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7.5 pct GDP growth in 2009 optimistic but attainable
* Oil price slump starves Iraq of funds
* Inflation slips to 9.2 percent
* 7.5 pct GDP growth in 2009 optimistic but attainable
* Iraq undecided on new IMF standby arrangement 
By Missy Ryan and Wisam Mohammed
BAGHDAD, March 5 (Reuters) - The slump in oil prices will force Iraqi officials to make more sober budget decisions at a time the country is seeking to rebuild from years of war and fuel broad-based growth, the central bank governor said. 
Iraq relies on oil for more than 95 percent of revenue and Prime Minister Nuri al-Maliki's government is already grappling with tough decisions as it looks for ways to reconcile today's oil price outlook with spending priorities crafted last year.
"There will be a difficult transitional period, but it should give us an idea of how to take a more realistic attitude toward allocations and demands from the various sectors," Sinan al-Shibibi said in an interview late on Wednesday.
"Of course, this occurs at the wrong moment because of the fact that Iraq actually needs to embark on huge projects and it will affect that. There will have to be reshuffling of the budget, and between investment and consumption."
An original plan to spend $80 billion in 2009 has already been shaved to $62 billion, but further cuts are likely needed.
Lawmakers have been sparring for weeks on ways to cut costs without jeopardizing plans to undertake urgently needed reconstruction projects and provide basic services -- all while avoiding stoking instability by cutting public sector pay. 
As Iraq emerges from the worst of the sectarian and insurgent violence unleashed by the 2003 U.S.-led invasion to oust Saddam Hussein, it is now focusing on creating jobs and plans to rebuild a shattered economy.  Shibibi said core inflation, which shot as high as 35 percent in the chaos after 2003, had dropped to 9.2 percent now.
The bank has pursued a strong dinar policy, Shibibi said, in order to curb core inflation, which excludes fuel and transport. Iraq holds currency auctions through which it sets the exchange rate.
Iraq is also striving to reverse the dollarization of its economy since 2003. Today, the dinar is "very much in demand, and we think this is good for the economy and good for combating inflation," he said.  As inflation subsides, the bank has cut its policy interest rate to 11 percent from 14 percent in January, Shibibi said.

But with retail lending still scarce, the bank's policy rate is seen mainly as a signal to banks in setting their own rates rather than the transactional tool it is elsewhere.
"We want now to encourage investment and lending in general but (the policy rate) will depend - I don't want to give an idea of the direction - on the results of inflation every month."

Shibibi said lending in Iraq's banking sector, still largely isolated from the rest of the world, was picking up, mostly in financing trade and some personal loans excluding mortgages.

Increasing the availability of credit will be one key element for creating growth outside the oil sector, by far the biggest in dollar terms but which generates relatively few jobs.
Shibibi said the International Monetary Fund's December forecast for 2009 gross domestic product growth of around 7.5 percent was "probably optimistic" due to the global oil trend.  "On the other hand, it will be attainable because there will be a big endeavour ... to increase (oil) production," he said.

Iraq has been courting major investment in its oil fields, which contain the world's third largest proven reserves, but short-term help is urgently needed to update aging facilities and boost output that remains below pre-invasion levels. 
Shibibi said growth outside the oil sector, which the IMF expects will be 6 percent in 2009, "needs a lot of work".  Iraq has been spared much of the impact of the financial crisis due to its relative financial isolation, but it may be hurt by a slowdown in oil demand. Shibibi said that the growth of money supply in Iraq had probably slowed more recently.

Iraq has yet to decide whether it will seek another stand-by arrangement from the IMF, Shibibi said, but said such a decision could come when Iraqi officials meet shortly with the IMF.

Iraq is also due to begin repaying its remaining stock of Paris Club debt in 2011. Shibibi said he didn't expect that new obligation would pose a major problem.  "I really don't think it is very dangerous ... Of course the amount at the beginning will be relatively big, but we will have to manage that unless we restructure again," Shibibi said.

"The Paris Club debt was cancelled 80 percent, so we're talking about 20 percent. A few countries cancelled 100 percent, but the remaining debt from other creditors, we have to deal with that and probably there will be another restructuring." (Editing by Toby Chopra)

7.5 pct GDP growth in 2009 optimistic but attainable -  Source

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