## 1irqea2021002

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### Context, immediate shock, and pre-crisis vulnerabilities
- Iraq entered the COVID-19 crisis with deep socio-economic fragilities hardened by wars, political fragmentation, systemic and severe corruption, and unsupportive policies.
- Oil revenues account for over 90 percent of external and fiscal proceeds.
- Health system capacity-constrained; pandemic infections accelerated during the summer but daily increases began to decline since September.
- Political paralysis (six months before May 2020) and plans for early parliamentary elections in mid-2021 raised risks of social unrest, geopolitical tensions, and security incidents.
- Long-standing vulnerabilities (pre-crisis):
  - Civil service employs nearly 3.3 million people or 8.5 percent of the population.
  - Government payroll swelled to an estimated 24 percent of GDP in 2020.
  - Unemployment among youth rose from 16 to 26 percent during 2012–17.
  - Fiscal policy historically procyclical; tightening achieved at expense of reconstruction investment and social assistance while protecting the civil service.
  - Large state-owned banks (SOBs) accumulated public sector exposures that are consistently rolled over and often not serviced.
  - Social assistance fragmented across multiple schemes, some poorly targeted and overly generous.
  - Under-investment in critical infrastructure and weak institutions have limited basic service provision.

### Economic fallout from COVID-19 (2020) — activity, external sector, fiscal outcomes
- Activity and poverty:
  - Non-oil real GDP expected to have fallen by 8 percent in 2020.
  - Overall real GDP likely declined by 11 percent in 2020.
  - Inflation was low at 1 percent in 2020.
  - A World Bank and UNICEF study estimates 4.5 million Iraqis (12 percent of population) could be pushed into poverty, potentially increasing poverty rate to 32 percent.
- External sector and reserves:
  - Oil production cut by about 13 percent owing to OPEC+ commitments in 2020.
  - Oil exports declined by 40 percent in 2020.
  - External current account swung from a surplus of 0.5 percent of GDP in 2019 to a deficit of 15.2 percent of GDP in 2020.
  - Gross international reserves declined by $14 billion to $54 billion by end-2020; reserves remained adequate at 178 percent of the ARA metric or 150 percent of the ARA metric adjusted for potential oil price volatility.
  - Parallel foreign exchange market spread averaged 6–7 percent until December.
- Fiscal balance and arrears:
  - Payroll and pension expenditures grew by 21 and 28 percent, respectively, in 2020.
  - Budget deficit about 20 percent of GDP in 2020 (after a small surplus in 2019).
  - Additional domestic and external arrears accumulated over 6 percent of GDP, bringing total stock of arrears to 8.2 percent of GDP.
  - Government financed most of the remaining deficit by borrowing from the central bank equal to 13 percent of GDP.
  - Government debt rose from 47 to 83 percent of GDP over the course of 2020 (about 9 percentage points of this increase reflects revaluation of external debt with the new exchange rate).

### Policy response, 2021 budget proposals, and estimated fiscal savings
- Authorities’ reforms and announcements:
  - October 2020: economic reform plan (“White Paper”).
  - December 2020: package including fiscal consolidation measures and social safety net strengthening.
- Key proposed fiscal consolidation measures (draft 2021 budget):
  - Nominal freeze of government wages, allowances, and pensions; hiring freeze.
  - Removal of exemption of government allowances from payroll tax.
  - More-than-threefold increase in domestic price of crude oil to reduce implicit fuel subsidy.
  - Increase in excise and sales taxes (alcohol, tobacco, car sales, shopping malls).
  - Personal income tax measures: progressive payroll tax increase on wages, allowances, and pensions; 10 percent flat tax on retirement benefits and end-year service benefits.
- Social spending adjustments:
  - Proposed increase of ID 2.5 trillion (79 percent) in the budget for targeted cash transfers to the vulnerable.
  - Allocated ID 725 billion (equivalent to $0.5 billion) for additional COVID-19 related health spending.
- Estimated fiscal savings from proposed 2021 measures (in billion of Iraqi dinars and percent of 2021 GDP):
  - Progressive Payroll Tax: 3,206 — 1.3
  - Reduction of oil-price subsidy: 1,865 — 0.7
  - Tax on pensions, retirement and end-year service benefits: 1,021 — 0.4
  - New excise and sale tax (alcohol, tobacco, vehicle sales): 493 — 0.2
  - Additional Revenue Mobilization 2/: 5,705 — 2.2
  - Spending measures:
    - Nominal Freeze of Wages, Allowances, Pension and a Hiring Freeze: 1,040 — 0.4
    - COVID-19 health-related spending: (725) — (0.3)
    - Expansion of cash transfers to cover all eligible poor households: (2,455) — (1.0)
  - Total Savings: 10,150 — 4.0
  - Note: Fiscal savings relative to "no-reform" scenario. Additional revenue mobilization includes (i) a new tax on shopping malls and major markets; (ii) increased fee collections; (iii) sales of state-owned buildings and lands.

