- Foreign exchange market volatility and reduced oil production have affected Iraq's growth momentum.
- The authorities' fiscal expansion plans could stoke inflation in the short run and pose significant medium-term macroeconomic stability risks.
- Fiscal discipline and wide-ranging structural reforms are critical to reduce Iraq's vulnerabilities, strengthen resilience, and achieve durable and more inclusive growth.
Washington, DC: A staff team of the International Monetary Fund (IMF) led by Tokhir Mirzoev visited Amman, Jordan from May 24-31 to discuss with the Iraqi authorities the recent economic developments and outlook as well as policy plans in the period ahead.
At the end of the mission, Mr. Mirzoev issued the following statement:
" The Iraqi economy's growth momentum has slowed in recent months. After recovering to its pre-pandemic level last year, oil production is set to contract by 5 percent in 2023 owing to the OPEC+ production cut and outage of the Kirkuk-Ceyhan oil pipeline. The foreign exchange (FX) market volatility in the wake of tighter anti-money laundering/combating the financing of terrorism (AML/CFT) controls by the Central Bank of Iraq (CBI) on FX sales has adversely affected import-dependent non-oil sectors. Real non-oil GDP is estimated to have contracted by 9-percent (year-on-year) in the last quarter of 2022, negating its growth during the previous three quarters. With the FX market appearing to be stabilizing, helped by CBI's actions, growth of real non-oil GDP is expected to resume and reach 3.7 percent in 2023. After spiking to 7 percent in January, inflation has begun to moderate—reflecting lower international commodity prices as well as a 10-percent revaluation of the dinar—and is projected to average 5.6 percent in 2023.
"Favorable oil market conditions have supported Iraq's fiscal and external positions, but structural imbalances continue to widen. In 2022, fiscal and external current account surpluses have reached 7.6 and 17.3 percent of GDP respectively on the back of record-high oil revenues. The CBI's FX reserves rose to US$97 billion (11 months of imports), including US$16.3 billion (6 percent of GDP) in fiscal savings accumulated by the government. At the same time, a large fiscal expansion has widened the non-oil primary deficit from 52 to over 68 percent of non-oil GDP in the course of 2022.
" An even bigger fiscal loosening envisaged in the draft 2023 budget law would widen the non-oil primary fiscal deficit further to 75 percent of non-oil GDP and bring the overall fiscal balance to a deficit of 6.5 percent of GDP. The combined effects of increased government spending, the exchange rate revaluation, and reduced oil production would bring the fiscal break-even oil price to $96 per barrel.
" In the short run, implementation of the authorities' fiscal plans could re-ignite inflation and FX market volatility. Over the medium term, continuation of current policies in the presence of substantial uncertainty about the future path of oil prices poses critical macroeconomic stability risks. Barring a large increase in oil prices, the current fiscal stance could lead to mounting deficits and intensifying financing pressures in the coming years.
"A significantly tighter fiscal policy is needed to strengthen resilience and reduce the government's dependence on oil revenues while safeguarding critical social spending needs. Key priorities include diversifying fiscal revenues, reducing the oversized government wage bill, and reforming the pension system to make it financially sound and more inclusive. While supporting the government's plan to increase social assistance, the mission recommends stronger targeting to ensure that it is directed to those who are most vulnerable.
"Improving public financial management remains of critical importance. In this context, the mission cautions against the planned establishment of new extrabudgetary funds, which raise governance and efficiency concerns, and strongly recommends adhering to on-budget government expenditures Furthermore, the mission urges full implementation of the framework for managing government guarantees, including Parliamentary approval and publication of an annual ceiling on and the list of government guarantees as part of the budget law. Accelerated efforts to establish a Treasury Single Account are also needed to strengthen public financial management.
"The mission welcomes the progress made by the CBI in improving its liquidity management and the AML/CFT frameworks and underscores the importance of close alignment of the stance of fiscal and monetary policies in managing the economy.
"Creating an enabling environment for private sector development will be of utmost importance for achieving durable and more inclusive growth. Priorities include continued efforts to enhance governance and reduce corruption, restructuring large state-owned banks to improve access to finance, reforming the labor market to promote private sector job creation, improving cost recovery in the electricity sector to enhance its ability to meet demand in a sustainable manner, and improving the broader business environment.
"The IMF staff team stands ready to support the authorities in their reform efforts and would like to thank them for candid and productive discussions during this mission."
