IMF predicts post-war boom in Iraq but admits lending is risky

Posted in Iraq | 20-Oct-04 | Source: The Daily Star (Lebanon Edition)

Overwhelming debt, security situation also mentioned

The IMF predicted Monday a post-conflict economic boom in Iraq this year and in 2005, but admitted lending to Baghdad is a big risk because of the fighting and huge debt.

The International Monetary Fund cleared a $463 million loan to Iraq on Sept. 29.

The Iraqi gross domestic product (GDP), or total economic output, should soar 52 percent this year, 17 percent in 2005 and 9 percent a year on average from 2006 to 2009, IMF staff said in a report.

Oil output should climb from 2.1 million barrels per day this year to 3.5 million by 2009, it said.

"The authorities' policies have succeeded in promoting overall macroeconomic stability despite the difficult security environment," the fund said in an executive summary of the staff findings.

"Inflationary pressures have remained relatively subdued, the exchange rate has remained largely unchanged and gross international reserves have increased by about $3 billion since end-2003," the report said.

The IMF emergency loan to Iraq was expected to galvanise international support for the rebuilding of Iraq, including for relief of foreign debt amounting to more than $120 billion.

"Fund financing to Iraq under the present circumstances is subject to a considerable degree of risk," the staff conceded. "The security situation has not been brought under control and Iraq also has an unsustainable level of debt. Official creditors have yet to agree on how to resolve the debt burden."

IMF staff and management had sought to minimize the risks by seeking "assurances" from Iraqi creditors for the period covering the loan's work - up to the end of 2005 - and the repayment period, it said.

But clashes with insurgents were a massive obstacle to economic progress, the fund said.

The IMF aid came as the Paris Club of 19 richest industrialized countries discussed how much of Iraq's debt should be cancelled.

The United States and Canada are pushing for forgiving 90 percent of the debt while France, who opposed the war, proposes a 50 percent debt write-off.

The IMF said its appraisal of Iraq's debt had not made any recommendations on the magnitude of debt reduction needed.

Meanwhile, the IMF said Iraq's government had already shown it could implement economic changes despite the violence. These include the introduction of a new Iraqi currency, approval of a new banking sector and central bank laws, and a new tax law.

It said inflationary pressures in Iraq were relatively subdued, the exchange rate had remained largely unchanged and gross international reserves had increased by about $3 billion since the end of 2003.

"Despite efforts to bring opponents into the political mainstream, Iraq continues to suffer repeated attacks by insurgents against government officials and police officers, as well as sabotage of crucial infrastructure," the IMF said. "This has severely hampered the economic recovery and reconstruction of Iraq."

The Iraqi authorities hoped political reforms would enhance backing for the government and sap support for the insurgents, it said.

But the outlook for Iraq - and the chance of a new beginning of peace and prosperity - depended heavily on the commitment of the international community and debt reduction.

Without international commitment the Iraqi reforms may be lost, and the country risked returning to a regime of "autocracy, renewed economic decline and rising poverty," the fund warned. "This downside scenario, bringing with it the likelihood of further conflict and political instability, has serious adverse implications not only for Iraq but for the entire Middle East region."

Iraq oil export revenues should surge from $16 billion this year to $22 billion in 2009, reflecting rising oil exports and easing prices, the fund said.

Subsidies for oil derivatives, which had kept the price of gasoline comparatively low against the rest of the region, should be lowered by the end of this year and eliminated by 2009 to help shore up government coffers, the IMF said.

Iraq would need substantial investment to upgrade refineries, all of which were "very inefficient," and to expand total capacity to meet local demand, the fund said.

"In the next few years, therefore, Iraq is expected to have to continue to import oil refined products worth over $2 billion annually," it warned. - with agencies