IMF Staff Completes 2019 Article IV Mission on Iraq

An International Monetary Fund (IMF) team led by Gavin Gray visited Amman from April 26 to May 2, to hold discussions with the Iraqi authorities in the context of the 2019 Article IV Consultation.

At the end of the visit, Mr. Gray made the following statement:

“The end of the war with ISIS and a rebound in oil prices provide an opportunity to rebuild the country and address long-standing socio-economic needs. However, the challenges to achieving these objectives are formidable. The economic recovery has been sluggish, post-war reconstruction is limited, and large current spending increases risk placing the public finances and central bank reserves on an unsustainable path. Moreover, combatting corruption is critical to promote the effectiveness of public institutions and to support private-sector investment and job creation.

“Near-term vulnerabilities subsided in 2018, with the budget in surplus and a build-up in central bank reserves. Non-oil growth is expected to increase to 5.4 percent in 2019 on the back of higher investment spending. However, fiscal deficits are projected to rise over the medium term, requiring financing that may crowd out the private sector or erode central bank reserves. In these circumstances, it would be hard to sustain capital spending, and growth would slow markedly.

“Policy changes and structural reforms—including to improve governance—are therefore essential to maintain medium-term sustainability and lay the foundations for inclusive growth.

“Fiscal policy should aim to scale up public investment gradually while building fiscal buffers. To make space for this, staff recommends budgetary savings of around 9 percent of GDP over the medium term through tight control of current spending, particularly public-sector wages, and phased measures to boost non-oil revenue. Setting ceilings on current expenditure in the 2020 budget onwards would strengthen the fiscal framework’s capacity to support higher capital spending and to adapt to oil price shocks. Key reforms should include:

  • Containing public-sector wages. Spending pressures could be dampened in the short run through compensation measures such as capping allowances, bonuses and other non‑base wage payments, and by not fully replacing retirees. Structural measures will be required over the medium term, based on a functional workforce review as well as deeper civil service reform once new HR management and information systems are in place.
  • Electricity reforms are key to addressing the weak quality of service and reducing the high budgetary costs, due to modest tariff rates, chronic non-payment of electricity bills, poor maintenance and over-reliance on expensive generation sources, coupled with losses throughout the generation, transmission, and distribution process. It would be important to ensure that the poor and most vulnerable are protected throughout this reform.
  • Bolstering public financial management. Enhancing the legal framework and improving commitment and other control systems are key to minimizing misuse of public resources and restoring budgetary discipline.

“In the financial sector, a robust plan to restructure the large public banks coupled with enhanced supervision is essential to secure financial stability and will help promote financial development and inclusion. Strengthening anti-money laundering and countering financing terrorism (AML/CFT) controls and oversight will help prevent Iraq’s financial sector from being misused for the laundering of criminal proceeds and terrorist financing.

“Addressing governance weaknesses and corruption vulnerabilities is critical to achieving the described policy objectives. As a first step, the authorities need to develop a comprehensive understanding of the corruption risks present in Iraq and then implement policies to tackle these risks in a coherent and coordinated manner. The legislative framework needs to be strengthened to effectively prevent officials from abusing their position or misusing state resources. To this end, laws strengthening the asset declaration regime and criminalizing illicit gains should be rapidly adopted. Furthermore, the independence and integrity of bodies involved in combatting corruption should be ensured and the AML/CFT regime should be mobilized to support anti-corruption efforts.

The team will prepare a report that, subject to management approval, is tentatively scheduled to be considered by the IMF’s Executive Board in July 2019.

“The IMF team would like to thank the authorities for the candid and constructive discussions during this visit.”

(Source: IMF)

By Salam Zidane for Al Monitor. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News.

Iraqi President Barham Salih (pictured) approved the controversial 2019 budget on Feb. 4.

The budget passed the parliament Jan. 23 after long debates over allocations for the Kurdistan Region and southern provinces and amendments that ignored Iraq’s obligations under an agreement with the International Monetary Fund (IMF) mandating austerity measures until 2021.

The Iraqi parliament approved draft legislation for the 2019 budget amid objections from authorities in the southern provinces. At 133.1 trillion Iraqi dinars ($112.6 billion), the budget, if passed, would be the country’s third largest, behind those for 2013 and 2014. With a 27.8% increase in spending, it would appear to blow up the IMF agreement.

Click here to read the full story.

By Salam Zidane for Al Monitor. Any views expressed here are those of the author, and do not necessarily reflect the views of Iraq Business News. 

The Iraqi government sent to parliament a revised version of the 2018 budget bill for the fourth time Feb. 11. The budget proposal includes a new 10% tax on sales at commercial centers, restaurants and barbershops.

