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    Exclamation IMF IRAQ Letter of Intent

    1/12/16


    The following item is a Letter of Intent and a Memorandum of Economic
    Policies of the government of Iraq. It is being made available on the IMF website
    by agreement with the member as a service to users of the IMF website. This
    memorandum describes the policies that Iraq is implementing in the framework
    of a staff-monitored program. A members's staff-monitored program is an
    informal and flexible instrument for dialogue between the IMF staff and a
    member on its economic policies. A staff-monitored program is not supported by
    the use of the Fund's financial resources; nor is it subject to the endorsement of
    the Executive Board of the IMF.

    International Monetary Fund
    Iraq and the IMF
    Press Release: IMF
    Managing Director
    Approves a StaffMonitored
    Program
    for Iraq
    January 12, 2016
    Country’s Policy
    Intentions Documents
    E-Mail Notification
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    Iraq: Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
    December 22, 2015
    The following item is a Letter of Intent and a Memorandum of Economic Policies of the government of Iraq. It is being made available on the IMF website by agreement with the member as a service to users of the IMF website. This memorandum describes the policies that Iraq is implementing in the framework
    of a staff-monitored program. A members's staff-monitored program is an informal and flexible instrument for dialogue between the IMF staff and a member on its economic policies. A staff-monitored program is not supported by
    the use of the Fund's financial resources; nor is it subject to the endorsement of
    the Executive Board of the IMF.
    IRAQ
    INTERNATIONAL MONETARY FUND 1
    Letter of Intent
    Baghdad, December 22, 2015
    Ms. Christine Lagarde
    Managing Director
    International Monetary Fund
    700 19th Street, N.W.
    Washington, DC 20431, USA
    Dear Ms. Lagarde,
    1. The attacks by the so-called Islamic State in Iraq and Syria (ISIS) have put Iraq in great
    danger. Iraqi security forces have made notable progress in the fight against ISIS, with the help of
    our international partners. In fact, a significant portion of the territory captured by ISIS after its
    invasion has already been retaken. However, the war is not likely to end soon and will continue to
    affect the lives of Iraqis as well as the national economy.
    2. The attacks has resulted in the loss of thousands of lives and caused a dramatic
    humanitarian crisis. More than 4 million people have been displaced in the northern regions since
    June 2014, in addition to 250 thousand Syrian refugees whom Iraq has been sheltering since the civil war in neighboring Syria. Nearly half of the internally displaced persons are children, forced to live in difficult conditions and to face serious health risks. The refugee crisis is also putting great pressure on Iraq’s infrastructure system and public services. Furthermore, the war has destroyed public and private assets and infrastructure, is seriously hampering economic activity in the non-oil sector, and has undermined domestic and external trade.
    3. As the ISIS threat expanded, world oil prices fell by 50 percent in the space of a few months,
    causing a huge external shock to our balance of payments and our budget revenue, which depends predominantly on oil export receipts. The shock has caused a strong deterioration of the current account balance, drained our international foreign exchange reserves, and boosted the Iraqi
    government budget deficit.
    4. Against this background, the government commits to implement the economic and financial policies described in the attached Memorandum on Economic and Financial Policies (MEFP) as part of a Staff-Monitored Program, in order to demonstrate good performance and move to a possible IMF financing arrangement as soon as possible. The MEFP describes the large fiscal consolidation that the government has already implemented in 2015 and plans to continue to implement in 2016.
    The MEFP describes also the foreign exchange policy, public financial management and banking
    IRAQ
    2 INTERNATIONAL MONETARY FUND
    supervision reforms that the government commits to implement during the remainder of 2015 and in 2016.
    5. The government believes that the measures and policies set out in the attached MEFP are
    appropriate for attaining the objectives of this program and will take any further steps that might be necessary to that end. It will consult with the IMF staff on the adoption of such measures prior to any revision of the policies described in the attached MEFP.
    6. The government will provide IMF staff with any relevant information referred to in the
    attached Technical Memorandum of Understanding (TMU) concerning progress made under the
    program.
    7. The government intends to make public the content of the IMF staff report, including this
    letter, the attached MEFP, the TMU, and the informational annex of the staff report. It therefore authorizes the IMF staff to publish these documents on its website once you have approved this
    Staff-Monitored Program.
    Sincerely yours,
    /s/ /s/




