## 1irqea2019001

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### Background and context
- Iraq possesses the world’s fourth largest oil reserves, projected to last over 100 years at current production rates.
- Conflict with ISIS resulted in 100,000 deaths, five million internally displaced people and an estimated $46 billion of damage to infrastructure and property.
- Development needs: large infrastructure gaps, poor basic services, subpar health and education outcomes, and widespread poverty; GDP has barely grown in per capita terms over the past five years.
- Electricity supply has averaged only 17 hours per day in recent years.
- Weak fiscal policy frameworks have been procyclical: little saving during oil price booms, ramped up current spending (particularly civil service payroll), and cuts to investment when oil prices dipped—leading to arrears and undermining infrastructure investment.
- The Fund provided a $5.3 billion SBA in 2016; the SBA went off track after the second review in August 2017 and expires in July 2019.
- Opportunities and constraints: improved security and higher oil prices offer a rebuilding opportunity; obstacles include re-imposition of U.S. sanctions on Iran, weak governance and corruption, and an estimated 800,000 annual entrants to the labor market.

### Recent developments and fiscal/external position (2018–2019)
- Post-war reconstruction and GDP:
  - Capital spending in liberated areas was ID 100 billion ($85 million) in 2018, or less than 0.5 percent of the estimated damage.
  - Non-oil GDP rose by only 0.8 percent year-on-year in 2018; overall GDP contracted by around 0.6 percent in 2018.
  - Inflation was flat over the year as a whole.
- Fiscal and external outcomes in 2018:
  - Fiscal surplus—around 8 percent of GDP—driven by larger than expected oil revenues and significant underexecution of the capital budget.
  - Public debt fell to 49 percent of GDP at end-2018.
  - A large current account surplus in 2018 reached 5¾ percent of GDP.
  - Gross international reserves reached $65 billion by end-December 2018.
  - Spread between official and market FX rates narrowed to below 2 percent from 6.25 percent at end-2017.
- Banking sector weaknesses (end-2018):
  - Two large public banks—Rafidain and Rasheed (R&R)—burdened by legacy assets and loans to SOEs; R&R’s capital is below statutory levels.
  - Private-sector credit stock was only 9 percent of GDP at end-2018, up 9 percent year on year.
- Institutional reform:
  - Parliament adopted a new General Financial Management Law (GFML) in May 2019 that defines general government, establishes a medium-term fiscal framework, enshrines fiscal transparency requirements, and limits parliament’s capacity to amend the budget. Gaps remain (e.g., guarantees and a treasury single account).

### Outlook and risks — baseline and scenarios
- 2019 budget implications:
  - 2019 budget implies a large fiscal loosening: current spending projected to rise by 27 percent year on year.
  - Staff baseline projects the wage bill will exceed budget provisions and total more than 17 percent of GDP (the equivalent of 47 percent of oil revenues).
  - Budget projected to shift from a surplus of close to 8 percent in 2018 to a deficit of 4 percent of GDP in 2019; reserves projected to decline in 2019.
- Medium-term baseline (absent policy changes):
  - Sizable fiscal and external deficits—both reaching around 6 percent of GDP by 2024.
  - Reserves will fall steadily to well below adequate levels and fiscal buffers will be eroded.
  - Public debt will increase but remains sustainable; financing needs will increase and remain above the high-risk threshold.
  - Government likely unable to fulfill more than a quarter of reconstruction needs over the medium term.
- Growth projections (selected):
  - Non-oil GDP growth projected to reach 5½ in 2019.
  - Oil production and exports expected to increase in 2019–20 if OPEC+ agreement expires and export capacity improves.
  - Growth declines from 2021 onward, falling below population growth.
- Oil price sensitivity:
  - Every $1 per barrel decline in oil prices lowers annual oil revenue by 0.6 percent of GDP.
  - Illustrative negative $10 oil-price shock with policy response of cutting capital spending to a minimum while maintaining current expenditure through significant external borrowing and some accumulation of arrears:
    - Reserves decline from $65 billion at end-2018 to $37 billion by end-2020.
    - Public debt reaches 61 percent of GDP (10 percentage points above baseline).
- Geopolitical and domestic risks:
  - High likelihood of spillovers from U.S.–Iran tensions given reliance on electricity and gas imports from Iran.
  - Domestic political risks: popular protests could undermine government effectiveness absent faster improvements in public services or reconstruction.
  - Fiscal costs of restructuring and recapitalizing R&R are a non-negligible medium-term risk.

### Key messages and policy priorities (summarized)
- Restore medium-term sustainability while ensuring sufficient resources for investment to rebuild physical and human capital.
- Strengthen policy frameworks and build fiscal institutions to manage oil revenue more effectively, including a medium-term engagement strategy adapted to Iraq’s circumstances.
- Recalibrate public expenditure and promote financial inclusion to address business environment weaknesses and promote private-sector led employment and growth.
- Review adequacy and efficiency of social spending in light of social and demographic strains.
- Capacity development from the Fund and development partners to support reform implementation.

### Tailored macro guidance and fiscal framework proposals
- Use energy revenues to rebuild capital while scaling up investment gradually due to inefficiencies and limited absorptive capacity.
- Optimal current account deficits of 2.5–4.5 percent (of GDP) over the medium term to support higher investment (as per staff model tailored to Iraq).
- Staff recommended a risk- and rules-based fiscal approach:
  - Build fiscal buffers to mitigate oil price shocks.
  - Move to a multi-year fiscal and budget framework.
  - Implement expenditure rules to reduce procyclicality and shift to more growth-friendly composition.
- Specific proposal: commit to a fiscal rule in the form of a ceiling on current primary spending of the central government (excluding capital expenditure).
- Phased adjustment and calibration:
  - Phased adjustment of 11 percent of non-oil GDP over the medium term.
  - Spending ceiling calibrated based on annual nominal growth of 2 percent during 2020–24.
  - Target to build a fiscal buffer equivalent to one-year revenue loss from a permanent oil price shock, estimated at 17 percent of non-oil GDP.
  - Increase government cash balances at the CBI from ID 20 trillion in 2018 to ID 28 trillion by 2024 (11 percent of non-oil GDP).
  - Create space for about $22 billion of capital spending over the baseline (close to a quarter of the World Bank’s aggregate reconstruction cost estimate).
  - Gradually ramp up capital spending allocations—to 4.5 percent of GDP by 2024.

### Revenue mobilization and capital spending execution
- Expanding non-oil revenues would create further fiscal space and lower vulnerabilities to oil price shocks.
- Revenues from sales taxes adopted in the 2018 budget fell short due to weak compliance; most measures were cancelled in the 2019 budget.
- Recommended way forward: develop a standalone tax bill with well-articulated measures and clear penalties, and adequately resource the large taxpayers’ office.
- Prioritize capital spending in 2019 but select projects carefully given weak procurement and long lead times.

### Reallocating public expenditure and wage bill management
- Public wage bill already one of the highest in the world; reached 17.4 percent of GDP and accounts for over a third of central government budget in 2019 (Annex VII).
- Staff proposals to contain wage bill growth:
  - Short-term: cap allowances, bonuses and other non-base wage payments; use natural attrition to avoid further payroll increases in 2020.
  - Medium-term: conduct a functional workforce review and undertake deeper civil service reform once new HR management and information systems are in place.
  - Use biometric systems and other technological solutions to eliminate ghost workers and double dippers.

### Electricity sector: fiscal burden, causes, and reforms
- Sector incurs a large operational deficit covered through direct budgetary transfers, borrowing from the Ministry of Oil and arrears to Iran.
- It paid 1.8 percent of GDP in 2018 for oil and gas inputs, compared with 3.8 percent of GDP if they were valued at market prices.
- Cross-liabilities between the Ministries of Electricity, Oil, and Finance totaled nearly 5 percent of GDP by end-2018 and should be settled.
- Summary Budget and Financing of the Electricity Sector, 2018 (In percent of GDP):
  - Tariff Collection: 0.4
  - Expenditures: 2.6
  - Deficit: -2.3
  - Total Financing: 2.3
    - Transfer from Ministry of Finance: 1.2
    - Project financing and suppliers credit: 0.3
    - Debt to Ministry of Oil: 0.8
    - Payment of old arrears to Iran (- means payment): -0.1
    - Accumulation of new arrears to Iran: 0.3
  - End of year balance (- means surplus): -0.2
- Cost of Electricity Generation, 2018 (In percent of GDP) — selected items as reported:
  - Imported Electricity from Iran MoF [budget transfer]: 0.1 (If Priced at International Prices: 0.1)
  - Purchased Electricity from IPPs MoF [budget transfer]: 0.3 (If Priced at International Prices: 0.3)
  - Imported Gas from Iran MoF [budget transfer]: 0.6 0.6
  - Dry Gas from BGC MoO [debt]: 0.2 0.4
  - Imported Gas Oil MoO [debt]: 0.2 0.2
  - Fuel Gas MoO [debt]: 0.3 0.6
  - Crude Oil MoO [debt]: 0.1 1.6
  - Total Support from Ministries: 1.8 3.8
- Causes of high budget costs: modest tariff rates, chronic non-payment, poor maintenance, over-reliance on expensive generation sources, significant losses in generation and distribution.
- Recommended actions:
  - Settle cross-liabilities (nearly 5 percent of GDP by end-2018).
  - Continue allocation of contracts to rehabilitate moth-balled plants and improve generation capacity.
  - Explore technological solutions to increase revenue collection.
  - Ensure poorest and most vulnerable are protected during reforms.
  - Curtail gas flaring to capture more domestic natural gas; significant capital expenditure required.

### Banking sector restructuring and financial stability
- Key next step: install core banking systems in the two large public banks (Rafidain and Rasheed) as pre-requisite to audit, restructure, and recapitalize.
- Steadfast supervision needed to prevent further deterioration in balance sheets and monitor private banks.
- Once core systems operational, audit to international standards to assess capital needs.
- Financial inclusion measures: strengthen payment systems, encourage salary payments into bank accounts, develop mobile banking, improve credit information, strengthen legal procedures, develop deposit insurance.
- Caution in licensing new banks; strengthen frameworks for handling troubled banks.

### Guarantees, contingent liabilities, DSA, and financing needs
- Debt and service guarantees, mostly in the electricity sector, estimated to exceed 20 percent of GDP in 2017.
- At end-June 2017, stock of guarantees for foreign currency service payments and debt amounted to $21.7 billion (12 percent of GDP): $19.4 billion for service payments to IPPs and $2.3 billion for debt.
- Legacy external arrears: full face value of $40 billion of external arrears to non-Paris Club creditors before 2003 is included in external debt; DSA assumes these arrears will not be settled during projection period.
  - If arrears were restructured on Paris Club terms, debt-to-GDP would fall from 51 to 37 percent in 2019, and from 56 to 46 percent in 2024.
  - Applying an 80 percent haircut to the $40 billion of non-Paris Club arrears would reduce headline public debt from 49 percent of GDP in 2018 to 34 percent of GDP.
- Gross financing needs (GFN) projected to remain substantially above the high-risk threshold of 15 percent of GDP over 2019–24.
- Debt composition shift (2018–24):
  - Domestic debt rises from 37 percent of total debt in 2018 to 56 percent of total debt by 2024.
  - Share of T-bills in new debt increases from 22 percent in 2018 to close to 60 percent by 2024.
- Stress-test results (selected):
  - Growth shock (lower growth by 5.6 percentage points in 2020–21) raises debt ratio by 16 percentage points by 2021, and to 77 percent of GDP by 2024.
  - Primary balance shock (worsening by 3.8 percentage points of GDP in 2020–21) leads to debt reaching 65 percent of GDP by 2024.
  - Real interest rate shock (one-time, permanent increase of 10 percentage points in 2019) makes debt ratio reach 73 percent of GDP in 2024.
  - Real depreciation shock (one-time 30 percent in 2018) increases total public debt to 65 percent of GDP by 2024.
  - Combined shock increases debt to 103 percent of GDP by 2024.
- Staff-proposed adjustment path could reduce financing needs to 15.7 percent of GDP.