### Exchange rate, monetary actions, and social protection
- Exchange rate policy:
  - Central Bank of Iraq (CBI) announced a 22.7 percent devaluation of the ID/USD exchange rate to narrow external imbalance and reduce need for monetary financing.
  - Following devaluation, parallel market spread initially turned negative but later began to shrink as market rate converged to new peg.
- CBI monetary measures:
  - Lowered reserve requirement and extended repayments on directed lending initiatives.
  - Reduced reserve requirement from 15 percent to 13 percent.
- Social protection:
  - Targeted cash transfer system currently supports about 1.4 million Iraqi households but excludes over half a million additional households below the poverty line.
  - Draft 2021 budget increases allocation by ID 2.5 trillion (79 percent) to expand coverage to all eligible households (amounting to over 20 percent of population) and raise assistance to shield the vulnerable from expected inflation increases.
  - Staff recommendations: legal changes for automatic inflation indexation of cash transfer benefits; regular updates of population registry and targeting criteria; limit PDS eligibility to those in the social security database to free fiscal space.

### Financial sector stability and fragilities
- Banking sector developments:
  - Credit to the private sector increased driven by lending to households by about 15 percent in the first three quarters of 2020 (year-on-year).
  - Reported non-performing loans (NPLs) at SOBs increased to 12 percent as of Q2 2020 from 10 percent at end-2019.
  - SOBs account for over 80 percent of the banking system and likely remain undercapitalized, burdened by legacy assets and political interference.
  - SOBs are exempted from supervisory scrutiny by the CBI; many lack core banking systems and have incomplete, unaudited financial reports.
- Staff recommendations:
  - Urgent international audit of large SOBs to assess balance sheets and inform restructuring options.
  - Enhance CBI supervision and engage government on restructuring.

### Outlook, projections, and fiscal trajectory under baseline
- Macroeconomic projections:
  - Inflation expected to reach 11.5 percent at end-2021 followed by a gradual reduction to 2 percent over the medium term.
  - Real GDP projected to grow at an average rate of 3.5 percent over the medium term and reach its pre-crisis level by 2024.
  - Oil production expected to remain constrained by OPEC+ commitments, with gradual increases over the medium term.
- Fiscal trajectory (assuming adoption of proposed budget and sustained reforms):
  - Fiscal revenues in 2021 expected to increase by 10.8 percent of GDP — of which 5.4 percent of GDP attributed to revaluation of oil revenues at the new exchange rate.
  - Budget deficit projected to decline to 16 percent of GDP in 2021.
  - In the medium term, budget deficit projected to gradually narrow to single digits by 2026.
  - Government debt-to-GDP ratio projected to peak at above 90 percent in 2023 before gradually declining thereafter.
  - Debt composition in 2020: legacy debt and borrowing from the central bank and SOBs account for over 70 percent of the debt stock.
  - Government debt assessed as sustainable, although not with high probability — conditional on continued implementation of fiscal reforms.

### External outlook and reserves (Annex I highlights)
- Current account and reserves:
  - External current account deficit expected to shrink from 15.2 percent of GDP in 2020 to 2 percent of GDP in the medium term under baseline.
  - Foreign exchange reserves projected to decline further, reaching $25.6 billion in the medium term, equivalent to 64 percent of the ARA metric or 3.5 months of imports (35 percent of the ARA metric adjusted for potential oil price volatility).
  - Assumption: "This assumes a passthrough of 50 percent to prices of 85 percent of the consumption basket, over a period of nine months."
- Model-based CA assessment (2020):
  - EBA-lite cyclically adjusted CA gap: -4.9 percent of GDP.
  - Investment-needs model CA gap: -2.7 percent of GDP.
  - Consumption-allocation model CA gap: -8.6 percent of GDP.

