Iraq and The SBA
Last December 2005, the IMF granted Iraq a Stand by Arrangement (SBA) for 15 months, starting in December 2005-March 2007 in the amount of usd 685 million. Behind the SBA agreement were stipulations for the new Iraqi government. The Iraqi government agreed to end the petroleum products subsidies in a piece meal fashion over the course of the year.
Upon the completion of the SBA in December Fuel prices were raised over night 5 and 9 fold gasoline, diesel, and kerosene and according to the SBA agreement the Iraqi government were to raise the cost of the petroleum products each quarter in 2006, so that by the end of the year Iraqi fuel cost to the average Iraqi would be inline with other gulf Arab countries.
In March 2006, the Iraqi government delayed the raising of fuel and diesel prices until June 2006. Currently Iraqi’s pay $.26 per gallon of regular gasoline compared to $.91 per gallon in other Gulf Arab countries. It remains to be seen if the Iraqi government will be raising fuel prices in June.
The cost of the oil fuel subsidies to the Iraqi people is estimated anywhere from 2 to 5 billion usd. Complying with the SBA loan, Iraq would be able to place the cost of the subsidies billions of usd into the main general fund of the Iraqi government starting in 2007.
Iraq would be able to use the extra liquid cash to pay for medial care and the welfare for the poorest of Iraqi’s. The IMF continues through out the year to monitor Iraq and measure the progress in the SBA loan. The money is granted to Iraq in quarterly installments when the IMF agrees the Iraqi government is making progress in accordance with the SBA loan.
There are a few tasks at the end of June that the Iraqi government must be in the process or close to completion. According to the SBA there are several ongoing operations and completion dates for each item. I am going to list what I think is important. There are few that I am going to list.
1. Implementation of Payment System Regulations
2. Commencement of operations of real time Gross Settlement system (RTGS) linking headquarters of commercial banks to the CBI.
Both of these are to be completed by June 30. Now let’s look at another benchmark for the Iraqi government to complete.
3. Commencements of payments clearing system between the headquarters of commercial banks and the CBI through the Automatic Clearing House (ACH),
This is supposed to be completed by 30 November 2006. If you don’t know what ACH is in the banking world, it allows banks to be connected electronically and a very cheap way of sending money and clearing checks worldwide as long as the bank is connected to the ACH network.
And finally by the end of the year 2006, fully capitalization of CBI to the stipulated ID 100 billion, based on the 2005 audited financial statements and taking into account the restructuring of outstanding claims on the central government that are on the 31 December 2005 balance sheet of the CBI.
Also in June the IMF will be meeting to evaluate what the Iraqi government has been doing in regards to completing the SBA agreement. Also a payment from the IMF to the Iraqi government is also made if everything goes accordingly and no issues. The next review from the IMF will be September 2006.
I am unsure if the Iraq government will complete all agreements in the SBA especially with all the continue delays and the recent delay of the fuel price hike in March. I am unsure if the Iraqi government will raise the fuel prices in June, we will just have to play a wait and see.
I will quote the recent appointed Planning and development cooperation minister Ali Baban, when he said recently in a Financial Times report that Iraq might not be able to enact economic reform soon, or reduce subsidies as envisioned by the IMF. Baban went on to say “I hope the IMF will take into consideration the situation in Iraq and not pressure us to do what will be hard for our people, especially cancelling subsidies.”
More to follow.