The Government of Iraq (GoI) has been able to resist unwarranted spending pressures and the Central Bank of Iraq (CBI) has maintained stable monetary conditions. Inflation, however, has risen to an unacceptable level. Annual consumer price inflation peaked at a rate of almost 77 percent in August, fell back to around 52 percent in September-November, and increased again to almost 65 percent in December. The underlying rate of inflation (excluding fuel and transportation) has been stable, in the range of 30–35 percent.
Real GDP growth is estimated at about 3 percent in 2006. This is lower than the 10½ percent projected at the outset of the program, because oil production has not increased as expected. Oil exports have been hampered by technical problems, as well as security and other difficulties in undertaking the necessary investments. Real non-oil GDP growth also lagged expectations and, on the basis of available output indicators, is estimated at 7½ percent compared to 8 percent originally projected.
The 2007 budget is designed to accommodate the exchange rate appreciation, while preserving a solid investment program. Oil revenues are projected on the basis of increasing oil exports to 1.7 million barrels per day (mbpd) from 1.44 mbpd in 2006. The envisaged increase in the reconstruction (import) levy from 5 to 10 percent will be postponed until 2008.
The GoI intends to keep spending under control in 2007. The budget makes provision for the (amended) pension system, and allows for a large increase in the allocation for the social protection program, as well as for security. Other current expenditures, including on wages, will rise moderately while the daily hardship allowance for military personnel will be revised to limit the costs. We will freeze hiring in 2007 and resist unbudgeted bonuses. Budgetary support for imports of fuel products will be restricted to $300 million (for kerosene) and all other imports of fuel products by the Ministry of Oil (MoO) will be financed from the revenues of the MoO. There will remain an implicit subsidy on domestically produced fuel products (mainly regular gasoline and diesel).
To help curb inflation the CBI will continue its tight monetary policy stance and allow the exchange rate to appreciate gradually, assuming the inflationary situation warrants a continuation of this policy. The CBI also stands ready to further increase its policy interest rate, if needed and effective to bring inflation down.
We have raised the domestic prices of fuel products and will continue to gradually increase these prices in the period ahead (Table 3; indicative quantitative benchmarks). The government has exited the domestic market for premium gasoline. Regular gasoline (all of which is produced domestically) will be priced at ID 300 per liter by March 5, 2007, and at ID 350 per liter by end-June 2007. Government imports of premium gasoline will be blended with regular gasoline at a ratio not exceeding 50 percent. We will increase the price of blended gasoline to ID 400 per liter by March 5, 2007, and to ID 450 per liter by end-June. The price of diesel was increased to ID 300 per liter as of January 13, 2007, and will be further raised to ID 350 per liter by March 5, 2007. The price of LPG was increased to ID 2,000 per canister as of January 13, 2007, and will be set at ID 3,000 per canister by March 5, 2007. Kerosene will be priced at ID 150 per liter by March 5, 2007, and at ID 200 per liter by end-June 2007. We will review the price increases planned for end-June in light of the then prevailing security situation. To help the State Oil Marketing Organization (SOMO) import some of the petroleum products without having recourse to the proceeds generated from the sales of these products, the GoI has provided SOMO with a revolving credit, not to exceed a ceiling of ID 300 billion at any point in time (indicative target).
We will make every effort to have the amendments to the new pension law passed by the CoR as soon as possible. The main elements of the reform include a gradual reduction of replacement rates to fiscally sustainable levels, and zero indexation in 2007 to ensure affordability in the short-term. The reforms also involve the creation of an extrabudgetary fund, which will receive all pension contributions but would only pay out to new pensioners. The budget will continue to be responsible for paying existing pensioners, resulting in a direct budgetary cost of about ID 1.2 trillion in 2007, which will decline over time. We are committed to managing the extrabudgetary pension fund in a transparent manner, in line with international best practices, and seek technical assistance from the IMF and the World Bank in this area.
Related;
Iran Is Playing a Growing Role in Iraq Economy ;
Some Iraqi cities, including Basra, the southern oil center, buy or plan to buy electricity from Iran. The Iraqi government relies on Iranian companies to bring gasoline from Turkmenistan to alleviate a severe shortage. Iraqi officials are reviewing an application by Iran to open a branch of an Iranian bank in Baghdad, and Iran has offered to lend Iraq $1 billion....
The Iranian government gives Najaf $20 million a year to build and improve tourist facilities for pilgrims, said Asaad Abu Galal, the governor of Najaf. Mr. Abu Galal, a member of the Supreme Council for the Islamic Revolution in Iraq, an influential Iraqi political party founded in Iran, said Karbala got roughly $3 million a year. In addition, each Iranian pilgrim spends up to $1,000 on hotels, food and souvenirs
Footing the Iraq Bill
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