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  1. #11
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    Appendix III. Iraq: Debt Sustainability Analysis
    1. Iraq’s external debt burden continues to ease owing to progress in regularizing
    Saddam-era external claims. As of end-2012, total external debt was $60 billion (28 percent of
    GDP). In 2010, an agreement with China extinguished $6.7 billion out of total claims of $8.5 billion
    and rescheduled the remainder balance on terms broadly comparable to those of the Paris Club. In
    2011, $0.1 billion of small claim commercial debt (i.e., original individual claims below $35 million)
    was extinguished through deep-discount buy-back operations and in 2012 Algeria agreed to cancel
    fully its claims of $0.4 billion. With these operations, an estimated $42 billion of claims to non-Paris
    Club bilaterals and small claim commercial creditors remains to be restructured.
    2. As of end-2012, total restructured and new external debt amounted to $18.2 billion
    (8.5 percent of GDP). Current and prospective disbursements are fairly limited (the World Bank and
    Japan International Cooperation Agency are the main partners) and it is expected that net external
    public sector financing remain negative over the medium term. Under the staff’s baseline scenario, it
    is assumed that remaining previous-regime bilateral claims are regularized and rescheduled on Paris
    Club-comparable terms in 2013 and remaining small claim commercial debt are bought back in
    2014. By end-2018, total debt is projected to be $20.9 billion (5.6 percent of GDP).

    3. External debt service is projected at about $2–3 billion annually over the medium
    term. The debt service to exports ratio will double from 1.5 percent in 2013 to 3 percent in 2014
    owing to repurchases to the Fund and assuming the regularization of remaining previous-regime
    debt. Thereafter, the debt service ratio will gradually revert back to 1.5 percent. The debt service
    ratio is vulnerable to an oil price or oil production shock, which would have to be extraordinarily
    large to compromise the capacity to service timely the debt given Iraq’s large reserves.
    4. The public sector’s total domestic obligations have increased significantly since 2009,
    but so have its domestic financial assets. Total obligations increased from ID 5.2 trillion at end-
    2009 to ID 16.2 trillion at end-2012 (6.5 percent of GDP). The obligations are composed of (1) T-bills
    held by the banking system and bank loans totaling ID 7.5 trillion; and (2) government-guaranteed
    loans by state-owned banks to state-owned enterprises totaling ID 8.6 trillion. Given the financial
    difficulties in the state-owned enterprise sector, the likelihood that these guarantees will be called is
    very high. Public sector commercial bank deposits—ID 40.5 trillion at end-2012—exceed
    comfortably the stock of government- and government-guaranteed financial liabilities.

    5. Domestic debt service is projected at about ID 2 trillion annually over the medium
    term. Under the staff’s baseline scenario—which assumes the rolling over of T-bills, and no new
    borrowing and issuance of government-guaranteed loans—domestic obligations will decline to just
    ID 5.7 trillion (1.3 percent of GDP) by end–2018
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  2. #12
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    Exchange Arrangement
    The CBI has been conducting foreign exchange auction on a daily basis since October 4, 2003. The
    CBI followed a policy of exchange rate stability which has translated in a de facto peg of the
    exchange rate since early 2004. However, from November 2006 until end 2008, the CBI allowed the
    exchange rate to gradually appreciate. As a result, the exchange rate arrangement of Iraq was
    reclassified to the category of crawling peg effective November 1, 2006. Since the start of 2009, the
    CBI returned to its earlier policy of maintaining a stable dinar. Consequently, the exchange rate
    arrangement of Iraq was reclassified effective January 1, 2009 as a stabilized arrangement.
    Iraq continues to avail itself of the transitional arrangements under Article XIV. Eight exchange
    restrictions (plus one exchange restriction maintained for national or international security) and one
    multiple currency practice (MCP) are subject to IMF jurisdiction and approval. The exchange
    restrictions are (i) the limitation that corporates can purchase foreign exchange in the auction for
    import transactions only; (ii) limitation on the availability of foreign exchange cash for individuals
    (i.e., one request per month); 
    (iii) maximum limits on the availability of foreign exchange cash in the
    auction for banks;
    (iv) maximum limits on the availability of foreign exchange cash in the auction for money transfer companies and money exchange bureaus; (v) the requirement to pay all obligations
    and debts to the government before proceeds of investments of investors, and salaries and other
    compensation of non-Iraqi employees may be transferred out of Iraq; (vi) the requirement to submit
    a tax certificate and a letter of non-objection stating that the companies do not owe any taxes to the
    government before non-Iraqi companies may transfer proceeds of current international transactions
    out of the country; (vii) the requirement that before non-Iraqis may transfer proceeds in excess of ID
    15 million out of Iraq, the banks are required to give due consideration of legal obligations of these
    persons with respect to official entities, which must be settled before allowing any transfer; and
    (viii) an Iraqi balance owed to Jordan under an inoperative bilateral payments agreement. In
    addition, one exchange restriction maintained for security reasons should be notified to the IMF
    under the framework of Decision 144-(52/51). The MCP arises from the absence of a mechanism to
    ensure that the official exchange rate and the market exchange rate do not deviate by more than
    2 percent.


