## 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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## Bibliographic details
- Published: October 23, 2003

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### 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.*

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## References

- [Iraq and the IMF](http://www.imf.org/external/country/IRQ/index.htm)
- [Statements at Donor Meetings](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/29/18/04/dm102303_