The Executive Board of the International Monetary Fund (IMF) on Friday approved the institution's first-ever Stand-By Arrangement for Iraq, which is designed to support the nation's economic program over the next 15 months. The IMF arrangement, for an amount of about US$685 million, is being treated as precautionary by the Iraqi authorities.
Iraq, a founding member country of the IMF, received its first-ever loan from the Fund in September 2004 through Emergency Post Conflict Assistance. The initial credit was designed to facilitate Iraq's negotiations with its Paris Club creditors over a debt-restructuring agreement that is now in place, and to support the nation's economic programs through 2005. Approval of the Stand-By Arrangement is a condition for the second stage of debt reduction agreed with Iraq's Paris Club creditors.
Following the Executive Board's discussion of Iraq, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said: "The Iraqi authorities were successful in promoting macroeconomic stability in 2005, despite the extremely difficult security environment. Economic growth was modest, following the strong rebound recorded in 2004, and inflationary pressures moderated, although prices remained volatile. The Central Bank of Iraq built up reserves and the exchange rate remained stable. The projected fiscal deficit is much lower than expected under the EPCA-supported program, mainly due to higher than projected export prices for crude oil. On the other hand, because of security concerns and capacity constraints, the implementation of structural benchmarks specified in the EPCA-supported program was slower than envisaged.
"The authorities' program for 2006 aims to allocate resources towards the planned expansion of the oil sector, redirect expenditures away from general subsidies towards providing improved public services, and strengthen administrative capacity. The program, which envisages an increase in economic growth, a reduction in inflation, and an increase in net international reserves, maintains a focus on macroeconomic stability, while improving governance and advancing Iraq's transition to a market economy.
"A critical component of the overall strategy is to contain expenditures within revenues and available financing, by prioritizing expenditures, controlling the wage and pensions bill, reducing subsidies on petroleum products, and expanding the participation of the private sector in the domestic market for petroleum products, while strengthening the social safety net.
"The authorities have recently increased prices of refined petroleum products and will need to press ahead with other structural reforms, including measures to enhance the efficiency and transparency of public financial management and the development of a comprehensive restructuring strategy for the state-owned banks. At the same time, the Central Bank of Iraq aims to establish a modern payments system, implement modern supervisory frameworks, facilitate the proper functioning of foreign exchange and money markets, and conduct a monetary policy geared to ensuring financial stability.
"The medium term outlook for Iraq is favorable, but subject to many risks. A strengthening of the security situation will help the authorities to implement the program. Moreover, Iraq remains vulnerable to shocks, particularly those relating to oil production development and oil export price movements," Mr. Kato said.