Post From Dinar Updates
Chat Room Excerpts & Highlights
Dinar Updates Sunday PM Chat 9-11-16 Part 2 of 3
rcookie says():21. In 2017–19 and beyond, the government will design and implement deeper grounded revenue and expenditure reforms in order to continue to hold a tight lid on the non-oil primary balance and achieve debt sustainability (MEFP, ¶¶23–24).
The government will continue to have the account of the Development Fund for Iraq and Successor Account 300/600 at the CBI audited by an international auditor to check that all oil revenues reach the Treasury and monitor the use of the resources deposited in that account (SB, MEFP, Table 5).
The government will conduct diagnostics of the tax and customs codes and tax and customs administrations in order to increase non-oil tax revenue. It will also implement a hiring freeze in sectors other than security, health and education and have the Board of Supreme Audit (BSA) audit the wage and pension recipients’ payrolls (﴾SB, MEFP, Table 5)﴿ to first identify, and then cancel payments to, ghost workers and ghost pensioners.
The government will also reform the public pension system, in discussion and coordination with the World Bank, in order to make it more financially sustainable, equitable and efficient.
It will reform the electricity sector by gradually increasing prices above cost, improving electricity sales revenue collections and reducing distribution losses, and making the necessary investment to capture the gas currently flared when oil is extracted to use it for electricity production, thus reducing the need to import natural gas.
The government will set up a proxy means testing database with the assistance of the World Bank to improve the targeting of the state transfers to poor households. The government plans to reform the 176 state-owned non-financial enterprises, most of which have limited rationale beyond providing public employment, are structurally loss-making, and present a large burden on public finances.
As a first step, the government is setting up a database to monitor the fiscal risks of non-financial SOEs, which will be used to design and implement a strategy to restructure them.
rcookie says():HMMMM...ANY OF THAT LOOK FAMILIAR FROM THE BREAKDOWN...
rcookie says():AND AS FAR AS THE CREDIT AGENCIES OR THE 3 LETTER AGENCIES WORRIED ABOUT IRAQS ABILITY TO PAY BACK THESE LOANS...
rcookie says():22. Provided the recommended fiscal adjustment is implemented, public debt is projected to remain sustainable over the medium-run (Annex I). The projected fiscal consolidationand improving medium-term growth prospects would support a reduction of public debt from85 percent of GDP in 2018 to 75 percent of GDP by 2021.
However, the implementation of fiscal adjustment plans, the high level of external debt and large gross financing needs pose risks for debt sustainability. The risks are partly mitigated by the fact that the gross financing needs are rollover of short-term debt by state-owned banks, which will be getting credit from the central bank, which limits the risk of non-rollover, and two thirds of external debt consists of legacy arrears still to be restructured on Paris Club terms.
Indeed, Iraq’s external debt stock of $67 billion at end-2015 includes $41 billion of unresolved external arrears to non-Paris Club creditors that were accumulated under the pre-2003 Saddam regime.
These arrears can be tolerated under the Fund’s policy on Arrears to Official Bilateral Creditors because the aforementioned Paris Club Agreement was found to be adequately representative (i.e., Paris Club creditors provided the majority of the financing contributions required from official bilateral creditors in the context of that agreement) and the authorities have since been making best efforts to conclude agreements with non-Paris Club
rcookie says():creditors on Paris Club comparable terms.13 Indeed, negotiations to implement debt relief on the same terms as with the PC creditors, i.e. an 80 percent net present value reduction, are ongoing (MEFP, ¶17).
However, even with such a markdown, debt sustainability concerns would remain elevated due to Iraq’s high gross financing needs (﴾29 percent of GDP in 2016)
rcookie says():AND THIS IS HOW OFTEN THE IMF IS REVIEWING CBI ASSETS AND BALANCE SHEET
rcookie says():The SBA will set: quarterly PCs on the non-oil primary balance, the stock of total public debt,18 the stock of net domestic assets of the CBI, official foreign exchange reserves, the absence of new external arrears and the stock of outstanding arrears to IOCs (MEFP, Table 3); quarterly IT on social spending (a floor) and the stock of outstanding domestic arrears on non-oil investment (a ceiling); and PA and a few SB (MEFP, Table 5)﴿.
As in Iraq’s previous SBA, the external auditor of the CBI will audit the stocks of net domestic assets and official foreign exchange reserves within two months after the test dates. An external auditor will also audit the stock of public debt within the same deadline.
The IMF Statistics Department has been providing technical assistance to ensure that the authorities report fiscal data in compliance with the IMF Government Finance Statistics Manual 2014.
rcookie says():The PCs on the stock of net domestic assets of the CBI and official foreign exchange reserves will have adjusters allowing more/less indirect monetary financing and use of reserves in case foreign financing is lower/higher than programmed, with an asymmetric cap on the additional monetary financing to protect foreign exchange reserves.