  2. #2
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    Hoshyar Mahmoud Zebari Ali Mohsen Ismail Al Allaq
    Minister of Finance of Iraq Acting Governor of the Central Bank of Iraq
    Attachments:
    1. Memorandum of Economic and Financial Policies
    2. Technical Memorandum of Understanding
    IRAQ
    3 INTERNATIONAL MONETARY FUND
    Attachment I. Memorandum on Economic and Financial Policies
    1. This Memorandum on Economic and Financial Policies (MEFP) sets out recent economic
    developments, outlook and economic and financial policies in 2015-16 in regard to Iraq’s StaffMonitored-Program
    with the International Monetary Fund (IMF).
    Background and Recent Economic Developments
    A. Background
    2. The attacks by the so-called Islamic State in Iraq and Syria (ISIS) have put Iraq in great
    danger. The Iraqi security forces have made notable progress in the fight against ISIS, with the help of our international partners. In fact, a significant portion of the territory captured by ISIS after its invasion has already been retaken. However, the war is not likely to end soon and will continue to affect the lives of Iraqis as well as the national economy.
    3. The ISIS attacks has boosted the number of internally displaced persons—estimated at
    4 million people at end June 2015. Close to 10 million Iraqis (or almost one third of the
    population) need humanitarian assistance. With 250,000 Syrian refugees, Iraq is the fourth largest hosting country in the region for people fleeing Syria. Refugees—60 percent of whom are
    women and children—mostly reside in the north, including the Kurdistan Regional Government
    (KRG) where they have been granted residency status including rights to work. This refugee
    inflow is adding to the already difficult internal humanitarian situation faced by the Iraqi
    government.
    4. In response to escalating protests across the country fueled by massive electricity
    outages, the Prime Minister proposed a series of significant administrative reforms in August.
    Parliament approved a number of these measures, including reducing cabinet from 33 to 22 members, eliminating three vice-president and three deputy prime minister positions, addressing
    tax evasion, implementing customs at border points including within KRG,
    reducing security
    budgets and lowering pension ceilings and salaries for officials.
    B. Recent Economic Developments

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    5. Oil production, located in areas under control of the Iraqi government and the KRG, is
    holding well: for the first 11 months of 2015, it increased by 14 percent compared to last year
    and oil exports increased by 23 percent. Northern oil exports accelerated in line with the oil
    revenue sharing agreement between the Iraqi government and KRG until June, when the KRG
    drastically reduced oil supply to the State Oil Marketing Organization (SOMO) and increased its
    independent sales to repay the debt to oil companies incurred in 2014 as the oil and budget
    agreement with Baghdad stumbled.
    IRAQ
    4 INTERNATIONAL MONETARY FUND
    6. Non-oil activity in the part of the country that is not occupied by ISIS dropped by 8 percent
    year-on-year during the first semester of 2015. The government has no information on economic
    activity in the ISIS-controlled territories.
    7. At end-October 2015, y-o-y consumer price inflation (CPI) was low at 1.6 percent, but is
    likely underestimated because CPI coverage excludes areas occupied by ISIS.
    8. Broad money stayed flat at end June year-on-year and reserve money contracted by
    13 percent at end-September likely reflecting lower government spending and weakening nonoil
    economic activity.
    9. Gross foreign exchange reserves of the Central Bank of Iraq (CBI) stood at $59 billion at
    end-October compared to $67 billion at end-2014.
    10. As part of the preparation to issue Eurobonds to help finance the large fiscal deficit, the
    Fitch Ratings agency gave a sovereign rating of B- to Iraq. In light of the adverse market
    conditions, the government has decided to postpone the issuance of $2 billion in Eurobonds
    from 2015 to 2016 (¶26).
    11. The Iraqi stock exchange index lost about 16 percent between June and September.
    12. The spread between the official and the parallel foreign exchange market rate receded to around 2 percentage points since August from as high as 16 percentage points in June, as a result of the elimination of the obligation to prove custom duty and income tax payments before buying foreign exchange.
    13. During the first eight months of the year, public expenditures were compressed owing to
    the tight financing constraints. Oil revenue amounted to ID 39 trillion, non-oil revenue amounted to ID 5 trillion, and total spending amounted to ID 54 trillion, out of which ID 41 trillion in current expenditures and ID 13 trillion in investment expenditure. Total spending was about ID 23 trillion lower than the path assumed in the budget. The resulting deficit of ID 11 trillion, or 5 percent of GDP, was financed mostly by the issuance of T-bills subscribed by the state-owned banks Rasheed and Rafidain, of which 4 trillion was refinanced at the discount window of the Central
    Bank of Iraq (CBI). The deficit was also financed by the accumulation of domestic arrears
    estimated at ID 5 trillion at end-April 2015. The government paid all the arrears it owed to the
    international companies (IOCs) in an amount of $3.5 billion. The deficit was also financed by a
    loan of $1.2 billion by the IMF under the Rapid Financing Instrument (RFI) approved by the IMF
    Executive Board on July 29, 2015.

