Press Release No. 06/175

Press Release: IMF Executive Board Completes First and Second Reviews Under the Stand-By Arrangement with Iraq

August 3, 2006

The Executive Board of the International Monetary Fund (IMF) has completed the first and second review of Iraq's performance and a review of financing assurances under the 15 months Stand-By Arrangement. The arrangement is being treated as precautionary by the Iraqi authorities.

The Stand-By Arrangement in an amount equivalent to SDR 475.4 million (about US$705.6 million) was approved on December 23, 2005 (see Press Release No. 05/307).

In completing the reviews, the Board approved the authorities' requests for waivers of applicability of six end-June 2006 quantitative performance criteria as well as waivers for the nonobservance of the quantitative performance criterion on the revenue of oil-related state enterprises for March 31, 2006, the May 15, 2006 structural performance criterion on completing the final audit of the Central Bank of Iraq's 2005 financial operations, the structural performance criterion on adopting a fully detailed budget classification and chart of accounts by June 30, 2006, and the continuous performance criterion on external arrears on new borrowings.

Following the Executive Board's discussion of Iraq, on Wednesday, August 2, 2006, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"The Iraqi authorities have taken important and decisive measures to bring their economic program back on track, although continued progress in the authorities' reform efforts will remain critically dependent on an improvement in the security situation. Substantial efforts have been made to maintain fiscal discipline and control recurrent spending, despite the difficult environment, and the Central Bank of Iraq's tightening of monetary conditions constitutes an important step in the right direction. The timely adjustment of fuel prices is welcome, and the submission to the Council of Representatives of the revised draft law to liberalize private imports of fuel products restores to the agenda a key component of the authorities' program, and its early passage into law and implementation will be key to prevent supply bottlenecks in the market for petroleum products.

"Inflation remains, however, a serious source of concern. The ongoing violence and supply disruptions in the non-oil economy will undoubtedly continue to put pressure on prices. In this context, it is commendable that the Central Bank of Iraq stands ready to further tighten monetary and exchange rate policy to prevent high inflation from becoming entrenched. Fiscal policy should be supportive by keeping public sector wages and pensions in check.

"Structural reforms and institution-building will remain the cornerstone of the reconstruction process. It is encouraging that preparations for establishing an operational payments system are well advanced. However, much work remains to be done in other areas. A top priority is the reform of the pension law to ensure that Iraq's public sector pension system is sustainable over the medium term. Other key areas of reform include improvements in transparency in the government's payroll, improvements in public expenditure management, and work towards a successor to the Public Distribution System. There has been a welcome increase in targeted support for the poor, and reforms in this area will continue to be of central importance, including the development of a better targeted social safety net that will go hand in hand with the reduction in general subsidies.

The completion of bilateral negotiations with Paris Club creditors is welcome and progress has to be made toward resolving non-Paris Club official claims. The excellent progress in settling arrears with private creditors is also noteworthy. Good faith efforts to resolve the remaining arrears should continue.

Governance and transparency are essential for the authorities' program to succeed. The government's efforts to tackle corruption in the petroleum sector are therefore welcome," Mr. Kato said.