IMF deal calls for radical change in Iraq

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The government of Iraq will cut public spending, raise taxes and electricity tariffs and implement sweeping reforms in its economic and financial management by 2019, the agreement signed last month between the IMF and Iraq says.

The agreement, published in full for the first time yesterday, is the most far-reaching fiscal reform programme ever attempted in Middle East.

The agreement also says that the government Iraq has a debt-management strategy that addresses $41bn borrowed before 2003 from foreign creditors and involves a further postponement of war reparations due to Kuwait worth $4.6bn.

Iraq’s external debts totalled $67bn at end of 2015.

The agreement says that the federal government is considering a new agreement with the Kurdistan Regional Government (KRG) that will involve netting out KRG oil receipts. At present, Baghdad receives income from all Iraqi oil exports and transfers an agreed portion to the KRG.

The key features of the agreement are:

  • the government commits to contain the 2016 non-oil primary deficit to no more than ID 65.2trn (53.3 per cent of non-oil GDP), compared to ID 76.7trn (56.3 per cent of non-oil GDP) in the 2016 budget.
  • It will collect at least ID 7.4trn (6.1 per cent of non-oil GDP) in non-oil revenue, compared to ID 8.8trn (6.5 per cent of non-oil GDP) in the 2016 budget. This will involve higher personal income tax revenue through a reduction of exemptions
  • Non-oil primary expenditure will be limited to ID 72.6trn (59.4 per cent of non-oil GDP) compared to ID 85.5trn (62.8 per cent of non-oil GDP) in the 2016 budget by cutting the budgeted wage bill by ID 3.0 trillion; reducing pension payments by ID 1.8 trillion; reducing spending in goods and services by ID 2.2 trillion, while making room for the increase in electricity charges from ID 360 billion to ID 675 billion, as a consequence of the fivefold electricity tariff increase decided by the Council of Ministers; cutting transfers by ID 2.4 trillion and cutting non-oil investment expenditure by a further ID 3.6trn
  • The domestic financing will be covered by the issuance of treasury bills worth ID 14.9trn
  • The external financing will be covered by loans from the IMF under the borrowing agreement ($1.9 billion); the World Bank under a Development Policy Loan to be disbursed in December 2016 ($1billion); a bond to be issued with full guarantee of the US ($1bn); loans by the World Bank guaranteed by France, the UK and Canada: budget support loans by the Japanese International Cooperation Agency and a $1bn Eurobond issue in the final quarter of 2016 ($1billion). The external financing will also be covered by project loans from the US government; Germany; JICA; the World Bank; Italy and the Islamic Development Bank.
  • Broaden the tax base of wages. This decision is expected to yield additional tax revenue of ID 0.3trn in 2016 and ID 0.6trn in 2017

“The Ministry of Finance will, by end-September 2016, prepare tax policy measures to increase tax and customs revenue, with technical assistance from the IMF and the World.” The agreement says. “Such measures could include the introduction of a value added tax or sales tax, a personal income tax on pension earners, excise taxes.”

The agreement says nearly ID 2.2trn (1.8 per cent of non-oil GDP) will be raised through higher electricity tariffs. Cuts in gas flaring will release gas for electricity production. This could yield about ID 1.4trn ($1.2 billion, or 1.1 per cent of non-oil GDP) in budget savings annually.

The report says there are 176 state-owned enterprises (SOEs) employing more than 550,000 people, of whom 30 to 50 per cent are estimated to represent excess labor.

“Many of these SOEs have limited rationale beyond providing public employment,” the report says “As a result, they are structurally loss-making and present a large burden for public finances.”