Transcript of a conference call: Report on Iraq's Request for New Stand-by Arrangement

January 16, 2008

Washington, D.C.
Wednesday, January 16, 2008

MR. BUENEMANN: Good morning everybody, in the American time zone it's 10:00 a.m., and good afternoon or good evening to those who are farther eastward. I am Niels Buenemann of the IMF External Relations Department. I am here with Mohsin Khan, Director of the Middle East and Central Asia Department, with Erik De Vrijer, Mission Chief for Iraq, and with Adam Bennett, Senior Adviser.

This is a conference call on the staff report dealing with Iraq's request for a Stand-By Arrangement and cancellation of the current arrangement. The staff report was made available to you already three hours ago and this report and also the contents of this conference call will be embargoed until 12:00 noon Washington time which is in 2 hours from now. I should now like to give the floor to Mr. Mohsin Khan for introductory remarks.

MR. KHAN: Thank you very much, Niels. As Niels said, I am Mohsin Khan. I am the Director of the Middle East and Central Asia Department. Thank you very much for participating in this conference call related to the publication of the report on Iraq's request for a new Stand-By Arrangement with the IMF. The IMF's Executive Board approved this arrangement on December 19, 2007.

The new Stand-By Arrangement supports Iraq's economic program for 2008 and builds on the achievements made under the previous arrangement which was approved by the IMF's Executive Board on December 23, 2005. This new arrangement which amounts to SDR 475 million, or about $744 million, will be treated by the authorities as a precautionary arrangement, meaning that they do not intend to draw on these resources, and it will cover a 15-month period through March 2009.

Iraq's performance under the first Stand-By Arrangement that covered 2006 and 2007 was very impressive. In fact, it is quite remarkable that the program has held together in light of the very difficult security circumstances on the ground. A major accomplishment was the sharp reduction in inflation which had jumped to 65 percent in 2006, in large part because of security-related fuel shortages. Inflation was brought under control in 2007 with a policy package including exchange rate appreciation, tightening monetary policy, fiscal discipline, and measures to reduce fuel shortages. Helped by declining black market fuel prices, consumer prices increased by only 4 percent during the period January to November 2007.

While the government successfully contained current expenditures, the implementation of the ambitious public investment program fell short of expectations. This, together with the difficult security situation, prevented oil output and economic activity generally from expanding as much as we had hoped. Our growth estimate of 1.3 percent for 2007 is therefore quite low. However, for the non-oil sector, this estimate was based on indicators that were available when we wrote the report, namely only for the first half of the year. With the improvement in security during 2007, and particularly in the second half of 2007, non-oil activity in the second half of the year may well have picked up. If so, overall growth in 2007 might turn out to have been higher than the 1.3 percent we mention in the report, but we really cannot take a view on this until we have data on the indicators used to estimate real sector development for the second half of 2007.

Rising oil export prices more than offset the production shortfall, thus boosting the accumulation of international reserves by close to $7 billion. The amount at the end of 2007 was $27 billion, some $6 billion higher than projected. In light of the strong international reserve position, Iraq made an early payment of the full amount outstanding under the Emergency Post-Conflict Assistance (EPCA), which preceded the 2005 Stand-By Arrangement and was approved by the IMF Executive Board in September 2004. This EPCA arrangement amounted to SDR 297 million or about $466 million. The original terms of the EPCA envisaged repayment of half of this amount in 2008 with the balance due in 2009. Instead, Iraq repaid the full amount on December 12th of last year.

Aside from achieving macroeconomic stability, progress was also made with structural reforms. A very important achievement was the significant increase in domestic official fuel prices which enabled Iraq to eliminate direct subsidies on all fuel products, except kerosene. This released much-needed resources for reconstruction and reduced the incentives for smuggling. Other achievements included liberalizing private-sector fuel imports to reduce shortages; amending the new pension law to make the pension system fiscally sustainable; modernizing the payment system; starting the modernization of budget management; and strengthening the accounting and reporting framework of the Central Bank of Iraq.

The main objectives of this new 2008 program are to maintain macroeconomic stability, facilitate higher investment, and move forward with reforms and institution building. The program aims to contain inflation in 2008, building on the success in bringing inflation down in 2007. The program is also seeking a higher implementation ratio of the government's investment program so that economic growth can start to accelerate. We are projecting growth to be over 7 percent in 2008.

Key structural reforms in the program include the strengthening of public financial management and the accounting framework of the Central Bank of Iraq; the restructuring of the two largest public banks, Rafidain and Rasheed; and strengthening governance in the oil sector. With the favorable oil price outlook and a gradual increase in oil production and exports, the overall fiscal position should be sustainable. Also, debt sustainability would be achieved with the third and final tranche of the Paris Club debt rescheduling (20 percent in net present value terms) which would be triggered upon completion of the final review under the Stand-By Arrangement before the end of 2008.

To conclude, good performance under this new stand-by arrangement would constitute an important step forward in consolidating macroeconomic stability and placing the economy on a higher growth path. Of course, for this to happen it will remain critical as it has in the past that the security situation continues to improve and that political consensus is strengthened. Thank you.

