IMF: Rising Iraq’s debt 64% and low cash reserves… reasons and treatments..

IMF: Rising Iraq’s debt 64% and low cash reserves… reasons and treatments..

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The IMF announced on 18 / March / 2017 about Iraq ‘s debt rising from 32% to 64% of GDP in the period 2014-2016, and a slowdown in credit growth and rising non – performing loans at state banks, with low cash reserves by $ 7 billion annually.

And the Iraqi authorities and experts of the International Monetary Fund (IMF) held discussions in Amman, Jordan, during the period from 5-17 March 2017 related to consultations on Article IV of the 2017, there will be a second review to the agreement of Stand By Arrangements (SBA) with Iraq, amounting to a 36 – month, which was approved by the Executive Board of the international Monetary Fund on July 7 2016.

in this context, the international Monetary Fund to prevent its employees from traveling to Iraq and manages all his works from its offices in the Jordanian capital , Amman, and depends entirely on the figures and statements of the Iraqi state, issued by the Ministry of Finance, Federal Board of Supreme Audit and the Central Bank.

The SBA aims to correct the balance of public finances and the balance of the external position, and improving public financial management, while protecting social spending. And the completion of the first review under the agreement of SBA on 5 December 2016.
The head of the IMF Mission Christian coconut confirmed in a statement that the Rawabet Center for Research and Strategic Studies received a copy of it that the Iraqi economy suffered a great damage caused by the double shock caused by the organizing Daesh attacks on the one hand and low prices oil on the other hand; which is putting pressure on the country ‘s resources, and the occurrence of new waves of internal displacement, where the number of internally displaced more than four million people, and about 10 million poor people in need of humanitarian aid , about 27% of the population of Iraq.

According to the Fund’s statement, in 2016 there was a real growth to the GDP by 11% supported by a substantial increase in oil production, which benefited from previous oil investments, while the non – oil economy shrank by 8% due to conflicts and administrative corruption.
The International Monetary Fund expects to keep the activity of the Iraqi economy idle in 2017, because of shrinking of oil output 1.5% under the Organization of Petroleum Exporting Countries agreement (OPEC), and the modest recovery of the non – oil sector.

The statement said the consequences and implications of lower oil prices on the Iraqi economy, including low cash reserves of 53.7 to 46.5 in 2015-2016, and the increase in large financial pressure as government deficits arrived of 12% in 2016, due to continued weakness in oil prices, high humanitarian and security spending. ”

He indicated to the high public debt from 32% to 64%, in 2014-2016 of the gross domestic product, and that the balance of external product represents the ratio of net foreign cash flows (incoming – outgoing) to GDP, is in a relatively comfortable position, The convenient indicators of Iraq according to the description of the Fund !
Economists stressed that the balance of payments and budget revenues are facing a major financial crisis as a result of the sharp fall in oil prices, due to the large for adoption on oil revenues.

And that the foreign reserves of the Central Bank of Iraq covers eight months only, from imports in the light of the continuing decline of the reserves through the window of corruption in the auction sale of the dollar, and imports that are not subject to censorship, which inevitably lead to imbalances in financial stability, and threatens the collapse of the Iraqi dinar exchange rate.

But the biggest challenge is the accumulation of domestic and external debt in the light of the increasing economic obligations, resulting in slowing down of credit growth and rising non – performing loans in the state – owned banks and private banks in 2016.

The Government has taken several financial correct policies mostly focus on reducing capital expenditures lacking efficiency while protecting social spending, and provide financing, asserting that continues to peg to the US dollar, provides a key pillar of the economy.

Economist and adviser to the prime minister the Mudher Mohammed Saleh, believes that the reform policy of the government at the present time and the period ago, particularly in the retrenchment was one of the reasons for the non-collapse of the cash balance of the central bank, and is stable at this point, although the direct impact on the stop of development and service activities.

Saleh added that we are working with the IMF on the subject called DSA which means the debt sustainability or the Energy debt sustainability without affecting the country ‘s economic growth, or to engage in the risk of failures in the payment of debt service in the future, noting that despite the reassurance there are a lot of concerns in the medium term, and the requirements of reform on the current situation and that we agree on the difficulty of implementation under these current circumstances.

He said the exchange rate peg to the dollar, which is an important basic foundation, noting that growth prospects will remain in the medium term modest because of the stability of the expected oil production, and the stability of its investment in the face of constraints on revenues, and the modest recovery in the non – oil growth, supported by the improvement of the security situation, and the implementation of structural reforms.

The head of mission added that Iraq needs more reforms to create fiscal space for the inclusive growth, and enhance the business environment, reduce corruption, and reform of the banking sector to support growth led by the private sector, and diversification in the economy, once launched the reconstruction process in the stage after the organization Daesh.

He stressed that “risks are high; and this stems from the uncertainty surrounding the prospects for oil prices, the security situation and political uncertainty, and points of administrative weakness.”

