Mismanagement clouds Iraq development fund’s future

Mismanagement clouds Iraq development fund’s future



Iraq needs to enhance its wealth management policies, especially as the flow of oil revenues is set to fill the government’s coffers over the coming years, according to the International Monetary Fund (IMF).
Most oil-exporting nations such as Norway, the UAE, Kuwait and Qatar have had tremendous success in channeling a portion of their hydrocarbon revenues into a fund that is managed separately and serves a number of functions including diversifying revenues and serving as a rainy-day fund.
Iraq generated USD 109.4 billion in oil export revenues alone in 2012 and is forecast to generate USD 117.9 billion this year, according to the IMF. With rising production of oil, revenues are expected to exceed USD 175 billion by 2015.
Iraq, of course, has the Development Fund of Iraq, which was set up in 2003 immediately after Saddam Hussein’s regime was overthrown by the US and Western forces.
The fund was originally set up by the UN Security Council and charged with consolidating Saddam-era frozen assets, managing oil revenues and ensuring that Kuwait was compensated for Saddam Hussein’s misadventures during the first Gulf War in 1990.
However, a report last year by US Special Inspector General for Iraqi Reconstruction (SIGIR) has highlighted mismanagement and unaccounted for payments of billions of dollars.



“SIGIR sampled 12 DFI-funded payments, totaling about USD1.1 billion, made to USACE [United States Army Corps of Engineers] and found that two key financial documents–public vouchers and vendor invoices–were in the payment files,” said . However, a third key document–the receiving report–was missing from more than 95% of the files.” Other US official reports estimate that close to USD 7 billion has been mismanaged by the US authorities from various Iraqi funds. Since 2011, the DFI’s affairs have been managed by the Central Bank of Iraq on behalf of the country’s Ministry of Finance. The fund is audited by an independent auditing firm to ensure transparency. “Over the past years, the Iraqi government has directed investment partners to credit the account with other types of payment, such as oil contract signature bonuses or mobile phone license fees,” the (IMF) notes. The DFI has emerged as a ‘de facto sovereign wealth fund’ for the Iraqi government especially during financial hardship, the IMF said.

“The government drew resources from the DFI to avoid slashing spending, especially on current expenditure, following the 2008 oil price shock. As a result, the DFI was almost depleted in the course of 2009, declining from USD 27 billion in August 2008 to USD 7.7 billion in June 2009.”


POLITICAL DEBATE Frank Gunter, an economic advisor at the Multi National Force in Iraq, notes that establishing an SWF was one of the eight objectives of the Financial and Monetary Sector in the National Development Plan 2010-2014. “However, little progress has been made in making this fund operational,” he wrote in his book ‘The Political Economy of Iraq: Restoring Balance In A Post-Conflict Society’. Lately, there has been some political debate in Iraq to use the funds more aggressively and more transparently and certainly the authorities have considered the idea of an SWF. “A sovereign wealth fund (SWF) could help manage excess fiscal reserves more aggressively,” said the IMF.Emerging resource exporters also use SWFs to generate returns abroad which cannot be productively invested at home. In addition, SWFs absorb excess liquidity and reduce inflationary pressure, which are typical macroeconomic challenges in natural resource-rich countries due to the size of export revenues.”


The fund, which held around USD18-billion by the end of 2012, may not be sufficient to address all of Iraq’s needs, especially given rising public sector wage bill and public expenditures.

Deepening the fund’s reserve pool is crucial as Iraq may have little access to international capital markets in the event of a short fall of funds, or dramatic collapse in oil prices. The IMF also recommends keeping the Central Bank of Iraq’s international reserves separate from those of the DFI. The CBI had reserves of USD 70 billion by the 2012, compared to USD 61 billion a year earlier. But keeping the two-tier system would work for Iraq given its poor governance and lack of robust oversight. The IMF believes the DFI should borrow a leaf from other sovereign wealth funds, by creating ring-fenced sub-accounts that focus on high yielding returns. The DFI has “greater political sustainability than a separate SWF would, thanks to its low profile/visibility and relatively long history, and is less likely to attract rent-seeking attention than a dedicated vehicle with a specific spending agenda.” “At the same time, the DFI – in its present form of stabilization fund – could be further strengthened through new features such as investment policies and guidelines, as Iraq’s capacities in these areas evolve.”