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Iraq : Technical Assistance Report-Guarantees and Extra Budgetary Funds Management
International Monetary Fund. Fiscal Affairs Dept.
February 5, 2021
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Iraq is substantially exposed to fiscal risks related to guarantees issued by the State, with a stock of guarantees related to foreign currency service payments and debt of USD 21.7 billion at end-June 2017 and a stock of domestic guarantees that remains to be fully assessed. In 2017, the Council of Ministers approved a set of procedures to tighten controls on the approval of State guarantees. Nevertheless, misreporting cases highlight the need to further strengthen capacities and institutional arrangements to effectively identify and monitor the fiscal implications of guarantees, including in the context of EBFs’ operations.
Country Report No. 2021/032
IMF Country Report No. 21/32
IRAQ
TECHNICAL ASSISTANCE REPORT—GUARANTEES AND
EXTRA BUDGETARY FUNDS MANAGEMENT
February 2021
This Technical Assistance Report for Iraq on Guarantees and Extra Budgetary Funds Management was prepared by a staff team of the international monetary fund. It is based on the information available at the time it was completed in June 2019.
EXECUTIVE SUMMARY
Iraq is substantially exposed to fiscal risks related to guarantees issued by the State, with a stock of guarantees related to foreign currency service payments and debt of USD 21.7 billion at end-June 2017 and a stock of domestic guarantees that remains to be fully assessed.
In 2017, the Council of Ministers approved a set of procedures to tighten controls on the approval of State guarantees. Nevertheless, misreporting cases highlight the need to further strengthen capacities and institutional arrangements to effectively identify and monitor the fiscal implications of guarantees, including in the context of EBFs’ operations.
Three areas have been identified by the mission as short-term priorities to strengthen the management of guarantees:
• Ascertaining the existing stock of guarantees
• Defining a policy framework regulating the issuance of new guarantees
• Improving the transparency of guarantees and limiting their usage as a mean to finance
extrabudgetary expenditure.
The exposure of Iraq to fiscal risks resulting from the guarantees needs to be fully assessed.
Various government entities and individuals have issued various types of guarantees in the past 15 years. Some data and information on outstanding guarantees exist, but they are not systematically aggregated and are unlikely to be exhaustive, especially the domestic.
The understanding of the specific risks from guarantees seems to be limited.
To ascertain the government’s exposure to risks from guarantees, a comprehensive guarantees registry should be developed. All relevant stakeholders should be required to provide information on guarantees and corresponding claims to the Ministry of Finance.
The Government needs to develop capacity and dedicate time and resources to understand the risks it is taking when guaranteeing certain transactions.
Dedicated staff at the Ministry of Finance should develop the required capacity over time. The legal status of all guarantees should be clarified and guarantees with no legal basis voided.
To further strengthen controls on the issuance of new guarantees, a policy framework should be developed.
The new framework for issuing government guarantees, resulting from the General Financial Management Law (GFML), approved by the Council of Representatives in May 2019, is sound in respect of transparency and involvement of both the legislature and the executive branch of government in the process.
Nevertheless, a policy framework regulating under what conditions a guarantee could be issued has not been defined yet.
This framework should include: mandatory risk assessment before a guarantee can be issued, minimum requirement of the beneficiary to be supported by a loan guarantee, affirmation of the authority of the Minister of Finance to issue guarantees, rules related to the duration of a guarantee, and risk-sharing mechanisms with the lender.
Capacity to assess fiscal implications of guarantees should be developed in a pragmatic manner.
Risks are not assessed before new guarantees are issued or to monitor the evolution of risks of the existing ones and capacity to undertake such analysis is low.
Nevertheless, new guarantee proposals should be assessed before issuance to understand their fiscal implications.
Initially, the risk assessment may be simple, using expert judgement and only a few criteria to arrive at a ranking of risks.
Over time, the risk assessment should be based on a standardized methodology, implemented by dedicated staff at the Ministry of Finance.
Insights from the risk assessment can be used to design risk mitigation measures.
Measures to mitigate risks arising from guarantees should be developed.
Guarantee limits have been set in the budget law in recent years, but they have not been adhered to.
The Government does not systematically use any risk mitigation measures.
As foreseen by the GFML, future budget laws should set limits for all guarantees and the limit should be adhered to.
The Government should explore measures to improve its ability to recover payments made for materialized guarantees and include in formal guarantee agreements obligations on guarantee beneficiaries aimed at mitigating risks.
These obligations should include the reimbursement of payments made by Government but also reporting requirements vis-à-vis the Government to allow for regular monitoring of guarantees
The GFML should contribute to a better integration of guarantees within the overall budget management.
In some instances, guarantees have been used to overcome budget and financing constraints and are similar to extrabudgetary expenditure.
Called guarantees are treated as financing operation.
The GFML includes provisions aimed at improving the integration of guarantees within the budget.
To ensure transparency and effectiveness of the budget choices, the issuance of guarantees should be fully integrated into the budget, as foreseen by the GFML.
Adequate provisions should be included in the budget for ensuring the State’s ability to make payments as and when a guarantee is called.
The budget documentation should provide enhanced disclosure on guarantees.
Information related to guarantees remains very limited, impairing any active management of related fiscal risks.
The GFML introduces improved disclosure requirements and foresees that the Ministry of finance will be responsible for the recording of guarantees.
The effective implementation of the GFML should improve the information on guarantees but will require an overhaul of the recording and monitoring procedures.
The legal mandate to the Ministry of Finance to ensure the centralization of information on guarantees should be complemented by the authority to require detailed information from all parties to the guarantees.
To support risk monitoring, reporting, and management, the guarantees registry needs to be maintained and updated regularly.
Discussions related to extrabudgetary funds (EBFs) highlighted the need to undertake their systematic identification and classification, based on international standards.
Identifying and monitoring the EBFs should improve the soundness of fiscal analysis and fiscal policy formulation but also accountability.
In addition, improved disclosure on EBFs should support enhanced budget transparency.
The report proposes a detailed work program to strengthen the management of guarantees.
The IMF stands ready to support its implementation in the limit of its available resource.
