This repeat assessment of Public Financial Management (PFM) in Iraq is based on the PFM Performance Measurement Framework (PMF) developed by the Public Expenditure and Financial Accountability (PEFA) partners as a tool to provide reliable information on the performance of PFM systems, processes, and institutions over time. The report does not assess government policies or capacity.
 
The assessment was conducted by World Bank staff, in consultation with Government of Iraq staff. Funding was provided by the United Kingdom Department for International Development in the context of the Iraq Public Financial Management, Transparency, and Regulatory Reform Technical Assistance Program. 
 
Purpose and management of the assessment
 
The overall objective of this PEFA assessment is to prepare a comprehensive “PFM Performance Report” according to the upgraded PEFA Performance Measurement Framework Methodology of 2016. This aims to provide an analysis of the overall performance of the PFM systems of the Government of Iraq (GoI), examine progress since the previous assessment in 2008 (where possible, as several of the indicators have changed), and provide a baseline against which future progress can be measured.
 
Assessment coverage and timing 
 
This assessment covered the Government of Iraq, and the fieldwork took place in July/August 2016 followed by a PEFA results validation mission in November 2016. Most of the indicators were assessed using data from 2015 and the two previous completed FYs. 
 
Impact of PFM Systems on the three main budgetary outcomes
 
Aggregate fiscal discipline As might be expected in the very difficult circumstances in which the country finds itself, fiscal discipline is not good, and most elements in the overall PFM system that contribute to achieving this objective are not functioning well. In addition, a lack of consensus in parliament meant that the budget proposed by the Executive was not approved for the FY2014, while in the last completed year (2015) there was significant under-spending, particularly on investments (only 33%) while the execution rate for recurrent expenditure was 70% – both are the result of low cash inflows from tax and non-tax revenues. More than 90% of revenue is generated via petroleum products, raised from a very small number of tax payers or via royalties paid into the National Oil Marketing Company (SOMO), and hence the recent volatility of world oil markets has caused huge disruptions to GoI spending plans, and very significant adjustments have had to be made. This can be seen in the variances in income against the original budget (PI-3) and also in expenditure (PI-2), which is further distorted by payment arrears, although the stock of these is declining (PI-22). 
 
In addition, several risks to attaining fiscal discipline are apparent, such as unreported operations (PI-6) and a lack of monitoring fiscal risks from other Public Sector entities including contingent liabilities and ‘Public Private Partnerships’ (PI-10). However, the recording of government debt and the inclusion of donor funded project bank accounts into the consolidation of government cash/bank balances is sound (PI-13); and multi-year focus is incorporated in fiscal planning (PI-16.3 and 14).
 
Overall, the various elements of the system concerned with budget execution – including internal controls – are no more than ‘functional’ and are unable to ensure that aggregate fiscal discipline is effectively attained and sustained.
 
Strategic allocation of resources

The indicators concerned with ‘policy-based fiscal strategy and budgeting’, (PIs 14 to 18) show a mixed picture. There are processes in place that intend to allocate budgetary resources in accordance with GoI’s declared strategic objectives, in particular, the mediumterm focus on expenditure budgeting and the preparation process (PIs 16 and 17).
 
Most of the other indicators that contribute to the strategic allocation of resources function well at a basic level, notably the budget documentation and its classification in accordance with international norms (PIs 5 and 4 respectively). However, and as mentioned above, the indicators related to revenue collection (PIs 19 and 20) are concentrated on a very small number of tax payers (or on royalties paid into the SOMO) and the volatility of world oil markets has caused huge disruptions to the planning of services, and required very significant short-term adjustments to be made.
 
There are two completely new indicators relevant to this budgetary outcome, the first of which ‘Public Investment Management’ (PI-11) was not rated in the context of the fiscal crisis facing GoI – which has meant that the very scarce resources available for investment are allocated to meet ongoing emergency needs rather than well-thought through plans. The second innovation relates to the manner in which a government manages its assets, and with the exception of financial assets, the practice in GoI reflects “generally accepted good practice”, with ‘B’ ratings for two of the three dimensions (PI-12).
 
Efficient use of resources for service delivery

Financial management is not an end but rather a tool to assist a government to deliver services to its citizens, and of course, services cannot be delivered in the absence of funds. In this respect, GoI’s PFM system works reasonably well. This can be seen in the good ratings for the processes that plan services (PIs 16 and 17 mentioned above), as well as for the revenue indicator (PI-20 – despite the negative consequence of the fall in world oil prices), and the fact that despite the very difficult circumstances, there is a reasonable degree of predictability in the availability of funds that support expenditure during the year (PI-21, ‘C+’). 
 
However, although these indicators might suggest a satisfactory level of performance, the rating for PI-8, ‘performance information’ – which can help demonstrate the effectiveness of services delivered – (rated ‘D’) is disappointing, and it is also a matter of concern that the mechanisms in place to reduce possible leakages in the system, such as internal controls, controls over payroll and basic accounting controls (PIs 25, 23 and 27 respectively) are weak, and are only partly compensated by measures in place regarding procurement (PI-24), and the fact that the Internal Audit function (PI-26) is still developing. 
 
Lastly, it must be noted that the oversight arrangements (addressed in PIs 30-31) are less than effective. While the FBSA is independent and has an extensive mandate that includes using international audit standards, the deteriorating political and security conditions has meant that audit have not been completed for all audited bodies, and backlogs are evident. Moreover, the Council of Representatives was unable to scrutinize audited financial reports as they had not been submitted on time, and while there are powers to hold hearings, none have taken place recently.

