Iraq renews $744 million loan from the IMF

13 February 2008

Iraq’s renewed Stand-By Arrangement with the International Monetary Fund (IMF) includes macroeconomic policy reforms that may restrict fiscal space for public spending, particularly on the public wage bill. It also continues the deep involvement of international financial institutions in Iraq’s oil sector.

The Executive Board of the International Monetary Fund (IMF) approved US$744 million for Iraq in a renewed Stand-By Arrangement (SBA) loan program on December 19, 2007. The arrangement will cover a 15-month period, concluding in March 2009. Iraqi government officials are to treat this agreement as “precautionary,” implying that they do not intend to use these resources.

Iraq became qualified for this SBA program when it repaid its entire outstanding debt of $470.5 million to the IMF on December 12, 2007—a full two years before it was due. Iraq had acquired this debt to the Fund under an Emergency Post-Conflict Assistance program that began in September 2004. Managing Director of the IMF, Dominique Strauss-Kahn, applauded Iraq for its economic reforms over the years, stating that “Iraq’s ability to repay the IMF ahead of schedule reflects its strong international reserve position against a background of high oil prices.”

In 2007, Iraq—a founding member of OPEC—produced 1.98 million barrels per day, the sixth-highest output in the 11-nation OPEC cartel. These quantitative targets are highly contingent on continued oil production expansion, given that Iraq’s oil sector constitutes 70% of the country’s GDP. 

Indeed Iraq has built up its foreign reserves to $27 billion by the end of 2007, thanks to the surge in the international price of oil. The higher price of oil thus justified scrapping direct fuel subsidies in 2007, except on kerosene. It also led to liberalizing private fuel imports, which according to the IMF, frees up the government’s budget for other priority spending. Meanwhile, the U.S. government commends Iraq’s central government for reaching its “2007 target of $30.2 billion in budget revenue one month before the end of the year,” further reinforcing the importance of strengthening the central budget. Mohsin Khan, Director of the Middle East and Central Asia department at the IMF, expressed satisfaction in Iraq’s ability to bring inflation—which had soared to 65% in 2006 due to fuel shortages—under control to approximately 20% in 2007. Inflation control required a combination of tightened monetary policy (which often hurts loan borrowers), an appreciated dinar (which generally hurts export value), and fiscal discipline (which constrains public spending).

The key components of Iraq’s SBA program reflect the standard mix of ingredients that comprise the IMF’s ideology of a strong macroeconomic policy package: to speed up economic growth and build up foreign reserves while maintaining low inflation, a small fiscal deficit, and liberal investment and trade policies.  As stated in the IMF’s publicly available Memorandum of Economic and Financial Policies (MEFP) for Iraq:

“The broad objectives of the program are to maintain macroeconomic stability, facilitate investment and higher output in the oil sector, and advance priority structural reforms to pave the way for higher growth over the medium term and to strengthen governance and administrative capacity in the public sector.”

The MEFP also highlights that completion of the current SBA program will “trigger the third and final stage of debt reduction under the 2004 Paris Club agreement” for Iraq. The MEFP is a key document for civil society in countries that have ongoing programs with the IMF to know what policies their government is planning to implement when signing on to agreements with the IMF.

The key objectives of the program are:

• Macroeconomic stability through quantitative macroeconomic targets for 2008. These targets include reaching an overall GDP growth rate of over 7%, containing consumer price inflation at 12%, boosting net foreign reserves to $34 billion, and increasing oil output to 2.2 million barrels per day.

• Structural reforms include strengthening the financial management of the Central Bank of Iraq (CBI), restructuring the two largest banks—Rafidain and Rasheed—and prioritizing a significant expansion in the country’s oil sector.
• Structural reform in the oil sector involves a major investment plan by the Iraqi government in both oil and non-oil sectors, liberalizing private fuel imports, and increasing oil sector output.
• Fuel subsidies have been eliminated, although kerosene subsidies will remain.

