Press Release No. 07/48

Press Release: IMF Executive Board Completes Third and Fourth Reviews under Iraq's Stand-By Arrangement, Approves Six-Month Extension of Arrangement to September 2007

March 13, 2007

The Executive Board of the International Monetary Fund (IMF) has completed the third and fourth reviews of Iraq's performance under its economic program supported by a Stand-By Arrangement. The IMF 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 US$714.7 million) was approved on December 23, 2005 (see Press Release No. 05/307). In completing the latest reviews, the Executive Board also approved the authorities' request for a six-month extension of the arrangement through September 28, 2007. Additionally, the Board also approved the authorities request for a waiver of the non-observance of a structural performance criterion.

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

"Iraq is entering a crucial period in its economic recovery. Despite very difficult political and security circumstances, the Iraqi authorities have taken important measures to keep their economic program on track. The maintenance of fiscal discipline, as well as the tightening of monetary policy and the appreciation of the dinar, are commendable. The increase of official domestic fuel prices and the enactment by the Council of Representatives (CoR) of a law liberalizing the import of fuel products are important steps. The amendments to the pension law were submitted to the CoR; we look forward to their early passage into law. The government's approval of a new oil and gas law augurs well for the future of the oil sector. Progress is also being made in financial sector reform.

"Inflation, however, remains high. While this is to an important extent due to the prevailing difficult security situation and supply disruptions, the Central Bank of Iraq (CBI) may need to take further steps in order to prevent high inflation from becoming entrenched and to de-dollarize the economy. Fiscal policy should be supportive by keeping current spending, including the wage and pension bill, in check. At the same time, it is important to increase government investment, especially in the oil sector. The government also needs to reduce supply bottlenecks, especially of fuel products. To that end, actions are needed to facilitate the importing of fuel products by the private sector. The pace of structural reforms needs to be increased. Efforts to modernize the chart of accounts and the budget classification need to be stepped up, and the Financial Management Information System should be implemented rapidly. It is important to complete the census of public sector employees by mid-year. While the restructuring effort on the two largest banks is commendable, efforts should be made to restructure the four other state-owned banks. The modernization of the payments system needs to be expanded to cover all banks.

"The CBI's efforts to implement the recommendations of the Interim Safeguards assessment report and the Ernst & Young 2005 audit report are encouraging. The Ministry of Finance is strongly encouraged to recapitalize the CBI as soon as possible.

"Corruption and violence need to be brought under control to unlock Iraq's oil wealth. More forceful actions are needed, especially in the area of smuggling. In this respect, the implementation of oil metering projects should be finalized as soon as possible. The authorities' intention to join the Extractive Industries Transparency Initiative is welcome.

"Progress in settling arrears with private creditors is commendable. However, further progress is needed towards resolving non-Paris Club official claims," Mr. Kato said.