The IMF programme in Iraq

Iraq was fortunate to avoid an external financing crisis, but failed to deliver on structural reforms.

Arab countries that are seeking help from the International Monetary Fund (IMF) fall into one of two categories: countries which have experienced recent political change such as Yemen, Tunisia and Egypt; and oil-importing ones exposed to high price shocks. It may then seem surprising that Iraq—an oil-exporter with an unchanged prime minister since 2006—has been until recently engaged in a programme with the IMF.

A little historical background may help explain this. Oil prices experienced a large drop in 2009 following the global financial crisis and the economic recession that ensued. The price of an Iraqi barrel of oil fell from $124 in mid-2008 to $35 in early 2009 before picking up later in the year. For an economy where oil accounts for 95% of total exports and 90% of the government’s revenue, this risked creating a hole in the financing of both the government’s budget and imports.

The second column of the table illustrates this by showing the calculations carried out in February 2010 when Iraq applied for help. Assuming an average oil price of $62.5 per barrel and average exporting volume of 2.1 million barrels per day, Iraq would have had a $5 billion gap in financing its transactions with the outside world through 2011. Faced with this risk, Iraqi officials agreed with the IMF on a two-year programme and a $3.7 billion loan was approved on 24 February 2010. 

As it turned out, the risks did not materialise and oil prices recovered from their 2009 lows. My calculations—shown in the third column of the table—suggest that the financing gap was reduced to $3 billion by the end of 2010 as Iraqi oil price averaged $74 per barrel in 2010, more than compensating for the failure to meet the export volume target. By the time the programme had its second assessment in March 2011, the financing gap was all but eliminated under the government’s new conservative assumptions for oil price ($76.5) and export volume (2.2 million barrels per day) as shown in the last column of the table.

At the stage, the programme’s main focus shifted from “covering the balance of payments needs” to providing “a framework for advancing structural reforms”. This included improving accounting, auditing and reporting practices; restructuring and recapitalising the two main state-owned banks; and improving public financial management. However, the programme became a frustrating affair from this point on. Progress slowed down, reviews were delayed and eventually never carried out, and the programme deadline was extended twice, first to July 2012 and then to February 2013, when it finally expired.

In summary, the programme was one of two halves. The first focused on avoiding a balance-of-payments crisis, which Iraq managed to do more by luck than judgement. But higher oil prices, which were the main reason for preventing the crisis, weakened the appetite for change. It is fair to say that the second half of the programme, designed to advance structural reforms, was a complete and utter failure.