### Projections and selected numeric tables (staff baseline, selected entries)
- Real GDP (percentage change): 2.5 (2015); 15.2 (2016); -2.5 (2017); -0.6 (2018); 4.6 (2019); 5.3 (2020); 2.6 (2021); 2.3 (2022); 2.1 (2023); 2.1 (2024).
- Non-oil real GDP (percentage change): -14.4 (2015); 1.3 (2016); -0.6 (2017); 0.8 (2018); 5.4 (2019); 5.0 (2020); 4.1 (2021); 3.4 (2022); 2.7 (2023); 2.7 (2024).
- GDP per capita (US$): 5,047 (2015); 4,843 (2016); 5,263 (2017); 5,882 (2018); 5,728 (2019); 6,017 (2020); 6,172 (2021); 6,326 (2022); 6,486 (2023); 6,666 (2024).
- Oil production (mbpd): 3.7 (2015); 4.6 (2016); 4.3 (2017); 4.4 (2018); 4.5 (2019); 4.8 (2020); 4.9 (2021); 5.0 (2022); 5.10 (2023); 5.18 (2024).
- Government revenue and grants (percent of GDP): 30.6 (2015); 26.8 (2016); 33.0 (2017); 39.8 (2018); 40.5 (2019); 39.6 (2020); 37.9 (2021); 36.5 (2022); 35.5 (2023); 34.6 (2024).
- Expenditure (percent of GDP): 43.4 (2015); 40.7 (2016); 34.6 (2017); 32.0 (2018); 44.6 (2019); 43.1 (2020); 41.2 (2021); 40.5 (2022); 40.5 (2023); 40.5 (2024).
- Capital expenditure (percent of GDP): 15.6 (2015); 11.5 (2016); 8.3 (2017); 5.3 (2018); 10.6 (2019); 8.4 (2020); 7.5 (2021); 7.0 (2022); 6.8 (2023); 6.6 (2024).
- Overall fiscal balance (including grants, percent of GDP): -12.8 (2015); -13.9 (2016); -1.6 (2017); 7.9 (2018); -4.1 (2019); -3.5 (2020); -3.3 (2021); -4.0 (2022); -5.0 (2023); -5.9 (2024).
- Total government debt (in percent of GDP): 56.2 (2015); 64.2 (2016); 58.9 (2017); 49.3 (2018); 51.4 (2019); 50.5 (2020); 50.6 (2021); 51.5 (2022); 53.6 (2023); 56.4 (2024).
- Gross reserves (in US$ billion): 54.1 (2015); 45.5 (2016); 49.4 (2017); 64.7 (2018); 57.2 (2019); 53.5 (2020); 48.5 (2021); 38.8 (2022); 28.2 (2023); 14.3 (2024).
- Current account (percent of GDP): -6.5 (2015); -8.3 (2016); 1.8 (2017); 6.9 (2018); -5.2 (2019); -4.2 (2020); -4.3 (2021); -4.6 (2022); -5.3 (2023); -6.0 (2024).
- Gross international reserves reached $65 billion by end-December 2018 in reported outturns.

### Anti-corruption, AML/CFT, and e-governance
- AML/CFT legal developments:
  - AML/CFT Law adopted in 2015; FATF removed Iraq from its list of jurisdictions with strategic deficiencies in 2018.
  - Significant ML/TF risks persist from the informal economy and cross-border cash movement; supervision of financial institutions is not yet sufficiently effective.
- Recommendations:
  - Enact legislation to criminalize illicit enrichment, trading in influence, embezzlement, and all forms of bribery.
  - Bar public officials convicted of corruption from holding office.
  - Digitalize procedures (e-governance) to simplify processes and limit discretion; digitalize and verify asset declarations and publish them over time.
  - Strengthen CBI risk-based AML/CFT supervision, including focus on PEPs and beneficial ownership; finalize criteria to risk-profile banks and implement AML/CFT inspections based on risk-profiling.
  - Target the informal financial sector (licensed/unlicensed exchange houses) through licensing or enforcement actions.
- E-governance:
  - Digitalizing registries and databases (e.g., property) would improve access to information, facilitate cooperation, and detect corruption and financial crime.
  - MoO developed a policy on disclosure of oil and gas contracts pending adoption of the law on access to information.

### Capacity development and TA priorities (Annex I)
- Recent CD activities focused on PFM (arrears control, commitment controls, TSA steps), revenue administration (indirect taxation), financial sector (prudential regulation, bank supervision, AML/CFT), and training components.
- Priorities going forward:
  - Fiscal CD: budget execution and control, monitoring off-budget spending and guarantees, strengthen non-oil revenue, PFM, revenue administration, and over time public investment management.
  - Financial sector CD: bank supervision support.
  - Statistics CD: real sector and external sector statistics; CSO capacity constraints necessitate assistance to introduce 2012 base year and implement 2008 SNA concepts.

### Risk Assessment Matrix — selected risks and policy responses
- Large swings in oil prices: Likelihood Medium / Short to Medium Term; Expected Impact High. Policy measures: build fiscal space, diversify revenue, improve spending efficiency.
- Spillovers from geopolitical tensions (including reimposition of U.S. sanctions on Iran): Likelihood High / Short to Medium Term; Expected Impact High. Policy measures: continue AML/CFT implementation, diversify energy sources, exploit domestic gas.
- Political instability and rising popular discontent: Likelihood High / Short to Medium Term; Expected Impact High. Policy measures: reach consensus on reforms, secure resources for capital spending through fiscal consolidation, implement PFM and anti-corruption reforms.

### Staff appraisal and recommendations (summary)
- The post-war opportunity to rebuild should be used to scale up capital spending while building fiscal buffers and containing current spending.
- Staff recommends:
  - Adopt a more risk- and rules-based fiscal policy anchored on containing current spending and boosting non-oil revenue.
  - Strengthen PFM frameworks and implement GFML secondary legislation (vetting and monitoring of guarantees).
  - Commit to medium-term ceilings on current spending with well-structured, sequenced measures focused on the wage bill.
  - Cap allowances and bonuses in the short term and pursue structural civil service reform.
  - Undertake significant reforms to reduce the electricity sector operational deficit while expanding supply.
  - Accelerate restructuring of public banks and strengthen banking supervision.
  - Continue capacity development support from the Fund and partners.

*Italic: IMF staff report excerpt (2019).*

### 2019. The staff team comprised Gavin Gray (head), Gazi Shbaikat

### BACKGROUND: IMPROVED POLICY ENVIRONMENT BUT MEDIUM-TERM RISKS ON THE RISE

### A. Context
- Iraq possesses the world’s fourth largest oil reserves, which are projected to last over 100 years at current production rates.
- Decades of political upheaval and armed conflict have weakened public institutions; weak governance and corruption are widely acknowledged elements of the problem.
- The conflict with ISIS led to 100,000 deaths, five million internally displaced people and an estimated $46 billion of damage to infrastructure and property.
- Development needs include large infrastructure gaps, poor basic services, subpar health and education outcomes, and widespread poverty; GDP has barely grown in per capita terms over the past five years.
- Electricity supply has averaged only 17 hours per day in recent years.
- Weak fiscal policy frameworks have been procyclical: authorities generally saved little during oil price booms, ramped up current spending (particularly the civil service payroll), and cut investment when oil prices dipped—leading to arrears and undermining infrastructure investment.
- The Fund provided a $5.3 billion SBA in 2016; main achievements included preservation of the pegged exchange rate, a large fiscal consolidation (mainly through capital expenditure cuts), reduction in external arrears, and progress on AML/CFT. The SBA went off track after the second review in August 2017, and expires in July 2019.
- An improved security situation and higher oil prices offer an opportunity to rebuild and address longstanding social problems, but obstacles include geopolitical strains (re-imposition of U.S. sanctions on Iran), weak governance and corruption, and an estimated 800,000 annual entrants to the labor market.

### B. Recent Developments: Slow Post-War Recovery
- Post-war reconstruction under-delivered: capital spending in liberated areas was ID 100 billion ($85 million) in 2018, or less than 0.5 percent of the estimated damage.
- Non-oil GDP rose by only 0.8 percent year-on-year in 2018 due to weak execution of public investment and power outages; overall GDP contracted by around 0.6 percent in 2018 as oil production was cut to comply with the OPEC+ agreement.
- Inflation was flat over the year as a whole.
- Fiscal and external positions improved in 2018 due to higher oil prices and underexecution of the capital budget:
  - A large fiscal surplus—around 8 percent of GDP—was recorded in 2018 driven by larger than expected oil revenues and significant underexecution of the capital budget.
  - Underlying fiscal position barely improved: non-oil revenue collection declined significantly (due to weak compliance) while current spending expanded by 5 percentage points of non-oil GDP.
  - The government retired some domestic debt, including unwinding ID 1 trillion (about $0.9 billion) of indirect monetary financing, and accumulated fiscal buffers (about $17 billion).
  - Public debt fell to 49 percent of GDP at end-2018.
  - A large current account surplus in 2018 reached 5¾ percent of GDP.
  - Gross international reserves reached $65 billion by end-December 2018, outstripping standard reserve adequacy metrics.
  - The spread between official and market FX rates narrowed to below 2 percent from 6.25 percent at end-2017.
- Banking sector weaknesses:
  - Two large public banks—Rafidain and Rasheed (R&R)—are burdened by legacy assets and loans to SOEs.
  - R&R’s capital is below statutory levels; NPLs are high at a number of private banks.
  - Private banks are losing money due to compression of spreads in the FX market and could face capital constraints.
  - Private-sector credit stock was only 9 percent of GDP at end-2018, up 9 percent year on year.
- Institutional reform: Parliament adopted a new General Financial Management Law (GFML) in May 2019 that:
  - Defines general government for the first time.
  - Establishes the need for a medium-term fiscal framework.
  - Enshrines fiscal transparency requirements.
  - Limits parliament’s capacity to amend the budget and scope for spending authorized outside budget processes.
  - Gaps remain (e.g., guarantees and a treasury single account) requiring secondary legislation or council of ministers decisions.
  - Newly introduced elements of fiscal federalism could erode non-oil revenue.