Iraq lacks the appropriate environment to collect new taxes because sales are made in cash, not credit cards. This reality will likely impose obstacles on tax collection as both citizens and shop owners can find ways to evade taxes. This is not to mention the influence peddling in the tax collection departments, where some officials could add the taxes to their personal accounts instead of state coffers.

The government’s new tax policy comes as a result of Iraq’s 2015 agreement for a $5.4 billion loan with the International Monetary Fund.

This deal includes a reform of public finances (including the tax system) to collect 2.3 trillion dinars ($1.8 billion) under the 2018 budget through taxes imposed on telecommunications services, hotels, refreshments, cigarettes and alcohol, among other items.

In an interview with Al-Monitor, Madhar Mohammad Saleh, financial adviser to the prime minister, attributed the government’s new taxes to efforts to diversify the economy and end its reliance on oil. Saleh said, “Iraq ranks last in the world in terms of paying taxes — with the amount of tax paid equivalent to only 3% of GDP. Paying taxes is still alien to the Iraqi people.”

He added, “Paying taxes is a national duty so that every citizen could contribute to the state budget and these funds could be used for national projects that are of paramount importance to Iraqis, such as hospitals and infrastructure, among other development projects. … The imposed taxes are very low and will not pose any burden to citizens. Politicians need to find solutions to financial problems as the situation in the country is already difficult.”

The government began to impose taxes for the first time in the 2015 budget, namely Article 33, on prepaid mobile card and airplane tickets in the wake of the financial crisis that broke out in 2014, which is still ongoing. Those taxes were implemented because of low oil prices and the high cost of the battles against the Islamic State, which swept the north and west of Iraq.

Najiha Abbas, director of the General Tax Authority, said, “The proposed sales tax in the budget of 2018 is not imposed on traders and shop owners but are rather deducted from consumers.” Abbas added, “Taxation will help diversify the economy and reduce the rate of the non-oil deficit and therefore make the country less reliant on oil.”

The Finance Committee of the Iraqi parliament described the economic measures as “unrealistic and full of confusion.”

“Imposing new taxes on the Iraqi people means further impoverishing them as the country’s economy is facing major obstacles in addition to the bad economic decisions that came to the detriment of citizens,” parliamentarian Serhan Ahmed told Al-Monitor.

“These taxes will raise the prices of goods and will lead to economic stagnation and citizens are already tied up with loans. The oil funds, loans and grants have already gone to the pocket of the government, which is now seeking more funds through taxes,” Ahmed said. He called upon parliament to cancel the article on taxation from the 2018 budget bill.

Shop, hotel and barbershop owners have largely objected to the 10% tax, which will adversely affect their incomes in light of the stagnation that has been gripping the country since 2014.

Selim Khadem, a barbershop owner in Baghdad, told Al-Monitor, “The government does not provide any service of essence to the citizens while it continues to collect billions of dollars from oil every year. Now they want more money, which explains the new taxes. If this system comes into force, I will have to sell my business as I cannot afford that the government shares my profits through sales taxes.”

Khadem said, “Usually people pay taxes in exchange for good services provided by their state. In Iraq, however, people buy fake commodities at a very high price and now they will pay taxes.”

Abdul Rahman al-Mashhadani, a professor of economics at Iraqi University in Baghdad, agreed with Khadem.

“This is a bad decision by the government. The country is already gripped by an acute financial crisis that has taken its toll on citizens, causing more poverty and unemployment. With these new taxes, the already shaky trust between the people and the government has been strained,” Mashhadani told Al-Monitor. He said the new taxation system will serve as fertile ground for the rampant financial and administrative corruption due to the major imbalance in the tax system, stressing that Iraq needs a long-term strategic policy to reform its economy and not short-term palliatives.

The government has been facing many obstacles in collecting taxes, as it has said more than $8 billion a year from custom duties on imported goods have been wasted.

(Picture Credit: Adam Jones)

EU strategy on Iraq: new proposal to strengthen support to the Iraqi people

On Monday, the High Representative of the Union for Foreign Affairs and Security Policy and the European Commission adopted a Joint Communication proposing an EU strategy for Iraq in order to address the many challenges the country faces following the territorial defeat of Da’esh.

The proposal outlines both ongoing and longer term EU support to the country, fully taking into account the Iraqi government’s priorities.

Federica Mogherini, High Representative of the Union for Foreign Affairs and Security Policy / Vice-President of the European Commission said:

“Iraq is at a crossroads in its history following the territorial defeat of Da’esh at great sacrifice. It is now crucial to act quickly and rebuild the country with the participation of all the components of Iraqi society, to promote and protect fundamental rights and the rule of law in each and every area: only inclusiveness can guarantee true reconciliation so that Iraqis can close once and for all with the past.

“This needs international support and we are ready to contribute, to keep supporting the Iraqi people and government in these challenges, for the sake of the people of the country and the region”.