When reviewing the Fund statement related to the Iraqi financial position No. 4/16, we find that he considered the fiscal adjustment for the period 2016-2019 appropriate correction to address the financial pressure from falling oil revenues and rising spending on humanitarian and security needs, but fiscal adjustment elements should be improved gradually, to allow a space for investment spending a larger and more efficient, and it is necessary to conduct a comprehensive reform of the system of public financial management in order to improve fiscal discipline and raise the quality of spending.
The statement added that the agreement of sharing of the budget with the Government of Kurdistan regime has improved the position of the federal government and the government of the regime of Kurdistan, including allowing them to face Daesh attacks and oil prices.

And Press statement No. 16/321 issued by the Fund indicates that is related to the Iraqi financial situation in 2016, that the Executive Board of the IMF approved the agreement of SBA with Iraq worth 3.831 billion and Special Drawing Right SDR (about 5.34 billion US dollars, or 230% of the share Iraq) to support the government’s economic reform program, and the Board’s approval allow disbursement of 455 million SDR (about 634 million US dollars) to Iraq.

Iraq had got in July 2015 of a payment amounted to 891.3 million of SDR, worth of 1.24 billion US dollars, the time of approval, through the “rapid financing tool.”

The aim of economic reform , which is supported by the standby credit agreement SBA to meet the needs of the balance of urgent payments program, and access of spending to a level consistent with the decline in world oil prices, and to ensure that debt remains within the limits that can continue to bear , and protect the poor, strengthening financial management, and to support the stability of the financial sector, and curb corruption; and the implementation of these policies requires the availability of support from the international community
, the IMF said in a statement 16/540: “the public finance program modified in 2016 and the draft of 2017 budget came consistent with what is stated in the standby credit agreement SBA, noting that it should be a gradual improvement of the elements of fiscal adjustment, by increasing non – oil revenue and reduce current spending – including wages payment and pensions – and the reform of the electricity sector , and support, and state – owned enterprises, to make way for a larger investment spending but more effective and efficient to support growth.

And the measures to support for the stability of the financial sector includes , strengthening the legal framework of the Central Bank of Iraq and the restructuring of state – owned banks ‘ , and the abolition of exchange restrictions, and implement measures to prevent money laundering, anti – terrorism, and strengthen anti – corruption law.

The statement added: “It would be important to achieve a significant improvement in the management of public finances, re – evaluate the arrears and paid it after verification, and enhance cash management and spending obligations to prevent the accumulation of new arrears.

The statement said: “Implementation of the budget – sharing with the Kurdistan Regional Government to put both the Kurdistan Regional Government and federal government in a better position to face the crisis facing the Iraqi economy.”
The International Monetary Fund suggested during the meeting held on 03.18.2017 several proposals for fiscal adjustment in Iraq; including economic and administrative reform to reduce corruption, strengthen and create the right environment for business and investment, and reform of the banking sector and diversification of economic any diversification of income sources, and support the growth led by the private sector, and especially that the country is on the verge of the reconstruction phase after the war on Daesh.

Fund demanded the commitment to amend the current Act of Commission of Integrity in order to comply with the UN Convention against Corruption, and the new draft in the process of legislation and amending the Central Bank Act constitutes a strengthening of internal control of the financial operations, in line with World Bank standards and the International Monetary Fund as well as the program of SBA follows the amendment of law of financial management, all of these amendments are to fight against corruption.

Experts point to the insistence of the centers of power in Iraq to keep the corruption and chaos , especially in the financial aspect and administrative, which its manifestations are :
– inconsistencies in the numbers of the House of Representatives staff, as Chairman of the Finance Committee of the council Mohammed Halbusi says that the number of employees 3,000 employees, while a member of the Finance Committee Rahim Darraji says that after a thorough statistical work shows they have 1950 employees; which means that there is a big difference which is 1050 employees.
– A statement to the Prime Minister Haider al – Abadi and former Defense Minister Khaled al – Obeidi, confirmed the existence of 40 000 soldiers who are actually non-existed in the armed forces.

– Allocation within the budget for 2017 , an amount of 588 million US dollars for endowments , although the Waqf Diwan , which is the source of the sources of national income to spend on beneficiaries of social welfare, has high income through money of Awqaf movable and immovable property left behind and still leave by the benefactors of their money after the death, or in their lives, as well as from the proceeds of the shrines, and mosques, and according to the Ministry of Education, the cost of construction of a typical school is billion Iraqi dinars , the equivalent of 844,000 US dollars, the budget of endowments per day is enough to build two typical schools designed per day that equals 720 schools a year.

And the risks remain existed to the Iraqi economy because of uncertainty or predict for the oil prices and the security situation and the political and administrative weakness in the country.

The envoy added that “Iraqi authorities and experts of the International Monetary Fund began discussions on the second review of the agreement of SBA , ” explaining that “discussions will continue during the coming spring meetings of the International Monetary Fund and the World Bank in the period between April 21 to 23, 2017 in Washington , DC.”

Shatha Khalil 
Unit Economic Studies 

Translated by : Mudhaffar al-Kusairi

Rawabet Center for  Research and Strategic Studies