Iraq has told the IMF that it plans to issue a new round of government debt this year to plug its budget deficit and establish a benchmark interest rate. "As our financing needs in 2010 will still be substantial, we will step up our efforts to mobilise domestic financing through the treasury bill market," the central bank governor Sinan al Shabibi, and the finance minister Bayan Jabr, told the IMF as part of its application for a US$3.6 billion (Dh13.22bn) lending programme.
"To that end, we will conduct regular auctions and refrain from cancellations, while allowing interest rates to be determined by the market." Iraq's banking sector remains undeveloped after the second Gulf War and continuing sectarian violence, and there is no market for trading government debt. The central bank unilaterally sets rates on the only debt it does issue, the short-term securities that are bought by banks.
In a bid to develop its financial sector, the government told the IMF it also wants to develop foreign exchange markets, including an interbank foreign exchange market. The government said it would not return to a budget surplus until 2012. Its budget for this year had been based on an average oil price of $62.50 a barrel. Mr al Shabibi and Mr Jabr warned that unless oil prices increased markedly, the government would be forced to constrain spending this year and next year while the country's developmental and security needs remained high.
"A fiscal contraction would hurt the economy and undermine our hard-won macroeconomic stability, and could also contribute to a deterioration of the security situation," they wrote. They said the country planned to introduce a sales tax as a precursor to a value-added tax. Iraq's GDP growth slowed to 4 per cent last year from almost 10 per cent the year before, they said. GDP would rise by almost 7 per cent this year and between 7.5 and 8 per cent next year and in 2012, they said.
Supporting economic growth would be an increase in oil output to 3.1 million barrels per day (bpd) in two years, from about 2.5 million bpd now, the officials said in the letter, which was submitted to the IMF on February 8 and released yesterday. * with agencies @Email:email@example.com