IRAQ FINANCE 2014IRAQ’S ECONOMY:RECENT DEVELOPMENTS AND CHALLENGESCarlo Sdralevich - International Monetary Fund

Emergency Post-Conflict Assistance (2004) Various Stand-By Arrangements (2005-2013) Latest SBA: February 2010 – February 2013, SDR 1.1 billion Now: Surveillance mode Latest Article IV: July 2013

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Arabic

Iraq’s relations with IMF

http://www.imf.org/external/pubs/ft/scr/2013/cr13217.pdf

http://www.imf.org/external/arabic/pubs/ft/scr/2013/cr13217a.pdf

Recent economic developments

Growth has slowed down as oil production stabilized

2010 2011 2012 2013 20140

2

4

6

8

10

12

14

5.9

8.6 8.4

2.8

6.5

2.4 2.7 3.0 3.0 3.2

GDP growth (%)Crude oil produc-tion (mbpd)

Source: Iraqi authorities, and IMF staff calculations.

Economic Growth

Proj.

Inflation has remained in the low single digits

Jan-08 Nov-08 Sep-09 Aug-10 Jun-11 May-12 Mar-13 Jan-14 Dec-1402468

1012141618

CPI HeadlineCPI Core

Inflation (In percent, y-o-y)

Sources: Central Statistical Organization of Iraq; and IMF staff calculations.

Proj.

The exchange rate has been broadly stable…

0

50

100

150

200

250

300

350

400

1,1001,1201,1401,1601,1801,2001,2201,2401,2601,2801,3001,320

Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13

Average daily auction volume (In millions of US dollars, RHS)Average priceAverage parallel market price

Source: Central Bank of Iraq.

Foreign Exchange Developments, 2011–2013

… and the real effective exchange rate has appreciated

Jan-10 Jul-10 Feb-11 Aug-11 Mar-12 Sep-12 Apr-13 Oct-13120

125

130

135

140 REER (based on headline infla-tion)REER (based on core inflation)

Real Effective Exchange Rate(Index, 2007=100)

Source: IMF staff calculations.

Fiscal performance is weakening

2007 2008 2009 2010 2011 2012 2013 2014-15

-10

-5

0

5

10

0

20

40

60

80

100

120

140Overall Fiscal Balance

(In percent of GDP)

Overall fiscal balanceOil prices (US$ per barrel, RHS)

Sources: Iraqi authorities, and Fund staff estimates and pro-jections.

Proj.

Medium term:Oil will continue to drive growth

2010 2011 2012 2013 2014 2015 2016 2017 20180

1

2

3

4

5

6

0

20

40

60

80

100

120

140Crude Oil Production (in millions of barrels per day)National Petroleum Export Price (in US$ per barrel)

Crude Oil Production and Export Price

Sources: Iraqi authorities, and Fund staff estimates and projections.

Oil revenues will support reserves

2010 2011 2012 2013 2014 2015 2016 2017 2018-505

101520253035

0

20

40

60

80

100

120Current Account BalanceDevelopment Fund for Iraq Gross International Reserves (RHS)

Medium-Term Outlook for International Reserves and DFI (In billions of US$)

Sources: Iraqi authorities; and IMF staff calculations.

Challenges

A rising GDP has not fully benefitted the population20

04

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000IraqMiddle East and North AfricaMiddle East and North Africa: Oil Exporters

GDP per Capita, 2004–2013(In US Dollars)

Sources: Country authorities, and IMF staff calculations.

2005 2006 2007 2008 2009 2010 2011 20120.00.10.20.30.40.50.60.70.80.91.0

Algeria Bahrain IranIraq Kuwait Libya Oman Qatar Saudi ArabiaUAE Yemen

MENA Oil Exporters: HDI (Human Development Index, closer to 1 = higher development)

Source: UNDP Human Development Re-ports.

Fiscal vulnerability to oil market shocks, with a high break-even price…

Qatar

Kuwait

Libya UAE

Saud

i Ar...

Oman Iraq

Bahrai

nAlge

ria Iran

Yemen

0

50

100

150

200

250

Break-Even Oil Prices for Selected Middle East Coun-tries, 2012(U.S. dollars per barrel)

Source: MCD REO database.

…and a rigid spending structure

2010 2011 2012 2013 20140

10

20

30

40

50

60Investment ExpendituresOther Operating Expenditures

Source: IMF staff calculations.

Composition of Government Expendi-tures(In percent of GDP)

Financial deepening is still low…

Iran Iraq Jordan Qatar Saudi Arabia

UAE Yemen0

20

40

60

80

100

120Bank Deposits Broad Money Credit to Private Sector

Source: IMF staff calculations.

Financial Deepening Indicators for Selected Countries, 2012(In percent of GDP)

…and the financial sector is dominated by state-owned banks

Source: Central Bank of Iraq.

2010 2011 20120

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

02,0004,0006,0008,00010,00012,00014,00016,00018,00020,000

Total Assets (In billions of Iraqi Dinars)

State banksPrivate banks (RHS)

2010 2011 20120%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Credit to Private Sector / Total Assets

(In percent)State banksPrivate banks

Foreign direct investment is limited…

KuwaitAlgeria

IraqLibya

OmanUAE

Saudi ArabiaYemen

BahrainSudanQatar

0 1 2 3 4 5 6 7

Sources: Iraqi authorities, and IMF staff calcula-tions.

Foreign Direct Investment, 2012(In percent of GDP)

…reflecting a weak business environment

Iraq LIC Oil ex-porters

MENAP EM0

20

40

60

80DB-2012 rank5-year improvement

Ease of Doing Business (Percentile rank)

Sources: Doing Business (2006, 2011, 2012); and IMF staff calculations.

5 6 7 8 9 10 11 120

20

40

60

80

Higher GDP per capita →

High

er W

GI p

erce

ntile

→

WGI-4 1/ and GDP per Capita(log PPP)

Sources: Worldwide Governance Indicators (gov-ernment effectiveness, regulatory quality, rule of law and control of corruption).1/ Regulatory quality.

Weakening policy implementation Deterioration of political and security situation Delays in ramping up oil production Oil market shocks

Risks

Role of policies

Fiscal policy Build fiscal buffers in the DFI Rationalize current spending (subsidies,

wages, transfers, PDS) Strengthen fiscal institutions and

processes (chart of account, single treasury account, information and reporting systems)

Monetary and financial sector

Maintain stable exchange rate Continue liberalization of FX market,

simplify regulations, and strengthen AML/CFT regime

Maintain separate management of CBI and DFI assets

Pursue restructuring of public banks Support development of private banks

by strengthening supervision and ensuring a level playing field

Conclusions Mixed performance in 2013 This year will be challenging - risks are

high Enormous oil potential can be maximized

through good policies: Sound fiscal management of oil revenues Independence of CBI Stable exchange rate

IRAQ FINANCE 2014IRAQ’S ECONOMY:RECENT DEVELOPMENTS AND CHALLENGESCarlo Sdralevich - International Monetary Fund