IRAQ 2013 ARTICLE IV CONSULTATION July 2013
I will summarize just a few interesting parts but feel free to read all the report as needed.
The word Note: is used to express my thoughts and highlights are underlined
Adequacy of international reserves
Monetary measures: Particularly in countries with open capital accounts, the reserve coverage of the monetary base is useful to reflect the foreign exchange demand potentially arising from the conversion of commercial bank deposits.
The coverage of foreign exchange deposits indicates the capacity to meet the banking system’s liquidity needs in case of a crisis. In Iraq, owing to the high level of reserves and the limited financial development, end-2012 CBI net foreign exchange reserves covered 122 percent of reserve money and 104 percent of broad money, or approximately four times foreign exchange deposits.
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In principle, therefore, the CBI reserves would be enough to cover the complete dollarization of the economy. Additionally, a large part of deposits are owned by government agencies and state-owned enterprises, making them less vulnerable to confidence crises.
Comparison with peers: A regional cross-country comparison shows that the current level of reserves as a percentage of GDP is comparable to its closest peers.
Stryker Note: Kuwait and Saudi Arabia and the UAE just to name a few for you!
Please see chart on page 33
Exchange rate developments and assessment
7. The real effective exchange rate has appreciated over the last three years.
Stryker Note: When you read real effective exchange rate in the report please keep in mind that they are talking about the real effective rate set by the CBI, according to the type of exchange rate system that they are running in Iraq. We are expecting the CBI to be changing this exchange rate regime prior to them going global with their economy.
Stryker Note: In this report I will point out that they refer to Iraq having an appreciation of their exchange rate 12 and 7 percent respectively as you will see below. This means that their exchange rate regime is considered a Float and what I have been explaining by the Float of Orbit. Dollars are sold and dinars come in through the daily auctions which IMO is a Dirty Float, hence an artificial exchange rate being driven by an artificial economy that can be changed to reflect their real value when the time is right.
the real and nominal effective exchange rates have appreciated 12 and 7 percent respectively.
8. Competitiveness is mixed:
The oil sector is extremely competitive as the cost of producing oil—below $5 per barrel--is among the lowest in the world. At these levels, neither the real exchange rate level (which in any case has a limited impact on production costs) nor international oil price volatility has any effect on the oil sector’s competitiveness.
9. A quantitative assessment of the real exchange
rate using the CGER methodology is problematic.
Applying the quantitative methodology is restricted by
data limitations. Furthermore, given Iraq’s turbulent recent history, it is difficult to anchor the analysis to a recent representative period where broad macroeconomic aggregates, including the real exchange rate, were in equilibrium.
Of the three standard Consultative Group on Exchange Rates (CGER)-methodologies (macroeconomic balance approach, equilibrium real exchange approach, and the external sustainability approach), these constraints limit a quantitative analysis to the external sustainability approach.
10. The external sustainability approach confirms the broad alignment of the exchange rate with fundamentals. Estimates using this methodology suggest that the current account norm is a surplus of 3 percent of GDP. In comparison, under the staff’s baseline medium term baseline projection, the average current account surplus is 4 percent of GDP.
Therefore, the estimated undervaluation of the real exchange rate is close to 10 percent. Given the large margins of errors, these calculations suggest that the real exchange rate is in line with economic fundamentals.
Stryker Note: Once again they are talking about the real exchanged rate that they show at the CBI in comparison to the parallel rate in the local market. Which are the market imbalances within the Iraq and with this increase real exchange rate as they call it, it is in line with economic fundamentals. According to the way they run their internal market system IMO.
11. In the medium term, the increase in oil revenues might lead to an appreciation f the real exchange rate.
Appendix III. Iraq: Debt Sustainability Analysis
1. Iraq’s external debt burden continues to ease owing to progress in regularizing Saddam-era external claims.
As of end-2012, total external debt was $60 billion (28 percent of GDP).
In 2010, an agreement with China extinguished $6.7 billion out of total claims of $8.5 billion and rescheduled the remainder balance on terms broadly comparable to those of the Paris Club.
In 2011, $0.1 billion of small claim commercial debt (i.e., original individual claims below $35 million) was extinguished through deep-discount buy-back operations and in 2012 Algeria agreed to cancel fully its claims of $0.4 billion.
With these operations, an estimated $42 billion of claims to non-Paris Club bilateral and small claim commercial creditors remains to be restructured.
2. As of end-2012, total restructured and new external debt amounted to $18.2 billion (8.5 percent of GDP).
Under the staff’s baseline scenario, it is assumed that remaining previous-regime bilateral claims are regularized and rescheduled on Paris Club-comparable terms in 2013 and remaining small claim commercial debt are bought back in 2014.
By end-2018, total debt is projected to be $20.9 billion (5.6 percent of GDP).
Stryker Note: It looks to me that Iraq has its debt arranged but I am still reading. This is enough for now but I will continue to break this down for our members. Have a great day, Stryker