Economic growth has been slower than expected at the time of the last Article IV consultation, mainly because the expected expansion of oil production has not materialized. Following a decline in oil production and real GDP in 2005, economic growth is estimated at 6¼ percent in 2006. Average annual crude oil production has remained at about 2 million barrels per day since 2004. Annual consumer price inflation increased to almost 65 percent at end-2006 from 31½ percent at end-2005 mainly due to supply bottlenecks, in particular of fuel products. Core inflation (excluding fuel and transportation) remained high at about 32 percent. Following policy efforts to bring inflation under control and some easing of fuel shortages, inflation has since then declined to 46 percent in June 2007, and core inflation has decreased to 19 percent.
Since November 2006 the Central Bank of Iraq (CBI) has allowed the exchange rate of the Iraqi dinar to appreciate by 15 percent and raised its policy interest rates in two steps to 20 percent. In addition to reducing inflation, these policies have also had some success in de-dollarizing the economy and increasing the demand for dinars. The CBI gross international reserves increased to $18.7 billion at end-2006 (almost 6 months of import cover).
Following a fiscal surplus of 11 percent of GDP in 2005, the fiscal outturn for 2006 showed a surplus of almost 12 percent. This outcome is partly the result of underspending on investment reconstruction projects, including in the oil sector. The surpluses contributed to an accumulation of balances in the Development Fund of Iraq to a level of $8.6 billion at end-2006.
Progress in implementing the structural reforms has been made. Official fuel prices have been increased to levels in other oil-exporting countries in the region, and private sector importation of fuel products has been liberalized. Negotiations on a new legal framework for the oil sector are ongoing. An interim audit of the CBI's 2006 financial statements and an audit of its net international reserves have been finalized. Progress has also been made in developing the financial system with the introduction of a payments clearing system and a Real Time Gross Settlement system. The process of restructuring Iraq's two largest state-owned banks has started. The Ministry of Finance has adopted a new chart of accounts and budget classification, but completion of a census of all public service employees has proven more time-consuming than foreseen and is still underway...
Directors were encouraged by the reduction in inflation. They generally supported the policy of the CBI to continue allowing the gradual appreciation of the dinar through end-2007. This would contribute to further reducing inflation and de-dollarizing the economy. Directors called on the CBI to stand ready to accelerate the pace of appreciation and tighten monetary conditions further if inflation deviates from its downward path and dollarization is not reduced as expected. Key to fighting inflation would be to continue restraining public spending pressures and stepping up efforts to reduce shortages, especially by actively supporting private sector fuel imports...
Directors urged the authorities to improve the transparency and accountability of public financial management and step up their fight against corruption. They were encouraged by the authorities' intention to join the Extractive Industries Transparency Initiative and implement a comprehensive oil metering system as soon as possible....
Directors stressed the critical need to further improve the statistical database.
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