IMF deal sees smaller civil service

More details on Iraq’s new two-year stand-by arrangement (SBA) with the IMF were revealed in March with the publication of the Fund’s Staff Report. The main budgetary problems in 2008 contributing to Iraq’s request for the SBA were falling oil prices, a 70% expansion in the civil service wage bill and transfers, and a higher than expected execution rate on the capital budget. Thus, one of the SBA’s performance criteria is to hold constant recurrent expenditure in the 2011 and 2012 federal budgets, in nominal terms so that it falls to 57% of GDP by 2012. As a key step in doing so, Iraq has committed to carrying out a census of state employees by the end of September. As this census has been an outstanding Iraqi commitment to the Fund for some years now, the task has been simplified to exclude employees of the state security apparatus.

The Iraqi authorities have also committed to reducing transfers to state- owned enterprises (SOEs): the IMF projects that these will decline from US$2.6bn this year to US$1.9bn in 2012. In late March the Ministry of Industry and Minerals announced that, over the next five years, it would allow foreign investors to take up to 50% stakes in as many as 240 of its factories. As similar announcements have been made for some years now, it remains to be seen how credible this is: although Iraq’s statist mode of industrial development has seen non-oil GDP per head fall to the same level as Rwanda’s, the mentality remains deeply ingrained.

Other Iraqi policy commitments include the completion of its oil metering system by end-2010. The balance sheets of the state-owned Rasheed and Rafidain banks, accounting for 90% of Iraqi banking assets, are to be restructured by the end of June. The adoption of a plan for doing so was a structural benchmark in Iraq’s last SBA with the IMF, which was due to be completed by September 2008. Finally, Iraq is committed to improving its institutional and statistical capacity. Although the pledge to hold recurrent expenditure constant for the next two years is a bold one for Iraq, the other conditions of the SBA are the same as those outlined previously, leading to skepticism about the country’s willingness to carry out the agreed reforms.

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