$250 million to Support Iraq’s Fiscal Sustainability against External Shocks

The World Bank Group’s Board of Executive Directors today approved a US$250 million Development Policy Loan to the Government of Iraq in support of the country’s efforts to mitigate the impact of the current fiscal crisis on the national economy and to support its medium-term economic reform program.

The Fiscal Sustainability Development Policy Loan is the first of two planned programmatic Development Policy loans (DPLs) to the Government of Iraq, which together will total US$500 million. This support is designed to reduce Iraq’s fiscal and socio-economic vulnerability to external shocks emanating from sudden drops in oil revenues, the country’s main source of income. Years of conflict have taxed Iraq’s oil production levels – from both an infrastructure and an institutional standpoint – and strained its budget, largely because of reconstruction and rehabilitation needs.

“Iraq’s immediate needs are to manage this short-term financing gap in ways that soften the impact of this fiscal crisis on its citizens,” said Hedi Larbi, World Bank Country Director for Iraq. “The Bank’s loan today helps Iraq protect the key social and infrastructure expenditures that the country needs to rebound.”

Iraq’s excessive dependence on oil revenues makes it highly vulnerable to abrupt changes in international oil prices. This became particularly evident during the sharp decline in oil prices in late 2008 when its fiscal position deteriorated significantly.  After holding fiscal surpluses in the order of 9.7 percent of GDP and 1.7 percent of GDP in 2007 and 2008 respectively, it is expected to end with an overall fiscal deficit of about 22.6 percent of GDP in 2009.  A considerable financing gap – in the order of US$4.9 billion – has emerged for the period 2009-2011, which needed to be addressed through external financing. 

The World Bank budget support under the DPL will help sustain an adequate level of public expenditures to strengthen the delivery of key public services and rebuild infrastructure. It will also provide support in key reform areas critical to Iraq’s longer-term development: (i) strengthening budget management and prioritization; (ii) reforming the financial sector; and (iii) improving the efficiency of the social protection system.

“The World Bank’s role in Iraq goes beyond resource transfers. We are helping Iraq build the institutions and systems to better use its own resources for the benefit of its citizens,” said World Bank Vice President for the Middle East Shamshad Akhtar. “Our engagement has helped lock in a commitment to reform for the future and the Bank will further support this with key knowledge on poverty reduction, oil revenue management and private sector development.”

The World Bank’s program in Iraq consists of four completed projects (in capacity building, textbook provision, and community infrastructure development), and 20 active projects. Fifteen of these projects are financed by the Iraq Trust Fund and five by the International Development Association (IDA), a member of the World Bank Group that provides concessional financing to the world’s poorer countries. The projects are concentrated in sectors such as water, road rehabilitation, health, energy, education, financial management, and social protection.

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