Bank and Fund in-roads into Iraq

23 January 2006

As the World Bank and IMF ratchet up efforts to plough money into Iraq’s reconstruction, civil society groups call for greater national and international scrutiny over crucial reforms and a total cancellation of the country’s ‘odious debt’. In November, the Bank’s board of executive directors approved the first development loan to the country in over 30 years. This was followed by an IMF stand-by arrangement, quietly approved a week after Iraqi elections at the end of December. Compliance with the conditions of the stand-by arrangement has lead to a dramatic increase in fuel-prices, sparking riots in many parts of the country and leading to the resignation of the oil minister, Ibrahim Bahr al-Uloum in protest.

The stand-by credit arrangement of approximately $685 million is the Fund’s first ever with Iraq, designed to support its economic programme over the next 15 months. It follows an emergency post-conflict assistance disbursement in September 2004, and an Article IV consultation concluded in August 2004. The arrangement, carefully timed to avoid electoral scrutiny, makes Iraq eligible for further IMF loans. It is also necessary to secure the 80 per cent reduction of Iraq’s debt with the Paris Club as agreed in November 2004, and as a seal of approval to initiate aid from other donors.

Key components of the SBA include:

dramatic increase in fuel prices, sparking riots in many parts of the country
  • cutting of public subsidies, especially on fuel;
  • a restructuring of Iraq’s external debt;
  • strengthening of administrative capacity, including statistical reporting; and
  • reform and restructuring of Iraq’s two state-owned banks.

Consequently, the Iraqi government increased state-controlled prices of petrol and diesel by up to 200 per cent. Oil minister Bahr al-Uloum who resigned in protest over the plan said the price hikes should have been introduced gradually to satisfy both the demands of the IMF for an end to subsidies and the demands of ordinary Iraqis for cheap fuel. Iraqi Finance Minister Ali Abdulameer Allawi also expressed concern regarding the potential for unrest as a result of the removal of subsidies. Further rises of petroleum and petroleum products are planned on a quarterly basis.

After a two-day seminar in Amman on IFI policies in Iraq, representatives of five Iraqi trade unions adopted a joint statement concerning the policies of the IMF and World Bank in the country and formed a permanent coordinating committee on the IFIs. Points in the statement included:

  • the importance of complete sovereignty for Iraq over its petroleum and natural resources;
  • increased transparency and additional representation for Iraq in the decision-making structures of IFIs;
  • cancellation of debt incurred by the former regime and an end to conditionality;
  • rejection of the privatisation of publicly owned entities; and
  • rejection of the increase in the price of petroleum products.

Jubilee Iraq said that “the timing of the deal was very worrying, coming in the period after elections and before the formation of the interim government”. They pointed out that if the deal had been made a few weeks earlier then it may would have been an election issue, and if it had been delayed for a few months then the permanent elected government would have been able to negotiate it from a position of greater strength. They stated that “there would be no need to borrow this money if Iraq were not paying more than $100 million a month in reparations and with a huge odious debt burden still un-cancelled from the era of Saddam Hussein.”

Debt restructuring

As part of the stand-by arrangement the debt that Iraq owes to the Paris Club has been reduced by the equivalent of 80 per cent in net present value terms. Non-Paris Club official debt constitutes about twice as much as that of the Paris Club. Only a small proportion of it has been reconciled so far. On 19 January Iraq issued its first bonds for trading as part of the restructuring of debt owed to commercial creditors.

Bank expansion

In spite of security concerns, Joseph Saba, the Bank’s country director for Iraq hopes to expand staff (currently seven Iraqis and one expatriate) in the country, asserting that Bank expertise is needed to “promote macroeconomic stability and improve governance”. The ground work for the Bank and Fund’s involvement in the country started shortly after the invasion. The International Reconstruction Fund Facility for Iraq (IRFFI), administered by the Bank and the UN was set up in 2003. It channels and coordinates donor support for reconstruction via two trust funds, including the World Bank Iraq Trust Fund(ITF). The Bank administrates the ITF but does not contribute to it.

In July 2005 the Bank set out the framework for up to $500 million in concessional loans from the International Development Association (IDA), of which the first instalment of $100 million, for education projects was approved in November 2005. The Bank’s private sector arm, the International Finance Corporation (IFC), has also provided financial and technical support

Oil ‘privatisation’?

One of the conditions of the stand-by arrangement was that Iraqi officials would consult with the IMF on the drafting of a petroleum law in the second half of 2006, to restructure Iraq’s oil industry. The IMF has already aligned itself with private sector interests on this subject: in autumn 2004, the IMF and World Bank presented a report by little-known corporate lobby group the International Tax and Investment Centre(ITIC) and multinational oil companies to the Iraqi ministries of finance, oil and planning. The report called for Iraq’s oil reserves – the second largest in the world – to be developed by multinational companies through contracts known as production sharing agreements. To do so would break from the standard practice across the major oil producers of the Middle East, whose oil industries are in the public sector.Crude Designs, a report by PLATFORM and other UK and US NGOs revealed that such a move would cost the Iraqi economy between $74 and $194 billion, compared to continuing with the current system. The contracts would substantially restrict the ability of the Iraqi government to control its oil industry or even pass new legislation for up to 40 years. PLATFORM commented, “Oil accounts for more than 90 per cent of the Iraqi economy. The oil industry’s proposals, which appear to be supported by the IMF and World Bank, could sign away a large chunk of Iraq’s oil revenue for decades.”