Press Release No. 07/175

Press Release: IMF Executive Board Completes Fifth Review and Review of Financing Assurances under Iraq's Stand-By Arrangement, and Approves Three-Month Extension of the Arrangement to December 2007

August 2, 2007

The Executive Board of the International Monetary Fund (IMF) has completed the fifth review of Iraq's performance under its economic program supported by a Stand-By Arrangement and a financing assurances review under the Arrangement. The Stand-By Arrangement is being treated as precautionary by the Iraqi authorities, and no purchase is planned.

The Stand-By Arrangement in an amount equivalent to SDR 475.36 million (about US727.4 million) was approved on December 23, 2005 (see Press Release No. 05/307). In completing the review, the Executive Board also approved the authorities' request for a three-month extension of the Arrangement through December 28, 2007.

The Board also approved the authorities request for the waivers of the non-observance of the structural performance criteria on the interim audit of the Central Bank of Iraq's 2006 financial statements, on completing a census of all public service employees (central government and military), and on the adoption of a fully detailed budget classification and chart of accounts, and request for waivers of the applicability of the June 30, 2007 quantitative performance criteria under the Arrangement.

The Executive Board also concluded the Article IV Consultation with Iraq.

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

"Despite a persistently difficult security environment, the Iraqi authorities have taken important measures to keep their economic program on track. However, the expansion of oil production is lagging and inflation, while on a downward path, remains high reflecting in large part shortages associated with the security situation, notably of fuel products. A turnaround hinges critically on an improvement in the security situation.

"Measures to speed up reconstruction and increase investment, especially in the oil sector, are needed. The measures adopted by the authorities to increase the implementation rate of the public investment program are encouraging. Enhancing the protection of oil installations is also important.

"The government is showing a commendable commitment to pursue a prudent fiscal policy, by keeping current spending in 2007 within the budget limits and by seeking to maintain fiscal sustainability over the medium term. It remains essential to amend the new pension law in order to ensure fiscal sustainability of the pension system.

"The recent increase in official fuel prices to regional levels is an important step in the right direction. The authorities are considering the development of a rule-based mechanism for setting domestic fuel prices in the future, which should prevent the re-emergence of budgetary subsidies (except for kerosene), help fight corruption, and free up resources for much-needed investment spending.

"Inflation has come down, reflecting the appropriate policy actions taken by the Central Bank of Iraq (CBI). The CBI will need, however, to continue its tight monetary and exchange rate policies to further reduce inflation and de-dollarize the economy. The government should also help to fight inflation by restraining public spending pressures and by stepping up efforts to reduce shortages, notably by actively supporting private sector fuel imports.

"Structural reforms remain the cornerstone of the reconstruction process. However, much remains to be done and the pace of implementation needs to be stepped up. Key actions include the broadening of the coverage of the Financial Management Information System, and modernizing and streamlining the tax system. The government is committed to restructuring the largest two state-owned banks and to rehabilitate viable public enterprises on a commercial basis.

"Transparency needs to be enhanced and corruption to be brought under control, in order to reinforce the credibility of the government's reform program. In this connection, it is important to put in place a comprehensive oil metering system as soon as possible.

"Unlocking Iraq's oil wealth requires advancing the enactment of a new legislative framework for the hydrocarbon sector, in view of the large investments needed to increase oil production.

"The CBI has taken steps to strengthen CBI safeguards area. The CBI should continue its efforts to address all the recommendations of the Fund's interim safeguard assessment report, as well as the Ernst & Young interim 2006 audit report.

"Good progress has been made in settling arrears with the remaining official and private creditors. However, further progress is needed towards resolving non-Paris Club official claims," Mr. Kato said.