Iraq Gets $5.34 Billion IMF Loan to Support Economic Stability

IMF News, July 14, 2016

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IMF approval: three-year, $5.34 Billion loan under the Stand-By Arrangement facility.
Purpose: implement economic and financial policies to help Iraq cope with lower oil prices and ensure debt sustainability.
The loan builds on a Staff‑Monitored Program started in November 2015 to address the double shock of ISIS attacks and the sharp drop in global oil prices.
Previous emergency financing: US$1.2 billion in July 2015 under the Rapid Financing Instrument.
Financing gap to be closed by the program: about $18 Billion.
Context: ongoing conflict with over 4 million internally displaced people.

Non-oil economy: contracted by 19 percent in 2015 and is expected to continue to contract in 2016.
Oil sector: grew by 13 percent in 2015 and by more than 20 percent during the first five months of 2016.
Macroeconomic consequences noted: internal and external imbalances, large and rising budget deficits, increasing public debt, losses in official foreign exchange reserves, and some pressure on the Iraqi Dinar.

Four main program elements:
- Reduce budget spending and restore public finances to a healthy state and stabilize debt.
- Protect spending on the social front to ease the lives of the poorest, internally displaced people and refugees.
- Improve the quality of public spending and prevent accumulation of unpaid debt through improvements in public financial management.
- Begin the process of restructuring state-owned banks to reduce their dominance in the banking system, thereby mitigating financial sector risks and preserving the sector’s stability.

Maintain the Iraqi Dinar’s peg to the U.S. dollar.
Rationale provided:
- Devaluing the Dinar would have minimal bearing on the economy’s overall trade competitiveness because Iraq is predominantly an oil exporter.
- Devaluation would trigger a spike in inflation for most food and other consumer goods due to import dependence (almost half of Iraq’s consumption needs are imported), exacerbating social tensions.
The authorities are committed to maintaining the peg under the current circumstances, and the IMF supports this view.

Program sets a floor on a number of budget items deemed crucial for social spending.
Protected spending areas include:
- Social safety net.
- Public distribution system (subsidies on food items, wheat, rice).
- Agricultural product subsidies.
- Transfers and assistance for internally displaced populations and refugees.
- Spending for salaries and goods and services by the ministries of health and education.

Identified risks:
- Continued conflict, including the fight against ISIS.
- Subdued global oil prices.
- Uncertainty around the budget sharing agreement between the federal government and the Kurdistan Regional Government.
The program’s policy responses are intended to help stabilize Iraq’s economy despite these risks.

Preserve macroeconomic stability, including debt sustainability.
Maintain fiscal discipline to create fiscal space to pay suppliers and international oil companies on time, supporting financial sector stability and oil production.
Restructure state-owned enterprises, including the six state-owned banks, to reduce their dominance and spur private sector activity.
Prioritize investment projects, such as in the electricity sector, to improve infrastructure development.

IMF News — Iraq Gets $5.34 Billion IMF Loan to Support Economic Stability (July 14, 2016).