Commissioner for Humanitarian Aid and Crisis Management Christos Stylianides, who has visited Iraq several times to assess EU aid projects on the ground said:

The EU has been providing emergency assistance to the Iraqi people since the beginning. Humanitarian needs remain high and many people remain displaced by conflict. I have seen first-hand the suffering in places like Mosul and Fallujah and it is crucial that all aid efforts continue to be impartial and neutral. It is essential to support all Iraqi’s in need of assistance today and tomorrow, for as long as it takes.”

The Iraqi authorities and the staff of the International Monetary Fund (IMF) continued discussions in Amman from November 17 to 21, 2017 on the third review of Iraq’s 36-month Stand-By Arrangement (SBA).

The IMF Executive Board approved the SBA on July 7, 2016 (See Press Release No. 16/321), and completed the second review on August 1, 2017 (See Press Release No. 17/311).

At the end of the mission, Mr. Christian Josz, Mission Chief for Iraq, issued the following statement:

The Iraqi authorities and IMF staff continued discussions on the third review of the SBA and made good progress towards reaching agreement on a draft 2018 budget in line with the SBA.

“During the discussions, the team met with Acting Governor of the Central Bank of Iraq (CBI), Dr. Ali Mohsen Ismail Al-Allaq, Acting Deputy Minister of Finance, Dr. Maher Johan, Deputy Minister of Planning, Dr. Qasim Enaya, Financial Adviser to the Prime Minister, Dr. Mudher Saleh, Chairman of the Board of Supreme Audit, and officials from the ministry of finance, CBI and the ministry of oil. The team would like to thank the Iraqi authorities for their cooperation and the open and productive discussions.

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.

(Source: IMF)

Iraq Britain Business Council holds successful Autumn Conference in Dubai

Following on from the first Iraq Britain Business Council conference in Dubai in 2016, the IBBC was delighted to host its Autumn Conference in the UAE once again. The event was strongly supported by the UAE authorities.

Alongside Baroness Nicholson, the UK Prime Minister’s Trade Envoy to Iraq and President of the IBBC, the conference was opened by H.E. Mr. Abdulla Ahmed Al Saleh, Under Secretary for Foreign Trade and Industry, UAE Ministry of Economy.

H.E. Mr. Abdulla reminded delegates that non-Oil & Gas related trade between the UAE and Iraq had already passed 11 Billion USD in 2016, with Dubai in particular being a hub for local and international companies in the region.

H.E. Mr. Abdulla firmly believes that the UAE’s role in the rebuilding of Iraq will continue to expand and expressed his wish to cooperate with organisations such as the IBBC to accomplish this crucial task.

Vikas Handa, IBBC UAE Representative and the Managing Partner of the Emirati Company DrillTech, warmly thanked the minister and stated that the IBBC stands ready to work even more closely with the UAE in Iraq.

The Government of Iraq sent a high calibre ministerial delegation led by H.E. Mr Qasim Al-Fahdawi, The Minister of Electricity, to the conference. The delegation included H.E. Mrs Ann Naufi Aussi Balbool, Minister of Construction Housing and Public Municipalities; H.E. Kadhim Fijan Al Hamami, Minister of Transport; H.E. Dr Sami Al Araji, Chairman of the National Investment Commission (NIC); and H.E. Mr Fayadh Hassan Nima, Deputy Minister of Oil for refining affairs.

The conference was structured around several sessions in which the Iraqi officials and international companies operating successfully in Iraq, most of which are members of the IBBC, exchanged their views and experiences.

These sessions focused on strengths, weaknesses and opportunities of the economy in Iraq, Reconstruction & Infrastructure, Transport, Power and Oil & Gas. In parallel, a series of high level round-table discussions between investors and Iraqi Government representatives took place.

The conference included for the first time a presentation on the rapidly developing Tech sector in Iraq , given by the CEO of Zain.

IBBC thanks the International Finance Corporation (World Bank) and the IMF for its participation. Thanks also go to the IBBC members who sponsored the conference: Gold Sponsor International Islamic Bank; Silver Sponsors Serco and Gulftainer; Lunch Sponsor Rolls-Royce; pre-reception Sponsor Wood; and Coffee Break Sponsors Eversheds Sutherland and KCA Deutag.

IBBC Managing Director, Christophe Michels, stated that the increasing involvement of the UAE and wider GCC with Iraq was a game changer for the country. The IBBC very much welcomes this development and is delighted to be part of it and support it. The organisation will increase its presence in the UAE and the Autumn Conference in Dubai will become a regular feature in its calendar of events.

(Source: IBBC)

Rebuilding Iraq is central to the agenda of the Iraq Britain Business Council (IBBC) autumn conference at The Address, Dubai Marina on 12th November.

The opportunity for businesses in the region to engage in Iraq is reflected by the attendance of a number of high profile Iraqi Ministers: from Electricity, Transport, Oil, Construction and Housing, to the Governor of Basrah and International financiers, including the IMF and World Bank.