QUESTIONER: I was wondering what you see generally for the growth outlook for Iraq. I know you say that it could be higher. You are saying that security is improving, has that improvement — things seem to stabilize a little bit more, what do you think the growth potential could be of Iraq?

MR. KHAN: Thank you. As I am saying, I think for 2008 we are expecting a significant jump in growth, to be a little over 7 percent. And I think the big change of course is going to be in—what we are also hoping for—in oil production. Beyond that, for 2009 we also expect growth to be within the 7 to 8 percent range. Of course, all this is conditional on expansion in oil production, and most importantly, on the security situation improving—continuing to improve.

QUESTIONER: Could you just clarify on the growth expectations? What I understood is you just said 7 to 8 percent, but for the year that just ended you are saying it was 1.3 percent but you think it might be stronger because of the second half of the year? Can you clarify that?

MR. KHAN: Yes, of course. We based our growth estimates for 2007 on indicators that ran through the middle of last year, 2007, and on that basis we projected that growth overall would be 1.3 percent for the year as a whole. Now it turns out that we are looking at some of the data that is coming through for the second half of the year and that looks to be stronger than we had originally expected. So in the end, I think growth may well turn out to be higher than the 1.3 percent we projected.

QUESTIONER: But yet in this year you are expecting much higher growth, correct?

MR. KHAN: That is correct. We are expecting much higher growth, and it is really coming from the fact that we expect oil production to be higher. Oil is 70 percent of GDP and we expect oil production to go up by at least 200,000 barrels per day. We also think that the government will be—if the security situation continues to improve—that the government will be able to fulfill its major investment plan in the oil and the non-oil sectors, so we expect a significant jump in the growth rate in 2008 up to, as I said, over 7 percent from the low number that we had projected for 2007.

QUESTIONER: I have a few questions, actually. Are you already seeing that the improvements in security have already boosted the economy in some ways or is that still early to determine? Then the follow-up I have is: is there any update you have on the debt cancellation from non-Paris Club members and when do you think that that could come through?

MR. KHAN: We have some anecdotal evidence and evidence from reports on the ground that in the second half of last year, of 2007, there was an improvement in economic activity. That is really the basis on which we are saying that our growth numbers may be too conservative for 2007, that the actual growth rate may be higher. Unfortunately we do not have good indications yet, but we certainly do have anecdotal evidence that says things are getting better in the economy.

QUESTIONER: Are you talking mainly about economic activity, trade and setting up small businesses or is it something broader?

MR. KHAN: No, I think partly it is oil production looking to go up in the second half of the year. October and November were good months. So this last quarter in the oil sector was good.

In addition, I think people talk about evidence of services improving, retail services improving. We have not seen any major investment yet, but there is a lot of anecdotal evidence now that the last quarter in particular was probably the best quarter of the year.

On your update of the debt cancellation, the discussions are continuing. I assume you are talking about non-Paris Club debt?

QUESTIONER: Yes, correct.

MR. KHAN: One interesting piece of news was that just very recently, on January 10, the debt with former Yugoslavia was settled. It amounted to $2.5 billion. But big debts, that is basically Saudi Arabia and Kuwait, those are still being discussed and I understand that discussions are taking place as we speak with Saudi Arabia on this. So we are optimistic that there will be a resolution and I think the issue that most people have accepted and most countries have accepted is that it will be at least on Paris Club terms.

QUESTIONER: The other one is on the budget. Do you feel that Iraq is currently fiscally able to sustain itself in many ways or does it still need large contributions of aid?

MR. KHAN: I think from a fiscal standpoint, at the moment we gauge the fiscal sustainability by also looking at the fiscal balance including grants and including aid. The country still will continue to need aid particularly I expect in the security area, but the fact of the matter is we have a very conservative fiscal projection, because we base it on a pretty low price of oil and I think the Iraqis do this by design. So the oil prices we are assuming for example in 2008 is $57 a barrel, which is obviously much, much lower than the world price. So I think even on that basis they are fiscally sustainable. If in fact we factor in today's price, then the fiscal picture looks very, very good.

QUESTIONER: I just wanted to confirm the figure that you mentioned about foreign exchange reserves. You said that they jumped by $7 billion to $27 billion. Could you clarify which period that was over?

MR. KHAN: Yes. I will give you the figures. At the end of 2006, they were $20 billion. At the end of 2007, they were $27 billion.

QUESTIONER: I just wanted to clarify on the oil production issue when you were talking about oil as 70 percent of GDP, you said in this year you expect it to go up by at least 200,000 barrels a day, so that it goes up to what? I expect maybe in the release it talks about what it is now, but I do not have that in front of me.

MR. KHAN: Production has been running in 2006 and 2007 at about 2 million barrels a day. And in 2008 we expect it to jump by another 200,000 barrels, so to 2.2 million barrels a day.

MR. BUENEMANN: It seems that there are no further questions, so it just remains for me to thank you all for participating and please be reminded that this was an on-the-record conference call with an embargo for 12:00 noon Washington time. Thank you very much and until next time.


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