    IRAQ
    INTERNATIONAL MONETARY FUND 5
    Economic and Financial Policies for the End of 2015 and 2016
    14. The external outlook has worsened since the latest Article IV consultation assessment
    (May-June)1 mainly owing to a further weakening of global oil prices. Lower capital spending on
    the back of falling oil revenue is expected to contract non-oil economic activity by 8 percent in
    2015, after a contraction of close to 9 percent in 2014. Overall real GDP should nonetheless grow
    by 1.5 percent thanks to an increase of oil production by 10 percent. In 2016, real GDP growth
    should increase to 10.6 percent thanks to the projected 20 percent increase in oil production,
    despite flat non-oil GDP.
    15. The fall in oil prices since mid-2014 is expected to shift the current account balance from a surplus of 1 percent of GDP in 2014 to a deficit of 7 percent of GDP in 2015 and 6 percent of GDP in 2016. The overall balance of payments deficit will reach $14 billion in 2015 and $11 billion in 2016, which will be financed mostly by a large draw down of official foreign exchange reserves.
    Official gross foreign exchange reserves held by the CBI would fall from $67 billion (13 months of
    imports of goods and services) in 2014 to $51 billion (9 months) in 2015, and $43 billion (7
    months) in 2016. Reserves should resume their rising trend in 2017 and beyond owing to rising
    oil revenue: they should gradually increase from $48 billion (7 months) in 2017 to $88 billion (10
    months) in 2020.
    16. The fall in oil prices is also causing a sharp deterioration of the fiscal position with the
    budget deficit increasing from 6 percent of GDP in 2014 to 15 percent of GDP in 2015 and 10
    percent of GDP in 2016 (provided measures discussed below are taken), and the total public debt increasing from 39 percent of GDP in 2014 to 62 percent of GDP in 2015 and 66 percent of GDP in 2016 as result of a sharp increase of mostly domestic borrowing to finance the deficit.
    17. In the medium term, the outlook should improve as oil production expands further, oil
    prices recover somewhat, structural reforms are implemented, and progress is made to retake
    territories controlled by ISIS.
    C. Foreign Exchange Policy
    18. The government will maintain the peg with the U.S. dollar. The peg provides a key
    nominal anchor in a highly uncertain environment with policy capacity weakened by the conflict
    with ISIS.

    19. The government will gradually remove remaining exchange restrictions and multiple currency practice (MCP) with a view to eliminating exchange rate distortions. Such a move towards acceptance of the obligations under Article VIII of the IMF’s Articles of Agreement will send a positive signal to the investment community that Iraq is committed to maintain an

    1
    See Country Report No. 15/235. Iraq: 2015 Article IV Consultation and Request for Purchase under the Rapid
    Financing Instrument.
    IRAQ
    6 INTERNATIONAL MONETARY FUND
    exchange system that is free of restrictions and MCPs for current international transactions and thus facilitate creation of a favorable business climate. As a first step, the government will, by
    end-February 2016, amend the Investment Law, or issue clarifying implementing regulations, to
    remove the limitation on transfer of investment proceeds that gives rise to an exchange
    restriction, as recommended by a recent technical assistance mission of the IMF.



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    20. The government will implement reforms on anti-money laundering and combating the
    financing of terrorism (AML/CFT). This will improve the integration of the domestic financial
    system into the global economy and lower transaction costs, improve governance, and reduce the size of the informal sector.
    As a first step, the government will, by end-February 2016, draft, with the help of IMF technical assistance, and adopt a by-law to set up a mechanism to comply with the relevant United Nations Security Council resolutions related to terrorism financing and Recommendation 6 of the Financial Action Task Force on Money Laundering (FATF).
    D. Fiscal Policy
    21. In order to maintain macroeconomic stability, the government commits to implement a
    large fiscal consolidation to bring spending into line with available resources in 2015 and 2016.
    This will require: (i) a sizable reduction in the non-oil primary balance2 (quantitative targets, Table 1), of about 12 percent of non-oil GDP (ID 24 trillion, or $20 billion) over 2013–16;3
    and (ii) a large increase in mostly domestic but also external financing over the short run that will remain compatible with debt sustainability in the medium run. In order to minimize the impact of the fiscal consolidation on the population, the government will protect social spending, i.e. spending on health, education, and transfers in support of the social safety net, the internally displaced and the refugees (quantitative targets, Tables 1 and 3).
    Fiscal Program in 2015
    22. In 2015, the government commits to contain the non-oil primary deficit to no more than
    ID 69 trillion (52 percent of non-oil GDP), compared to ID 84 trillion (60 percent of non-oil GDP)
    in 2014. This will be achieved through the implementation of the following measures:
     collect at least ID 6.5 trillion (4.9 percent of non-oil GDP) in non-oil revenue, compared to
    ID 5.9 trillion (4.2 percent of non-oil GDP) in 2014; and



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    2
    The non-oil primary fiscal balance is defined as the difference between non-oil revenue and non-oil primary expenditure, i.e. excluding interest payment, see Technical Memorandum of Understanding (TMU), ¶7.
    3
    2013 is the appropriate reference year to measure the fiscal consolidation since it is the last year that fully included revenue and expenditure of KRG in the federal government fiscal tables; 2014 includes only 2 months of KRG’s revenue and expenditure and 2015 only 6 months owing to disagreements between KRG and the federal government over their oil revenue sharing agreement. The 2016 budget fully incorporate oil revenue exported by KRG and transfers of the federal government to KRG.
    IRAQ
    INTERNATIONAL MONETARY FUND 7
     contain non-oil primary expenditure to ID 75 trillion (57 percent of non-oil GDP) compared
    to ID 90 trillion (64 percent of non-oil GDP) in 2014; this reduction will be borne mostly by a
    reduction of non-oil investment expenditure (by ID 15 trillion, or 10 percent of non-oil GDP),
    goods and services (ID 3.7 trillion, or 2.4 percent of non-oil GDP) and transfers (by ID 1.3
    trillion, or 0.5 percent of non-oil GDP), making room for higher wages for security forces
    fighting ISIS and for higher pensions; the reduction in non-oil investment expenditure has
    been achieved by cancelling non-priority projects and delaying other ones to outer years.
    23. In order to finance the non-oil primary fiscal deficit, the oil investment expenditure and
    the debt service, the government will have recourse to oil revenue (ID 55 trillion), domestic
    financing (ID 33 trillion) and external financing (ID 2 trillion). The domestic financing will be
    covered by the issuance of Treasury bills, out of which up to ID 15 trillion will be refinanced by
    commercial banks at the discount window of the CBI.
    The external financing will be covered by
    the loan from the IMF under the RFI ($1.2 billion, ¶13), a Development Policy Loan by the World
    Bank ($1.2 billion) to be disbursed in December 2015, and project loans by the World Bank ($35
    million), the Japan International Corporation Agency (JICA, $307 million), and Italy ($40 million).


