Transcript of a Press Briefing on the 2005 Article IV Review of Iraq by Lorenzo Perez, Deputy Director, Middle East and Central Asia Department, and Adam Bennett, Assistant Director, Middle East and Central Asia Department, with William Murray, Deputy Chief of Media Relations, IMF

August 16, 2005

By Lorenzo Perez, Deputy Director, Middle East and Central Asia Department, and Adam Bennett, Assistant Director, Middle East and Central Asia Department, with William Murray, Deputy Chief of Media Relations, International Monetary Fund
Tuesday, August 16, 2005
Washington, D.C.

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MR. MURRAY: Welcome. This is the IMF's briefing on the latest Fund review of the Iraqi economy. It is under embargo until 11:00 a.m. today, or 1500 GMT. I welcome everybody that's on the Media Briefing Center, and I also encourage you to pose questions during the briefing.

With me today is Lorenzo Perez, the Deputy Director of the Middle East and Central Asia Department, and Adam Bennett, Assistant Director in the Middle East and Central Asia Department. Lorenzo and Adam have leading roles in maintaining IMF relations with Iraq and in analyzing the Iraqi economy.

Let me now turn the table over to Lorenzo and Adam, who will have some brief opening remarks before we take your questions. Lorenzo?

MR. PEREZ: Thank you. Thank you for being here this morning. We are holding this press conference to announce the conclusion of the Article IV consultation with Iraq. This is the first consultation that we have had in a quarter-century.

As you know, most member countries of the IMF are supposed to hold economic consultations once a year or once every 18 months as part of their membership obligation with the IMF. So we feel that after 25 years, the fact that we have been able to hold an Article IV consultation with Iraq is something—a very important milestone for Iraq in its reintegration into the international financial community.

Let me very briefly outline the four main conclusions that we have in our report that has been made available to you, and then I will pass the microphone to Mr. Bennett, and he will elaborate a bit more on the elements of the report and on the nature of the Fund relationship with Iraq.

The first finding that we have in the report is that Iraq has achieved a reasonable degree of stability given the very difficult circumstances that it faces. At the same time, we find that the reconstruction efforts and the structural reforms of the Iraqi institutions have proceeded more slowly than expected.

The second finding is that, looking forward, it is very important that the Government of Iraq resists pressures to increase the current spending, particularly on less important activities and wages and transfers. Given Iraq's very enormous reconstruction efforts, it's also important that spending is prioritized, and that spending on subsidies is reduced.

The third finding is that the pegged exchange rate system that Iraq has been following has served the country well, but that the economic authorities need to be ready to adjust monetary policy as necessary to maintain this monetary framework.

And, finally, the last finding is that, looking ahead in the medium term, the medium-term prospects of Iraq are reasonably optimistic, but this will depend a lot on the level of oil export prices, as you can imagine, and also it will be a function of the extent that the security situation improves, but overall the medium-term prospects of the country are good.

Let me ask Mr. Bennett to elaborate a bit on our report.

MR. BENNETT: Thank you.

Well, as Mr. Perez explained, after a 25-year absence, the Fund re-engaged with Iraq in mid-2003. We began by providing Iraq with technical assistance and advice on macroeconomic policy reform. We also undertook an assessment of Iraq's external debt sustainability.

Then in September 2004, we provided financial support to Iraq in the equivalent of about US$430 million under our policy of emergency post-conflict assistance, EPCA for short. Following this, in November 2004, the Paris Club agreed to a phased reduction of Iraq's external debt by 80 percent in net present value terms.

Much has been achieved in the past two years taking into account the extremely difficult conditions on the ground. The economy rebounded in 2004 by nearly 50 percent, albeit mostly reflecting the recovery in oil production. Inflation so far this year has been very low, although it was quite high in the second half of last year because of fuel shortages, which drove up fuel prices, which is connected to the intensification of violence during that period.

The exchange rate has been kept relatively stable to the dollar, and international reserves of the central bank of Iraq rose strongly last year and have been fairly steady so far this year.

However, there is still much to be done. Although there has been progress in stabilizing the economy, there has not been such good progress in pushing forward reforms. This is, of course, understandable considering the very difficult security situation on the ground in Iraq.

