IMF Extends Iraq Loan Another Six Months

"Despite...Circumstances, Iraqi Authorities Have Taken Important Measures"

March 13, 2007

The IMF Executive Board on Tuesday approved a 6-month extension for Iraq's $700 million+ "Stand-By Arrangement"--the term for an IMF line of credit.

Iraq first received the IMF pledge of support in September 2005, and is required to undergo scheduled performance reviews to maintain the offer of financing. Iraq requested the extension as a precautionary measure, and says no use of the funds is immediately required.

Following the Executive Board's discussion of Iraq, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"Iraq is entering a crucial period in its economic recovery. Despite very difficult political and security circumstances, the Iraqi authorities have taken important measures to keep their economic program on track. The maintenance of fiscal discipline, as well as the tightening of monetary policy and the appreciation of the dinar, are commendable. The increase of official domestic fuel prices and the enactment by the Council of Representatives (CoR) of a law liberalizing the import of fuel products are important steps. The amendments to the pension law were submitted to the CoR; we look forward to their early passage into law. The government's approval of a new oil and gas law augurs well for the future of the oil sector. Progress is also being made in financial sector reform.

"Inflation, however, remains high. While this is to an important extent due to the prevailing difficult security situation and supply disruptions, the Central Bank of Iraq (CBI) may need to take further steps in order to prevent high inflation from becoming entrenched and to de-dollarize the economy. Fiscal policy should be supportive by keeping current spending, including the wage and pension bill, in check. At the same time, it is important to increase government investment, especially in the oil sector. The government also needs to reduce supply bottlenecks, especially of fuel products. To that end, actions are needed to facilitate the importing of fuel products by the private sector. The pace of structural reforms needs to be increased. Efforts to modernize the chart of accounts and the budget classification need to be stepped up, and the Financial Management Information System should be implemented rapidly. It is important to complete the census of public sector employees by mid-year. While the restructuring effort on the two largest banks is commendable, efforts should be made to restructure the four other state-owned banks. The modernization of the payments system needs to be expanded to cover all banks.

"The CBI's efforts to implement the recommendations of the Interim Safeguards assessment report and the Ernst & Young 2005 audit report are encouraging. The Ministry of Finance is strongly encouraged to recapitalize the CBI as soon as possible.

"Corruption and violence need to be brought under control to unlock Iraq's oil wealth. More forceful actions are needed, especially in the area of smuggling. In this respect, the implementation of oil metering projects should be finalized as soon as possible. The authorities' intention to join the Extractive Industries Transparency Initiative is welcome.

"Progress in settling arrears with private creditors is commendable. However, further progress is needed towards resolving non-Paris Club official claims," Mr. Kato said.