Statement on the IMF's Staff Macroeconomic Assessment of Iraq, Delivered by Lorenzo Perez, IMF Mission Chief for Iraq, to the International Donors' Conference for the Reconstruction of Iraq
IMF News, October 23, 2003
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- Published: October 23, 2003
Context and purpose
- Prepared as an input to the Joint Needs Assessment Report issued on October 8, 2003, in the context of the United Nations-World Bank Needs Assessment.
- Provides a preliminary appraisal of the current state of the Iraqi economy, near-term recovery prospects, and a proposed macroeconomic strategy.
Assessment of economic conditions and key statistics
- Causes of dislocation: pervasive state intervention, costly militarization, three wars, and over a decade of international sanctions.
- Proven oil reserves: about 112 billion barrels.
- Historical GDP per capita: declined from over US$3,600 in the early 1980s to about US$770-US$1000 in 2001.
- External indebtedness: even before reparations, Iraq is among the most heavily externally indebted countries in the world.
- 2003 economic impacts:
- GDP in U.S. dollar terms for 2003 is likely to decline by 20 percent (or a decline similar to the one estimated for 2002).
- Factors contributing to GDP decline: a 40 percent decline in oil production; a 30 percent drop in electricity production; closure and restructuring of half of the state-owned enterprises (SOEs).
- Consumer price inflation is likely to be less than 15 percent by end-2003.
- Oil-for-Food Program (OFFP) continued to provide the majority of Iraqis with basic necessities.
- Draft 2004 budget projections:
- Oil revenue assumed: US$12 billion.
- Non-oil revenue: negligible.
- Operating (recurrent) expenditures: almost US$20 billion (including spending associated with remaining contracts of the OFFP).
- Resulting deficit: US$8.5 billion or 55 percent of GDP.
- Financing: expected to be fully financed by official Iraqi assets held abroad and existing contracts under the OFFP.
- External debt: based on partial information, the external debt stock is projected at close to nine times GDP.
Recent policy actions and institutional developments (2003)
- Second-half 2003 budget adopted in July 2003, financed by oil export sales, grants by the United States government, and official Iraqi assets held abroad; implementation faced payment system and infrastructure disruptions.
- As of August 2003, wage and pension payments have been regularized, and rehabilitation work has started.
- Banknote exchange program started on October 15, for a period of three months, to provide liquidity and address counterfeiting concerns.
- A reform agenda is being formulated to move to a market economy and liberalize prices; in September 2003, newly appointed economic ministers announced reforms in foreign investment, the financial system, and taxes to encourage private sector participation, including foreigners, in reconstruction.
Near-term outlook and conditional recovery scenario
- IMF staff view: a strong economic recovery in 2004 is possible, driven by a pick up in oil output and private investment, provided:
- sufficient security is restored; and
- the functioning of basic utilities returns to more normal levels.
- Inflation outcome in 2004 will be affected by the conduct of macroeconomic policies and by the extent to which price subsidies are phased out.
Main challenges identified
- Emergence from conflict combined with inherited features of a transition economy complicate policymaking.
- Critical challenges listed:
- Restoration of lasting security is essential to support recovery, private investment, and effective donor involvement.
- Reform strategies need careful planning and transparent implementation to ensure broad political support in sensitive areas.
- Collection of essential macroeconomic information is critical to design the macroeconomic strategy.
Policy recommendations and strategic priorities
- Fiscal policy and public finances:
- Consider adopting a broader-based tax revenue effort due to uncertainties about fiscal oil revenue, large reconstruction needs, and heavy debt burden.
- Iraq will need generous external debt relief for sustainable future debt service payments.
- Expenditure and wage policy:
- A reform of the civil service salary scale has been implemented, decompressing the wage scale but substantially increasing the wage bill.
- Wage restraint will need to be exercised in the future; wage policy decisions should be coordinated with reform of price subsidies and the OFFP commodity distribution program.
- SOE and subsidy reforms:
- SOE reform should account for the complexities of the existing environment, including capacity to absorb current high unemployment.
- Removal of domestic oil price subsidies should be phased out in stages to avoid undue social disruption.
- Social safety nets and OFFP transition:
- A gradual, carefully monitored transition from the in-kind social safety net under the OFFP to a cash-transfer system could begin in 2004.
- Constitute a strategic food reserve to guarantee access to essential food commodities at international prices until alternative private import supply channels develop.
- As means testing becomes feasible, target the safety net to limit costs.
- Monetary and financial sector policy:
- Primary objective for monetary policy: maintain broad price stability by targeting currency in circulation, and monitoring inflation and exchange rate developments.
- Adopt a flexible exchange rate regime.
- Central Bank of Iraq should improve banking supervision capacity to ensure banks play their key role.
- Strengthen domestic banks while opening the financial system to foreign investment.
- Institutional development:
- Develop institutions based on international best practices and internationally accepted standards of transparency and openness.
- Design safety nets to protect the poor and vulnerable from negative impacts of the transition.
Statement delivered October 23, 2003, IMF EXTERNAL RELATIONS DEPARTMENT — Public Affairs / Media Relations.