### C. Outlook and Risks: Vulnerabilities on the Rise Again
- 2019 budget implications:
  - The 2019 budget implies a large fiscal loosening: current spending is projected to rise by 27 percent year on year due to large increases in the public-sector wage bill, transfers, goods and services, and allocations to KRG.
  - Staff baseline projections assume the wage bill will exceed budget provisions and total more than 17 percent of GDP—the equivalent of 47 percent of oil revenues.
  - The budgeted ramp-up in capital spending will likely not fully materialize due to absorption constraints.
  - The abolition of non-oil taxes will dampen revenues.
  - The budget is projected to shift from a surplus of close to 8 percent in 2018 to a deficit of 4 percent of GDP in 2019, and reserves are projected to decline in 2019.
- Medium-term baseline (absent policy changes):
  - Fiscal position will deteriorate as oil prices subside and current expenditure persists at elevated levels.
  - Sizable fiscal and external deficits—both reaching around 6 percent of GDP by 2024.
  - Reserves will fall steadily to well below adequate levels and fiscal buffers will be eroded.
  - Public debt will increase but remains sustainable; financing needs will increase and remain above the high-risk threshold.
  - Government likely unable to fulfill more than a quarter of reconstruction needs over the medium term.
- Growth projections:
  - Non-oil GDP growth projected to reach 5½ in 2019 (due to better rainfall, rebound in electricity production, and significantly looser fiscal policy), with some carryover in 2020.
  - Oil GDP growth will increase in 2019-20 if the OPEC+ agreement expires and export capacity improves.
  - Transitory factors will unwind; authorities likely unable to sustain capital spending; borrowing by the public sector will crowd out private credit.
  - Growth will decline significantly from 2021 onward, falling below population growth and below levels required to absorb labor market entrants.
- Oil price sensitivity:
  - Every $1 per barrel decline in oil prices lowers annual oil revenue by 0.6 percent of GDP.
  - Illustrative ± $10 oil price scenarios show large impacts on the overall balance, current account balance, central bank reserves, and public debt for 2018–20:
    - Under a negative $10 shock and policy response of cutting capital spending to a minimum while maintaining current expenditure through significant external borrowing and some accumulation of arrears, reserves would decline from $65 billion at end-2018 to $37 billion by end-2020, with public debt reaching 61 percent of GDP (10 percentage points above baseline).
  - Conversely, higher oil prices could improve positions but blunt reform incentives and divert spending away from priority investment.
- Geopolitical and domestic risks:
  - Tension between the U.S. and Iran could have significant implications given Iraq’s reliance on electricity and gas imports from Iran; U.S. sanctions complicate energy reforms.
  - Regional factors and the risk of a resumption of terrorism could have political and security spillovers with macrocritical effects.
  - Domestic political risks: popular protests could undermine government effectiveness absent faster improvements in public services or reconstruction; absorptive capacity constraints and deteriorating governance could undermine long-term growth.
  - Fiscal costs of restructuring and recapitalizing R&R pose a non-negligible medium-term risk.

### Authorities’ Views
- Authorities were more positive than staff on the outlook, viewing medium-term vulnerabilities as more contained given a more supportive outlook for oil prices and ample buffers.
- They viewed risks overall on the upside from potentially higher oil prices if market concerns on supply shortages re-emerged due to U.S. sanctions on Iran.
- Authorities recognized challenges from sanctions given dependence on energy imports from Iran but saw an opportunity to rebalance trade relations with neighboring countries and promote domestic production.
- Authorities were concerned that an escalation of geopolitical tensions could jeopardize regional security.

_Italic: IMF staff report excerpt (2019)._

### 18.      Discussions focused on the required changes in policy settings and structural reforms

### 18.      Discussions focused on the required changes in policy settings and structural reforms to restore medium-term sustainability and help lay the foundations for inclusive growth

### Key messages and policy priorities
- Restore medium-term sustainability while ensuring sufficient resources for investment to rebuild physical and human capital after the end of the war with ISIS.
- Strengthen policy frameworks and build fiscal institutions to manage oil revenue more effectively, including a medium-term engagement strategy adapted to Iraq’s circumstances.
- Recalibrate public expenditure and promote financial inclusion to address business environment weaknesses and promote private-sector led employment and growth.
- Review adequacy and efficiency of social spending in light of social and demographic strains.
- Capacity development from the Fund and development partners to support reform implementation.

### Tailored macroeconomic guidance for a resource-rich developing country
- Given large investment needs and that oil exhaustibility is not an immediate concern, Iraq should use energy revenues to rebuild capital while scaling up investment gradually because of investment inefficiencies and limited absorptive capacity.
- A model tailored to Iraq implies it would be optimal to run current account deficits of 2.5–4.5 percent (of GDP) over the medium term to support higher investment.
- Fiscal policy frameworks should create space for investment, dampen procyclicality, and reduce vulnerabilities to oil price fluctuations.

### Governance and institutional reforms — macroeconomic benefits (Box 1)
- A comprehensive package of governance reforms (reducing fiscal leakages and enhancing private investment) is assessed to add 10–20 percent to output over 10 years.
- Using the DIGNAR model, simultaneous reforms in (i) reducing firms’ distortions, (ii) improving public investment efficiency, and (iii) improving tax revenue mobilization were simulated.
- Optimistic scenario outcomes over 10 years:
  - Private investment doubles in real terms.
  - Output and private consumption each increase by about 20 percent.
  - Additional annual growth of 2 percent (i.e., "about 2 percentage points to growth each year").
  - Public debt falls by 32 percent of GDP over 10 years.
- Moderate scenario outcomes over 10 years:
  - Additional annual growth of 1 percent.
  - Public debt falls by about one-fifth of GDP over 10 years.
- Largest contribution to improved macroeconomic conditions comes from removing distortions affecting private firms’ investment decisions; improving public investment efficiency and tax collection efficiency also have meaningful impacts.

### Building a robust fiscal framework to manage oil wealth
- Staff recommended a risk- and rules-based fiscal approach:
  - Build fiscal buffers to mitigate oil price shocks.
  - Move to a multi-year fiscal and budget framework based on robust budget processes and reinforced by fiscal rules.
  - Expenditure rules, if well designed and politically backed, can reduce procyclicality and shift to a more growth-friendly expenditure composition.
- Specific proposal: commit to a fiscal rule in the form of a ceiling on current primary spending of the central government, excluding capital expenditure from the ceiling to preserve space for reconstruction and infrastructure.
- The ceiling on current spending should be supported by strengthened public expenditure management to ensure capital spending efficiency and prevent circumvention.

### Macroeconomic adjustment scenario and calibration
- A phased adjustment of 11 percent of non-oil GDP is proposed over the medium term.
- The spending ceiling is calibrated based on annual nominal growth of 2 percent during 2020–24.
- Spending measures focusing on containing wage bill growth and lowering electricity subsidies would deliver most of the needed adjustment in current spending.
- The proposed adjustment and financing mix aim to:
  - Build a fiscal buffer equivalent to one-year revenue loss from a permanent oil price shock, estimated at 17 percent of non-oil GDP.
  - Increase fiscal buffer (government cash balances at the CBI) from ID 20 trillion in 2018 to ID 28 trillion by 2024 (11 percent of non-oil GDP); the buffer could be built faster if oil prices are higher or capital expenditure is under-executed; buffer can be used to protect capital spending if an oil price shock materializes.
  - Create space for about $22 billion of capital spending over the baseline (close to a quarter of the aggregate reconstruction cost estimated by the World Bank).
  - Gradually ramp up capital spending allocations—to 4.5 percent of GDP by 2024—recognizing limited absorptive capacity and the need for reforms to improve efficiency.
  - Adopt a financing mix that builds the buffer while largely eliminating central bank financing; expedite disbursement of pledged donor financing; rely more on domestic banks to retain some T-bills rather than rediscounting all T-bills at the central bank.

### Revenue mobilization and capital spending execution
- Expanding non-oil revenues would create further fiscal space and lower vulnerabilities to oil price shocks.
- Revenues from sales taxes adopted in the 2018 budget fell short due to weak compliance procedures; most measures were cancelled in the 2019 budget.
- Recommended way forward: develop a standalone tax bill with well-articulated measures and clear penalties, and adequately resource the large taxpayers’ office.
- Prioritizing capital spending in 2019 is important, but weak procurement and long lead times mean careful project selection is required to avoid efficiency losses; transferring unexecuted capital spending to spending units’ trust funds would weaken budgetary controls.

### Authorities’ views
- Authorities were unconvinced of the urgent need to modify fiscal policy settings, citing higher oil prices and their track record of underexecuting the budget as potential near-term savings.
- Authorities viewed reining in current spending as politically and socially undesirable at this stage and signaled intention for another expansionary budget in 2020.
- They agreed on the need for medium-term reforms on non-oil revenue mobilization, subsidies, and civil service, and expressed interest in adopting fiscal rules integrated into their medium-term fiscal strategy.

### Reallocating public expenditure and the wage bill
- The public wage bill is already one of the highest in the world and faces further pressures from rising labor market entrants and pressures to convert contractual and daily workers into regular employment.
- Staff proposals to contain wage bill growth:
  - Short-term compensation measures: cap allowances, bonuses and other non-base wage payments; use natural attrition to avoid further payroll increases in 2020.
  - Medium-term structural measures: conduct a functional workforce review and undertake deeper civil service reform once new HR management and information systems are in place.
  - Use biometric systems and other technological solutions to eliminate ghost workers and double dippers, generating savings.
- The staff cautioned that certain recent practices (conversions of contractual workers, wage increases in specific ministries, recruitment of specific categories) are exerting upward pressure on wage spending in a context of weak PFM controls.

*Source: IMF staff discussions and analysis in the IMF chapter titled “18. Discussions focused on the required changes in policy settings and structural reforms.”*

### 29.      The electricity sector is a major

### 29.      The electricity sector is a major drag on public resources.

### Electricity sector fiscal burden and key statistics
- The sector incurs a large operational deficit covered through direct budgetary transfers, borrowing from the Ministry of Oil (MoO) and arrears to Iran.
- It paid 1.8 percent of GDP in 2018 for oil and gas inputs, compared with 3.8 percent of GDP if they were valued at market prices.
- Cross-liabilities between the Ministries of Electricity, Oil, and Finance totaled nearly 5 percent of GDP by end-2018 and should be settled.
- Summary Budget and Financing of the Electricity Sector, 2018 (In percent of GDP):
  - Tariff Collection: 0.4
  - Expenditures: 2.6
  - Deficit: -2.3
  - Total Financing: 2.3
    - Transfer from Ministry of Finance: 1.2
    - Project financing and suppliers credit: 0.3
    - Debt to Ministry of Oil: 0.8
    - Payment of old arrears to Iran (- means payment): -0.1
    - Accumulation of new arrears to Iran: 0.3
  - End of year balance (- means surplus): -0.2
  - Sources: Iraqi authorities; and IMF staff calculations.
- Cost of Electricity Generation, 2018 (In percent of GDP) — Selected itemized support from ministries as reported:
  - Imported Electricity from Iran MoF [budget transfer]: 0.1 (If Priced at International Prices: 0.1)
  - Purchased Electricity from IPPs MoF [budget transfer]: 0.3 (If Priced at International Prices: 0.3)
  - Imported Gas from Iran MoF [budget transfer]: 0.6 0.6
  - Dry Gas from BGC MoO [debt]: 0.2 0.4
  - Imported Gas Oil MoO [debt]: 0.2 0.2
  - Fuel Gas MoO [debt]: 0.3 0.6
  - Crude Oil MoO [debt]: 0.1 1.6
  - Total Support from Ministries: 1.8 3.8
  - Note: As reported by the authorities, MoE debt stock rose from ID 9.3 trillion to ID 12.7 trillion in 2018, implying a flow of ID 3.4 trillion. This is higher than the ID 2.1 trillion of debt to MoO implied by this table.

