Iraqi finance minister Ali Allawi arrives in Washington today expecting to announce the start of talks on the country's first IMF stand-by agreement (SBA) of the post-Saddam era.
But with key economic criteria yet to be met, it remains to be seen whether negotiations could be completed before the Iraqi elections in December, as Allawi hopes.
I expect that we can announce [at the meetings] that the staff and senior management of the IMF have recommended, and agreed with Iraq, to enter into negotiations for an SBA, Allawi said in an interview with Emerging Markets in advance of the annual meetings.
I'd like to get down to it and discuss the nitty gritty of [the SBA], and hopefully produce something, certainly before the end of the year, and preferably in October or November. Preferably before our elections, so that its put behind us.
An Iraqi finance ministry delegation met Fund officials in Amman, Jordan, less than two weeks before the opening of the annual meetings. The Fund team returned to Washington on Monday.
One Fund source said that Managing Director Rodrigo de Rato would be the only IMF official Allawi will be meeting in Washington, suggesting that only formalities remain to be settled before the SBA talks start. But unless the ongoing conflict in Iraq causes the IMF to deem the country an exception, several hurdles have yet to be completely passed before an SBA can be agreed.
An executive at the Fund acknowledged the possibility that the start of negotiations could be announced, but noted: We have a number of economic conditionalities. We are very cautious about misuse and misreporting of funds.
An SBA is especially important to Iraq because it sets the stage for the second phase of the Paris Club's debt reduction programme, which cannot go forward without an IMF agreement in place.
Iraq has appointed the international accounting firm Ernst & Young as auditors of its Central Bank accounts, but reporting and managing financial information related to the country's budget and expenditures is not yet up to speed.
'We are doing that, not with difficulty but with some problems,' Allawi told Emerging Markets. 'Although we can manage to do that at a national level . . . there are certain provinces whose internal accounting is such that it delays the process. We're improving our performance.'
But the biggest issue standing between Iraq and a stand-by agreement is that of fuel subsidies. In 2004, according to the IMF, fuel imports and subsidies on petroleum product sales cost the country some $7.8 billion in lost revenue. Iraq's official prices for fuel, except premium gasoline, are between 50% and 90% below international prices, with regular gasoline selling for a few pennies a litre.
IMF staff have urged Iraqi authorities to 'significantly reduce domestic petroleum subsidies,' according to the Fund. But Iraq has made little progress in this direction, although the country reportedly raised official gasoline prices to three and a half cents per litre on Monday. (Many consumers pay much higher prices for fuel on the black market.)
Though the IMF probably doesn't see Monday's fuel-price increase as a 'significant' subsidy reduction, it may be a step in the right direction. 'Because of the deteriorating political background, I think that our inability to introduce these reforms into the supplemental budget this year has flagged this as an issue,' Allawi said.
On the eve of the annual meetings, however, Allawi still held hope that the Fund might make an exception in view of events in Iraq since the US invasion.
'Under normal circumstances, you would say this would be a pre-condition,' Allawi told Emerging Markets. But he continued, 'Iraq is a special case. It's not every day that a country has its government overthrown. It's not every day that you go through a major political reformation in less than an 18-month period.'