### Risks, downside scenarios, and stress tests
- Key risks:
  - Implementation risk: delays or reversals in implementing fiscal and structural reforms.
  - Health risks: new COVID-19 waves and cross-border spikes.
  - Social and political risks: elevated risk of social unrest and political instability.
  - Financial risks: SOBs’ weak solvency and under-reporting of NPLs; potential for further reserve pressures if external conditions worsen.
- Scenario and stress-test findings:
  - Downside scenario of non-implementation of planned fiscal reforms: government debt would assume an unsustainable trajectory and central bank reserves would be depleted in the medium term.
  - Stress tests considered: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock.
  - DSA highlights:
    - Nominal gross public debt projections (percent of GDP): 2018: 51.6; 2019: 50.6; 2020: 48.5; 2021: 83.0; 2022: 89.7; 2023: 91.6; 2024: 91.3; 2025: 89.9.
    - Gross external financing need (in billions of US dollars): 2020: 29.8; 2021: 11.2; 2022: 11.0; 2023: 10.6; 2024: 9.3; 2025: 9.0.
    - Stress-test example (Combined Shock): effective interest rate path includes values such as 2.2; 2.4; 6.2; 8.2; 9.1; 9.7 (figure entries).

### Policy recommendations — stabilizing the economy and protecting the vulnerable
- Health crisis response:
  - Prepare a comprehensive health crisis response plan with detailed costing and resource mobilization for vaccine acquisition and distribution.
  - Establish a dedicated COVID-19 fund combining budgetary and donor resources; form a Steering Committee with key ministries and international partners (WHO, UNDP, UNICEF, World Bank); delegate procurement to specialized UN agencies.
  - Authorities drafted a health plan and allocated $0.5 billion in the draft 2021 budget.
- Fiscal consolidation and safeguards:
  - Frontload effort to reverse unsustainable expansion of the wage bill; reduce inefficient oil and electricity subsidies; raise non-oil revenues.
  - Maintain fiscal restraint, limit wage indexation in 2022 to no more than half of inflation, implement attrition-based reduction in government workforce by at least 2 percent per year over the medium term.
  - Contingency measures: extend nominal freeze, cut allowances of highest-paid civil servants, further reduce energy subsidies, raise sales and excise taxes.
  - Institutionalize reforms: contain wage bill via law or amendments to civil service law; reflect key revenue measures in permanent tax legislation.
- Exchange rate and monetary-fiscal interaction:
  - Support for exchange rate devaluation combined with strong fiscal framework to ensure credibility and minimize monetary financing.
  - Recommend explicit limits on future central bank financing and repayment terms via an MoU between the CBI and Ministry of Finance.
- Protecting vulnerable households:
  - Legal changes for automatic inflation indexation of cash transfer benefits.
  - Regular updates to population registry and targeting criteria.
  - Limit PDS eligibility to those in social security database to free fiscal space for targeted assistance.
- Monetary and financial stability actions:
  - Raise reserve requirement, limit increases in administered prices, restrict borrowing by SOEs.
  - Contingency planning, maintain liquidity provision to banks, clear public communication, enhanced monitoring of banks’ liquidity and balance sheets, and early corrective measures.
- Structural and sectoral reforms:
  - Civil service reform: establish effective IT system and centralized HR framework; comprehensive functional review to eliminate "ghost workers"; remuneration reform and legal changes to bind hiring/compensation.
  - Pension reform: address unsustainable statutory retirement age of 50 and minimum full-career pension after 15 years of service; withdraw extension of public pension benefits to private sector until comprehensive analysis completed.
  - Electricity sector: coherent sector reform strategy; strengthen governance; improve collection through smart metering and reduce theft; gradual tariff adjustment to increase cost recovery; enhance gas capture and reduce flaring; prioritize efficiency-enhancing investments and calibrate investment plans to available resources.

### Fiscal and PFM priorities, governance, and AML/CFT
- Fiscal reform and PFM:
  - Comprehensive tax reform needed to improve tax and customs administration and develop progressive effective tax policy.
  - Priority PFM actions: set up a Treasury Single Account (TSA); accelerate implementation of IFMIS.
  - Stricter control and accountability over unspent public investment funds; more transparent public investment management system.
- Fiscal risks and federal framework:
  - Implement enhanced framework for vetting and issuing government guarantees.
  - Agree a permanent fiscal federalism framework between Federal and Kurdistan Regional Governments with clear revenue and risk-sharing arrangements.
- Governance and anti-corruption:
  - Strengthen understanding of corruption risks; simplify, digitalize and increase transparency of public services, especially public procurement; publish key information on awarded contracts including beneficial ownership; deploy resources for risk-based inspections and ex-post audits; align anti-corruption framework with international standards.
- AML/CFT and central bank supervision:
  - CBI needs to strengthen risk-based AML/CFT supervision; enhance due diligence, identification of beneficial owners and politically exposed persons; implement targeted financial sanctions more effectively to maintain correspondent banking relationships.

