International Monetary Fund

IMF Executive Board Concludes 2009 Article IV Consultation with Iraq
Public Information Notice (PIN) No. 10/34
March 1, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 24, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Iraq.1


The Fund has been closely engaged with Iraq since 2003. Initial work focused on providing policy advice, mainly on monetary and fiscal policies, and technical assistance to rebuild essential economic institutions. In September 2004, the Fund approved Emergency Post Conflict Assistance for Iraq, which—in combination with a debt sustainability analysis—paved the way for an agreement with Paris Club creditors. Since then, Iraq successfully completed two precautionary Stand-By Arrangements whose main objectives were to achieve macroeconomic stability; promote growth; and continue the process of structural reforms.

Substantial progress has been made since 2003, despite the difficult security situation. Inflation has been reduced to single digits, the international reserves position has improved markedly, and direct fuel subsidies were eliminated, while the pension system was put on a sustainable footing, which created room for priority spending on investment and the social sectors. Several steps have also been taken to strengthen public financial management, improve transparency in the oil sector, and rebuild capacity at the central bank, and the authorities have initiated the restructuring of the two largest state-owned banks. In addition, important advances have been made in attaining long-term debt sustainability. In 2004, Paris Club creditors agreed to reduce Iraq’s external debt by 80 percent in net present value terms. Also, bilateral debt agreements with several non-Paris Club creditors have been concluded, although this process is yet to be completed.

Iraq’s economic performance was strong in 2008, aided by record oil prices and improved security. Oil production rose to 2.3 million barrels per day (mbpd), the highest level since 2003. As a result, real GDP is estimated to have grown by 9½ percent in 2008, up from 1½ percent in 2007. Crude oil export receipts reached $61 billion in 2008—65 percent higher than in 2007—and the current account recorded a large surplus. The government budget registered a lower-than-expected surplus of 1½ percent of GDP in 2008. This reflected a significant increase in government spending that more than offset the higher-than-budgeted revenues. This increase in government spending reflected in part a large wage adjustment to compensate for the erosion in real wages that had taken place in previous years.

Following the strong economic performance in 2008, more recently the Iraqi economy has been seriously affected by the drop in oil prices from their peak levels in mid-2008. Also, oil production and export volumes have not risen as much as planned due to insufficient investment; production reached 2.4 mbpd. As a result, Iraq’s external position weakened in 2009, with oil export proceeds falling to $39 billion and both the external current account and the overall balance of payments shifting into large deficits. With oil export receipts accounting for about 85 percent of government revenues, the lower oil prices had a similar impact on the government’s budget, which is estimated to have recorded a deficit of over 20 percent of GDP in 2009. The CBI’s international reserves fell by almost $7 billion in 2009, to about $44 billion by year’s end, reflecting the use of government deposits at the CBI to finance the budget deficit. Growth is estimated to have slowed to 4 percent in 2009, even though oil production improved towards the end of the year owing to efforts to address infrastructure bottlenecks.

Iraq’s longer-term economic outlook is strong as oil prices and production are projected to increase markedly in the coming years. However, based on conservative oil price assumptions, the external current account and the overall balance of payments are expected to remain in deficit in 2010 and 2011. Similarly, Iraq’s fiscal position is projected to record significant, albeit declining deficits in both years, before returning to a surplus position in 2012. Financing the budget deficits in 2010–2011, would require additional financial support to fill a financing gap projected at almost $5 billion, even after mobilizing substantial amounts of domestic financing and utilizing the recent SDR allocation amounting to the equivalent of about $1.7 billion.

Against this background, the authorities have designed an economic program for 2010–11 that aims to maintain macroeconomic stability during the period of political transition (parliamentary elections are scheduled for early March 2010) and deepen structural reforms, particularly in the areas of public financial management, the financial system, and oil sector transparency. In support of this program, the authorities have requested a new Stand-By Arrangement from the IMF in the amount of SDR 2,376.8 million (about $3.6 billion). This amount, together with disbursements from the World Bank under a Development Policy Loan and support from some donors, is expected to cover the financing gap for 2010–11. An important objective of the authorities’ fiscal program is to contain current spending in order to gradually reduce the budget deficit and make room for additional investment. Specifically, current spending in both 2010 and 2011 will be kept broadly unchanged in nominal terms at 2009 levels. At the same time, given the urgent need to improve infrastructure and basic public service delivery, a significant increase in capital spending is planned for 2010, following an underexecution of the 2009 capital budget due to administrative capacity constraints associated with security incidents that affected the Ministry of Finance towards the end of the year. Monetary and exchange rate policies will continue to aim at keeping inflation low in 2010 and 2011.

Executive Board Assessment

Directors commended the Iraqi authorities for the progress in rebuilding its economy under extremely difficult security and political conditions. While the medium-term economic outlook remains favorable as oil prices and production are expected to increase in the coming years, major challenges lie ahead. Large fiscal and balance of payment gaps are projected for 2010 and 2011, caused by the lower oil receipts and infrastructure bottlenecks. Directors also noted considerable risks associated with security problems, oil price volatility, and capacity constraints. They welcomed the authorities’ strong commitment to consolidate macroeconomic stability and advance the structural reform agenda, particularly in the areas of public financial management and the banking sector. Directors underscored the importance of steadfast implementation of the economic program, which would help unlock much needed resources from other donors and multilateral development banks.

