IMF >>>Iraqi Letter of Intent

[Ett]

Mr. Dominique Strauss-Kahn
Managing Director
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431
Dear Mr. Strauss-Kahn:
In the past few years, despite a very difficult security situation, Iraq’s economic performance
strengthened considerably owing to improved macroeconomic management and a favorable
external environment that lasted until mid-2008. These improvements also reflected the
assistance we received from the international community, including from external creditors
and the International Monetary Fund (IMF). Growth accelerated, inflation was reduced to
single digits, and fiscal and external sustainability improved substantially. Since 2004, we
have successfully completed three economic programs supported by the IMF, with our last
Stand-By Arrangement (SBA) ending in March 2009.
Already at the time of the last SBA review it became evident that the external environment
was deteriorating rapidly due to the sharp drop in international oil prices and the onset of a
slowdown in the global economy. As the proceeds from oil exports account for the bulk of
Iraq’s export receipts and government revenue, the decline in oil prices has posed
considerable challenges to our internal and external stability. During 2009, we have been
able to absorb much of the adverse impact of these external shocks by using the financial
buffers we built up in recent years. However, unless oil prices increase markedly, we would
be forced to constrain government spending in 2010 and 2011, at a time when our
developmental and security-related needs remain high. A fiscal contraction would hurt the
economy and undermine our hard-won macroeconomic stability, and could also contribute to
a deterioration of the security situation.
To address these challenges, we have developed the attached economic program for 2010–
2011. Our program aims to manage the effects on the Iraqi economy of the lower oil prices
and the slowdown in global economic activity. The program focuses on keeping inflation
low, increasing growth by boosting oil production, and ensuring fiscal sustainability. While
our main focus is on macroeconomic policies, we are also accelerating the pace of structural
reforms, especially to improve public financial management and develop the financial sector.
To support our efforts, and based on the economic program and the specific targets set out in
Tables 1 and 2 attached to this letter, we request a 2-year Stand-By Arrangement from the
IMF in the amount of SDR 2,376.8 million (approximately $3.8 billion), equivalent to
200 percent of Iraq’s quota, to help cover our balance of payments needs.
2
Given the large uncertainties and the high volatility of international oil prices, our projections
and the government’s budget for 2010 are conservatively based on an average price of
$62.5 per barrel for Iraqi oil. In the event that our oil export revenues turn out to be higher
than projected, we plan to save half of the additional revenues to rebuild our financial
buffers, while using the other half to finance additional investment to improve the delivery of
basic public services. Moreover, if by the time of the first or second program review futures
markets indicate that we will be able to obtain, on average, an oil price equal to or higher
than $73 per barrel for our exports in 2010, we intend to treat the SBA as precautionary,
given that we would no longer expect to have a financing need, provided that our oil export
volume (projected at 2.1 million barrels per day) is sustained (this issue will be examined in
detail at the time of each program review discussion). Vice versa, should oil export receipts
fall below our assumptions, we will reduce spending by half of the revenue shortfall and
cover the remaining gap by further using our financial buffers and seeking additional external
support, including from the IMF. If the revenue shortfall turns out to be sizable, or if the
reserve position of the CBI weakens below program targets in between test dates, we will
consult on the policy response with IMF staff.
In the same vein, we intend to treat the SBA as precautionary if it is expected that the 2010
investment budget will not be fully executed. Disbursements of capital spending in 2009 fell
short of budgeted amounts, due in part to severe disruptions of administrative capacity as a
result of the bombings of the Ministry of Finance in August and December. Investment
remains a key priority, however, as underscored also by the Council of Representatives’
provision of additional investment spending at the time of approval of the 2010 budget. The
2010 capital budget would imply a large increase over last year’s estimated investment
outturn. In order to ensure that the disruptions of administrative capacity do not lead to poor
quality implementation, we are working hard to rebuild and expand capacity, including by
restoring information systems and strengthening project approval processes. With these
efforts, we will aim to execute the full envelope for the year. If capacity issues cannot be
fully addressed, however, investment could again fall short of budgeted amounts. Therefore,
at the time of the second review we will reach understandings with IMF staff on the expected
rate of execution of the 2010 investment budget. If the rate of execution is expected to be less
than 93 percent, we intend to treat the SBA also as precautionary.
We understand that the requested SBA will be subject to semi-annual reviews, semi-annual
performance criteria, and structural benchmarks, as set out in the attached Tables 1 and 2,
and described in more detail in the attached Technical Memorandum of Understanding
(TMU). In this regard, we understand that the completion of the first review under the
SBA—expected to take place on or after May 31, 2010—will require observance of the
quantitative performance criteria for end-March 2010 specified in Table 1, and that
completion of the second review—expected to take place on or after August 31, 2010—will
require observance of the quantitative performance criteria for end-June 2010.
3
We believe that the policies set forth in our economic program are adequate to achieve our
objectives but are prepared to take additional measures if necessary. We will consult with the
IMF on the adoption of these measures and in advance of any revision to the policies
contained in our economic program, in accordance with IMF policies on such consultation.
The Iraqi government and the Central Bank of Iraq will continue to provide the IMF with the
necessary information for assessing progress in implementing our program, as specified in
the attached TMU, and will maintain a close policy dialogue with IMF staff. We authorize
the IMF to publish the Letter of Intent and its attachments, as well as the related staff report,
on the IMF’s website following consideration of our request by the IMF’s Executive Board.
Sincerely yours,
//s// //s//
Mr. Baqir S. Jabr Al-Zubaydi Dr. Sinan Al-Shabibi
Minister of Finance of Iraq Governor
Central Bank of Iraq

[mannamay]

Very nice, keep'm coming!!

[dbcooper]

Nice post...Thanks!

[IcemanSC]

Thanks for the post.