Iraq to modernize public financial management

Iraq to modernize public financial management
March 11, 2010 · Posted in NEWS
LINK TO ORIGINAL ARTICLE

Posted by Gamal Ragay
Thursday, 11 March 2010 13:28

Over the next two years, Iraq intends to transform and modernize its public financial management (PFM) system. Late last year, in consultation with the IMF and the World Bank, Iraq has adopted a three-year action plan that identified priority measures in the areas of budget preparation, execution and reporting; cash management; public procurement; and the accounting framework. Specifically:

- To improve budget preparation, Iraq will clearly define priorities, set ceilings in the budget circular for current and investment spending in line with a sustainable medium-term budget strategy, and develop overall sector strategies;

- To strengthen reporting and cash management, Iraq will require spending units to submit reports on all spending including investment, advances, and letters of credit no later than two months after the end of each month, and to reconcile these amounts with the cash balances at the beginning and end of the reporting period. Cash releases will be approved only after the Ministry of Finance has reviewed the report from three months before. This will reduce the idle balances in spending units’ accounts to the minimum required to ensure the continuity of government operations. Moreover, by end-March 2010 Iraq will review all accounts in the banking system that are classified as central government accounts and reconcile them with Treasury records, and will return any idle balances received from the budget to the central Treasury.

- With regard to advances, Iraq will review the outstanding stock of advances to identify those that are recoverable and set a time schedule for their recovery and for writing off irrecoverable advances based on appropriate authorization at a high level. Iraq will prepare a detailed report to document the results of the review. The basis on which debts have been classified as recoverable or irrecoverable, and actions taken to recover doubtful amounts before recommending that they be written-off will be clearly specified.

- To strengthen internal audit and control systems, Iraq will reexamine its internal policies and procedures at the Ministry of Finance, as well as the accounting systems, processes and internal controls used by the accounting department; and review the internal controls of the largest spending units’ operating systems. To strengthen the quality of its investment agenda and accelerate the reconstruction of Iraq’s infrastructure, Iraq will ask the Board Supreme Audit (BSA) to review the largest investment projects financed with 2008 budget allocations. This audit report will evaluate (i) the criteria for approving capital investment projects: whether a costbenefit analysis was carried out; (ii) the procurement process: whether it conformed to international standards of transparency and competitiveness; and (iii) the project management process: whether the projects were delivered on time and within budget. The report will provide recommendations that could be used in the following budgeting process to enhance the agenda on public investment.

- Iraq will also undertake an assessment of the functionality of the Iraq Financial Management Information System (IFMIS) developed with the assistance of USAID, and make the changes required to ensure that this system is fully operational (with the inclusion of a commitment control system and the ability to produce regular comprehensive reports in line with best practices) in 2011.

- Iraq will continue to submit to the BSA and to the Council of Representatives the final accounts for each fiscal year no later than September 30 of the following year. The BSA has already completed the audit of the final accounts of the federal budget for 2005-06, and it is reviewing the 2007 and 2008 accounts.

To avoid the obstacles Iraq has encountered last year in data collection for the census of public service employees, Iraq has narrowed the coverage to include all central government employees that work outside of security related areas. Iraq will make all efforts to have the census completed by September 30, 2010. After completion of the census, Iraq will move swiftly to eliminate ghost workers and adopt an action plan aimed at developing a computerized human resource database and a computerized payroll system, as a first step toward comprehensive civil service reform. In parallel, the BSA has begun a project to verify the personnel records in the line ministries in order to clean up the existing payroll.

Tax Reforms
Iraq has made some progress in developing a medium-term tax reform strategy with the objective of streamlining the tax system, broadening and diversifying the tax base, and increasing revenue collection. As a first step, in 2008 Iraq has introduced a mobile phone tax. Looking ahead, Iraq plans to introduce a sales tax in the coming years as a precursor for a value-added tax, and are also considering to reduce the number of income tax brackets. Iraq has will seek technical assistance from the IMF and other international partners to support its tax reform efforts. Iraq will urge the Council of Representatives to adopt the new customs law that will establish a transparent and efficient tariff system with fewer exemptions.