Vikas Handa, the IBBC UAE representative agrees:

“Iraq is the second largest oil producer in OPEC and has one of the biggest programmes for new power generation projects in the region; Iraq presents massive opportunities for housing, Infrastructure and FMCG businesses. The event is designed to discover the opportunities and projects live and intended in Iraq, for business people to meet the decision makers, to obtain insights and to network”.

UAE is increasingly seen as the regional hub for corporate operations in Iraq and the place where business decisions are determined.

We can confirm this as a range of leading international companies are attending, including GE, Siemens, BP, Wood, Serco, Shell, Petronas, Gulftainer, Zain, KCA Deutag, the International Islamic Bank and more. There will also be plenty of networking and engagement on the sidelines beyond the main stage.

The IBBC Dubai conference is also the location for the Governor of Basrah to outline his vision for the future, and it is expected ministers will outline the latest thinking on the evolving situation in Iraq and the opportunities this brings.

To register, please follow the link: http://www.webuildiraq.org/ibbc-conference/autumn-conference/

(Source: IBBC)

The Iraqi authorities and the staff of the International Monetary Fund (IMF) held discussions in Amman from September 17 to 28, 2017 on the third review of Iraq’s 36-month Stand-By Arrangement (SBA).

The IMF Executive Board approved the SBA on July 7, 2016 (See Press Release No. 16/321), and completed the second review on August 1, 2017 (See Press Release No. 17/311).

At the end of the mission, Mr. Christian Josz, Mission Chief for Iraq, issued the following statement:

The Iraqi authorities and IMF staff started discussions on the third review of the SBA and made good progress towards reaching agreement on a draft 2018 budget in line with the SBA. These discussions will continue during the upcoming IMF and World Bank Annual Meetings from October 13–15, 2017 in Washington, DC.”

“During the visit, the team met with the Acting Governor of the Central Bank of Iraq (CBI), Dr. Ali Mohsen Ismail Al-Allaq, Acting Deputy Minister of Finance, Dr. Maher Johan, , and officials from the Prime Minister’s office, ministries of finance, oil, planning, and electricity, the State Oil Marketing Organization, the Central Statistical Organization, the Central Bank of Iraq, and the Board of Supreme Audit. The team would like to thank the Iraqi authorities for their cooperation and the open and productive discussions.

(Source: International Monetary Fund)

Iraq has signed for receiving a Japanese loan worth USD270 million according to a statement from the Japanese Embassy in Iraq.

The loan is designed to improve Iraq’s financial situation and to help the country proceed with reforms, the statement by the embassy said, noting that it comes as a second tranche of a USD500 million Japanese financial assistance commitment.

The statement said falling world oil prices and spending on defence and refugee relief portfolios had largely reduced the country’s budget resources. It also pointed to earlier assessments by the International Monetary Fund (IMF) which estimated Iraq’s budget deficit for 2016 by 14.1% and public debt for the same year by 6.99% of the GDP.

In February, Japan approved a loan of about $100 million to support humanitarian, counter-terrorism and infrastructure projects in Iraq.  In January, Japan agreed to lend Iraq up to 27.2 billion yen ($240 million) to rebuild damaged electricity infrastructures in areas recaptured from Islamic State militants.

(Source: GardaWorld)

On August 1, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV consultation with Iraq.

Iraq is facing a double shock arising from the conflict with ISIS and the plunge in oil prices.

In 2016, real GDP increased by 11 percent owing to a 25 percent increase in oil production, which was little affected by the conflict with ISIS. This year, economic activity is expected to remain muted due to a 1.5 percent contraction in oil production owing to the OPEC + agreement to reduce oil production and only a modest recovery of the non-oil sector.

The decline in oil prices has driven the decline of Iraq’s international reserves from $54 billion at end-2015 to $45 billion at end-2016. Fiscal pressures are ongoing, with the government deficit increasing from 12 percent of GDP in 2015 to 14 percent in 2016 despite the ongoing fiscal consolidation, due to weaker oil prices and rising humanitarian and security spending.

The authorities have appropriately maintained the exchange rate peg. The simplification of documentation requirements implemented by the Central Bank of Iraq led to a decline in the parallel market spread to 6 percent in June 2017.

Medium-term growth prospects are positive. Growth will be driven by the projected moderate increase in oil production and the rebound in non-oil growth supported by the expected improvement in security and implementation of structural reform. Risks remain very high, however, arising primarily from volatile security, political tensions, and poor policy implementation.

The Fund is supporting Iraq through a three-year Stand-By Arrangement in the amount of SDR 3.831 million ($5.380 billion), equivalent to 230 percent of quota.

Full statement here.

30-page report can be downloaded here.

(Source: IMF)