### Sectoral focus: electricity and public wage bill (Annex highlights)
- Public wage bill:
  - Wage bill was 24 percent of GDP in 2020.
  - Rapid expansion in 2020 through large-scale hiring of contractors and daily workers despite fiscal constraints.
  - Official statistics report about 365,000 new hires between 2017 and 2020, bringing total to 3.3 million in 2021 (excludes contractors and some local employees); anecdotal reports place civil service closer to 4 million.
  - Combined with new hiring commitments expected in 2021, a 33 percent nominal wage bill growth between 2019 and 2021 is expected.
  - Government’s future ability to absorb new job market entrants (estimated at 450,000 annually) is extremely limited.
- Electricity sector fiscal magnitude (2019 figures preserved exactly):
  - Revenue Due (A): 0.6 (in percent of GDP) — 1.5 (in trillions of Iraqi dinars)
  - (-) Non-collection losses: 0.2 — 0.6
  - Actual Revenue Collected (B): 0.3 — 0.9
  - Total Unsubsidized cost (C): 5.8 — 15.3
    - o/w Implicit fuel subsidy through MoO: 2.4 — 6.4
  - Subsidized cost: 3.4 — 9.0
    - o/w fuel: 2.0 — 5.2
    - o/w wages: 0.5 — 1.4
  - Deficit (B-D): (3.0) — (8.0)
  - Deficit including implicit subsidy (B-C): (5.4) — (14.4)
  - MoE plans to add 8300 MW of generation capacity during 2021–023; outstanding stock of government-guaranteed loans at end-2019: $5.1 billion.
  - Hiring of reportedly 60,000 employees in 2020 will add ID 0.6 trillion to the sector’s annual wage bill going forward.
- Electricity reform priorities:
  - Enhance revenue collection (smart metering); gradual tariff adjustment; prioritize maintenance and efficiency-improving investments; enhance gas capture and reduce flaring; strengthen governance and regulatory framework; promote private participation.

### Data, technical assistance, and IMF relations
- Data shortcomings:
  - Data provision to the Fund has serious shortcomings that hamper surveillance.
  - CSO lacks adequate technical expertise and resources; national accounts mainly follow SNA 1968 and suffer from limited source data and coverage.
  - CPI rebased to 2012; new survey planned for June 2021; official CPI data exclude four conflict-affected governorates since June 2014.
  - External trade data and customs data face serious timeliness and quality problems; coverage excludes Kurdistan; smuggling not estimated.
  - NE0s remain high and persistently negative, suggesting capital flight.
- IMF technical assistance (2015–20) spans FAD, LEG, MCM, STA with multiple missions and workshops on PFM, AML/CFT, banking supervision, reserve management, statistics, and IFMIS.
- Fund relations and macro-financial data as of December 31, 2020:
  - Quota: 1,663.80 (SDR Million) — 100.00 (Percent of Quota)
  - Stand-By Arrangements outstanding: 909.30 (SDR Million) — 54.65 (Percent of Quota)
  - Effective December 20, 2020, the official exchange rate set at ID 1,460 per U.S. dollar including the Central Bank commission (ID 1,450 plus ID 10 (fees)). Previously on May 24, 2018: ID 1,190 per U.S. dollar including commission (ID 1,182 plus ID 8 (fees)).

### Conclusion — main challenge and engagement
- Main challenge: maintaining economic stability while ensuring durable social stability, peace and inclusive growth.
- IMF engagement: authorities expressed appreciation for Fund support and capacity development; authorities requested emergency financing under the Rapid Financing Instrument and expressed interest in a follow-up Extended Fund Facility.
- Proposed next Article IV consultation: standard 12-month cycle.

*International Monetary Fund — Chapter: 1. Iraq’s Social Welfare System (excerpts and key findings).*

### 1. Iraq’s Social Welfare System  __________________________________________________________________ 14

### 1. Iraq’s Social Welfare System

### Context and immediate shock
- Iraq entered the COVID-19 crisis with deep socio-economic fragilities hardened by wars, political fragmentation, systemic and severe corruption, and unsupportive policies.
- Oil revenues account for over 90 percent of external and fiscal proceeds.
- The health system is capacity-constrained; pandemic infections accelerated during the summer but daily increases began to decline since September.
- Political paralysis (six months before May 2020) and plans for early parliamentary elections in mid-2021 weighed on reform momentum and raised risks of social unrest, geopolitical tensions, and security incidents.

