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Sunday, December 17, 2017

Iraq, The IMF and the Dinar

We have seen a surge of phone calls and emails about the Iraq Dinar and rumors again about a rate adjustment.

I will remind everyone that IMF and Iraq have a formal agreement  - a  $5.3 billion Stand-By Arrangement (SBA) for three years with the IMF where in which there is an agreement that the Dinar rate will remain unchanged.

The IMF met with Iraq officials Nov 17 - 21 to discuss preparation of Iraq's 2018 budget draft and they are making good progress. As soon as they finalize the budget, we will know if the IMF approves a Dinar valuation adjustment.

On another front, on July 23, 2017, Dr. Maher H. Johan, Acting Deputy Minister of Finance, and Ali Mohsen Ismail Al Allaq, Acting Governor of the Central Bank of Iraq, penned a Letter of Intent to Ms. Christine Lagarde Managing Director International Monetary Fund 700 19th Street, N.W. Washington, DC 20431, USA.

In part it stated...

1.  As you know, the Iraqi economy continues to suffer under the ISIS attack and oil price shock that hit the economy in mid-2014. In response to this double shock, the government has taken bold but necessary steps to put its public finances on a sustainable footing and welcomed support of the international community including our SDR 3.831 billion (about $5.3 billion) Stand-By Arrangement (SBA) for three years with the IMF as well as sizable support from donors.

2. As explained in the attached Memorandum of Economic and Financial Policies (MEFP, ¶¶15-17), all performance criteria (PCs) at end-December 2016 and one continuous PC were missed, and one PC at end-June 2017 was likely missed. The government missed these PCs because of the spending pressure flowing from the war against ISIS and the ensuing humanitarian crisis at a time when oil prices fell precipitously. This forced us to spend more in 2016 and pay less external arrears than programmed. The breach of the continuous PC related to the accumulation of external arrears in amounts of $2.5 million for almost two months at the beginning of 2017 and $157 million for several days at the beginning of July 2017, all of which were paid. Considering the temporary nature of these arrears, and the steps described in the MEFP to put the program back on track and improve cash management, the government requests waivers for the non-observance of the continuous PC and one PC at end-June 2017. We also request waivers of applicability for the four PCs at end-June 2017 for which complete information is not available yet.

3. The government has made good progress in meeting the structural benchmarks (SBs) for the second review of the SBA (MEFP, ¶20). In particular, we have completed the following SBs: the survey of arrears of the central government; the audit of arrears on non-oil investment and on wheat purchases by the Board of Supreme Audit;  the survey of guarantees issued by the central government; the external audit of the gross international reserves and the net domestic assets of the Central Bank of Iraq (CBI);  the external audit of the total public debt;  the circular sent by the Ministry of Finance requiring all spending units to record all existing commitments on current and capital expenditures; the posting on the Ministry of Finance’s external website of the financial statements of the Development Fund for Iraq and Successor Account according to international standards; the adoption by the Governing Council of the CBI of a new charter for the Audit Committee prohibiting CBI executive representation on the committee; the introduction to Parliament of amendments to the Law on the CBI to strengthen CBI governance and the internal control framework; and the issuance by the CBI of clarifying implementing regulations to remove the limitation on transfer of investment proceeds that gave rise to an exchange restriction. We have also made progress in the two other SBs—amendments to the 2011 law establishing the Integrity Commission, and report of all current and investment commitments by the Ministry of Finance—but need more time to complete them. We therefore propose to postpone them to, respectively, the third and fourth reviews.

4. In view of the difficulty in reducing the obligations outstanding for more than three months to IOCs to zero because of the lumpy size of oil shipments, the government proposes to raise the floor on these obligations to $500 million, starting in September 2017. The government also supports staff’s proposal to set the stock of these obligations as an indicative target rather than a PC starting in September 2017. The government also supports staff’s proposal of changing end-December 2017 PCs for the fourth review in line with the revised macroeconomic framework, and setting PCs for end-June and end-December 2018. The program would continue to have indicative targets on all the variables serving as PCs at the end of the first and third quarters of the year, which should ensure continued monitoring of program performance on a quarterly frequency and help ensure program performance remains on track.

5. Against this background, the government requests completion of the second review under the SBA and requests purchase of the third tranche of SDR 584.2 million (35.1 percent of our quota). The government commits to implement the economic and financial policies during 2017–19 described in the attached MEFP to gradually bring expenditure down to a level consistent with the lower level of oil revenues to achieve debt sustainability while maintaining the exchange rate peg, strengthening public financial management and banking supervision, and fighting money laundering, the financing of terrorism, and corruption. The government will protect social spending and commits to maintain such spending above a floor during the SBA. 

6. 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. 

7. The government will provide IMF staff with any relevant information referred to in the attached TMU concerning progress made under the program.

8. 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 authorizes the IMF staff to publish these documents on its website once the Executive Board has approved this review.

Information and People For Diligent Outcomes!

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