    This measure gives rise to an exchange restriction because the limitation of one request per month constitutes a
    governmental limitation on the availability of foreign exchange for payments and transfers by individuals for current
    international transactions, e.g., basic allocations for tourist or business travel abroad, family living expenses, etc.
    Furthermore, because of the limitation on the availability of foreign exchange in the non-cash auction to corporates
    and only for trade transactions, individuals who need to make payments and transfers for current international
    transactions beyond the maximum limit have no alternative means or channels to get access to foreign exchange,
    except for resorting to informal sources.

    This measure gives rise to an exchange restriction because the maximum cap constitutes a governmental limitation
    on the availability of foreign exchange for certain payments and transfers, e.g., repatriation of certain investment
    income by nonresidents, including remittances of profits, dividends or interest. Because of the limitation on the
    availability of foreign exchange in the non-cash auction by corporates to only trade transactions, they would have no
    other means or channels to get access to such foreign exchange beyond the maximum limits, except for resorting to
    informal sources.
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  3. #13
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    IMF Executive Board Concludes 2013 Article IV Consultation with Iraq


    On May 13, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the
    Article IV consultation with Iraq.5


    Background

    Iraq is exceptionally rich in oil, but its economy suffers from severe structural weaknesses, such
    as a small non-oil sector, a dominating role of the government in all areas of the economy, and
    a poor business environment. Nevertheless, partly thanks to the increase in oil production since
    2003, Iraq has achieved a rise in GDP per capita from $1,300 in 2004 to $6,300 in 2012 in a
    very difficult security and political context. During this period, Fund program engagement with
    Iraq was instrumental in maintaining macroeconomic stability—even though progress on
    structural reforms and job creation was mixed.

    Recent macroeconomic developments have been broadly positive. Economic growth has
    reached 8.4 percent in 2012 and is expected to rise to 9 percent in 2013 as oil production
    increases to 3.3 million barrels per day (mbpd). Inflation has declined from about 6 percent at
    end-2011 to 3.6 percent at the end of last year, and should increase only slightly in 2013.
    International reserves of the Central Bank of Iraq (CBI) rose from $61 billion at end-2011 to
    $70 billion at end-2012, and fiscal reserves held at the Development Fund for Iraq (DFI) have
    increased from $16.5 billion to $18 billion.

    Thanks to higher-than-expected oil revenues and the under-execution of the investment budget,
    fiscal surpluses reached almost 5 percent of GDP in 2011 and 4 percent in 2012. However, with
    a break-even oil price of about $100, fiscal performance is very vulnerable to oil revenue
    shocks—either from oil price declines or export shortfalls. Furthermore, fiscal discipline
    weakened over the past two years, with poor budget planning and execution, large off-budget
    spending, and low investment execution rates. The 2013 budget includes large unfunded
    commitments, increasing fiscal risks, including the possible depletion of fiscal reserves, if the
    budget were to be fully executed.
    The policy of a de facto peg to the U.S. dollar provides a key nominal anchor to the economy,
    and the nominal exchange rate in the official market has remained stable since 2010. However,
    since late 2011, the authorities enforced existing exchange restrictions and introduced new
    restrictions in response to concerns about money laundering and illegal foreign exchange
    outflows related to the increased demand for foreign exchange. As a result, the spread between
    the official rate and the parallel market rate—which had been up to that point below 2 percent—
    started to climb, passing 9 percent in May 2013.

    Over the medium term, Iraq’s macroeconomic outlook will continue to be driven by
    developments in the oil sector. Staff projects that oil production will rise gradually by about
    400-500 thousand barrels per day per year, reaching 5.7 mbpd by 2018. Overall, growth is
    projected to remain above 8 percent and inflation at 5–6 percent over the medium term.

    Risks to the macroeconomic outlook remain high. They include (a) weak policy implementation,
    particularly in the fiscal area; (b) further deterioration of the political and security situation;
    (c) a larger-than-projected decline in global oil prices; and (d) delays in developing Iraq’s oil
    fields and oil export capacity, possibly due to security issues but also insufficient investment in
    oil infrastructure. These risks can translate into lower oil revenues, deterioration in the fiscal
    position, pressures to use CBI reserves for fiscal purposes, and higher inflation.
    Executive Board Assessment

    Executive Directors commended the authorities for maintaining macroeconomic stability in a
    difficult security and political environment. With risks remaining high, including from oil price
    volatility, they stressed the need to build fiscal buffers and further strengthen the institutional
    framework. They urged the authorities to step up reforms to develop the private non oil sector to
    help generate employment and inclusive growth.