### Long-standing vulnerabilities (pre-crisis)
- Civil service and social structure:
  - Civil service employs nearly 3.3 million people or 8.5 percent of the population.
  - Government payroll swelled to an estimated 24 percent of GDP in 2020.
  - Unemployment among youth rose from 16 to 26 percent during 2012–17.
- Fiscal and financial distortions:
  - Fiscal policy historically procyclical; fiscal tightening often achieved at expense of reconstruction investment and social assistance while protecting the civil service.
  - Large state-owned banks’ (SOBs) accumulation of public sector exposures that are consistently rolled over and often not serviced, undermining bank soundness and crowding out private sector credit.
  - Non-oil private sector constrained by limited access to credit, inadequate infrastructure, and labor market disadvantages.
- Public service delivery and social assistance:
  - Under-investment in critical infrastructure and weak institutions have limited basic service provision.
  - Social assistance fragmented across multiple schemes, some poorly targeted and overly generous.

### Economic fallout from COVID-19 (2020) and immediate impacts
- Activity and poverty:
  - Non-oil real GDP expected to have fallen by 8 percent in 2020.
  - Overall real GDP likely declined by 11 percent in 2020.
  - Inflation was low at 1 percent in 2020.
  - A World Bank and UNICEF study estimates 4.5 million Iraqis (12 percent of population) could be pushed into poverty, potentially increasing poverty rate to 32 percent.
- External sector and reserves:
  - Oil production cut by about 13 percent owing to OPEC+ commitments in 2020.
  - Oil exports declined by 40 percent in 2020.
  - External current account swung from a surplus of 0.5 percent of GDP in 2019 to a deficit of 15.2 percent of GDP in 2020.
  - Gross international reserves declined by $14 billion to $54 billion by end-2020; reserves remained adequate at 178 percent of the ARA metric or 150 percent of the ARA metric adjusted for potential oil price volatility.
  - Parallel foreign exchange market spread averaged 6–7 percent until December (post-devaluation trends noted separately).
- Fiscal balance and arrears:
  - Payroll and pension expenditures grew by 21 and 28 percent, respectively, in 2020.
  - Budget deficit about 20 percent of GDP in 2020 (after a small surplus in 2019).
  - Additional domestic and external arrears accumulated over 6 percent of GDP, bringing total stock of arrears to 8.2 percent of GDP.
  - Government financed most of the remaining deficit by borrowing from the central bank equal to 13 percent of GDP.
  - Government debt rose from 47 to 83 percent of GDP over the course of 2020 (about 9 percentage points of this increase reflects revaluation of external debt with the new exchange rate).

### Policy response and measures announced
- Authorities’ reforms and 2021 budget proposals:
  - October 2020: authorities unveiled an economic reform plan (“White Paper”).
  - December 2020: authorities announced a package including fiscal consolidation measures and social safety net strengthening.
  - Proposed fiscal consolidation measures in the draft 2021 budget include:
    - Nominal freeze of government wages, allowances, and pensions; hiring freeze.
    - Removal of exemption of government allowances from payroll tax.
    - More-than-threefold increase in domestic price of crude oil to reduce implicit fuel subsidy.
    - Increase in excise and sales taxes (alcohol, tobacco, car sales, shopping malls).
    - Personal income tax measures: progressive payroll tax increase on wages, allowances, and pensions; 10 percent flat tax on retirement benefits and end-year service benefits.
  - Social spending adjustments:
    - Proposed increase of ID 2.5 trillion (79 percent) in the budget for targeted cash transfers to the vulnerable.
    - Allocated ID 725 billion (equivalent to $0.5 billion) for additional COVID-19 related health spending.
- Estimated fiscal savings from proposed 2021 measures (in billion of Iraqi dinars and percent of 2021 GDP):
  - Progressive Payroll Tax: 3,206 — 1.3
  - Reduction of oil-price subsidy: 1,865 — 0.7
  - Tax on pensions, retirement and end-year service benefits: 1,021 — 0.4
  - New excise and sale tax (alcohol, tobacco, vehicle sales): 493 — 0.2
  - Additional Revenue Mobilization 2/: 5,705 — 2.2
  - Spending measures:
    - Nominal Freeze of Wages, Allowances, Pension and a Hiring Freeze: 1,040 — 0.4
    - COVID-19 health-related spending: (725) — (0.3)
    - Expansion of cash transfers to cover all eligible poor households: (2,455) — (1.0)
  - Total Savings: 10,150 — 4.0
  - 1/ Fiscal savings relative to "no-reform" scenario. 2/ Additional revenue mobilization includes (i) a new tax on shopping malls and major markets; (ii) increased fee collections; (iii) sales of state-owned buildings and lands.
- Exchange rate policy:
  - Central Bank of Iraq (CBI) announced a 22.7 percent devaluation of the ID/USD exchange rate to narrow external imbalance and reduce need for monetary financing.
  - Following devaluation, parallel market spread initially turned negative but later began to shrink as market rate converged to new peg.
- Social protection:
  - Government proposed expansion of targeted cash transfers and allocated funding to COVID-19 health spending; implementation and coverage details remain critical.