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    24. To ease the cash constraint in 2015-16, the government of Kuwait has agreed to the
    postponement of the payment of the balance of war reparations ($4.6 billion, or 4 percent of
    non-oil GDP) by the Iraqi government to 2017.
    Fiscal Program in 2016

    25. On October 18, 2015, the government approved a draft budget for 2016 with a non-oil
    primary deficit of ID 78 trillion (57 percent of non-oil GDP) with a large amount of foreign
    financing. In light of the adverse market conditions (¶10), the government decided to reduce its foreign financing forecast and introduced amendments to the 2016 draft budget to parliament on December 2, 2015 that target a slightly lower non-oil primary fiscal deficit of up to ID 77
    trillion (56 percent of non-oil GDP; prior action for management approval, Table 2) with financing
    tilted towards domestic sources. This will be achieved through the implementation of the
    following measures:
    collect at least ID 8.8 trillion (6.5 percent of non-oil GDP) in non-oil revenue, out of which
    ID 1 trillion from an increase in wage taxation; and

     contain non-oil primary expenditure to ID 86 trillion (63 percent of non-oil GDP). This
    containment of non-oil primary expenditure at a level slightly higher than the low level
    programmed in 2015 will be obtained again mostly by the postponement of lower-priority
    non-oil investment projects to later years.
    26. In order to finance the non-oil primary fiscal deficit, oil investment expenditure and debt
    service, the government will have recourse to oil revenue (ID 73 trillion), domestic financing
    (ID 20 trillion) and external financing (ID 4 trillion). The domestic financing will be covered by the issuance of Treasury bills, out of which up to ID 7 trillion will be refinanced by commercial banks
    IRAQ
    8 INTERNATIONAL MONETARY FUND
    at the discount window of the CBI, the issuance of national bonds for the general public in an
    amount of ID 5 trillion, and the drawdown of government deposits in the banking sector in an
    amount of ID 4 trillion. The amount of central bank indirect monetary financing will be revisited
    on the occasion of the first review in light of the inventory of government cash holdings in bank
    accounts to be completed by end-February 2016
    (¶27). The external financing will be covered by the planned issuance of Eurobonds ($2 billion), a loan from the Islamic Development Bank ($500
    million) and project loans by the World Bank ($50 million), JICA ($502 million), and Italy ($40
    million). The government will not resort to the accumulation of arrears to finance the deficit. It
    commits to a zero ceiling on external arrears (continuous quantitative target, Table 1) and regular inventories of domestic arrears with a view to ensuring that new arrears do not accumulate and
    to paying them down after proper audit, as will be done for the existing stock of domestic arrears
    (¶27, second bullet).
    E. Public Financial Management Reforms
    27. In order to strengthen fiscal discipline, the government will implement the following
    measures:
    The Minister of Finance will approve a new draft of the Financial Management law in line with
    World Bank and IMF comments on the last draft submitted to the Shura Council (structural
    benchmark for the second review, Table 2).
     Survey, audit and pay domestic arrears. As a first step, the Ministry of Planning will complete,
    by end-February 2016, a survey of domestic arrears on investment spending accumulated by
    all ministries as of end-September 2015 (structural benchmark, Table 2) and the Ministry of Finance will complete a survey, also by end-February, on current spending arrears
    accumulated by the same units as of end-September; in addition, similar surveys of arrears as of end-December 2015 by end-March 2016, and as of end-March 2016 by end-May 2016 will be completed. On the basis of each of these surveys, the government will prepare plans for
    the orderly payment of the arrears, which will include an independent audit of the arrears
    and a repayment schedule in line with the government’s financing capacity. As of end-April 2015, the government identified ID 7.3 trillion in domestic arrears, out of which ID 5 trillion accumulated in 2015 (¶13); the Board of Supreme Audit will audit these arrears to check their validity by end-February 2016. So far, the government has included ID 2.4 trillion for the repayment of domestic arrears in its revised 2016 budget (¶25).
    Take steps to move to a Treasury Single Account (TSA); as a first step, the Ministry of Finance and the CBI will, by end-February 2016, compile a list of all bank accounts controlled by the Ministry of Finance and all spending units and sub spending units of the federal government,
    in CBI, state-owned and commercial banks; details should include balances at end-December
    2015,
    account number, title, location, purpose, authority, and signatories (structural
    benchmark, Table 2).
    IRAQ
    INTERNATIONAL MONETARY FUND 9
     Design and implement, with the IMF technical assistance, a commitment control system for
    budget execution that is based on a comprehensive financial plan for budget execution.
     Design and implement an Integrated Financial Management Information System (IFMIS) with
    the assistance of the World Bank; as a first step, adopt, by end-April 2016, a road map
    detailing its core functional requirements, such as: the chart of accounts, multi-year
    expenditure tracking; carry-over of resources from one year to the next; and management of
    advances and cash management arrangements.