### Causes of high budget costs and operational weaknesses
- Modest tariff rates and chronic non-payment of electricity bills.
- Poor maintenance and over-reliance on expensive generation sources.
- Significant losses materializing in the generation and distribution process.
- Curtailing gas flaring to capture more domestic natural gas is essential and will require significant capital expenditure.

### Reforms, investments, and operational measures recommended
- Settle cross-liabilities between the Ministries of Electricity, Oil, and Finance (nearly 5 percent of GDP by end-2018).
- Continue allocation of contracts in 2019 to rehabilitate moth-balled plants and improve generation capacity.
- Explore technological solutions to increase revenue collection.
- Ensure that the poorest and most vulnerable are protected throughout the reform process.
- Capture more domestic natural gas by curtailing gas flaring; recognize need for significant capital expenditure.

### Public investment management
- Improvements would strengthen absorption capacity and ensure resources are well spent.
- Recommended measures:
  - Prioritize capital spending within medium-term fiscal/expenditure frameworks and based on cost-benefit analysis.
  - Improve pre-investment studies and deepen quantitative analysis underpinning feasibility studies.
  - Introduce independent reviews of appraisals and curb political interference in prioritization decisions.
  - Rephase some investment projects where necessary.
  - Streamline procedures for approval of public projects as absorptive capacity improves, while maintaining adequate safeguards and strengthening capacity to comply with donor financing terms.

### Public financial management (PFM) reforms
- Essential to ensure public spending is appropriately monitored and to reduce vulnerabilities to corruption.
- Key actions:
  - Implement the newly adopted GFML, including by adopting decrees or secondary legislation; address gaps such as rules for vetting and monitoring guarantees.
  - Accelerate implementation of IFMIS (World Bank-led) to replace paper-based systems.
  - Establish commitment controls and reinforce monitoring of arrears to prevent recurrence of arrears in future shocks.
  - Strengthen cash management through regular sweeping of spending units’ cash balances as a step towards establishing a Treasury Single Account (TSA).

### Authorities’ views on electricity and public-sector wages
- Authorities viewed staff’s proposals on public-sector wages as desirable and feasible over the medium-term but politically difficult in the near term; some measures (freezing allowances and bonuses) could begin in 2021.
- On electricity, authorities broadly agreed with staff’s assessment and policy recommendations, emphasized the sector’s priority, and noted structural factors (including a multi-year agreement to import Iranian gas at prices currently above international levels).
- Authorities acknowledged the need to address debt between ministries and will reactivate a committee formed to address cross liabilities.

### Financial stability, banking sector, and inclusion (selected related content)
- Overhaul of the banking sector is essential to maintain financial stability and to transform the sector into an effective vehicle for intermediation.
- The two largest banks—Rafidain and Rasheed (R&R)—have portfolios heavily weighted towards public-sector assets, some not being serviced, limiting capacity to lend until restructured and recapitalized.
- Long-delayed restructuring of the public banks is beginning; R&R contracted suppliers for core banking systems and segregated legacy assets and liabilities into ‘bridge branches’.
- Once core banking systems are fully operational, the two banks should be audited to international standards to assess capital needs accurately.
- Strengthen banking supervision with focus on risks in public banks; commission a targeted quality review of public banks’ main assets, especially loans to SOEs that are government guaranteed yet not fully serviced.
- Caution in licensing new banks; strengthen frameworks for handling troubled banks.
- Measures to promote financial development and inclusion: strengthen payment systems, encourage salary payments into bank accounts, develop mobile banking given extensive wireless coverage, improve credit information, strengthen legal procedures, develop a deposit insurance scheme.

### Anti-corruption and AML/CFT
- Iraq has begun developing an anti-corruption framework; scope exists to strengthen it.
- Gaps and recommendations:
  - Enact drafted legislation to criminalize illicit enrichment, trading in influence, embezzlement, and all forms of bribery.
  - Bar public officials convicted of corruption from holding office.
  - Improve co-ordination and streamline institutional structures; High Council for Combatting Corruption should work closely with parliamentary Integrity Committee.
  - Digitalize procedures (e-governance) to simplify processes and limit discretion.
  - Strengthen the system of asset declarations: focus on high-risk officials, allocate resources to digitalize and verify submissions, establish and enforce clear penalties for non-submission, and publish declarations over time.
- AML/CFT progress: FATF removed Iraq from its list of jurisdictions with strategic deficiencies in recognition of the new AML/CFT law adopted in 2015 and establishment of implementing institutions; however, significant ML/TF risks persist from the informal economy and cross-border cash movement, and supervision of financial institutions is not yet sufficiently effective.

### Staff appraisal and fiscal policy recommendations
- The end of the war and higher oil prices present an opportunity to rebuild, but strong spending pressures and a procyclical fiscal expansion increase exposure to oil price shocks and risk eroding reserves.
- Fiscal policy should be anchored on scaling up capital spending and building fiscal buffers within a sustainable framework.
- Restructuring of the financial sector should be accelerated.
- Strengthening governance is essential to deliver social objectives and lower corruption risks.
- Staff recommends adopting a more risk- and rules-based approach to fiscal policy:
  - Contain current spending and boost non-oil revenue to create space for investment, lower the deficit, keep public debt on a declining path, and build fiscal buffers.
  - Strengthen public financial management frameworks and adopt necessary decisions and secondary legislation to implement the general financial management law, particularly regarding vetting and monitoring of guarantees.
  - Commit to medium-term ceilings on current spending, supported by well-structured and carefully sequenced measures, with a focus on the wage bill.
  - Short-term measures to cap allowances and bonuses to create space for structural measures including civil service reform.
  - Significant reforms required to reduce the operational deficit in the electricity sector while expanding supply; review adequacy and efficiency of social spending to protect poor and vulnerable groups during reforms.

*1irqea2019001 - 29.      The electricity sector is a major*

### 52.      Restructuring of the public banks coupled with enhanced bank supervision is essential

### 52.      Restructuring of the public banks coupled with enhanced bank supervision is essential

### Bank restructuring and supervision
- Key next step: "install core banking systems in the two large public banks," described as "a pre-requisite for these banks to be audited, restructured and eventually recapitalized."
- "Steadfast supervision would help prevent a further deterioration in their balance sheets during this process, and to monitor vulnerabilities among private banks."

### Financial inclusion and structural reforms
- "Successful restructuring of the banks coupled with structural reforms can help the authorities address long-standing problems with financial inclusion, including access to credit."
- Policy measures to improve access to credit:
  - "Improving credit information and strengthening legal procedures would encourage banks to relax collateral requirements and facilitate access to credit."
  - "The planned deposit insurance scheme would also help level the playing field across the banking sector, but effective supervision is essential to limit risks."
- Target outcome: "By strengthening SME financial inclusion, such efforts can have a significant impact on growth and employment."

### Anti-corruption legal framework and coordination
- Required reforms:
  - "A sound legal regime criminalizing all corruption offences and setting out effective sanctions will be necessary;"
  - "public officials convicted of corruption should be prohibited from holding office."
- Institutional measures:
  - "The authorities should also develop coherent national anti-corruption policies, based on a deeper understanding of the risks, and relevant agencies should coordinate more closely, with enhanced information exchanges."
  - Strengthening asset declarations by: "targeting the officials most exposed to corruption, sanctioning failures to submit declarations, digitalizing declarations and moving eventually to publication of asset declarations."

### AML/CFT implementation
- Rationale: "Bolstering AML/CFT implementation would help enhance the integrity of the financial system and support anti-corruption efforts."
- Recommended CBI actions:
  - "The Central Bank of Iraq (CBI) should implement risk-based AML/CFT supervision of banks and exchange houses to improve compliance with preventive measures, including those related to politically exposed persons and beneficial ownership."
  - Such efforts "would help identify proceeds of corruption and ease pressure on correspondent banking relationships."
  - "The CBI should also step up efforts to implement outstanding safeguards recommendations."

*Source: 1irqea2019001 - 52.      Restructuring of the public banks coupled with enhanced bank supervision is essential*

### 56.      The Managing Director recommends the initiation of post-program monitoring. The

### 1irqea2019001 - 56. The Managing Director recommends the initiation of post-program monitoring

### Managing Director recommendation
- The Managing Director recommends the initiation of post-program monitoring.
- The first PPM Board discussion is envisaged before end-2019.
- It is further proposed that the Article IV consultation cycle revert to the 12-month cycle.

### Macroeconomic outlook and projections (selected)
- Real GDP (percentage change): 2.5 (2015); 15.2 (2016); -2.5 (2017); -0.6 (2018); 4.6 (2019); 5.3 (2020); 2.6 (2021); 2.3 (2022); 2.1 (2023); 2.1 (2024).
- Non-oil real GDP (percentage change): -14.4 (2015); 1.3 (2016); -0.6 (2017); 0.8 (2018); 5.4 (2019); 5.0 (2020); 4.1 (2021); 3.4 (2022); 2.7 (2023); 2.7 (2024).
- GDP deflator (percentage change): -26.1 (2015); -13.4 (2016); 14.6 (2017); 15.4 (2018); -4.5 (2019); 2.3 (2020); 2.6 (2021); 2.8 (2022); 3.1 (2023); 3.3 (2024).
- GDP per capita (US$): 5,047 (2015); 4,843 (2016); 5,263 (2017); 5,882 (2018); 5,728 (2019); 6,017 (2020); 6,172 (2021); 6,326 (2022); 6,486 (2023); 6,666 (2024).
- GDP (in ID trillion): 207.2 (2015); 206.7 (2016); 231.0 (2017); 265.0 (2018); 264.8 (2019); 285.4 (2020); 300.4 (2021); 315.9 (2022); 332.3 (2023); 350.4 (2024).
- GDP (in US$ billion): 177.7 (2015); 175.2 (2016); 195.5 (2017); 224.2 (2018); 224.1 (2019); 241.5 (2020); 254.1 (2021); 267.3 (2022); 281.1 (2023); 296.5 (2024).
- Oil production (mbpd): 3.7 (2015); 4.6 (2016); 4.3 (2017); 4.4 (2018); 4.5 (2019); 4.8 (2020); 4.9 (2021); 5.0 (2022); 5.10 (2023); 5.18 (2024).
- Oil exports (mbpd): 3.35 (2015); 3.79 (2016); 3.80 (2017); 3.86 (2018); 4.03 (2019); 4.25 (2020); 4.33 (2021); 4.40 (2022); 4.47 (2023); 4.55 (2024).
- Iraq oil export prices (US$ pb) 1/: 45.9 (2015); 35.6 (2016); 48.7 (2017); 65.2 (2018); 56.0 (2019); 55.8 (2020); 54.9 (2021); 54.4 (2022); 54.4 (2023); 54.8 (2024).
- Consumer price inflation (end of period, percentage change): 2.3 (2015); -1.5 (2016); 0.2 (2017); -0.1 (2018); 2.0 (2019); 2.0 (2020); 2.0 (2021); 2.0 (2022); 2.0 (2023); 2.0 (2024).
- Consumer price inflation (average, percentage change): 1.4 (2015); 0.5 (2016); 0.1 (2017); 0.4 (2018); 0.8 (2019); 2.0 (2020); 2.0 (2021); 2.0 (2022); 2.0 (2023); 2.0 (2024).