    Directors emphasized the need to implement sustainable fiscal policies and address risks from
    oil revenue volatility. Rationalizing current spending—including public employment, energy
    subsidies, the Public Distribution System, and transfers to state owned enterprises—is needed
    to create space for priority social spending and public investment and to accumulate buffers.
    Enhancing public financial management and avoiding quasi fiscal operations by the state owned
    banks are also crucial. Directors noted that fiscal rules could provide a framework for fiscal
    policy over the medium term.

    Directors supported the objective of the Central Bank of Iraq (CBI) to liberalize the foreign
    exchange market and the recent steps to simplify market regulations. Further measures are
    needed to liberalize fully the supply of foreign currency, with the objective of lowering the
    exchange rate spread, removing distortions, and complying with Article VIII of the Fund’s
    Articles of Agreement. Directors considered that strengthening the Anti Money
    Laundering/Combating the Financing of Terrorism (AML/CFT) framework, in line with the Middle
    East and North Africa Financial Action Task Force (MENA FATF) recommendations and FATF
    standards, would be more effective than restricting foreign exchange in curbing money
    laundering and terrorist financing.
    Directors agreed that a stable exchange rate, supported by a high level of international
    reserves, provides a valuable anchor in an uncertain environment. They agreed that the two tier
    architecture of prudent management of CBI reserves and use of the Development Fund for Iraq
    (DFI) as a de facto oil stabilization fund is appropriate. They urged the authorities to continue to

    rely on the DFI to help stabilize government spending and ensure oil revenue transparency.

    Directors highlighted the importance of a stable financial sector in developing the private sector
    and diversifying the economy, and were encouraged by recent progress in strengthening
    banking supervision and restructuring the Rasheed and Rafidain banks. They encouraged the 3



    authorities to ensure a level playing field for public and private banks by opening to private
    banks access to government business.

    More broadly, Directors emphasized that fostering growth in the private non oil sector requires
    improving the business environment, investing in infrastructure and social capital, reforming
    state owned enterprises, and enhancing public service delivery. Judicious use of the country’s
    oil wealth can help address these pressing challenges. Improving the authorities’ capacity to
    implement reforms will also be critical.
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  4. #14
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    Statement by A. Shakour Shaalan, Executive Director for Iraq
    May 13, 2013

    Background

    1. On behalf of the Iraqi authorities, I thank staff for their engagement and the constructive
    Article IV Consultation discussions. The authorities highly value the views of the Fund on Iraq’s
    economic policies and appreciate the valuable technical assistance they receive from staff in support
    of their stabilization and reform efforts.

    2. Notwithstanding very challenging security and political conditions, Iraq’s economic
    performance was strong in the past two years. GDP growth picked up to over 8 percent, reflecting
    higher oil production and buoyant growth in the non-oil economy. Inflation remained low. The
    fiscal balance recorded surpluses and sizable external reserves were accumulated.

    3. Notwithstanding these favorable developments and the prospects of continued high growth
    in the medium term─driven by developments in the oil sector─the Iraqi economy continues to face
    challenges and risks. These include mainly a deteriorating political and security situation, volatility
    in oil prices, and constraints in administrative capacity.

    Fiscal Policies and Reforms

    4. In 2013, the authorities plan a more gradual fiscal consolidation than in the two previous
    years, with the fiscal surplus estimated at 1.6 percent of GDP. They also intend to put in place a
    medium-term fiscal strategy program that would cover more than three years. With oil revenues
    soaring, political pressures to increase current spending are growing. In March 2013 parliament
    approved a final budget that includes unfunded commitments, but implies a deficit that is less than
    in some previous years. While the government recognizes the need to redistribute part of the oil
    wealth among the population, it is also aware of financing constraints and the importance of
    maintaining fiscal buffers. Accordingly, the actual execution of the budget will aim at meeting
    priority social and investment spending, while maintaining fiscal buffers.

    5. In particular, the government intends to limit spending growth in subsidies for energy
    producers, rationalize transfers to state-owned enterprises and to the universal Public Distribution
    System, and contain the increase in public-sector employment. These measures would help maintain
    the fiscal buffers at the Development Fund for Iraq (DFI) at about six months of salaries and
    pensions. They would also enable full execution of investment projects in the oil sector, while
    keeping non-oil sector capital spending constant in nominal terms, in line with implementation
    capacity.

    Monetary and Exchange Rate Policies

    6. The authorities agree with staff that the stability of the exchange rate has provided a
    valuable anchor for inflation expectations in an uncertain environment. They intend to maintain
    exchange rate stability in the foreseeable future.