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     Implement Public Investment Management (PIM) reform with the assistance of the World Bank.
    On October 18, 2015, the Prime Minister issued a decree endorsing the Public Investment
    Management Decision Process Framework
    in line with World Bank recommendations
    covering investment selection, implementation, and ex-post evaluation. By end-April 2016,
    the federal Ministry of Planning will set up a central PIM unit that will screen projects based
    on feasibility studies and develop and manage the Integrated Bank of Projects (IBP) to be
    operated as a sub-system of the existing Iraq Development Management System (IDMS).
     Implement the existing asset declaration procedures for high-level officials in order to improve governance and enhance anti-corruption efforts; the Public Integrity Commission will
    continue to publish the names of those who fail to submit their annual declaration.
    F. Banking Supervision
    28. As of June 30, 2015, there were 56 banks operating in Iraq including 7 state-owned
    banks (SOB) of which one is an Islamic bank, 32 Iraqi private banks, of which 6 Islamic banks, and
    17 foreign branches, of which 5 are Islamic banks. The SOBs dominate the financial sector and account for the bulk of assets and credits. Three of the SOBs, Rafidain Bank, Rasheed Bank and Trade Bank of Iraq (TBI), cluster around 89 percent of the banking system’s assets. The financial positions of Rasheed Bank and Rafidain Bank are fragile following years of quasi-fiscal
    operations. As a first step to restructure these banks, the Ministry of Finance will, by end February 2016, appoint international auditors to audit the latest financial statements of Rasheed Bank and Rafidain Bank according to international standards (structural benchmark, Table 2), in cooperation with the Executive Committee for the restructuring of these banks and the World Bank.
    29. The CBI will continue to implement reform measures to enhance the stability of the
    banking sector in Iraq which includes inter alia:

     Introducing the international bank account number (IBAN) system in Iraq;
     Increasing the capital requirement of banks to ID 250 billion ($214 million), a level to which
    all private banks except one have increased their capital;
    IRAQ
    10 INTERNATIONAL MONETARY FUND
     Contracting a consultant to assist the CBI in rating banks, whereby they rated 17 banks: three
    banks were rated “satisfactory”, eight banks rated “fair” and six banks “marginal”;
     Contacting a consultant to assist the CBI in upgrading the prudential regulations on
    “Liquidity” and “Capital Adequacy Ratio”;
     Working on reviewing and assessing CBI prudential regulations with the assistance of the IMF
    Middle East Technical Assistance Center (METAC);
     Preparing a Deposit Insurance Scheme which stipulates the establishment of a corporation to
    be licensed by the CBI, of which banks will have the opportunity to take a share in the
    capital;
     Contracting a private firm to provide the CBI with a credit registry system for sharing
    information among banks on their common existing and potential borrowers;
     Issuing a banking law for financial institutions offering Islamic services; and
     Penalizing financially and administratively banks and non-banks financial institutions for any
    non-compliance with laws and regulations in force.
    Program Monitoring