### Fiscal position and projections (selected)
- Government revenue and grants (percent of GDP): 30.6 (2015); 26.8 (2016); 33.0 (2017); 39.8 (2018); 40.5 (2019); 39.6 (2020); 37.9 (2021); 36.5 (2022); 35.5 (2023); 34.6 (2024).
- Government oil revenue (percent of GDP): 27.8 (2015); 22.9 (2016); 28.9 (2017); 36.7 (2018); 37.2 (2019); 36.3 (2020); 34.5 (2021); 33.1 (2022); 32.0 (2023); 31.0 (2024).
- Government non-oil revenue (percent of GDP): 2.8 (2015); 4.0 (2016); 4.2 (2017); 3.1 (2018); 3.3 (2019); 3.3 (2020); 3.4 (2021); 3.4 (2022); 3.5 (2023); 3.5 (2024).
- Expenditure (percent of GDP): 43.4 (2015); 40.7 (2016); 34.6 (2017); 32.0 (2018); 44.6 (2019); 43.1 (2020); 41.2 (2021); 40.5 (2022); 40.5 (2023); 40.5 (2024).
- Current expenditure (percent of GDP): 27.8 (2015); 29.3 (2016); 26.4 (2017); 26.7 (2018); 33.9 (2019); 34.7 (2020); 33.6 (2021); 33.5 (2022); 33.7 (2023); 33.9 (2024).
- Capital expenditure (percent of GDP): 15.6 (2015); 11.5 (2016); 8.3 (2017); 5.3 (2018); 10.6 (2019); 8.4 (2020); 7.5 (2021); 7.0 (2022); 6.8 (2023); 6.6 (2024).
- Overall fiscal balance (including grants, percent of GDP): -12.8 (2015); -13.9 (2016); -1.6 (2017); 7.9 (2018); -4.1 (2019); -3.5 (2020); -3.3 (2021); -4.0 (2022); -5.0 (2023); -5.9 (2024).
- Non-oil primary fiscal balance, accrual basis (percent of non-oil GDP): -46.5 (2015); -43.3 (2016); -39.4 (2017); -42.4 (2018); -56.9 (2019); -52.1 (2020); -49.2 (2021); -47.1 (2022); -46.2 (2023); -45.3 (2024).
- Adjusted Non-oil primary fiscal balance, accrual basis (excl. KRG, percent of non-oil GDP) 2/: -44.7 (2015); -43.3 (2016); -39.4 (2017); -40.5 (2018); -50.1 (2019); -46.0 (2020); -43.6 (2021); -41.8 (2022); -41.0 (2023); -40.2 (2024).
- Total government debt (in percent of GDP) 4/: 56.2 (2015); 64.2 (2016); 58.9 (2017); 49.3 (2018); 51.4 (2019); 50.5 (2020); 50.6 (2021); 51.5 (2022); 53.6 (2023); 56.4 (2024).
- Total government debt (in US$ billion) 4/: 99.9 (2015); 112.5 (2016); 115.2 (2017); 110.4 (2018); 115.3 (2019); 121.9 (2020); 128.5 (2021); 137.5 (2022); 150.7 (2023); 167.3 (2024).
- External government debt (in percent of GDP): 37.2 (2015); 37.1 (2016); 35.6 (2017); 30.6 (2018); 32.2 (2019); 31.5 (2020); 30.5 (2021); 28.4 (2022); 26.8 (2023); 24.9 (2024).

### Central government fiscal accounts (selected levels in ID trillion)
- Revenues and grants (ID trillion): 63.5 (2015); 55.5 (2016); 76.3 (2017); 105.6 (2018); 107.3 (2019); 113.1 (2020); 113.9 (2021); 115.3 (2022); 117.9 (2023); 121.1 (2024).
- Oil revenues (ID trillion): 57.7 (2015); 47.2 (2016); 66.7 (2017); 97.3 (2018); 98.5 (2019); 103.6 (2020); 103.7 (2021); 104.4 (2022); 106.3 (2023); 108.7 (2024).
- Non-oil revenues (ID trillion): 5.8 (2015); 8.3 (2016); 9.6 (2017); 8.3 (2018); 8.8 (2019); 9.5 (2020); 10.2 (2021); 10.9 (2022); 11.6 (2023); 12.4 (2024).
- Expenditures (ID trillion): 90.0 (2015); 84.2 (2016); 80.1 (2017); 84.7 (2018); 118.0 (2019); 123.1 (2020); 123.7 (2021); 128.0 (2022); 134.6 (2023); 141.8 (2024).
- Fiscal balance (ID trillion): -26.6 (2015); -28.7 (2016); -3.7 (2017); 20.9 (2018); -10.7 (2019); -10.0 (2020); -9.8 (2021); -12.7 (2022); -16.7 (2023); -20.7 (2024).

### Monetary and external sector (selected)
- Gross reserves (in US$ billion): 54.1 (2015); 45.5 (2016); 49.4 (2017); 64.7 (2018); 57.2 (2019); 53.5 (2020); 48.5 (2021); 38.8 (2022); 28.2 (2023); 14.3 (2024).
- Total GIR (in months of imports of goods and services): 9.3 (2015); 7.8 (2016); 7.3 (2017); 8.0 (2018); 6.8 (2019); 6.2 (2020); 5.5 (2021); 4.2 (2022); 2.9 (2023); 1.4 (2024).
- Exchange rate (dinar per US$; period average): 1,166 (2015); 1,180 (2016); 1,182 (2017); 1,182 (2018); 1,182 (2019); 1,182 (2020); 1,182 (2021); 1,182 (2022); 1,182 (2023); 1,182 (2024).
- Current account (percent of GDP): -6.5 (2015); -8.3 (2016); 1.8 (2017); 6.9 (2018); -5.2 (2019); -4.2 (2020); -4.3 (2021); -4.6 (2022); -5.3 (2023); -6.0 (2024).
- Trade balance (percent of GDP): -0.1 (2015); -1.7 (2016); 7.6 (2017); 13.4 (2018); 3.5 (2019); 4.1 (2020); 3.2 (2021); 2.0 (2022); 1.3 (2023); 0.5 (2024).

### Central bank and monetary aggregates (selected)
- Reserve money (levels, ID billions): 62,914 (2015); 68,716 (2016); 65,690 (2017); 70,066 (2018); 71,815 (2019); 75,726 (2020); 79,264 (2021); 83,161 (2022); 87,420 (2023); 91,433 (2024).
- Currency in circulation (ID billions): 38,585 (2015); 45,232 (2016); 44,237 (2017); 47,169 (2018); 48,161 (2019); 50,525 (2020); 52,624 (2021); 54,915 (2022); 57,459 (2023); 59,825 (2024).
- Bank reserves (ID billions): 24,329 (2015); 23,485 (2016); 21,453 (2017); 22,896 (2018); 23,654 (2019); 25,201 (2020); 26,640 (2021); 28,247 (2022); 29,961 (2023); 31,607 (2024).
- Reserve money (annual growth, in percent): -12.0 (2015); 9.2 (2016); -4.4 (2017); 6.7 (2018); 2.5 (2019); 5.4 (2020); 4.7 (2021); 4.9 (2022); 5.1 (2023); 4.6 (2024).

### Social and inclusive growth indicators (selected)
- GDP per capita growth (percent; 2015-17 average): -6.7 (Iraq) vs. 1.4 (EMDE Average).
- Unemployment rate (% of total labor force, 2018): 7.9 (Iraq) vs. 7.5 (EMDE Average).
- Female unemployment rate (% of female labor force, 2018): 12.3 (Iraq) vs. 9.6 (EMDE Average).
- Youth unemployment rate (% ages 15-24, 2018): 16.6 (Iraq) vs. 16.5 (EMDE Average).
- Labor force participation (% ages 15+, 2018): 42.5 (Iraq) vs. 63.0 (EMDE Average).
- Poverty headcount ratio at $3.20/day (percent of population; 2012): 17.9 (Iraq) vs. 32.9 (EMDE Average).
- Multidimensional poverty (percent of population): 14.7 (Iraq) vs. 31.2 (EMDE Average).
- GINI Index (2012): 29.5 (Iraq) vs. 39.6 (EMDE Average).
- Human Development Index (2017): 0.60 (Iraq) vs. 0.6 (EMDE Average).
- Access to electricity (% of population, 2016): 100.0 (Iraq) vs. 78.4 (EMDE Average).
- Individuals using internet (% population, 2016): 21.2 (Iraq) vs. 40.8 (EMDE Average).
- Spending on social safety net (percent of GDP, 2018): 2.6 (Iraq) vs. 1.6 (EMDE Average).
- Domestic credit to private sector (% GDP, 2015): 9.2 (Iraq) vs. 39.8 (EMDE Average).
- Account at a financial institution (% age 15+, 2017): 20.3 (Iraq) vs. 43.0 (EMDE Average).

*Sources: Iraqi authorities; and Fund staff estimates and projections.*

### Annex I. Capacity Development Strategy

### Annex I. Capacity Development Strategy

### Overview of Capacity Development Efforts
- CD activities in recent years aimed at helping the authorities deliver on policy commitments under the 2016–19 SBA while responding to specific requests.
  - Public financial management (PFM): extensive technical assistance to help control arrears, establish commitment controls and take steps towards the establishment of a treasury single account (TSA). The Fund has also provided advice on Iraq’s PFM law.
  - Revenue administration: advice to develop and strengthen indirect taxation to support program commitments to diversify revenue sources.
  - Financial sector: technical assistance directed to strengthening prudential regulation, bank supervision and the AML/CFT framework.
- Much of the Fund’s TA has had a training component. However, the authorities have made more limited use of Fund training online or at the Center for Economics and Finance (CEF) training center.
- Coordination with development partners:
  - World Bank staff have joined Fund TA missions (e.g., to develop a chart of accounts), a critical pre-requisite for the World Bank-led IFMIS project.
  - JICA has financed support for debt management.
  - Resident advisors funded by other partners have supported practical implementation.

### Priorities for IMF Technical Assistance and Training
- Context: The government’s strategy of rebuilding the country will require significant capacity building effort alongside a reorientation of the budget towards capital spending.
- Fiscal CD priorities:
  - Continued focus on budget execution and control to maintain fiscal discipline amid rising expenditure.
  - Ensure that off-budget spending and guarantees are adequately monitored.
  - Strengthen non-oil revenue.
  - Main priorities for Fund fiscal TA are likely to include public financial management, revenue administration, and over time public investment management.
- Financial sector CD priorities:
  - Capacity development to support bank supervision should continue.
- Statistics CD priorities:
  - Improvements to statistics would support policy-making in Iraq.
  - The Central Statistics Organization (CSO) faces resource and technical expertise constraints, with progress hampered by weak interagency data sharing and issues surrounding data collection responsibilities.
  - Capacity development should focus in the near term on real sector and external sector statistics.