Many of the reforms slated for implementation under the program supported by EPCA have yet to be implemented. One of the most important of these pending reforms relates to the extensive and very expensive system of subsidies in Iraq. Perhaps the most egregious of these subsidies is the subsidy that applies to the domestic sale of refined petroleum products.

With its huge reconstruction needs as well as its need to rebuild its social services, including on education and health and also on security, it is hard to justify using such a large amount of Iraq's precious oil resources in this way, in supporting a subsidy on domestic sales of gasoline. This subsidy also creates enormous distortions and encourages smuggling and corruption.

There are many other reforms that Iraq needs to undertake. Iraq needs to set up an effective payment system. It needs to develop a functioning banking system. It needs to be able to accurately monitor budget execution. These are just a few areas that we are focusing on. You will find these reforms and many others described in the IMF staff report that you should now all have copies of, so I won't go into details here.

There is one area where reform cannot really be delayed, and this concerns the compilation of economic statistics. Good, reliable, and timely data is one of the most important things for a government to have if it is to be able to effectively apply sound macroeconomic policy. Such data has been in short supply in Iraq, but things are improving here.

We hope that, despite the shortage of information, we've presented in our staff report a sufficiently clear picture of what has been going on these past two years for you to be able to figure out where Iraq is headed and what its next steps should be. We hope you enjoy reading it.

Iraq presents the international community with an enormous challenge. Rebuilding Iraq's economy and restoring the health and welfare of its people will be a massive task. We will play our part, but in the end it is the Iraqi people who will decide and determine the future of Iraq.

Now we're ready to take your questions.

MR. MURRAY: Thanks, Lorenzo. Thank you, Adam.

If you do not have copies here in hand, the staff report on Iraq plus the Public Information Notice which summarizes the Executive Board discussion of August 1st is available in the front of the room.

We will be transcribing this briefing and posting the transcript, along with the documents that support the briefing, on our public website at 11:00 a.m., 1500 GMT. So do us a favor, particularly for the people viewing by web cast, and identify yourselves when you ask a question.

The first question, the gentleman over on the left.

QUESTIONER: You talk in the report about the need to eliminate price-distorting subsidies—you identify in particular oil - petroleum - subsidies. [inaudible} This has caused enormous hardships in other countries [inaudible]?

MR. PEREZ: You are right that this is an important issue and a delicate issue. I should say first that the level of subsidies in Iraq are probably the largest in the world; the level of prices in Iraq are extremely low.

Second, the prices that the consumers really face in Iraq are much higher than the official prices, so there is a very active black market in fuel products.

Thirdly, you know, the benefits of the subsidies--as a result, the benefits of the subsidies are not the large population of the country. The way that we have been discussing this issue with the authorities is that really it has to be a gradual process. You have to start adjusting the prices gradually, making sure that you are strengthening the safety net to protect the poor, who are negatively affected, and also explaining to the population why this is being done. It's really a trade-off between subsidies for the few or having more reconstruction projects, more hospitals, more schools.

MR. MURRAY: Thanks, Lorenzo.

Another question?

QUESTIONER: You mentioned in the report that Iraq [inaudible] over the past year for various reasons and that the authorities are interested in a Stand-By Arrangement at the end of this year. I wonder if you could elaborate [inaudible].

MR. BENNETT: Well, we will be discussing with the Iraqi authorities the next steps, including the possibility of a stand-by arrangement. The Paris Club agreement of November of last year envisaged a three-stage reduction in Iraq's external debt, and the second stage of that debt reduction is linked to the approval of the stand-by arrangement, and that is slated for the end of this year. So we hope that we'll be able to have productive discussions with the Iraqi authorities with that objective in mind. The content of the program we still need to discuss with the Iraqis at this point.

MR. MURRAY: The lady in front?

QUESTIONER: I would like to see if you could talk about the oil sector and how the oil sector now compares with before the war.

MR. BENNETT: Well, oil production has recovered strongly, particularly last year. It has not recovered to the extent that we had hoped when we approved the emergency financial assistance program in September of last year. But, again, that is perhaps not surprising in view of the fact that the insurgency has continued. But we expect oil production to continue to grow per the projections we made in the report that you have.

The oil sector comprises a very large proportion of the Iraqi economy, but we do hope that as we move into the medium term that the oil sector will be able to continue to expand.

QUESTIONER: Just wondering if you could explain why the 2000 - I think the 2005 growth forecast is 3 percent or 4 percent [inaudible] and if oil prices stay in the range that they are now, how that would influence the outcome.