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    30. The program will have quarterly reviews and set quarterly quantitative targets on the
    non-oil primary balance, the stock of net domestic assets of the CBI, official foreign exchange
    reserves, social spending, and the absence of new external arrears, starting in December 2015
    (Table 1). Each program review will set a few structural benchmarks in areas that are essential for
    the success of the program (Table 2 contains the list for the first review). The first review should
    be completed by end-May 2016. The government intends to demonstrate good performance
    under this Staff-Monitored Program to move to a possible IMF financing arrangement as soon as
    possible.
    IRAQ
    INTERNATIONAL MONETARY FUND 11
    Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
    Stock of gross international reserves of the CBI 51,100 43,064 38,945 37,849 42,517
    (floor; eop stock, in millions of U.S. dollars)
    Net domestic assets of the CBI 2/ 12,956 22,029 27,186 28,912 23,677
    (ceiling; eop stock)
    Cumulative flow from beginning of calendar year
    Central government non-oil primary balance (floor) 3/ (68,801) (20,949) (39,365) (58,621) (76,705)
    Social spending (floor) 3/4/ 17,456 4,355 8,710 13,829 18,949
    New external arrears on existing / rescheduled debt and new borrowing (in
    millions of U.S. dollars; ceiling) 5/ 00000
    1/ The Technical Memorandum of Understanding (TMU) provides for precise definitions of all quantitative targets.
    2/ Excluding other items net.
    3/ End-March, end-June, end-September and end-December targets are cumulative from January 1.
    5/ To be monitored on a continuous basis. The December 2015 target is cumulative from November 10, 2015.
    Table 1. Iraq: Quantitative Targets Under the Staff-Monitored Program, 2015–16 1/
    (In billions of Iraqi dinars, unless otherwise indicated)
    Targets
    4/ Quarterly targets assume spending of at least 90 percent of the budget allocation on health, education, and transfers in support of the
    social safety net, the internally displaced and refugees (see Table 3).
    IRAQ
    12 INTERNATIONAL MONETARY FUND
    Measures
    Scheduled review by which
    the measure will be
    completed
    Macroeconomic justification Status
    Prior action for Management approval
    Approval by the Council of Ministers and introduction to Parliament of amendments
    to the draft 2016 budget to bring it into line with the macroeconomic framework
    agreed under the Staff-Monitored Program.
    Preserve macroeconomic
    stability.
    Met
    Structural benchmark
    Completion by the Ministry of Planning of a survey of domestic arrears on
    investment spending accumulated by all ministries of the federal government at
    end-September 2015. Details should include the amount of the arrear, the
    identity of the creditor, the bill, the identification of the goods or the services
    delivered, and the credit line in the budget authorizing such spending.
    1rst review Strengthen cash management.
    Compilation by the Ministry of Finance and the Central Bank of Iraq (CBI) of a list of
    all bank accounts controlled by the Ministry of Finance and all spending and subspending
    units of the central government in CBI, state-owned and commercial banks.
    Details should include balances at end-December 2015, account number, title,
    location, purpose, authority, signatories.
    1rst review Strengthen cash management.
    Appointment of one or several international auditors to audit the latest financial
    statements of Rasheed Bank and Rafidain Bank according to international standards.
    1rst review Strengthen financial sector
    stability.