*Annex I. Capacity Development Strategy — excerpt from source content.*

### 2.      Guarantees and other contingent liabilities are significant. Debt and service guarantees,

### 1irqea2019001 - 2.      Guarantees and other contingent liabilities are significant. Debt and service guarantees,

### Guarantees and contingent liabilities
- Debt and service guarantees, mostly in the electricity sector, were estimated to exceed 20 percent of GDP in 2017.
- At end-June 2017, the stock of guarantees related to foreign currency service payments and debt amounted to $21.7 billion (12 percent of GDP) comprising $19.4 billion for service payments to independent power producers (IPPs) and $2.3 billion for debt.
- Contingent liabilities in the banking sector relating to potential recapitalization of the two largest public banks cannot be accurately measured prior to an international audit.

### Legacy external arrears and their treatment
- The full face value of $40 billion of external arrears to non-Paris club creditors accumulated before 2003 is included in the stock of external debt.
- The DSA maintains the conservative assumption that these arrears will not be settled during the projection period.
- If arrears were restructured on Paris Club terms, the debt-to-GDP ratio would fall:
  - from 51 to 37 percent of GDP in 2019, and
  - from 56 to 46 percent of GDP in 2024.
- Applying an 80 percent haircut to the $40 billion of non-Paris Club arrears (comparable to the Paris Club treatment) would reduce headline public debt from 49 percent of GDP in 2018 to 34 percent of GDP.
- A referenced NPV reduction: 89.75 percent reduction of the net present value (NPV) of the legacy arrears is mentioned in the document.

### Gross financing needs (GFN) and high-risk assessment
- Gross financing needs are projected to remain substantially above the high-risk threshold of 15 percent of GDP over 2019–24.
- Drivers of rising GFN:
  - widening fiscal deficits;
  - shift in debt structure toward shorter maturities (mostly T-bills purchased by state-owned banks and discounted at the Central Bank of Iraq or purchased and retained by banks);
  - declining longer maturity external debt as sizable external principal payments fall due starting 2019 (reaching over ID 8 trillion in 2024).
- Staff-proposed adjustment path would help reduce debt to below 50 percent and financing needs to 15.7 percent of GDP (main document, ¶21).

### Debt composition and medium-term shift
- Domestic debt rises from 37 percent of total debt in 2018 to 56 percent of total debt by 2024.
- Share of T-bills (short-term debt) in new debt increases from 22 percent in 2018 to close to 60 percent by 2024.
- Staff assumes continued reliance on medium-to long-term external financing, but net external borrowing is projected to be negative given large amortization payments.

### Fiscal constraints and reconstruction financing
- Post-conflict reconstruction and recovery needs are estimated at $88 billion.
- Only a small fraction of the $88 billion is covered in expenditure over the medium term given current oil revenue projections.
- To ramp up capital spending without endangering debt sustainability, authorities would need to:
  - better control current spending;
  - raise additional non-oil revenue;
  - aim at building fiscal buffers to avoid excessive recourse to domestic and external borrowing if the oil price declines.

### Stress tests and vulnerability analysis
- Stress tests show high sensitivity to growth and real interest rate shocks:
  - Growth shock: Lowering projected real GDP rates by one standard deviation (implying lower real growth by 5.6 percentage points) in 2020 and 2021 would raise the debt ratio by 16 percentage points by 2021, and increase gradually to 77 percent of GDP by 2024.
  - Primary balance shock: Worsening of the primary balance by 3.8 percentage points of GDP in 2020 and 2021 would lead to debt reaching 65 percent of GDP by 2024.
  - Real interest rate shock: A one-time, permanent real interest rate increase of 10 percentage points in 2019 would make the debt ratio reach 73 percent of GDP in 2024.
  - Real exchange rate shock: A one-time real depreciation of 30 percent in 2018 would increase total public debt to 65 percent of GDP by 2024.
  - Combined shock: Combination of these shocks would increase debt to 103 percent of GDP by 2024.
- Note on interest-rate shock methodology: The DSA methodology for generating interest rate shocks is based on GDP deflators rather than CPI inflation; due to the large weight of oil prices in the GDP deflator, a moderate 10 percent real rate shock is considered.

### DSA baseline and key projection figures (selected)
- Nominal gross public debt (percent of GDP): 2017 = 53.0; 2018 = 58.8; 2019 = 49.3; 2020 = 51.4; 2021 = 50.5; 2022 = 50.6; 2023 = 51.5; 2024 = 53.6; (table shows 56.4 also in summary lines).
- Real GDP growth (percent): 2017 = 7.3; 2018 = -2.5; 2019 = -0.6; 2020 = 4.6; 2021 = 5.3; 2022 = 2.6; 2023 = 2.3; 2024 = 2.1.
- Inflation (GDP deflator, percent): 2017 = 1.6; 2018 = 14.6; 2019 = 15.4; 2020 = -4.5; 2021 = 2.3; 2022 = 2.6; 2023 = 2.8; 2024 = 3.1; 2024 also listed as 3.3 in some tables.
- Effective interest rate (percent): 2017 = 1.1; 2018 = 1.7; 2019 = 2.7; 2020 = 2.5; 2021 = 3.7; 2022 = 3.7; 2023 = 3.7; 2024 = 4.0; 2024 also shown as 4.3 in one table row.
- Identified debt-creating flows (cumulative across projection): primary deficit cumulative = 15.7 (percent of GDP).
- Change in gross public sector debt (cumulative 2018–24 row): listed cumulative change = 7.2 (percent of GDP).
- Gross financing needs (GFN) projections (figure/table contexts): remain substantially above 15 percent of GDP over 2019–24; staff path could reduce financing needs to 15.7 percent of GDP.

### External debt indicators (selected from External DSA table)
- Baseline external debt (percent of GDP): 2017 = 35.6; 2018 = 30.6; 2019 = 32.2; 2020 = 31.5; 2021 = 30.5; 2022 = 28.4; 2023 = 26.8; 2024 = 24.9.
- External debt-to-exports ratio (percent): 2014 = 59.9; 2015 = 105.3; 2016 = 115.4; 2017 = 93.3; 2018 = 69.6; 2019 = 80.3; 2020 = 79.8; 2021 = 81.0; 2022 = 78.0; 2023 = 76.0; 2024 = 72.6.
- Gross external financing need (in billions of US dollars): 2014 = -4.5; 2015 = 13.0; 2016 = 15.4; 2017 = -2.4; 2018 = -14.0; 2019 = 14.0; 2020 = 14.3; 2021 = 16.4; 2022 = 20.1; 2023 = 21.2; 2024 = 24.9.

*Source: IMF staff calculations.*

### Annex V. Risk Assessment Matrix

### Annex V. Risk Assessment Matrix

### Potential External Shocks
- Large swings in oil prices
  - Likelihood/Time Horizon: Medium / Short to Medium Term
  - Expected Impact on Economy:
    - High. Iraq’s heavy reliance on oil implies that even modest price swings would undermine growth (via reduced public spending) or erode fiscal sustainability (higher deficits, or accumulation of arrears), and also put pressure on CBI reserves leading to increased vulnerabilities.
    - Price volatility also complicates economic management, and adversely affects investment in the energy sector.
  - Policy Measures to Dampen the Impact of Shocks:
    - Build fiscal space, diversify revenue away from oil, and improve the composition and efficiency of public spending.
    - Diversify the economy, encourage the emergence of the private sector and develop human capital.

- Spillovers from geopolitical tensions (including reimposition of U.S. sanctions on Iran)
  - Likelihood/Time Horizon: High / Short to Medium Term
  - Expected Impact on Economy:
    - High. Increased geopolitical tensions could undermine growth through confidence effects, as well as financial and energy channels.
    - Vulnerabilities in the financial sector arising from ML/TF risks are subject to greater scrutiny, implying increased risks to correspondent banking relationships (CBRs). Iraq’s access to U.S. dollar funding could also be affected.
    - If waivers on U.S. sanctions were not renewed, Iraq could face difficulties in sourcing and paying for electricity and gas imports, with a sharp adverse impact on domestic electricity supply.
  - Policy Measures to Dampen the Impact of Shocks:
    - Financial Sector: Continue implementing AML/CFT measures to avoid gray-listing and negative impact on CBR.
    - Energy: Existing initiatives to diversify energy sources, in particular by better exploiting domestic gas resources, would help lower Iraq’s vulnerability to disruptions in energy imports.

- Sharp tightening of global financial conditions
  - Likelihood/Time Horizon: Medium / Short to Medium Term
  - Expected Impact on Economy:
    - Medium. Notwithstanding Iraq’s limited exposure to global markets, tighter global conditions would exert upward pressure on debt service and risk premia, and could make it harder for Iraq to tap international financial markets (issuing new debt or rolling-over existing liabilities).
    - It could also lead to a tightening of domestic monetary conditions, given the U.S. dollar peg, with some impact on growth.
  - Policy Measures to Dampen the Impact of Shocks:
    - Implement fiscal consolidation to maintain debt sustainability.

Notes:
- Based on the Global Risk Assessment Matrix (February 2019). The relative likelihood is staff’s subjective assessment: “low” = probability below 10 percent, “medium” = between 10 and 30 percent, and “high” = between 30 and 50 percent.
- “Short term (ST)” indicates the risk could materialize within one year and “medium term (MT)” within three years.

### Potential Domestic Shocks
- Political instability and rising popular discontent amid poor policy implementation and political fragmentation
  - Likelihood/Time Horizon: High / Short to Medium Term
  - Expected Impact on Economy:
    - High. Political stability would be undermined by a resumption of popular protests or a spike in internal tensions (intra and inter-communal).
    - Such events would hinder the implementation of structural reforms, and compel the government to realign spending away from longer-term priorities towards items that buy social peace.
  - Policy Measures to Dampen the Impact of Shocks:
    - Reach a consensus on the priorities and scope of reforms.
    - Secure resources for capital spending and reconstruction (fiscal space) through fiscal consolidation.
    - Implement Public Financial Management and other governance-linked reforms and tighten anti-corruption measures.

- Resurgence of terrorism
  - Likelihood/Time Horizon: Low / Short Term
  - Expected Impact on Economy:
    - High. A renewed conflict with ISIS or other terrorist groups could threaten Iraq’s stability, result in further severe damage to infrastructure, undermine country risk perceptions, weaken the business environment and discourage foreign investment.
  - Policy Measures to Dampen the Impact of Shocks:
    - Build fiscal space to enable a reallocation of spending (including higher military spending if needed) while maintaining debt sustainability.

*International Monetary Fund — Annex V. Risk Assessment Matrix*

### 24.      E-governance efforts should be continued to simplify government procedures and

### 24.      E-governance efforts should be continued to simplify government procedures and

### E-governance and transparency in oil and gas
- Digitalizing registries and databases (such as for property and real estate transactions) would:
  - Improve access to information.
  - Facilitate cooperation among relevant authorities.
  - Facilitate the detection of corruption and financial crime.
- The Ministry of Oil (MoO) has developed a policy on the disclosure of oil and gas contracts, which remains to be implemented pending the adoption of the law on access to information.

### AML/CFT — legal and institutional developments
- Key developments and milestones:
  - The Middle East and North Africa Financial Action Task Force (MENAFATF) assessment in 2012 identified strategic deficiencies.
  - A new AML/CFT Law was adopted in 2015, bringing the legal framework into line with international standards, and establishing a national AML/CFT Council and the AML Bureau (the country’s financial intelligence unit).
  - The Central Bank of Iraq (CBI) has issued instructions to banks on customer due diligence, including a risk-based approach and measures for higher risk customers, such as politically exposed persons (PEPs).
  - The Council of Ministers established procedures to freeze terrorist assets in line with United Nations Security Council resolutions.
  - The FATF removed Iraq from its list of jurisdictions with strategic deficiencies in 2018.