MR. BENNETT: Well, we have—relative to the forecasts we made in the context of the EPCA program, we have had to revise down the projection for growth in 2005. Again, as I said, this reflects the fact that it has been harder to proceed with reconstruction, including in the oil sector, than we had initially anticipated. I think we have a real GDP forecast of about 4 percent for 2005. This basically is reflecting for the most part the projection for oil production.

MR. PEREZ: Also, the non-oil sector has been affected. Economic activity in the non-oil sector has been affected by the level of violence this year, so we had to reduce somewhat that projection.

QUESTIONER: [inaudible] continue to give us some more data on if you take oil out of the Iraqi economy [inaudible] economic activity last year, what [inaudible]?

MR. PEREZ: We don't have—I don't think we published the information for the non-oil activity. Clearly, if you look at the—if you take out oil, that we consider that oil was like three-fourths of the economy right now, you have essentially agriculture and some commercial activity. There have been a lot of decrease in commercial trading activity, imports, sales of appliances, particularly in the south and in the north. So that's the type of economic activity that has taken quite a rebound.

Now, it's not as much as you would expect in most normal post-conflict countries because of the level of the insurgency this year. Where you see some sluggishness in the non-oil sector is in the manufacturing sector, where still—which is essentially controlled by state-owned enterprises, and many of those state-owned enterprises are still producing at a relatively low level.

Also, as Adam mentioned, the level of reconstruction has been slowed down considerably from what was expected, so that has affected, for example, the cement factories and things like that.

QUESTIONER: [inaudible] has that been the case around the country, or is the insurgency hurting the economy just in the Sunni Triangle or throughout?

MR. PEREZ: It's mostly in the Sunni Triangle. But the Sunni Triangle, including Baghdad, are a very important part of Iraq.

MR. BENNETT: It's worth pointing out that we don't have good data on non-oil economic activity. We have to make assumptions based on what we hear, anecdotal evidence and so on. It's very hard to measure. We hope—this is one area where we hope that the process of improving statistics will focus on.

MR. MURRAY: A follow-up over here on the left.

QUESTIONER: Have you been able to gauge at all the extent to which the black market [inaudible] corruption in general [inaudible]?

MR. PEREZ: Black market sometimes is called underground economy, underground because you don't have much information. But, no, I mean, it's very difficult to try to measure that. You hear a lot of anecdotal evidence that there is black activity in the oil sector, in the distribution of [inaudible]. Also there are a lot of imports coming to various parts of Iraq that are not properly recorded. But this is not so unreasonable given the circumstances of the country right now.

MR. MURRAY: The back of the room?

QUESTIONER: Have you seen any signs of external [inaudible]?

MR. BENNETT: Again, this is very hard to measure. We don't have information on capital flows of this nature. It's quite possible that there has been some inflow of investment, but there may also be some capital flight, too, considering the difficult situation that prevails currently on the ground. So we're not really in a position to measure net private flows.

MR. PEREZ: There was some activity in the hotel sector in 2003 and 2004. There were also a number of foreign banks who have applied for licenses in Iraq, and as far as we know, none of them have really actually gone in and started operating in Iraq, although there is a British bank that might be about to do that.

Now, in the south, and in the north, the north in the Kurdistan area, there has been a lot more economic activity going on, so presumably there might have been some investment there.

QUESTIONER: Have you been able to measure whether trade has increased [inaudible]?

MR. PEREZ: There is the non-oil trade particularly from Jordan, for example, automobile imports. There's a lot of trade in appliances. So Jordan, and I think Turkey to some extent, you know, there's a lot of trade between Iraq and Turkey, to some extent in Iran. In Iran, when you see that there has been an increased influx of tourists coming from Iran to the sacred cities, so that's another part of trade that has become quite active.

MR. MURRAY: Any other questions?

QUESTIONER: [inaudible question related to the pace of reconstruction aid spending].

MR. BENNETT: Well, this reflects, again, the difficulty of implementing projects in the current circumstances in Iraq. This has considerably slowed up the ability to disburse related funds, and this obviously is connected to the slow pace of reconstruction.

The other problem is that a higher proportion of these resources have to go into providing security to protect the implementation of these projects, leaving less resources for the actual projects themselves. We expect, again, if the security situation improves, that the pace of implementation of projects and the disbursement of grants will pick up.