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    Approval by the Minister of Finance of a draft of the Financial Management law in
    line with World Bank and IMF comments on the last draft submitted to the Shura
    Council.
    2nd review Strengthen public financial
    management.
    Source: Iraqi authorities.
    Table 2. Iraq: Prior Action and Structural Benchmarks, 2016
    IRAQ
    INTERNATIONAL MONETARY FUND 13
    Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
    Total Social spending 17,456 4,355 8,710 13,829 18,949
    Social Safety Net 1,215 496 991 1,487 1,982
    Public Distribution System (PDS - food subsidies) 2,250 556 1,112 1,667 2,223
    Wheat and rice subsidy 1,604 396 792 1,188 1,585
    Assistance and subsidy to Iraqi refugees 192 0 0 95 189
    Assistance and subsidy to internally displaced persons 900 0 0 445 889
    Farmer subsidies 457 0 0 226 452
    Health Ministry and Environment Ministry- wages 2,546 668 1,335 2,003 2,671
    Higher Education Ministry - wages 2,035 564 1,128 1,691 2,255
    Lower Education Ministry - wages 6,258 1,676 3,352 5,027 6,703
    Targets
    Table 3. Iraq: Social Spending
    (In billions of Iraqi dinars, cumulative from the beginning of the year)
    IRAQ
    14 INTERNATIONAL MONETARY FUND
    Mar. Jun. Sep. Dec.
    Prog. Prog. Prog. Prog.
    Revenues and grants 15.5 34.5 56.2 81.7
    Revenues 15.5 34.5 56.2 81.7
    Oil 13.7 30.1 49.7 72.8
    Non-oil 1.8 4.3 6.5 8.8
    Grants 0.0 0.0 0.0 0.0
    Expenditures 27.4 52.7 78.5 103.1
    Current expenditures 20.3 39.7 59.0 77.4
    Salary and pension 13.4 26.1 38.8 50.9
    Salary 10.3 20.1 29.8 39.1
    Pension 3.1 6.0 9.0 11.8
    Goods and services 2.1 4.1 6.2 8.1
    Transfers 4.1 8.0 11.9 15.6
    Social safety net (including PDS) 2.0 3.9 5.8 7.6
    Transfers to SOEs 1/ 0.6 1.2 1.8 2.4
    Other transfers 1.5 2.9 4.2 5.6
    Interest payments 0.8 1.5 2.2 2.9
    War reparations 2/ 0.0 0.0 0.0 0.0
    Investment expenditures 7.0 13.0 19.5 25.7
    Non-oil investment expenditures 3.2 5.5 8.2 11.0
    Oil investment expenditures 3.9 7.5 11.2 14.7
    Balance (including grants) -11.9 -18.3 -22.3 -21.4
    Balance (excluding grants) -11.9 -18.3 -22.3 -21.4
    Financing 11.9 18.3 22.3 21.4
    External financing -0.5 -1.1 -0.5 1.8
    Assets held abroad
    Project financing 0.0 0.0 0.5 0.9
    World Bank (budget support, other) 0.0 0.0 0.0 0.0
    Regional and foreign national banks 0.0 0.0 0.6 0.6
    Loan guarantees by export credit agencies 0.0 0.0 0.0 0.0
    Eurobond 0.0 0.0 0.0 2.4
    Amortization -0.5 -1.1 -1.6 -2.1
    Arrears 0.0 0.0 0.0 0.0
    Domestic financing 12.4 19.3 22.8 19.7
    SDR Allocation 0.0 0.0 0.0 0.0
    IMF (RFI) 0.0 0.0 0.0 0.0
    Commercial bank loans 0.0 2.4 2.4 6.4
    T-bills and bonds 12.7 18.8 22.7 17.1
    o/w CBI purchases 3.8 4.6 6.2 7.0
    Arrears 0.0 -1.2 -1.2 -2.4
    Amortization -0.4 -0.7 -1.1 -1.4
    Financing gap: 0.0 0.0 0.0 0.0
    Memorandum items:
    Security-related expenditure (military and police
    equipment and salaries) 4.7 9.2 13.6 17.9
    Non-oil primary expenditure 22.8 43.7 65.1 85.5
    Non-oil primary fiscal balance -20.9 -39.4 -58.6 -76.7
    Sources: Iraqi authorities; and Fund staff estimates and projections.
    2016
    Table 4. Iraq: Central Government Fiscal Accounts, 2016
    (In trillions of Iraqi dinars; unless otherwise indicated. Cumulative from the beginning of the fiscal year)
    1/ Includes off-budget transfers to SOEs financed by Bank Rafidain.
    2/ Five percent of oil exports as mandated by U.N. Security Council Resolution 1483 to finance war
    reparations to Kuwait until 2016.
    IRAQ
    INTERNATIONAL MONETARY FUND 15
    Mar. Jun. Sep. Dec.
    Prog. Prog. Prog. Prog.
    Trade balance -3.9 -4.3 -2.4 2.8
    (In percent of GDP)
    Exports 11.0 24.4 40.4 59.4
    Crude oil 1/ 11.0 24.3 40.2 59.1
    Other exports 0.1 0.1 0.2 0.3
    Imports -15.0 -28.7 -42.8 -56.6
    Private sector imports -8.7 -16.7 -24.9 -32.9
    Government imports -6.3 -12.0 -17.9 -23.7
    Services, net -3.2 -6.2 -9.2 -12.2
    Receipts 1.1 2.0 3.0 4.0
    Payments -4.3 -8.2 -12.2 -16.1
    Income, net -0.1 -0.2 -0.3 -0.4
    Transfers, net 0.0 0.0 0.0 0.0
    Private, net 0.0 0.0 0.0 0.0
    Official, net 0.0 0.0 0.0 0.0
    Current account -7.2 -10.6 -11.9 -9.8
    (In percent of GDP)
    Capital account 0.0 0.0 0.0 0.0
    Financial account -0.7 -1.5 -1.8 -1.3
    Direct and portfolio investment (net) 2/ 0.5 1.0 1.5 2.0
    Other capital, net -1.2 -2.5 -3.3 -3.3
    Official, net -0.4 -0.9 -0.9 -0.1
    Assets 0.0 0.0 0.0 0.0
    Liabilities -0.4 -0.9 -0.9 -0.1
    Disbursements 3/ 0.0 0.0 0.4 0.8
    Amortization -0.4 -0.9 -1.3 -0.9
    Private, net -0.8 -1.6 -2.4 -3.2
    Errors and omissions 0.0 0.0 0.0 0.0
    Overall balance -8.0 -12.1 -13.7 -11.0
    (In percent of GDP)
    Financing 8.0 12.1 13.7 11.0
    Development Fund for Iraq (increase -) 4/ 0.0 0.0 0.0 0.0
    Gross International Reserves (increase -) 8.0 12.2 13.3 8.6
    Fund credit (net) -0.1 -0.1 -0.1 -0.1
    World bank 0.0 0.0 0.0 0.0
    Eurobond 0.0 0.0 0.0 2.0
    Islamic Development Bank 0.0 0.0 0.5 0.5
    Qatar National Bank 0.0 0.0 0.0 0.0
    Loan securitized by future oil revenue 0.0 0.0 0.0 0.0
    Change in arrears (negative = decrease) 0.0 0.0 0.0 0.0
    Financing gap 0.0 0.0 0.0 0.0
    Memorandum items:
    GIR (end of period) 5/ 43.1 38.9 37.8 42.5
    2/ Excludes planned issuances of Eurobonds in 2016, which are reflected under the financing gap.
    3/ Excludes prospective disbursements from the IMF and the WB in 2015 and 2016, which are reflected under
    the financing gap.
    4/ Reflects the transfer of the Development Fund for Iraq from the Federal Reserve Bank of New York to the CBI
    in May 2014.


