system and enhancing efficiency of state transfers to the poor, in coordination with the World Bank. - Gradually reforming the electricity sector and state-owned non-financial enterprises. ### Fiscal structural reforms and public financial management - Strengthening PFM procedures and oversight: - Approve a new draft of the Financial Management law with support from the Fund and the World Bank. - Report fiscal tables in compliance with the IMF Government Finance Statistics. - Survey, audit and pay domestic arrears. - Take steps to move to a Treasury Single Account. - Design and implement a commitment control system for budget execution and an Integrated Financial Management Information System. - Implement Public Investment Management reform. - Strengthen Debt Management with technical assistance from the Japanese International Cooperation Agency. - Strengthen legislation aimed at combating corruption. ### Exchange rate policy and external sector management - Exchange rate nominal anchor: - Commitment to maintain the peg to the U.S. dollar despite the deteriorating external position. - Gradual removal of remaining exchange restrictions and multiple currency practice to eliminate exchange rate distortions. - Removal of the limitation on transfer of investment proceeds that gives rise to an exchange restriction. - The CBI will increase the sale of foreign exchange for valid current exchange transactions on the official market to reduce the spread between the official and parallel exchange rates. ### Financial sector stability measures - Banking sector audits and restructuring: - International auditors appointed to conduct audits of Rafidain and Rasheed, the two largest state-owned banks; audit results will inform a restructuring plan. - Strengthening CBI and AML/CFT: - Strengthen the CBI’s legal framework, building on the recommendations of the Fund’s safeguards assessment of December 2015. - Implement reforms to strengthen the anti-money laundering and combating the financing of terrorism framework to improve integration with the global economy, lower transaction costs, strengthen governance, reduce the size of the informal sector, and disrupt ISIS funding. ### Macro statistical capacity and data reporting - Commitment to improve timeliness, coverage, and accuracy of macroeconomic statistics despite capacity constraints. - To optimize data delivery to the Fund: - External auditors to report data on three out of the six performance criteria under the requested program. - Continued reliance on Fund technical assistance to strengthen fiscal reporting. ### Conclusion and program prerequisites - Iraq is experiencing extreme economic stress and is facing a particularly difficult time. - Authorities demonstrated commitment to macroeconomic policies and reforms under the SMP and are fully committed to implementation of the SBA. - Stable security conditions remain a prerequisite for the success of their policies. - Authorities express appreciation for the Fund’s Executive Board, Management, and staff, and the technical assistance received in support of stabilization and reform efforts. *IMF staff report content as provided.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16225.pdf_