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An updated contribution regarding the Stand By Agreement finalized in favour of Iraq



An updated contribution regarding the Stand By Agreement finalized in favour of Iraq

On the 19th of May , during a meeting in Amman between the Iraqi Finance Minister Hashyar Zebari and some representatives of the International Monetary Fund (IMF), both parties have reached significant agreements regarding the new financial aids that Iraq will receive in the next three years. In this context, the negotiations led to successfully agree on a Stand By Agreements that will be composed of several instalments and whose provision should start this summer. This agreement represents an important financial support for Iraq, that is facing a considerable financial crisis and needs to stabilize its balance of payments. As already announced previously, this agreement should provide an amount of 15 billion dollars that would prevent Iraq from falling in an even deeper economic stagnation. According to the negotiations held in Amman, the Iraqi Government will receive the support from the IMF if it will implement important structural reforms necessary to reduce the expenses and improve the effectiveness of the public sector, through a more equal distribution of national resources and by trying to stop the growth of the public deficit and public debt.

The Stand By Agreement settled on May integrates a series of financial and economic aids aimed to stabilize Iraqi economy, based mainly on the fluctuations of the oil international market. This dependency from oil revenues implicated, especially in the past few months, a considerable series of difficulties for the Iraqi economy. In fact, the collapse of oil prices during 2015 and the readjustment of the price under the threshold of 45$, observed during the first months of this year, have caused and are still causing a considerable growth of the public debt, that is estimated will reach the 100% of the GDP by the end of this year. In these complex circumstances, the support of the IMF would mean not only a significant aid to rebalance the internal economic equilibrium of the country, but it would also represent an important tool to reinforce the trust of international investors who, discouraged by the political and institutional crisis and by the security problems involving Iraq, are quite reluctant to invest.

In particular, regarding the financial profile,a possible reason for concern lies with the Iraqi Central Bank’s management of foreign reserves. In this moment, the Iraqi Central Bank is contributing to payments of wages and pensions of public employees. In order to do so, the Iraqi Central Bank is selling American dollars to the public banking system, that in this way public debt. Analyzing this state of facts, it is possible possible to expect a significant decrease of the currencies’ reserves owned by the Central Bank, especially, a consistent reduction of the American dollars’ reserves. The first and direct consequence of this situation would be a depreciation of the exchange rate of Iraqi dinar to American dollar, this would lead to losses for the international investors that have invested in Iraq. Unfortunately, regarding these circumstances, it is very difficult to find official data or accountable resources able to give an exhaustive picture of the real state of the level of currencies’ reserves in Iraq. In this sense, according to the Stand By Agreement negotiated in Amman, the Iraqi Government will periodically provide transparent reports regarding the currencies' reserves’ situation and this element will surely represent a positive factor both for those international investors who are interested to do their investments in Iraq and for those economic actors who are already investing in this country.

Another important element related to the new agreement, reached by the IMF and Iraqi financial authorities, regards the payments to international oil companies, with whom Iraq has accrued some delay. According to the negotiations held in Amman, in order to unlock the funding provided by the by the IMF, Iraq will need to pay by the end of this year the arrears collected with international oil companies.

Surely, the Baghdad Government will face many challenges to satisfy all the conditions set up by the IMF. In the first place, there is the necessity to modify the fiscal system. In fact, even though the last two budget laws have incorporated the expectations of a fall of the oil price (until the threshold of a monthly medium price of 45$ in 2016 budget law), the expenses for the wages and the pensions of the public sector employees are still calibrated to an oil price of 100$, an amount that will hardly be reached again in the future months. In the second place, the IMF asks to the Iraqi Government to reduce the wages of public employees in order to decrease the public expenses and re-establish a sustainable equilibrium in the internal economy. Finally, both the Iraqi authorities and IMF agreed on a cut of the expenses of all the Ministries, in order to lower the impact of the public expense in the entire economic situation.