Since the capture of the ruthless dictator Saddam Hussein nearly a decade ago, the future of the Middle-Eastern nation of Iraq has been very unsure. Fighting between rival factions have the turbulent country on the verge of civil war and it seems as though democracy will have a very difficult time taking a foothold. Financial instability is also a problem for Iraq even though it is responsible for so much of the world’s annual crude oil yield.
Prior to the 2003 invasion of Iraq, the country was approximately $120 Billion in debt and its centrally planned economy didn’t allow foreign ownership of Iraqi businesses. Oil makes up nearly 95% of Iraq’s foreign exchange earnings but underdevelopment in other sectors has lead to an unemployment rate of 30%. This is because oil export actually generates very few jobs, resulting in a dismal gross domestic product (GDP) of only about $4,000. Since the invasion the coalition for provisional authority has issued several binding orders to open Iraq’s economy to foreign investors. The coalition of provisional authority is a transitional government founded by the Untied States, the UK and their allies and was formed to remove the former government of Saddam Hussein.
Now that Iraq is on its way to becoming a democratic nation, representatives from the International Monetary Fund (IMF) have recommended the acceleration of the pace of structural reform to increase job growth. The IMF which is also known as “the fund”, was conceived in 1944 at a United Nation’s conference in Bretton Woods, New Hampshire. 44 governments which were represented at the conference wanted to build an economic framework of cooperation to avoid a repeat of competitive devaluations which were largely responsible for the great depression of the 1930s. The IMFs main purpose is to maintain the International Monetary System which is the system of exchange rates and international payments that allows transactions between countries and the citizens of those countries. The IMF is necessary for sustaining economic growth and reducing poverty. The IMF’s mandate has been updated recently to cover a wider range of financial sector issues that influence global stability.
Since 2003, working closely with the IMF has helped Iraq achieve some level of macroeconomic stability. This has proved to be a challenging task because of an unstable political climate and constant fighting among rival factions. The IMF seeks to strengthen Iraq’s structurally weak economy and lower its very high poverty and unemployment rates. The IMF held discussions from March 2-12 to brainstorm ideas on how to better achieve these goals. The 2013 Article IV discussions were held in Amman, Jordan and many of Iraq’s top political figures attended such as Al-Turki Said; the head governor of the Central bank of Iraq and Al-Shakuri; acting finance minister of Iraq.
The Point of the Article IV Discussions
The point of the meetings in March was to discuss ways to improve security conditions, empower economic institutions and implement viable policies. It was agreed that fiscal policies would be more effective if they were focused on the financing of social and investment spending as well as creating fiscal buffers to protect the struggling economy against oil market shocks. There were five main policies recommended by the IMF at the discussions. (1) Creating fiscal buffers to protect Iraq’s new economy from oil revenue volatility; (2) making the foreign exchange market more liberal; (3) continue to closely manage reserves held by the Development Fund for Iraq (DFI) and the Central Bank of Iraq; (4) increasing reform in the financial sector, creating even competition for private banks; (5) speeding up structural reform which to create jobs and increase private sector growth.
Carlo Sdralevich, who led the IMF’s article IV discussions said the IMF will continue to work closely with Iraq to develop its government, improve social conditions and create employment opportunities for Iraqi citizens. Mr. Sdralevich was encouraged by the fact that Iraq was able to maintain macroeconomic stability despite a turbulent political climate. Mr. Sdralevich went on to say that Iraq’s economic growth remained sturdy at about 8% due to rising oil production and other non-oil activity. He says he expects economic growth to increase to 9% in 2013 as oil production increases from just less than 3 million barrels a day (MBPD) to 3.3 MBPD. He went on to say inflation was held to 6%. Oil proceeds lead to CBI reserves reaching $70 Billion US and the (DFI) rose to $18 Billion US.
The IMF was encouraged by the budget surplus of 4% which was due to high oil revenues and improving financial sector policies but they realize monetary policy instruments need to be refined. Also an accelerated restructuring of the banking system is crucial. Therefor, it’s paramount to clean up Rasheed and Rafidain balance sheets for their restructuring and recapitalization. Iraq still has to meet difficult medium-term challenges to create sustainable growth to improve the living standards of its citizens. The country also needs to improve public financial management to ensure that the huge oil revenues are used transparently and effectively. If all of these goals are responsibly managed, then the Iraqi Dinar, their national currency, should grow strong enough for the country to achieve economic independence.
There are essentially 2 kinds of money in the world; money like the US dollar which is based on the strength of the economy while the Iraqi Dinar is based on their most valuable commodity, oil as well as gold and agriculture. Right now, the US dollar is Iraq’s international currency but the IMF is trying to get the country’s money valuable enough for the Dinar to be their international currency. With so many of the world’s financial leaders so heavily invested in the Middle-Eastern nation, it’s easy to see why Iraq’s financial future is so important to the financial well being of the entire globe. Once Democracy has taken root in Iraq and their new economy rescues the citizens from the depths of poverty, perhaps other 3rd world countries will warm up to the idea of democracy and free world trade.