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Bank and Fund figure out Iraq lending

17 November 2003

Recent weeks have further clarified how the World Bank and the IMF are planning to contribute to the country’s reconstruction. Both institutions have now released figures on their potential financial involvement but a lot of uncertainty remains as to what extent international institutions will be able to work in the country.

Ahead of a donor conference on Iraq in Madrid in late October the World Bank and the UN published a needs assessment for the country. This estimated the overall reconstruction costs over the period 2004-2007 to be in the order of $36 billion. A separate report by the US-led Coalition Provisional Authority found that a further $20 billion would be needed. The needs assessment stresses the crucial importance of the security situation. Not only has this made collecting data difficult but the Bank also warns it is a major impediment to reconstruction.

The Bank has doubts about how much money Iraq can absorb in the current context or even who in Iraq would be entitled to sign a lending agreement. Nevertheless the Bank’s Executive Board has pledged $3-5 billion over the next five years for Iraq. This is part of the approximately $33 billion pledged by donors at the Madrid Conference, amid embarrassing allegations that the Coalition Provisional Authority could not account for $4 billion of past revenues. Donor assistance to Iraq will be channelled through the ‘International Reconstruction Fund Facility for Iraq’, two trust funds managed by the UN and the Bank. The Bank will charge an administration fee between 0.2 and 2% of incoming contributions and an International Advisory and Monitoring Board will oversee whether money is used in conformity with UN resolutions.

a bust of Milton Friedman might be erected in Baghdad to fill the empty plinth where the statue of Saddam Hussein once stood

Not everybody is convinced money will be put to good use: a demonstrator outside the conference said: “This conference is a sham. It is to justify spending money for American and Spanish corporations while claiming that the money is for Iraqi people. Reconstruction must be paid for by the Americans since they were responsible for the destruction.”

At the Annual meetings of the Bank and Fund in September the new Iraqi ‘Finance minister’ unveiled a series of reforms that the Financial Times described as “free-market economics so sweeping it suggested a bust of Milton Friedman might be erected in Baghdad to fill the empty plinth where the statue of Saddam Hussein once stood”. The plan sparked dissent in the Iraqi governing council but was strongly backed by the US administration.

Is Iraq a poor country?

Debates quickly emerged about which parts of the World Bank should provide what types of finance. The International Finance Corporation, the Bank’s private-sector lending arm, is planning a fund for small businesses. But the key issue was whether a resource-rich country like Iraq should have access to funds from the IDA, the arm of the Bank established to finance low-income countries. Iraq is expected to receive $250 million from IDA for the next two years, but the Bank then expects the country to be back among middle-income countries. The Bank claims that lending $500 million to Iraq would only use up 3 percent of remaining IDA resources and therefore it would not deprive other poor countries of money. But many observers argue that money for Iraq should be additional to existing aid commitments. The status of Iraqi foreign debt is unresolved and this may have a crippling effect on the country’s public finances.

The IMF has also announced the modalities of its involvement in Iraq. Priorities outlined by Managing Director Horst Koehler include contributing to a “stable macroeconomic” framework, and training Iraqi officials. The IMF could initially provide $850 million as emergency post-conflict assistance, followed by amounts between $850 million and $1.7 billion annually under its regular facilities. Total IMF assistance could range from $2.5 billion to $4.25 billion over three years.

The Bank and the IMF, as other donors, will certainly be under intense scrutiny over their operations in Iraq . Concerns have been fuelled by previous interventions in transition from conflict. Early involvement by the Bretton Woods Institutions has often helped lock in debatable policies before countries had the capacity and the democratic structures to make an informed decision.