MR. PEREZ: Just to add, I think it's fair to note that both the funds that were deposited in the trust fund managed by the United Nations and managed by the World Bank, those funds have already been committed to a specific project. In addition, the World Bank has announced multilateral lending to Iraq for the amount of US$500 million, and there are a lot of discussions going on to commit those funds to a specific project.

Also, there was recently a meeting in Amman, in Jordan, of the donor community with Iraqi authorities, with the transitional government authorities, and they have worked out a new procedure to try to coordinate better the aid flows to Iraq. So we're hopeful that will improve the pace of disbursement.

MR. MURRAY: We have about a 30- to 40-second lag between live event and the web cast on the Media Briefing Center. We're going to only take a few more questions and wrap up. So if there's anyone watching the briefing who cares to pose a question, I'd urge them to do so very soon because we'll be wrapping up shortly.

QUESTIONER: Yes, I would like to know [inaudible] that meeting, how many people were there, how did you collect the data, if you could explain that.

MR. BENNETT: We're in regular contact with our Iraqi counterparts. We didn't actually go to Baghdad. We communicate by teleconference, videoconference, and we also meet with them in locations in the region around Iraq. And this has proved to be a very effective way of exchanging views and discussing the issues with our counterparts, including the development and flow of data, which we have included in this report, as well as in the policy dialogue, all of which are reflected in this report. So we deal with Iraqi officials, government ministers from the key ministries—the Ministry of Finance, the Ministry of Oil, Ministry of Planning, and the central bank of Iraq—in this way.

QUESTIONER: Do you have anyone there in Iraq?

MR. BENNETT: No, we have no office in Iraq at this point.

QUESTIONER: [inaudible] anyone from the IMF [inaudible]?

MR. BENNETT: No, we don't actually go to Baghdad itself. As I said, we meet with our counterparts in locations in the area, outside of Iraq.

MR. PEREZ: We had—during 2003, we had like four missions to Baghdad, but after the bombing of the Canal Hotel and the withdrawal of UN personnel, you know, we had to stop traveling to Baghdad for the time being. But we are trying to find substitute means of meeting with the Iraqis, and we do. We meet regularly, almost on a quarterly basis.

One thing that worked very well in Baghdad is e-mail, so we have regular communication with the Iraqis. We communicate with email, and also via telephone in addition to videoconference...We have met in several cities in the Middle East and in Europe to continue this very close dialogue that we have.

QUESTIONER: You were in Baghdad in 2003, right?

MR. PEREZ: Yes, yes.

QUESTIONER: Would you presume that the Iraqi Constitution will have any immediate effect on the overall economy?

MR. PEREZ: On the overall economy? It will have a very immediate effect, a positive effect on the politics of Iraq. I think that the approval of the Constitution is an important step in the political and economic development process of Iraq. This is something that will clarify, you know, some basic economic issues, for example, the oil sector, you know, the management of the oil resources, the [inaudible], the sharing of the revenues might take some further discussions among Iraqis. But overall it will have a positive impact on the economic climate of the country.

QUESTIONER: What is your estimation [inaudible] 16.8 percent [inaudible] you know, the reason why the Iraqi economy [inaudible].

MR. PEREZ: The short answer is that it's first a function of the oil production and oil prices, and that projection is based in a situation where the instability of the insurgency starts coming down, so we will see some [inaudible] economic activity picking up [inaudible] this year.

MR. BENNETT: And we have projected oil production in 2006 to reach 2.4 million barrels per day compared to a projection a 2.0 million barrels per day in 2005, which is a 20-percent increase. So a 16.8, or 17 percent overall growth rate is in line with the increase in oil production. We have a slightly slower projection for the growth of non-oil activity.

MR. MURRAY: Any more questions? Any follow-up?

[No response.]

MR. MURRAY: Okay. Well, thank you for coming. If you do have follow-up questions—again, this briefing is embargoed until 11:00 a.m. Washington time, 1500 GMT. If you do have follow-up questions, drop me an e-mail,, and I'll follow up with Lorenzo and Adam.

Lorenzo and Adam, thank you very much for briefing today, and we appreciate everybody coming.

MR. PEREZ: Thank you.

MR. BENNETT: Thank you.

MR. MURRAY: Thanks.


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