8.19.2005

Iraq Reconstruction Hinges on Constitution, Reforms, IMF Says

Some stability achieved but economy remains "fragile," report says

Washington -- The pace of reconstruction in Iraq and the recovery of its economy will depend to a large degree on the adoption of a national constitution and the progress of economic reforms, an International Monetary Fund (IMF) official said.

Briefing reporters August 16 on the fund's just-released report on the Iraqi economy, Lorenzo Perez said that consensus on and formal approval of a constitution would be an “important step in the political and economic development process” and would have a “very meaningful and positive effect on Iraq.”

Perez, a senior official in the IMF’s Middle East and Central Asia department, spoke one day after Iraq's Transitional National Assembly agreed to a one-week extension of the deadline for drafting the country's new constitution.

The report is the fund’s first assessment of the Iraqi economy since 1980 when the Saddam Hussein regime severed ties with the multilateral bank.

The IMF reported that Iraq has achieved some economic stability and initiated structural reforms “under extremely difficult circumstances.” It commended Iraqi officials for making progress in drafting a new payment system, improving the banking regulatory framework, and establishing a legal framework aimed at combating the financing of terrorism and money laundering.

The report said, however, that Iraq's economy remains “fragile” and that the country still faces major risks.

“Much work remains to be done to transform Iraq into a market economy, firmly based on a path of sustained growth,” it said.

Eliminating price distortions and generating additional budget resources to support social services are some of the most important challenges facing Iraq, the report said. Consequently, IMF directors urged Iraqi authorities to begin slashing massive government subsidies on petroleum products that, together with other government supports, create market distortions and opportunities for corruption.

The IMF directors also called for more reform in the oil sector, particularly for strengthening corporate governance and for improving the monitoring of oil exports. And they urged the restructuring of state banks and state-owned companies with a view to reducing the role of the state in the economy.

The IMF directors said that their response to Iraqi authorities' request for access to the fund’s standby credit by the end of 2005 will depend on the progress of structural reforms as well as improvements in governance and institutional and administrative infrastructure.

They urged Iraq to begin debt-restructuring negotiations with creditors that were not party to its agreement with the Paris Club group of major creditor nations,

The 19 Paris Club countries (Austria, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Great Britain, Ireland, Italy, Japan, the Netherlands, Norway, Russia, Spain, Sweden, Switzerland and the United States) agreed in November 2004 to cut Iraq’s debt on their books by 80 percent by 2008.

Iraq’s economy grew by almost 50 percent in 2004, mostly driven by oil revenue, according to the IMF. However, the fund reduced its growth projections for 2005 to 4 percent from an earlier 17 percent on the expectation that continued insurgent and terrorist attacks on the country’s oil infrastructure would limit oil production.

Source: International Information Programs, U.S. Department of State

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