One of the primary goals of the newly installed SBA program is to significantly expand the oil sector through pumping investments, stimulating oil output, and liberalizing oil imports. The extent of the IMF’s reach in Iraq’s oil sector is substantial and will have critical long-term effects for the economic development of the country. Driven by the imperative of channeling large-scale investment into the sector, the IMF’s MEFP document clearly states that “increasing transparency and good governance in the oil sector remains a top priority.” An example of the Fund’s influence in Iraqi oil is seen in the IMF’s participation in drafting the legislation to re-structure the Iraq National Oil Company, reorganize the Ministry of Oil, and to define the parameters for oil revenue distribution. The IMF is also facilitating increasing the capacity of oil wells in the south Iraq, “protecting the Kirkuk-Ceyhan pipeline,” and improving export infrastructure at the port of Khor Al-Amyah. Iraq’s oil sector will however commit to joining the Extractive Industries Transparency Initiative (EITI), and the Fund mentions that it will solicit technical assistance from its international partners on implementing the EITI.

Ameliorating the delivery of essential public services in Iraq is included as a goal of the SBA program. However, according to the IMF Iraq needs to accomplish this while “containing current government spending, notably on the wage and pension bill,” and in order to “create room for higher investment outlays,” current spending for 2008 needs to be limited. The government’s wage bill (for all but employees of the defense and interior ministries) is bound to about 10.8 trillion Iraqi Dinars (approximately $8.9 million). This amount is subject to a quantitative performance criterion, which is a measurable economic target that Iraq must achieve during the course of its SBA loan. Furthermore, Iraq’s wage bill performance criterion will allow for very limited hiring increases, mostly in the education, health and security sectors, while an action plan outlined by the IMF seeks to “eliminate ghost workers” on the public payroll by September 2008.

One of the many pressing critiques from civil society working on debt, aid, and policy space for development is that the IMF imposes quantitative macroeconomic targets that constrain fiscal space for public spending by the central government. In a report titled “Confronting the Contradictions,” ActionAid International has pointed out how wage bill caps set forth in IMF loan programs lead to chronic deficits in salaries and resources for teachers, nurses, and doctors across several sub-Saharan African countries.

The IMF’s first program in Iraq was a $685 million SBA program that was approved on December 23, 2005 (and whose fifth and final review was completed on August 1, 2007). This was preceded by an Emergency Post-Conflict Assistance program in September 2004 and an Article IV consultation in August 2004. The 2005 SBA endorsed Iraq to receive donor aid, proved its eligibility to receive further IMF loans, and enabled it to reach an 80% debt reduction with the Paris Club. However, the impacts of the policy stipulations in the 2005 SBA led to dramatic increases in fuel prices (by up to 200%), which in turn led to riots across the country and the eventual resignation of the oil minister, Ibrahim Bahr al-Uloum. He later expressed that oil price hikes should have occurred in gradual stages so as to meet the demands of ordinary Iraqis who need cheap fuel and the IMF who seek subsidy eliminations. It seems the IMF has learned little from history; two years onward, some of the same policies, such as the elimination of fuel subsidies, are still included as a key program goal.

Resources

From IMF:

Transcript of a conference call: Report on Iraq’s Request for New Stand-by Arrangement, January 16, 2008. (IMF website)

Press Release: IMF Executive Board approves US $744 million Stand-by Arrangement for Iraq, December 20, 2007. (IMF website)

Press Release: Iraq completes early repayment of entire outstanding obligations to the IMF, December 14, 2007. (IMF website)

Iraq—Memorandum of Economic and Financial Policies for 2008, December 4, 2007. (IMF website)

Iraq: Letter of Intent, Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding, December 6, 2005. (IMF website)

From Civil Society Organizations:

Why you should care about the World Bank and Iraq, Bank Information Center, March 13, 2007 (BIC website)

Bank and Fund in-roads into Iraq, Bretton Woods Project, January 23, 2006 (Bretton Woods Project website)

Press:

IMF in support of Iraq’s growth by Stuart Matthews, January 26, 2008. (Arabian Business.com website)

Positive outlook for Iraq, January 17, 2008. (inthenews.co.uk website)

IMF extends Iraq’s standby credit by three months, Agence France Presse, August 2, 2007 (Haaba website)

Continued Progress in Iraq Allows “Return on Success,” Fact Sheet, Office of the President, The White House, 2008 State of the Union, January 28, 2008. (America.gov website)