    7. In 2011, the central bank of Iraq (CBI) started limiting foreign exchange supply to address
    concerns related to money laundering and financing of terrorism. To do so, it enforced existing
    exchange restrictions and introduced new restrictions. With the central bank the main source of
    funds to the foreign exchange market, foreign exchange auction regulations have led to a widening
    of the spread between the official and parallel foreign exchange rates. In the absence of sufficient
    capacity of the financial sector to implement Anti-Money Laundering and Combating Financing of
    Terrorism (AML/CFT) preventive measures, the CBI finds it necessary to restrict the supply of
    foreign currency to restrain illicit uses of foreign exchange.

    8. The CBI is committed to progressively liberalize the foreign exchange market as capacity to
    prevent AML/CFT is developed. It has recently taken steps to simplify foreign exchange market
    regulations and this has led to the elimination of many exchange restrictions. The CBI is working
    closely with staff on complying with Article VIII of the Fund’s Articles of Agreement, as well as
    eliminating the remaining exchange restrictions and the multiple currency practice.
    Structural Reforms

    9. Continued capacity constraints, compounded by the difficult political and security situation,
    have slowed progress in structural reforms. Nonetheless, progress was made in the area of public
    financial management, with the adoption of a government Chart of Accounts. The authorities also
    confirmed their commitment to adopt a single treasury account. They will pursue efforts to fully put
    in place an Integrated Financial Management Information System, which would help improve
    budgeting, budget execution, spending controls, debt management, and fiscal reporting. With regard
    to banking sector reforms, effective measures were taken to clean-up the balance sheets of the two
    largest state-owned banks, Rafidain and Rasheed, of legacy external debt, losses related to the war,
    valuation losses, and costs associated with issuing the new Iraqi currency. Continued progress is
    being made in improving transparency in the oil sector as Iraq became a full member of the
    Extractive Industries Transparency Initiative in December 2012.

    10. The authorities appreciate staff’s work on sovereign wealth fund options. They concur with
    staff’s view that the DFI is a successful and transparent fiscal institution, which helped Iraq mitigate
    the effects of negative oil price shocks. They consider that the DFI has been operating as a de facto
    stabilization fund, allowing the government to accumulate reserves through strong fiscal
    performance in boom years, and financing spending when oil revenues fall short.

    11. Staff notes that growth prospects hinge on implementing a prudent policy mix, enhancing
    service delivery, rebuilding infrastructure and strengthening the business environment. The
    authorities fully share this assessment. They are aware that promoting the non-oil private sector is
    crucial as the employment model based on the public sector is reaching its limits. In an effort to
    address Iraq’s growth and development needs, the Ministry of Planning prepared a five-year
    National Development Plan following an extensive consultative process. The plan is now being
    discussed by the Cabinet.
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  5. #15
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    Thanks for the facts EB, over and over again they state the wish to keep the dinar stable at its official rate, "The policy of a de facto peg to the U.S. dollar provides a key nominal anchor to the economy,
    and the nominal exchange rate in the official market has remained stable since 2010. However,
    since late 2011, the authorities enforced existing exchange restrictions and introduced new
    restrictions in response to concerns about money laundering and illegal foreign exchange
    outflows related to the increased demand for foreign exchange. As a result, the spread between
    the official rate and the parallel market rate—which had been up to that point below 2 percent—
    started to climb, passing 9 percent in May 2013".

    6. The authorities agree with staff that the stability of the exchange rate has provided a
    valuable anchor for inflation expectations in an uncertain environment. They intend to maintain
    exchange rate stability in the foreseeable future.
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  6. #16
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    Amid these views, Enas Mohamed, deputy director at Naseem Al Shemal Brokerage Company, told Al-Monitor that the stock market will be harmed the most by a change of currency and the deletion of zeros. The price of a share is one dinar, so currently 1,000 dinars are equal to 1,000 shares. Following the deletion of zeros, the new dinar will be equal to 1,000 shares, which would further confuse the stock market, which is already muddled as a result of the security situation.
    http://www.iraq-businessnews.com/201...on-of-zeros/2/

  7. #17
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    That'd be just fine with me - give me 1,000 shares per new dinar!

    Quote Originally Posted by dollarsign View Post
    Amid these views, Enas Mohamed, deputy director at Naseem Al Shemal Brokerage Company, told Al-Monitor that the stock market will be harmed the most by a change of currency and the deletion of zeros. The price of a share is one dinar, so currently 1,000 dinars are equal to 1,000 shares. Following the deletion of zeros, the new dinar will be equal to 1,000 shares, which would further confuse the stock market, which is already muddled as a result of the security situation.
    http://www.iraq-businessnews.com/201...on-of-zeros/2/
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