Monetary and Exchange Rate Policies and Financial Sector Reform
The CBI will continue to be independent in the pursuit of its policy objectives. The CBI’s monetary and exchange rate policies will continue to be aimed at keeping inflation under control and safeguarding international reserves. The subdued inflationary pressures thus far in 2009 have helped to maintain the nominal exchange rate stable since the beginning of the year and to reduce the policy interest rate to 7 percent. The policy interest rate will be kept positive in real terms (measured against core inflation) to signal the CBI’s firm commitment to maintain a low rate of inflation. Iraq is accelerating plans to roll out a new CPI based on more recent household expenditure data, which will help us better monitor underlying inflationary dynamics.

The banking sector is in urgent need of reform to foster financial intermediation and enable banks to contribute to the development of a strong private sector. With the help of the World Bank and other international agencies, Iraq has developed a banking sector reform strategy. The first important step will be to finalize the restructuring of Rafidain and Rasheed banks, based on their completed financial and operational audits. In this regard, the foreign liabilities incurred by Rafidain and Rasheed on behalf of the previous regime and the large suspense accounts will need be removed from these banks’ balance sheets. Iraq aims to complete the restructuring of the balance sheets of Rafidain and Rasheed by June 30, 2010. Once their balance sheets are cleaned up and restructured, based on the decision already made by the Economic Committee, the capital of Rafidain and Rasheed will be raised to ID500 billion and ID400 billion, respectively. Iraq is also strengthening their internal audit capacity, developing legal arrangements within the banks, and working towards providing missing data identified in the audit reports. The BSA has also completed the financial and operational audits for the three specialized state-owned banks and has proposed an individual strategy for each bank that was discussed by the Restructuring Oversight Committee (ROC). The three banks have set up a restructuring committee which includes BSA members to implement the recommendations from the proposed strategy.

Iraq has already completed the set of prudential regulations for commercial banks, including those related to minimum capital requirements, liquidity risk, and anti-money laundering, and will begin the implementation phase. Work on the relevant reporting tables for the banks will be completed soon in consultation with the IMF and other technical assistance providers. At the same time, Iraq is stepping up its efforts to further develop banking supervision practices in line with best international practices. In addition, Iraq has asked the commercial banks to conform their accounting norms to the International Financial Reporting Standards (IFRS) as per end-2009, and to prepare a set of financial soundness indicators that could be used to monitor sectoral developments. Finally, to assess the progress made so far, Iraq is in the process of conducting a full assessment of the banking supervision department.

Iraq has continued to strengthen the accounting and reporting framework of the CBI. The CBI has appointed a control committee, which is responsible for developing control procedures and manuals, and for establishing a modern internal audit function with the assistance of external consultants. An internal audit committee including two external experts has also been set up to make recommendations regarding external and internal audit oversight, financial reporting, and controls. Iraq has also reconciled almost all the outstanding suspense accounts and CBI intra-branch accounts, and established a register of outstanding off-balance sheet commitments (letters of credit and guarantees). As of July, the CBI has completed the process of becoming IFRS compliant.

Iraq is committed to strengthening the management of international reserves by moving ahead with the implementation of new reserves management guidelines that were adopted in early August 2008. Iraq will follow the guidelines to diversify currency composition and establish appropriate duration and credit risk, build capacity for risk analysis, and work towards establishing a dealing room. Iraq will also provide by end-March 2010 more frequent reports to the CBI board based on the investment criteria established in the guidelines.

To improve the functioning of foreign exchange auctions, Iraq plan to develop organized exchange markets outside the central bank, including an interbank foreign exchange market. its aim is to establish a forward market in Iraqi dinars in the near future.

Global Arab Network

Letter of Intent of the government of Iraq, which describes the policies that Iraq intends to implement in the context of its request for financial support from the IMF. (IRAQ: MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES FOR 2010–11)