COVID-19 Adaptation and Recovery Pilot: Supporting Firms Resilience, Access to Finance and Growth in Iraq

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His Excellency Ali Abdul Amir Allawi, Minister of Finance, sent on behalf of the Government of Iraq (GOI) an official letter to the World Bank Group (WBG) on August 18, 2020 formally requesting financial support of US$ 15 million. This is consistent with the endorsement in June 2020 by the Steering Committee of the Iraq Reform, Recovery & Reconstruction Fund (I3RF) co-chaired by the Ministry of Planning and the WBG. As such, I3RF will fund this Recipient-Executed Trust Fund for a period of three years.Iraq is facing a combination of acute shocks which the country is ill-prepared to manage. The precipitous drop in oil prices and the spread of COVID-19 are exacerbating the social and economic downturn. The growing discontent over poor service delivery of essential services, rising corruption, and lack of jobs persists. Iraq now needs to navigate through these challenges and provide targeted alleviating measures in the short-term to maintain private sector livelihoods. Iraq continues to face structural challenges, and suffers from limited financial intermediation, which constrains Micro Small and Medium Enterprises (MSMEs) access to finance. Traditional banking sector has been slow in providing financing support to the Private Sector Activity. Lockdown measures needed to contain the COVID-19 pandemic in early 2020 have deepened the already slow economic activity particularly in the services sectors. Mobility restrictions, liquidity pressures and uncertainty have had a devastating effect on the private sector and on people’s livelihoods, particularly for unbanked informal firms, and micro- and small formal firms. The proposed approach is to focus on firm’s recovery from COVID-19 on the one hand while laying the foundations for a much larger growth program on the other hand around Financial Inclusion and MSME-Support Measures. Interventions are needed to support MSMEs through the COVID-19 impacts and to build capabilities and prove modalities in the country for this support. This project aims to pilot modalities for support to MSMEs with a focus on the immediate impact of COVID-19. The Project Development Objective (PDO) is to test the effectiveness of selected financial and firm-level interventions in providing liquidity, supporting adjustment for targeted viable and growth-oriented firms, and mobilizing private investment. The proposed activities will test interventions that strengthen the resilience of MSMEs and support the viability and sustainability of their intermediaries in the aftermath of COVID-19 pandemic. Business continuity can be achieved through (a) the provision of financial support to MSMEs and innovative local private solutions during the recovery phase, and (b) the implementation of mitigation measures at firm-level.The project will have 4 components. The project is expected to limit firms’ closures, protect employment, help firms recover their revenues, and stimulate innovation in COVID-19 related sectors. The project will increase participating firms’ and entrepreneurs’ resilience and their access to liquidity (grants, microfinance, investment) and digitization opportunities (fintech, tech adoption, consumer internet access, digital enterprise solutions) to avoid persistent negative effects of the COVID-19 on the private sector. COMPONENT 1: FINANCIAL INCLUSION (US$ 4 million). This component will support the strengthening of MSME finance in Iraq, with a particular focus on providing liquidity support and technical assistance to microfinance institutions (MFIs) on the one hand and strengthening the legal and regulatory framework governing MSME finance in Iraq on the other. Two main interventions are being considered: (i) providing short-term liquidity support, mostly to the informal sector, through direct funding to eligible MFIs in the form of grants and complementary capacity building; and (ii) supporting the Central Bank of Iraq (CBI) to develop MSME finance guidelines, establish and operationalize a unit dedicated to MSME finance (or nonbank financial institution (NBFI) Unit) with a focus on strengthening its institutional infrastructure. COMPONENT 2: SME-SUPPORT MEASURES (US$ 9.1 million). This component aims to support the strengthening of the SME sector in Iraq, with a particular focus on Small and Growing Businesses (SGBs), a sub-set of SMEs which are key to providing quality employment opportunities and solutions to critical development challenges in Iraq. Two main interventions are being considered: (i) strengthening of SGB capabilities, productivity and resilience in Iraq through blended learning, capability building vouchers, and COVID-19 matching grants (CMG); and (ii) catalyzing private investment into Iraqi SGBs through pre-investment grants (PIG) and co-investment grants (CIG) to SGBs, and capacity development grants (CDG) for emerging seed/early stage investment programs in Iraq. COMPONENT 3: PROJECT MANAGEMENT (US$ 1.9 million). This component will finance project management costs over the project life including project planning, coordination, financial management, procurement, environmental and social safeguards, reporting, monitoring and evaluation, and communications. COMPONENT 4: CONTINGENT EMERGENCY RESPONSE COMPONENT (CERC). This component is a contingency component to be considered in the case of a relevant emergency event. It Is unfunded. The overall project implementation arrangements entail three levels. At the apex is the Project Steering Committee (PSC). The PSC will be established and chaired by the Ministry of Finance (MOF). The MOF will be the formal GOI Project Counterpart (PC). Overall management of the project is the responsibility of the Project Implementing Agency (PIA). The PIA is responsible for project management and the provision of technical services.The key beneficiaries to receive financial and non-financial support, directly and indirectly, will be MSMEs that do not have access to the traditional banking sector such as informal firms, micro, small and medium formal firms as well as SGBs, a sub-set of SMEs which are small businesses with innovative, scalable business models and significant potential for growth. Critical MSMEs intermediaries will also benefit from project activities such as MFIs, Business Development Services (BDS) providers, and emerging seed/ early-stage investment programs in Iraq (such as new and prospective early-stage funds, angel networks, or other investment approaches) who have traditionally had minimal access to finance. The project can leverage their expertise and capital to contribute in achieving the PDO.