  10. #10
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    5/ Starting 2014 includes US$ balances from oil revenues.
    Table 5. Iraq: Balance of Payments, 2016
    (In billions of U.S. dollars; unless otherwise indicated. Cumulative from the beginning of the fiscal year.)
    2016
    Sources: Iraqi authorities; and Fund staff estimates and projections.
    1/ Reflects KRG exports through the State Oil Marketing Company of Iraq.
    IRAQ
    16 INTERNATIONAL MONETARY FUND
    Mar. Jun. Sep. Dec.
    Prog. Prog. Prog. Prog.
    Net foreign assets 80,982 79,085 77,820 75,291
    Of which: CBI 48,970 44,110 42,816 48,325
    Net domestic assets 22,915 26,948 31,257 38,153
    Domestic claims 43,694 47,603 51,755 50,715
    Net claims on general government 15,890 19,386 23,263 21,671
    Claims on general government 55,545 58,042 60,918 58,326
    less: Liabilities to general government -39,656 -38,656 -37,656 -36,656
    Claims on other sectors 27,804 28,217 28,493 29,044
    Other Item Net (OIN) -20,779 -20,655 -20,499 -12,562
    Broad money 103,897 106,033 109,077 113,444
    Currency outside banks 42,506 43,467 44,137 44,706
    Transferable deposits 44,875 45,734 47,469 50,245
    Other deposits 16,516 16,832 17,471 18,492
    Sources: Iraqi authorities; and Fund staff estimates and projections.
    Table 6. Iraq: Monetary Survey, 2016
    (In trillions of Iraqi dinars; unless otherwise indicated)
    2016
    IRAQ
    INTERNATIONAL MONETARY FUND 17
    Mar. Jun. Sep. Dec.
    Prog. Prog. Prog. Prog.
    Net foreign assets 48,970 44,110 42,816 48,325
    Foreign assets 52,368 47,508 46,215 51,723
    Official reserve assets 50,815 45,955 44,662 50,170
    Gold 4,488 4,562 4,636 4,710
    Other 45,923 41,027 39,698 45,171
    SDR holdings and reserve position in the Fund 405 366 328 289
    Other foreign assets 1,553 1,553 1,553 1,553
    Foreign liabilities -3,398 -3,398 -3,398 -3,398
    Net domestic assets 17,686 22,843 24,569 19,333
    Domestic assets 20,867 21,752 23,321 24,198
    Net claims on general government 20,780 21,665 23,234 24,111
    Loans to central government 3,677 3,648 3,620 3,592
    Holdings of discounted treasury bills 19,000 19,870 21,435 22,227
    Other claims 0 0 0 0
    Domestic currency deposits -717 -673 -640 -542
    Foreign currency deposits -1,180 -1,180 -1,180 -1,166
    Monetary policy instruments 1/ 1,162 5,434 5,591 -521
    Other items net -4,343 -4,343 -4,343 -4,343
    Reserve money 66,656 66,952 67,385 67,658
    Currency in circulation 44,882 45,667 46,498 47,064
    Bank reserves 21,774 21,285 20,887 20,595
    Memorandum items
    Gross foreign exchange assets (in millions of U.S. dollars) 2/ 43,064 38,945 37,849 42,517
    Sources: Iraqi authorities; and Fund staff estimates and projections.
    2/ Starting 2014 reflects the balances of the Development Fund of Iraq were moved from the Federal Reserve
    Bank of New York to the CBI as a US$ account (US$ balances from oil revenues) in May 2014.
    1/ This mainly represents the ID standing overnight facilities, US$ deposits of commercial banks, domestic
    currency deposits, and CBI bills.
    Table 7. Iraq: Central Bank Balance Sheet, 2016
    (In trillions of Iraqi dinars; unless otherwise indicated)
    2016
    IRAQ
    18 INTERNATIONAL MONETARY FUND
    Attachment II. Technical Memorandum of Understanding
    1. This memorandum defines the quantitative targets for the economic program of the Iraqi
    authorities during the period November 10, 2015–December 31, 2016 under the Staff-Monitored
    Program (SMP). These indicators, presented in Table 1 of the Memorandum of Economic and
    Financial Policies (MEFP) attached to the Letter of Intent dated December 22, 2015 reflect the
    understandings reached between the Iraqi authorities and the staff of the IMF. It also specifies the periodicity and deadlines for transmission of data to the staff of the IMF for monitoring purposes.
    A. Quantitative Targets
    2. The quantitative targets are the following:
    (i) a floor on the stock of gross international reserves of the Central Bank of Iraq (CBI);
    (ii) a ceiling on net domestic assets of the CBI;
    (iii) a floor on the central government non-oil primary balance;
    (iv) a floor on the central government social spending;
    (v) a continuous ceiling on new external payments arrears on any existing, rescheduled and new debt of the central government and/or the CBI.
    B. Definitions
    3. An exchange rate set at ID 1,180 per U.S. dollar will be used for monitoring purposes. This exchange rate will be used to convert into Iraqi dinars the U.S. dollar value of all CBI foreign assets and liabilities denominated in U.S. dollars, as required. For CBI assets and liabilities denominated in SDRs and in foreign currencies other than the U.S. dollar, they will be converted in U.S. dollars at their respective SDR-exchange rates prevailing as of November 10, 2015, as published on the IMF’s website. The same rules will be used to convert external debt related parameters.


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