Directors considered that the 2010 budget, based on conservative oil price assumptions, is consistent with the program’s objectives. They highlighted the need to contain current spending, in particular through rationalizing the government wage bill and streamlining the in-kind Public Distribution System and transfers to state-owned enterprises. This would create room for targeted social safety nets and for essential investment and reconstruction projects, including improving public service delivery and infrastructure in the oil sector. Directors encouraged further reform efforts aimed at improving budget preparation and execution through developing a medium-term budget framework, and broadening the revenue base by introducing a general sales tax.

Directors welcomed the authorities’ continued commitment to strengthen governance and improve transparency in the hydrocarbon sector. Completion of the oil metering system would help facilitate the full reconciliation of oil flows with financial flows between the state-owned oil companies and the budget. Directors congratulated Iraq on becoming a candidate for membership in the Extractive Industries Transparency Initiative. They encouraged the authorities to establish a successor arrangement for the Development Fund for Iraq with the similar standards of transparency and accountability.

Directors supported the central bank’s objective of aiming monetary and exchange rate policies at keeping core inflation in single digits. They called on the authorities to remove the remaining exchange restrictions under Fund jurisdiction. Directors also encouraged the central bank to fully implement the recommendations of the previous safeguards assessment and looked forward to its update. The need to preserve central bank independence was particularly emphasized. Further steps are necessary to strengthen reserve management, banking supervision and prudential regulations, and the AML/CFT framework.

Directors welcomed the authorities’ good-faith efforts to conclude debt agreements with the remaining official and private creditors. They encouraged the authorities to continue to work with non-Paris Club creditors, with a view to securing debt relief on terms comparable to those of the 2004 Paris Club Agreement.

While welcoming Iraq’s participation in the General Data Dissemination System, Directors called for continued efforts to improve the quality, coverage, and timeliness of macroeconomic statistics.

Iraq: Selected Macroeconomic Indicators, 2007–10

2007 2008 2009 2010
Est. Proj.

Oil and gas sector

Total exports of oil and gas (in billions of U.S. dollars)
37.7 61.7 38.9 48.4

Average crude oil export price (in U.S. dollars/barrel)
63.0 91.5 56.5 62.5

Crude oil production (in millions of barrels/day)
2.0 2.3 2.4 2.6
(Annual percentage change)

Output and prices

Real GDP
1.5 9.5 4.2 7.3

Non-oil real GDP
-2.0 5.4 4.0 4.5

Consumer price inflation (end-of-period)
4.7 6.8 -4.4 6.0
(In percent of GDP)

Investment and Saving

Gross domestic investment
19.8 28.1 28.1 31.5

Of which: non-government
4.1 2.0 3.7 4.1

Gross national savings
32.5 43.2 8.7 10.5

Of which: non-government
7.1 15.4 11.3 2.9
(In percent of GDP, unless otherwise indicated)

Public Finances (cash basis)

Government revenue (including grants)
83.7 84.3 76.5 75.4

Of which: Oil revenue
74.0 77.6 68.0 67.0

74.0 82.6 99.0 94.5

Of which: Current
57.7 56.4 78.4 67.0

Of which: Capital
15.6 26.1 24.4 27.5

Budget balance (including grants)
9.7 1.7 -22.6 -19.1

Primary fiscal balance
10.5 2.2 -21.7 -18.0

Non-oil primary fiscal balance
-53.4 -64.7 -78.7 -74.2

Total government debt (in billions of U.S. dollars)
103.1 95.6 90.2 33.8
(Annual percentage change)

Monetary Sector

Base money
73.9 54.5 0.1 13.5

Currency issued
31.2 36.3 13.4 15.2
(In billions of U.S. dollars, unless otherwise indicated)

External Sector

Merchandise trade balance
13.4 20.8 -1.9 -2.4

Exports of goods
37.8 62.0 39.3 48.8

Imports of goods
24.4 41.2 41.3 51.2

Current account
7.2 13.1 -12.8 -16.8

Current account (in percent of GDP)
12.7 15.1 -19.4 -21.0

Total external debt (in percent of GDP)
181.0 110.5 137.1 42.1

Central banks gross reserves
31.5 50.2 44.3 44.0

In months of imports of goods and services
7.7 11.9 8.5 8.1

Memorandum Items

Nominal GDP (in billions of U.S. dollars)
57.0 86.5 65.8 80.3

Local currency per U.S. dollar (period average)
1,255 1,193 1,170 ...

Real exchange rate 1/
280.7 342.5 292.0


Sources: IMF staff estimates and projections.
1/ Calculated as the nominal exchange rate adjusted for the inflation differential between Iraq and the United States. Increase in the index denotes appreciation.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

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