In summary, most aspects of the PFM system are functioning at a barely satisfactory level – one that will make it difficult for GoI to attain its fiscal and budgetary objectives: there are many areas where significant improvements will be required in the years ahead.
 
Performance changes since last assessment
 
This is the first assessment of GoI using the upgraded Framework: an earlier assessment took place in 2008. The guidance issued by the PEFA Secretariat (October 2016) states that only 14 dimensions are directly comparable with the 2011 version: however, one of these is PI-2 (iii) which was part of one of the three indicators amOverview of on-going and planned PFM reforms and main weaknesses identified
 
The main challenge for Iraq is the incremental and long-term rebuilding of state institutions that were systematically weakened over the last 30 years. Despite the complex political situation, the authorities are committed to implementing the Government Strategic Plan “2014–2018”. The first strategic priority of the plan is to reach security and stability by liberating cities and Governorates controlled by terrorist groups and restoring the rule of law. The second priority is to deliver public services and upgrade standards of living. This includes delivering electricity services; improving water, health, and education sector performance; and reforming the social protection system.
 
The Government has already identified the main challenges regarding the preparation, implementation, and monitoring of the budget. Although it has made some progress in enhancing the PFM system, the inherited financial and development risks remain high. Therefore, it is important to accelerate the process of modernization over the medium term. The current fiscal crisis in Iraq also exerts pressure to move ahead with PFM reform to help strengthen fiscal sustainability. In the immediate term, the Government is seeking external financing to close the financing gap and has committed to a number of structural reforms to address inefficiencies and adjust the budget to a situation of lower oil revenues. The government PFM program is designed to meet the needs of these objectives within the following basic elements of the country’s fiscal policy: i) Reducing the Deficit, ii) Focusing on Investment Expenditures, iii) Adopting the principle of fiscal decentralization. 
 
Although it will be a challenge to ensure that the urgent security and fiscal stresses will not divert the Government from engaging in the necessary reforms toward better-governed institutions and better services, the Government recognizes the long-term vital importance of institution rebuilding. Accordingly, the government has been reaching out to experts and international organizations on the following PFM reform areas:   
 
• New Budget Law: In consultation with the IMF and the World Bank, a new general financial management law has been drafted and waiting for the Parliament’s endorsement. The law provides the foundation for sound financial management, including but not limited to more transparency in the use of public funds, fiscal discipline, and better quality of spending and the authorities’ control over budget execution.    
 
• Integrated Financial Management Information System (IFMIS): The IFMIS design and implementation is the backbone of the new PFM System Modernization Project supported by the World Bank. The continuation of PFM reform in Iraq can no longer be envisaged without an IFMIS in place to automate core budget execution functions (management of appropriations, commitments, payments, receipts, cash management, accounting, and fiscal reporting). This will introduce the IFMIS through a comprehensive turnkey procurement which includes all necessary IFMIS-related work, including the planning, designing, configuring, testing, commissioning, training, and implementing the IT solution and all related services and goods in the MoF, MoP, two line ministries, and two governorates (Baghdad and Babil).
 
• Public Investment Management (PIM): A comprehensive program of technical assistance and related support was recently started to modernize and strengthen the PIM system at the federal level, including through: (i) the carrying out of a capacity needs assessment for MoP; (ii) PIM capacity building for MoP staff and relevant government stakeholders; (iii) updating and improving project appraisal methodologies ended in 2011, i.e. after the previous assessment in Iraq.

and guidelines, including instructions, guidelines and templates; (iv) development of a framework for ex-post project evaluation; (v) supporting the establishment of a specialized PIM unit within MoP; (vi) development of an integrated bank of investment projects, to support investment planning and decision making, to track and monitor investments, and to serve as an investment project registry; (vii) updating and strengthening the Borrower’s legal and regulatory framework for PIM; and (viii) developing an interface within the IFMIS.
 
• Decentralization: Iraq has achieved a significant level of political decentralization comprised of a partial federal and partial unitary state.  The 2005 Constitution provides for a federal structure with respect to regional government(s) and a unitary structure with respect to the governorates. The Second Amendment to the Law on Governorates (Law 19, 2013) provides for the devolution of “sub-directorates, departments, tasks and competencies of parts of eight federal ministries”.1 Devolution was supposed to have been carried out over a two-year period, to be completed by August 2015. A strong push by the Prime Minister throughout 2015 has moved devolution forward with at least some of the affected Ministries and the Governorates now in agreement on which functions will be devolved, and which functions will remain with the federal ministries. 
 
• Transparency, Accountability, and Regulatory Framework: Under the “Public Financial Management, Transparency, and Regulatory Reform (funded by DFID, implemented in FY2016), the MOF has been working with the World Bank on the following PFM areas:
 
i. Ministry of Finance (MOF) on-line Information and Transparency: The MoF is developing an “Open Budget Portal” to streamline publication of information and data on public expenditure accounts in Iraq. The portal will explore innovative ways to consolidate and improve public access to fiscal information in Iraq, including using data visualization tools to transform fiscal data and information into intuitive and user friendly formats. 
 
ii. MOF Capacity Needs Assessment: The World Bank is supporting MOF in objectively assessing its needs and how well it is operating in the realm of PFM, through identifying strengths, weaknesses, gaps and the constraints it faces. Once it has identified these challenges, the MoF will be in a position to develop an appropriate strategy for developing its capacity: one that builds on its strengths and addresses (or copes with) constraints that inhibit its effectiveness. 
 
iii. Supporting the Federal Board of Supreme Audit (FBSA): this support included a review of a sample of audit reports completed by the FBSA (covering financial, compliance and performance audit) and recommendations for improvement, as well as exposure to international good practice in audit report preparation through targeted knowledge sharing activities with peer SAIs.