### AML/CFT — prevailing risks and enforcement gaps
- Structural and operational vulnerabilities:
  - The economy is primarily cash-based; a large share of financial transactions occur through unlicensed exchange houses or other informal channels.
  - Proceeds of domestic corruption and terrorist-related flows pose significant vulnerabilities, including via cash smuggling.
  - Risks include shell companies linked to unlicensed exchange operators attempting to obtain dollars at FX auctions.
  - Individual agencies are aware of risks to varying degrees; authorities are beginning work on a national assessment of ML/TF risks.
- Enforcement and supervisory weaknesses:
  - Enforcement of money laundering offences and confiscation of criminal proceeds remains weak: few cases have been disseminated by the AML Bureau for investigation; prosecution and convictions are rarely secured; tracing and confiscating criminal proceeds is not actively pursued.
  - Supervision capacity constraints:
    - Some 15 staff in CBI’s supervisory departments are responsible for supervising over 70 banks and 2,000 licensed exchange houses.
    - Supervision of securities and insurance from an AML/CFT perspective has yet to begin.
  - Lack of oversight over the real estate sector increases attractiveness for laundering proceeds of corruption.
- Reporting and controls by financial institutions:
  - Financial institutions generally do not appear to be taking a risk-based approach; Iraqi banks seem to be applying AML/CFT measures primarily on a rules-based approach.
  - Reporting of suspicious transactions by banks remains low, with no reports so far relating to PEPs or real estate transactions.
- Cross-border cash controls:
  - By law, any movements in cash exceeding $10,000 must be declared.
  - The customs service has been instructed to treat amounts exceeding $20,000 as suspicious, report them to the AML Bureau, and, if necessary, seize suspicious amounts.
  - Funds can be seized only at a few checkpoints, and with strict limits on how long they can be held.

### AML/CFT — recommendations and priority actions
- National assessment and strategy:
  - Develop national AML/CFT priorities and risk mitigation strategies, based on a national assessment of ML/TF risks.
  - Systematically leverage AML/CFT tools to identify and recover proceeds of corruption.
- Preventive measures for financial institutions:
  - Require enhanced due diligence for PEPs and identification of beneficial owners.
  - Combine transaction monitoring and customer due diligence to detect proceeds of corruption.
- Information sharing and inter-agency cooperation:
  - Strengthen and formalize inter-agency cooperation and information sharing to focus AML/CFT measures on tackling proceeds of corruption.
  - Address decentralization of information: few databases in electronic form or linked together cause significant delays in transmission and access to information.
  - The AML Bureau and the Commission on Integrity (COI) should coordinate more frequently.
- Strengthening supervisory capacity at the CBI:
  - Continue efforts to strengthen supervisory capacity; the CBI is piloting a risk-based supervision model with a view to full implementation in 2020, with rollout first to banks and subsequently to other financial institutions.
  - Develop ML/TF risk profiles for banks and conduct AML/CFT inspections based on risk-profiling.
  - Finalize specific criteria to risk-profile banks and implement new on-site procedures focused on:
    - Assessing the risk understanding of reporting entities.
    - Assessing implementation of preventive measures (particularly customer due diligence).
    - Assessing reporting of suspicious transactions.
  - Remind banks of the importance of verifying beneficial ownership of companies seeking to obtain FX through auctions.
  - Note: these steps will have significant resource implications for the CBI.
- Informal sector and licensing:
  - Targeted efforts to reduce the size of the informal financial sector by bringing entities into the regulatory fold (i.e., licensed and supervised) or shutting them down through more effective enforcement actions.
- Governance and resourcing of the AML Bureau:
  - Strengthen governance and operational capabilities of the AML Bureau: clarify governance and reporting lines, and the process for selecting and dismissing staff (which could be clarified by a Council of Ministers decision).
  - Enhance the Bureau’s resources.
- Cash and bearer instrument monitoring:
  - Put systems in place to monitor the transportation of cash and bearer negotiable instruments.
  - Develop an inter-agency network comprising the Customs Authority, the CBI, and the AML Bureau to coordinate monitoring and enforcement.

### Annex VII — International Experience with Public Wage Bill Management
- Magnitude and drivers:
  - The public sector is the largest employer in Iraq with a rising wage bill, reaching 17.4 percent of GDP and accounting for over a third of central government budget in 2019.
  - Multiple factors drove the increase: political pressure to find jobs for young entrants to the labor market, weaknesses in public financial management, and lack of centralized control.
- Short-term versus structural approaches:
  - International experience: short-term wage and employment measures can provide temporary fiscal relief; structural and institutional reforms produce longer-lasting impacts.
  - Short-term measures used internationally include across-the-board wage freezes and attrition-based employment reductions.
  - Structural measures include reforming compensation, targeted employment reductions, public sector restructuring, and strengthening payroll management.
- Iraq’s experience and policy implications:
  - Iraq implemented ad-hoc measures under the SBA, which provided temporary relief or were reversed; consistent with international experience that such measures tend to unravel without structural reforms.
  - Structural compensation measures recommended:
    - Streamline allowances.
    - Adopt a unified wage scale.
    - Once administrative capacity is strengthened, better align wages with job requirements and performance levels.
    - Review the public sector wage premium to avoid creating skill shortages in the private sector.
  - Structural employment measures recommended:
    - Reduce public sector employment through separations or targeted retirements; use targeted employment reduction measures, e.g., separation incentives/packages.
- Institutional reforms to support wage bill management:
  - Strengthen payroll management:
    - Conduct a census of government employees.
    - Centralize human resource management.
    - Identify ghost workers and double-dippers.
    - Install technological solutions such as biometric systems.
    - Undertake a functional workforce review followed by possible downsizing or mergers of government units based on functions.
  - Centralize wage bill management:
    - Given low capacity, wage bill management and civil service reforms should become centralized under the Ministry of Finance or another central authority.
    - As capacity and governance improve, delegations could be made to line ministries and agencies under standards guided by central government.
    - A central human resource management unit should champion reforms and make decisions on hiring, promotion, and termination rules.
  - Improve data availability and intergovernmental information flows, including between the central government and the Kurdistan Regional Government, to allow comprehensive assessment and monitoring of the wage bill and public employment processes.

*Source: IRAQ — STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION AND PROPOSAL FOR POST-PROGRAM MONITORING—INFORMATIONAL ANNEX*

### Section 2, and currently maintains one multiple currency practice (MCP) subject to Fund approval

### Section 2, and currently maintains one multiple currency practice (MCP) subject to Fund approval

### Multiple Currency Practice (MCP) and Exchange Restrictions
- The MCP arises from the lack of a mechanism to ensure that the exchange rate at the CBI foreign exchange window and the market rates (retail exchange rates of commercial banks and exchange bureaus for the sale of foreign currency from sources other than the CBI foreign exchange window) do not deviate from each other by more than 2 percent.
- A previously identified exchange restriction arising from an Iraqi balance owed to Jordan under an inoperative bilateral payment agreement has been eliminated.
- Authorities have imposed a requirement that, to access the CBI foreign exchange window, a purchaser must have at least one bank account that has been opened for a minimum of six months. This requirement does not apply for access to foreign exchange from other sources, including purchases of foreign exchange from commercial banks’ own resources. Fund staff will monitor implementation to ascertain whether any undue burdens on access to foreign exchange for current international transactions emerge.

### Article IV Consultation and Resident Representative
- Upon approval of the 36-month Stand-By Arrangement on July 7, 2016, Iraq was placed on the 24-month consultation cycle.
- The last Article IV consultation was concluded on August 1, 2017, along with the Second Review under the Three-Year Stand-by Arrangement.
- The staff report (IMF Country Report No. 17/251) was published on August 9, 2017.
- Resident Representative: Mr. Kareem Ismail has been the resident representative for Iraq, based in Amman, since June 2018.

### Technical Assistance, 2014–19 (Departments and Selected Purposes)
- FAD (selected):
  - March 2014 — Budget classification (METAC)
  - June 2015 — Status of public financial management reforms (METAC)
  - November 2015 — Public financial management law, budget execution, and program-based budgeting
  - March 2016 — Public financial management law
  - February 2017 — Revenue administration: tax policy
  - February 2017 — PFM: commitment controls, cash management, treasury single account (METAC)
  - March 2017 — Advice on a modern LTO/ Tax administration
  - July 2018 — Follow-up on Treasury Single Account and Cash Flow Management Unit (METAC)
  - March 2019 — Budget Classification and Chart of Accounts (METAC)
- LEG (selected):
  - May 2015 — Desk review of the draft AML/CFT Law
  - June 2015 — Article VIII acceptance
  - December 2016 — Program TA in Central Bank Law
  - January 2018 — Review of the "AML/CFT Regulations for Dealers in Precious Metals and Stones"
- MCM (selected):
  - March 2014 — Assessment of banking needs (METAC)
  - April 2014 — Central bank reserve management
  - November 2015 — Banking supervision (METAC)
  - March 2017 — Banking supervision: upgrade CBI prudential regulations (METAC)
  - November 2018 — Training on dealing with weak banks (METAC)
  - November 2018 — Forecasting and Policy Analysis System (FPAS)
- STA (selected):
  - December 2014 — Balance of payments statistics (METAC)
  - March 2015 — Government finance statistics (ArabStat)
  - November 2015 — Consumer price index (METAC)
  - January 2016 — National accounts statistics (METAC)
  - April 2018 — External sector statistics (METAC)
  - December 2018 — Government Finance Statistics
  - December 2018 — FSI: Financial Soundness Indicators

### Relations with Other International Financial Institutions
- World Bank link referenced (URL omitted per overlay rules).

### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of May 31, 2019)
- General:
  - Data provision to the Fund has serious shortcomings that significantly hamper surveillance.
  - Central Statistics Organization (CSO) lacks adequate technical expertise and resources for a modern statistical system.
  - CSO and Central Bank of Iraq (CBI) face challenges with interagency data sharing and data collection responsibilities.
- National Accounts:
  - CSO compiles annual and quarterly GDP at current and constant (2007) prices from the production approach, and in current prices from the expenditure approach.
  - National accounts mainly follow the 1968 System of National Accounts (SNA).
  - Lack of regular, reliable and comprehensive source data for some industries and for GDP by expenditure undermines quality.
  - Volume estimates of GDP suffer shortcomings; delays in source data affect timeliness of annual estimates.
  - Reduced regional coverage of source data due to conflicts in four provinces has weakened GDP measures.
  - Ongoing METAC TA is assisting CSO to introduce 2012 as a new base/benchmark year and to implement core concepts of the 2008 SNA.
- Price Statistics:
  - CSO compiles and disseminates a monthly CPI for all-Iraq (including Kurdistan) and for each governorate; the index was rebased in 2016 based on the 2012 Household Social and Economic Survey.
  - CPI covers only urban areas in all governorates; insufficient resources to expand coverage.
  - Starting June 2014 official CPI data do not include the four conflict-affected governorates.
  - A quarterly PPI for manufacturing is compiled on a 2012 base.
  - An upcoming STA TA mission will advise on further improvements.
- Government Finance Statistics (GFS):
  - Despite security-related challenges, provision of fiscal data for program monitoring has been satisfactory, with infrequent submission delays and sketchy coverage of Kurdistan.
  - STA GFS TA missions proposed a work plan to improve frequency and timeliness of fiscal reporting and to migrate to GFSM 2014.
  - Iraq resumed reporting government finance statistics for publication in the Government Finance Statistics Yearbook (GFSY) but the time lag remains long.
- Monetary and Financial Statistics:
  - CBI reports monetary statistics for the central bank and other depository corporations (ODCs) for IFS using SRFs.
  - Quality and timeliness hampered by lack of staff capacity, particularly at commercial banks, and source data quality.
  - December 2017 TA updated SRF 1SR for the central bank to align broadly with the Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG).
  - Publication of SRF data in IFS has resumed, but SRF 2SR for ODCs requires improvement due to inadequate source-data breakdowns.
  - Some foreign-owned companies operating in Iraq are classified as nonresidents—deviation from residence concept standards.
  - Monetary statistics do not cover bank operations in Kurdistan Region due to data collection problems.
  - Iraq reports some Financial Access Survey (FAS) data, including two indicators adopted by the UN to monitor Target 8.10.1 of the SDGs; reporting on use of financial services can be improved.
- Financial Sector Surveillance:
  - Following April 2016 FSI mission, CBI compiled the 12 core FSIs and 7 of the 13 additional FSIs for state banks and a similar set for private banks quarterly.
  - December 2018 FSI mission assisted in compiling sectoral FSIs covering the entire banking sector and prepared metadata; dissemination awaits CBI approval.
- External Sector Statistics:
  - CBI compiles and reports annual and quarterly balance of payments data in BPM6 format and disseminates an annual IIP statement.
  - April 2018 ESS TA mission occurred; net errors and omissions (NEOs) remain high and persistently negative, suggesting capital flight.
  - STA will continue assisting CBI to address probable sources of large NEOs: recording of oil sector transactions, cross-border trade with Kurdistan, arrears, and in-kind payments for external borrowing.
  - International reserves compiled consistent with international methodologies and published in IFS since end-2006.
- External Trade Statistics:
  - External trade data have serious problems of timeliness and poor quality due to absence of reliable customs data.
  - A new customs form for imports exists but is not being used at borders because of security and lack of Customs Department resources.
  - Compilation hampered by lack of interinstitutional coordination among key data providers.
  - Coverage of private sector imports constrained; only goods paid through the Iraqi banking system are captured—imports under external payment arrangements (e.g., direct investment projects by international oil companies) are not recorded.
  - Coverage excludes Kurdistan; no estimates for smuggling made.
  - Non-oil exports amount to the equivalent of 3–5 percent of total exports and are derived from customs export form information.
  - Transactions related to oil exploration, extraction, and development payments to international oil companies have recently been included in the balance of payments.
- Data Standards and Quality:
  - Iraq has participated in e-GDDS since 2009 but has not launched a National Summary Data Page.
  - Metadata for key macroeconomic indicators updated in early 2016 are available on the IMF’s Dissemination Standards Bulletin Board.

### Iraq: Table of Common Indicators Required for Surveillance (As of May 16, 2019) — Selected entries
- Exchange rates: Date of Latest Observation 01/2019; Date Received 03/07/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation 12/2018; Date Received 03/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4–6-week lag.
- Reserve/Base money: 12/2018; 03/2019; M; M; M, 4–6-week lag.
- Broad money: 12/2018; 03/2019; M; M; M, 4–6-week lag.
- Central bank balance sheet: 12/2018; 03/2019; M; M; M, 4–6-week lag.
- Consolidated balance sheet of the banking system: 12/2018; 03/2019; M; M; Q, 4–6-week lag.
- Consumer price index: 03/2019; 04/2019; M; M; M, 3-week lag.
- External current account balance: Q4/2018; 04/2019; Q; Q; Q.
- Exports and imports of goods and services: Q4/2018; 04/2019; Q; Q; Q.
- GDP/GNP: 03/2016; 04/2016; Q; Q; Q.
- International investment position: 12/2014; 12/06/2016; Q; Q; Q.

### Statement by Mr. Hazem Beblawi and Ms. Maya Choueiri — Recent Developments (July 19, 2019)
- On behalf of the Iraqi authorities, they thanked staff for constructive engagement and capacity development support.
- Recent political and economic improvements:
  - Formation of a new government, recapture of territories previously held by ISIS, and gradual recovery in oil prices.
  - Millions displaced by war returned home; trade agreement negotiations with neighboring countries have progressed.
  - Hundreds of thousands remain internally displaced; reconstruction efforts delayed by limited absorptive and implementation capacity and slow donor disbursements.
- Economic recovery and key indicators:
  - Economy gradually recovering after deep strains of the last four years.
  - Growth expected to be robust in 2019, reversing contraction of the past two years.
  - Non-oil economy projected to grow at more than 5 percent due to better rainfall, rebound in electricity production, and fiscal stimulus.
  - Inflation remained low in 2018.
  - Fiscal balance turned to a large surplus of about 8 percent.
  - International reserves increased to US$65 billion.
  - Domestic debt reduction included unwinding about US$1 billion of indirect monetary financing.
  - Growth and positive fiscal balance contributed to reducing public debt-to-GDP by about ten percentage points in 2018.
  - Government adopted a framework to control issuance of guarantees, in cooperation with the Fund.
  - Current account surplus about 7 percent of GDP.
  - Spread between official and market foreign exchange rates narrowed to below 2 percent in recent months.
- Authorities’ priorities:
  - Maintain economic stability while ensuring durable peace and inclusive growth.
  - Rebuild infrastructure, address conflict legacy, provide services and jobs—especially for youth—and modernize the economy.
  - Government launched Recovery, Reconstruction, and Development Program and National Development Plan.
  - International Conference for the Reconstruction of Iraq (Kuwait, February 2018) pledged US$30 billion in loans and guarantees; disbursements have been slow.

*IMF staff compilation and mission material as reflected in the provided content unit.*

### 5. The authorities are faced with pressures to increase employment in the public sector

### 1irqea2019001 - 5. The authorities are faced with pressures to increase employment in the public sector

### Public employment pressures and political economy
- Authorities face pressures to increase employment in the public sector to:
  - address unemployment;
  - achieve justice for some groups affected by past fiscal consolidation efforts including militia forces that helped defeat ISIS;
  - meet legal requirements to absorb graduates of certain specializations.
- Tightening the fiscal stance in the short run is politically and socially difficult.
- Parliament recently adopted a new civil service law as part of a comprehensive review of public sector functions and size.

### Fiscal-policy framework and public financial management reforms
- Authorities concur with staff on adoption of a risk- and rules-based approach to fiscal policy to manage oil revenue more effectively.
- Parliament adopted a new General Financial Management Law in May 2019 that:
  - defines general government for the first time;
  - establishes the need for a medium-term fiscal framework;
  - enshrines fiscal transparency requirements;
  - limits parliament’s capacity to amend the budget and the scope for spending to be authorized outside budget processes.
- PFM reforms and actions:
  - adopted tight procedures for the approval of government guarantees;
  - kept arrears under control;
  - enacted a new PFM law in May 2019;
  - designing and implementing a commitment control system for budget execution to avoid the emergence of new arrears;
  - budget transfers to the Kurdistan Regional Government were progressively restored during 2018 and have been included in the 2019 budget;
  - Ministry of Finance plans to implement an Integrated Financial Management Information System with World Bank support, contingent on adoption of an updated budget classification and a chart of accounts;
  - work in these areas is progressing with Fund technical assistance.

### Electricity sector reforms and outcomes
- Reform of the electricity sector is a high priority; emphasis on increasing generation capacity to address power outages.
- Outcome reported: increased electricity generation by about 25 percent in mid-May relative to the year before.
- Work to settle electricity-related cross-liabilities is ongoing.
- Authorities acknowledge important remaining challenges in the electricity sector (as outlined in paragraph 30 of the staff report).

### Monetary policy, exchange rate, and banking-sector reforms
- Authorities remain committed to the peg to the U.S. dollar as a key nominal anchor.
- Banking sector stability measures:
  - two largest state-owned banks, Rasheed and Rafidain, are being restructured;
  - progress in procuring suppliers for core banking systems and segregating legacy assets and liabilities into “bridge branches”;
  - Bureau of Supreme Audit finalizing accounts for 2014 and subsequent years;
  - once core banking systems are fully operational, the authorities intend to have the two banks audited to international standards to assess capital needs accurately.
- Central Bank of Iraq (CBI) policy and supervisory actions:
  - strengthening regulatory framework and prudential regulations to align with Basel II Committee on Banking Supervision standards and guidelines;
  - supervisory guidelines on bank internal audit and compliance functions were prepared in the fall with Fund technical assistance;
  - work progressing on early identification of bank risks, early intervention, corrective actions and enforcement, banking crisis management, supervisor’s role, and techniques for liquidating unviable banks;
  - CBI intends to develop a deposit insurance scheme to help level the playing field across the banking sector;
  - efforts to strengthen payment systems and encourage deposits, including public salary payments directly into bank accounts.

### AML/CFT progress and CBI safeguards
- Financial Action Task Force (FATF) action:
  - In June 2018, FATF welcomed Iraq’s significant progress in improving its AML/CFT regime and noted that “Iraq has established the legal and regulatory framework to meet the commitments in its action plan regarding the strategic deficiencies that the FATF identified in October 2013.”
  - FATF considered that Iraq was no longer subject to the FATF’s monitoring process under its ongoing global AML/CFT compliance process.
  - Authorities will continue to work to strengthen the AML/CFT framework and view progress as helpful in addressing transfer of illicit gains.
- CBI safeguards implementation:
  - good progress on recommendations of the 2016 safeguards assessment of the CBI;
  - amendments to the Law on the Central Bank of Iraq to strengthen CBI governance have been enacted;
  - revised audit committee charter now prohibits CBI executive representation on the committee;
  - work ongoing to strengthen internal audit and financial reporting capacity.

### Anti-corruption measures
- Government prioritizes anti-corruption efforts focused on strengthening public institutions.
- Institutional developments:
  - new High Council on Combatting Corruption, chaired by the Prime Minister, established in February 2019;
  - Commission on Integrity established in 2011 with tasks of corruption prevention and enforcement and has investigated several high-profile corruption cases.
- Legal and administrative measures:
  - legislation to criminalize illicit enrichment, trading in influence, embezzlement, and all forms of bribery has been drafted;
  - Iraq has developed a system of asset declarations and a large number of public officials are currently required to disclose their assets.
- Authorities agree with staff that streamlining the anti-corruption framework would make it more effective and less onerous for economic activity.

### Conclusion and Fund engagement
- Despite improved security conditions and oil prices, Iraq faces the serious challenge of maintaining economic stability while ensuring durable peace and inclusive growth.
- Authorities value the Fund’s policy advice and would welcome a Post-Program Monitoring engagement.
- Continued Fund capacity development is considered essential.
- Authorities have called on the Fund to resume visits to Baghdad and welcome the recent lowering of the Fund’s security rating for Baghdad to a medium level of residual risk.

*Source: 1irqea2019001 - 5. The authorities are faced with pressures to increase employment in the public sector — https://www.imf.org/-/media/files/publications/cr/2019/1irqea2019001.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1irqea2019001.pdf_