The PCs could be revised and the fiscal adjustment path changed on the occasion of each review in case the medium term path of oil revenue and/or external financing differs from the one presented in this report. The PC on the non-oil primary balance will have an adjuster that will tighten the target in case the transfers to the KRG (¶5) are less than programmed.
rcookie says():AND THEY ADDRESS RISKS......
says():30. The SBA is subject to several significant risks, the materialization of which would magnify the policy challenges. The agreement between the KRG and the Iraqi authorities (¶5) may not resume, possibly causing wider political fragmentation, thereby weakening program implementation prospects.
The authorities may face difficulties in reducing the wage bill and stemming the build-up of arrears. The authorities’ track record under the last SBA under more favorable economic, political and security conditions and in the context of prior actions for the recent purchase under the RFI was weak, although the authorities have made progress underthe SMP (¶12).
In light of the very difficult security situation in the territories occupied by ISIS, the tensions with the KRG over independent oil sales, and the social tensions in the rest of the country, the authorities may face difficulties in gathering the necessary political support to implement the fiscal consolidation and reforms envisaged under the SBA.
In addition to these risks, frequent changes to reported macroeconomic indicators underscore the strains on statistical and economic policy institutions posed by the ongoing conflict and weaknesses in the provision of reliable data for program monitoring.
The program will manage these risks by using technical assistance and external auditors for data provision related to three out of six PC (¶29). In spite of these planned measures, however, the reliability of data provision for program monitoring will remain uncertain, especially in the near term. Program engagement with Iraq will clearly remain exposed to such risk going forward.
rcookie says():AND IN THE END......
31. Iraq’s capacity to repay the Fund should remain adequate. The total outstanding Fund credit would peak at 16 percent of gross official reserves, 11 percent of exports of goods and services, and 7 percent of external public debt (Table 11).
rcookie says():THAT IS WHY THEY GOT THE LOANS.......THEY E A R N E D IT!!!!!!!!.........
rcookie says():AND THEN THE IMF OUTLINES A STRATEGY TO ACHIEVE FISCAL GOALS...
DIGIman1 says():The panic begins with the first one to say ‘Calm down!’
rcookie says():33. The policies put in place by the authorities to deal with the shocks are appropriate. In the fiscal area, the authorities are addressing the precipitous fall in revenues with a mix of fiscal adjustment, mostly through inefficient capital expenditure retrenchment while protecting social spending, and financing.
In the external area, the authorities are appropriately maintaining the peg to the U.S. dollar, which provides a key anchor to the economy. International reserves are at a broadly adequate level and can help cushion the projected decline in oil export revenues if the fiscal adjustment under the SBA takes place, oil prices recover somewhat in the medium term, expected donor support is delivered, and oil production is maintained at the present level.
rcookie says():AND THEY CONCLUDE...
rcookie says():34. The size of the fiscal adjustment envisaged in 2016–19 is appropriate to address the pressure from lower oil revenue and higher humanitarian and security spending, but the composition of expenditure needs to be improved over time.
The fiscal adjustment in reaction to the fall in oil prices is necessary to reach a level of spending over the medium term that can be sustained by projected oil revenues. But the composition of the fiscal adjustment is not optimal, as most of the adjustment is coming from capital spending rather than current items.
Over time, the authorities need to reduce current expenditure, including the oversized payroll and the unsustainable pension system, and reform the electricity sector, subsidies, and state-owned enterprises, in order to make room for larger but more effective and efficient investment expenditure that is conducive to growth. Oil investment needs to be protected as it is essential to generate the oil revenue to finance most of the public spending.
rcookie says():AND THIS IS WHAT THE IMF CONCLUDES ABOUT THE NECESSARY INDIRECT USE OF RESERVES...
rcookie says():35. Some indirect central bank financing of the government is unavoidable at this juncture. While this form of budget financing is not ideal, the large financing needs make it necessary given that the higher-than-programmed adjustment in government spending that would otherwise be needed could threaten Iraq’s delicate social and political balance. Moreover, it would be difficult to raise more foreign financing than assumed in the SBA.
rcookie says):AND REMEMBER THEY HAVE JUST SHY OF $11 BILLION BEFORE END OF 2016...
rcookie says():AND THIS IS WHAT THE IMF THINKS ABOUT THE RISK TOWARD THE SBA LOAN...
rcookie says():42. The balance of risks associated with this SBA is tilted to the downside. The downside risks are very high. They mainly stem from further downward oil price shocks, the extension of the conflict with ISIS, political tensions, and administrative weaknesses, including in data reporting for program monitoring, designing and implementing measures to reduce the wage bill over the medium term, and preventing the build-up of arrears.
To mitigate these risks, the authorities have designed fiscal adjustment measures that eschew the most politically sensitive cuts and structural reforms where partners have been delivering technical assistance.
