WASHINGTON, 17 August 2005 — The IMF, issuing its first review of Iraq in 25 years, urged leaders yesterday to adopt an elusive constitution and to pursue hard-hitting reforms to get the war-torn economy back on track.
The International Monetary Fund acknowledged the “daunting” security crisis facing the country, but said Iraqi authorities’ desire for access to IMF standby credit will depend on deeper reform progress.
Lorenzo Perez, the IMF’s last mission chief in Baghdad until a bloody bombing at the United Nations headquarters in August 2003, said agreement on the charter would have a “very meaningful and positive effect on Iraq”.
“The approval of the constitution (would be) an important step in the political and economic development process of Iraq,” Perez, one of the co-authors of the IMF report, told a news conference.
Several sticking points, such as distribution of Iraq’s oil wealth, would not be easy to resolve. “But overall it would have a positive impact on the economic climate,” he said. Iraqi lawmakers granted a one-week extension to draft the country’s post-Saddam Hussein constitution after leaders missed a midnight Monday deadline to submit it to Parliament despite intense US pressure.
In their report, IMF directors said: “While the long-run prospects are well supported by its substantial resource base, Iraq still faces daunting challenges and downside risks in reconstructing its economy.
“To speed up investment in essential infrastructure, social services and poverty reduction, directors underscored the importance of strong action on fiscal and oil sector reforms, along with the timely disbursement of aid commitments.”
The review marks the first time that the IMF has been able to comment in detail on Iraq’s economy since Saddam Hussein’s regime severed relations with the Washington-based fund in 1980.
Since Saddam’s ouster by US-led forces in April 2003, Iraq has been rocked by a bloody insurgency which has hampered efforts to rebuild the oil-rich country’s infrastructure.
Among concrete recommendations made in its report, the IMF board said the government must bring inflation, which was running at 37 percent in June, under control and put in place a “coherent” fiscal strategy to boost revenues. Authorities should crack down on corruption and reduce their influence in the economy by restructuring state-owned banks and other government-controlled enterprises.
Iraq must reconcile the demands of foreign private creditors along the lines of a deal with the “Paris Club” of government creditors last year, the report also said.
One key challenge is “the elimination of existing price distortions” including the phasing out of “significant government subsidies on petroleum products as quickly as feasible”, the IMF added.
“The level of subsidies in Iraq is probably the highest in the world,” Perez said, while acknowledging that higher prices would hurt ordinary Iraqis in the short term.
“You have to start adjusting prices gradually, making sure you are strengthening the safety net to protect the poor, and also explaining to the population why this is being done,” he said. “It’s really a trade-off between subsidies for the fuel or having more resources on hospitals and schools.” The review welcomed the Iraqi government’s desire to enter into a standby arrangement to gain access to IMF credit by the end of this year. But the authorities must first focus “on a reinvigoration of structural reforms and further steps to improve governance and the country’s institutional and administrative capacity”.
Greater attention to “the quality and timeliness of basic economic data” deemed essential for IMF monitoring would also be needed, the review concluded.
