If Ali Allawi, Iraq's new finance minister, has one major objection to the IMF's recent appraisal of his country's economy – and the advice that's left to him and his team to act upon – it's that the time-frame for carrying out its main proposals is simply unrealistic.
"Certainly I think they [the IMF] erred perhaps too much in terms of what can be expected from an economy that really has been in crisis, certainly since the 1990s, or arguably even earlier than that, since 1979," he tells Emerging Markets in an exclusive interview.
At issue is the politically volatile question of fuel subsidies. The IMF, whose report last month marked the institution's first comprehensive assessment of the country's economy in 25 years, raised alarm bells over Iraq's fiscal imbalance, which is driven largely by oil subsidies to the tune of $3 billion a year. The Fund warned, among other things, that the government must move swiftly to cut back its massive subsidies to petrol, diesel and kerosene to prevent its precarious budget situation worsening further.
Iraq has long subsidized petroleum prices, a practice that continued after the US-led invasion in 2003. At 9 cents a gallon, the extent of the discrepancy is clear: Americans pay on average around $2.50 a gallon, Britons $6.24. Even Iran is 38 cents, and Syria and Jordan are $1.74 and $1.89, respectively.
The difference in prices has led to a flourishing black market, with smugglers shifting hundreds of thousands of gallons of fuel every day to neighbouring countries. This has also aggravated a severe fuel shortage, which has forced a nation with the world's third-largest reserves of oil to import from $240 million to $400 million per month in fuel. Although Iraq has roughly 115 billion barrels of oil, it only produced about 2 million barrels last year. On most estimates, it's expected to be even worse this year.
Iraq was forced to tackle the question of subsidies head on in November 2004 after signing a debt relief agreement with the Paris Club, an informal group of major creditor nations. As part of the agreement, Iraqi officials promised to remove the subsidies by this December. That pledge, however, is now being renegotiated because Iraqis also fear that disaster would result from a sudden boost in fuel prices.
Yet, as it stands, the second stage of debt reduction under the Paris Club agreement first needs the approval of a stand-by agreement with the IMF – a critical step for bringing even a semblance of economic stability to the beleaguered country. Iraq hopes that a standby agreement with the Fund will be concluded by the end of the year.
Allawi, a mild-mannered technocrat and former World Bank official who, under the interim Iraqi government, held the posts of defence and trade minister, stresses that "as a matter of principle" he agrees the subsidies should be removed. But he casts doubt on the December deadline, as well as his ministry's ability to bring about such reform. "It's quite a tall order to expect that all of these things can be put together and implemented by a transitional government whose mandate is to some extent limited," he says. "First, this is a transitional government. Second, the constitutional referendum is coming up and then another government coming at the end of the year." Iraq's draft constitution will be put to the people in a referendum set for October 15. Although Allawi is "sanguine" about the outcome and believes the document will be endorsed, the mounting political uncertainty makes a decision over oil subsidies all the more treacherous.
Moreover, for a country already crippled by a violent insurgency and a lack of basic resources, and which is sinking deeper into poverty, ending fuel subsidies might prove fatal not only for an already brow-beaten government; it could also spell disaster for the country. "The question is, can we introduce these reforms given that we have a very, very difficult political adjustment to make over the next months?" asks Allawi.
The IMF, though not unmindful of the political realities unravelling in Iraq, is nevertheless insistent that action is taken by the end of the year, in line with the Fund's Emergency Post Conflict Assistance (EPCA) agreement with Iraq, signed last October. "It is hard to justify using such a large amount of Iraq's precious oil resources in this way, in supporting a subsidy on domestic sales of gasoline," said Alan Bennett, associate director for the Middle East at the IMF, at a recent press conference. "The benefits of the subsidies are not [for] the large population of the country."
He adds: "It's really a trade-off between subsidies for the few or having more reconstruction projects, more hospitals, more schools."
Although Allawi stresses that his government has made some progress towards tackling the problem – by imposing strict limits on the amount of cash that can be made available for the subsidies programme, and by introducing petroleum rationing, for example – the issue will take centre stage in discussions over the next IMF programme with Iraq. The government wants that agreement signed before the December elections. Without resolution of the fuel subsidies issue, it remains to be seen whether, for Iraq, the Fund will bend its rules.