To minimize the risk of misreporting, the authorities will call on external auditors to report data on three out the six PC, and technical assistance to strengthen fiscal reporting. On the upside, higher-than-programmed oil prices could reduce the fiscal and external imbalances.
rcookie says():43. Staff recommends completion of the first and second reviews of the SMP and approval of this request for a three-year SBA. Staff believes the policies laid out in the MEFP are adequate to deal with the present and urgent balance of payments and budget needs triggered by the ISIS attacks and the collapse in oil prices and achieve debt sustainability.
rcookie says():AND THESE XXXXX WHO WOULD RATHER STAND AROUND GUESSING ABOUT THE CREDIT RATING AGENCIES LOOKING AT IRAQ AND THEIR ABILITY TO REPAY ALL OF THESE LOANS....HAVE NEVER BOTHERED TO OPEN...LET ALONE READ THE LOI/MEFP/TMU TO EVEN KNOW WHAT A PUBLIC & EXTERNAL DEBT SUSTAINABILITY ANALYSIS IS.......
rcookie says():Annex I. Iraq—Public and External Debt Sustainability Analysis
The decline in international oil prices and the conflict with ISIS are expected to result in a large fiscal deficit in 2016 and beyond, despite ongoing consolidation efforts. New borrowing to finance the deficit will increase the stock of public debt sharply in 2016 and more gradually over the medium run in line with narrowing fiscal deficits.
Total debt as a share of GDP is projected to rise to 79 percent in 2016 and to peak at 85 percent in 2018 before embarking on a downward path, reaching 75 percent of GDP in 2021. External debt is project to increase to 48 percent of GDP this year, to peak at 50 percent of GDP in 2017 and to decline to 33 percent of GDP at the end of the forecast period.
Provided the recommended fiscal adjustment is implemented, debt is sustainable over the medium run. However, the implementation of fiscal adjustment plans, the high level of external debt, large gross financing needs and sensitivity to macro shocks pose risks for debt sustainability.
The risks are partly mitigated by the fact that one third of the gross financing needs are rollover of short-term debt by state-owned banks and 57 percent of the external debt consists of legacy arrears still to be restructured on Paris Club terms.
rcookie says():SO THE NEXT TIME ANYONE TRIES TO COME TO DU AND PAINT A PANIC PICTURE OF THE RESERVES OR IRAQS INABILITY TO REPAY LOANS OR LACK OF CONFIDENCE FROM GLOBAL COMMUNITY...CREDIT RATING AGENCIES OR 3 LETTER AGENCIES.....REMIND THEM THAT YOU ARE ALREADY INFORMED OF THE ONLY POSITION THAT MATTERS........THE IMF.......
rcookie says():2. The composition of debt is expected to shift towards domestic debt over the medium run. Domestic debt is projected to rise from 21 percent of GDP in 2015 to 31 percent of GDP in 2016 as financing needs this year would mostly be met using domestic bond issuance, bank loans and indirect monetary financing through lending operations of Rasheed and Rafidain.
Additional external financing in 2016, of which most will be provided on concessional terms, would increase external debt from 42 percent of GDP at end 2015 to 48 percent of GDP in 2016. The projected external debt of $72 billion in 2016 also includes a stock of external arrears of $41 billion which were accumulated under the pre-2003 government and are still under negotiation.
DSA conservatively assumes that these arrears will not be settled during the projection period. External debt would peak at50 percent of GDP in 2017 and gradually decline afterwards, falling below the stock of domestic debt as from 2020 and declining to around 33 percent of GDP by 2021.IRAQ
rcookie says():4.Risks from Iraq’s high debt level and gross financing needs are partly mitigated by the fact that a large share of the gross financing needs are rollover of debt held by state-owned banks and that external debt includes legacy arrears still to be restructured on Paris Club terms.
One third of the financing needis rollover of short-term debt held bystate-owned banks which obtain credit fromthe central bank, limiting the risk of non-rollover. Furthermore, 57 percent of the external debt stock in 2016 consists of external arrears (¶2), if restructured on Paris80 70 60 50 40Club terms, would lower the path of debt and 30mitigate foreign exchange risks.
The external arrears have to be settled at the terms of the2004 Paris Club meeting where a reduction of80 percent of the net present value of thedebt was agreed. If external arrears were reduced to 20 percent of the original US$41 billion, then the debt-to-GDP ratio would fall from 79 to 57 percent in 2016 and peak at 66 percent in 2018 before declining to 59 percent at the end of the forecast horizon.
rcookie says():5. Stress tests indicate that Iraq’s debt ratio and financing needs are sensitive to shocks. Iraq’s total debt is particularly vulnerable to a growth shock but an interest rate shock or a worsening of the primary balance would also significantly increase debt and financing needs over the medium run.
rcookie says():Growth shock: If projected real GDP rates are lowered by one standard deviation (implying lower real growth by 5 percentage points in 2017 and 2018), the debt ratio would peak at 105 percent of GDP in 2018 before gradually declining to 93 percent in 2021.
rcookie says():Primary balance shock: This scenario assumes a worsening of the primary balance by4 percentage points of GDP in 2017 and 2018. The larger deficit would increase the debt ratio to 93 percent in 2018 and 82 percent towards the end of the forecast period.
rcookie says():Real interest rate shock: Increasing real interest rates by 10 percentage points would raise the debt ratio to 87 percent of GDP in 2019 and to 84 percent in 2021.2