### Financial sector stability and fragilities
- CBI measures:
  - CBI lowered reserve requirement and extended repayments on directed lending initiatives to provide liquidity support.
- Credit and bank soundness:
  - Credit to the private sector increased driven by lending to households by about 15 percent in the first three quarters of 2020 (year-on-year).
  - Reported non-performing loans (NPLs) at SOBs increased to 12 percent as of Q2 2020 from 10 percent at end-2019.
  - SOBs account for over 80 percent of the banking system and likely remain undercapitalized, burdened by legacy assets and political interference.
  - SOBs are exempted from supervisory scrutiny by the CBI; many lack core banking systems and have incomplete, unaudited financial reports.

### Outlook and risks
- Macroeconomic projections:
  - Inflation expected to reach 11.5 percent at end-2021 followed by a gradual reduction to 2 percent over the medium term.
  - Real GDP projected to grow at an average rate of 3.5 percent over the medium term and reach its pre-crisis level by 2024.
  - Oil production expected to remain constrained by OPEC+ commitments, with assumed gradual increases over the medium term.
- Fiscal trajectory under baseline (assuming adoption of proposed budget and sustained reforms in White Paper):
  - Fiscal revenues in 2021 expected to increase by 10.8 percent of GDP — of which 5.4 percent of GDP attributed to revaluation of oil revenues at the new exchange rate.
  - These revenue gains are projected to more than offset additional wage and pension commitments accumulated in 2020, bringing the budget deficit down to 16 percent of GDP in 2021.
  - In the medium term, the budget deficit is projected to gradually narrow to single digits by 2026.
  - Government debt-to-GDP ratio projected to peak at above 90 percent in 2023 before gradually declining thereafter.
  - Debt composition in 2020: legacy debt and borrowing from the central bank and SOBs account for over 70 percent of the debt stock.
  - Government debt assessed as sustainable, although not with high probability — this assessment is conditional on continued implementation of fiscal reforms.
- Key risks:
  - Implementation risk: delays or reversals in implementing fiscal and structural reforms would worsen sustainability.
  - Health risks: risk of new COVID-19 waves and cross-border spikes could derail recovery.
  - Social and political risks: elevated risk of social unrest and political instability can constrain reforms and fiscal consolidation.
  - Financial risks: SOBs’ weak solvency and under-reporting of NPLs, and potential for further reserve pressures if external conditions worsen.

*International Monetary Fund — Chapter: 1. Iraq’s Social Welfare System (excerpts and key findings).*

### 11. The current account deficit would gradually narrow, while foreign exchange reserves

### 11. The current account deficit would gradually narrow, while foreign exchange reserves

### External outlook and reserves
- The external current account deficit is expected shrink from 15.2 percent of GDP in 2020 to 2 percent of GDP in the medium term, helped by the devaluation, recovering global oil demand, and fiscal reforms.
- Foreign exchange reserves are projected to decline further, reaching $25.6 billion in the medium term, equivalent to 64 percent of the ARA metric or 3.5 months of imports (35 percent of the ARA metric adjusted for potential oil price volatility).
- Assumption: "This assumes a passthrough of 50 percent to prices of 85 percent of the consumption basket, over a period of nine months."

### Macroeconomic projections and composition of fiscal adjustment
- Baseline projections in 2021 reflect the authorities’ proposed budget; medium-term baseline projections assume continued strengthening of nonoil revenue collection, gradual reduction of energy subsidies, and attrition-based reduction in government employment.
- Composition of Medium-Term Fiscal Adjustment (Cumulative change from 2020, in percent of GDP):
  - Revenue (2021 through 2026): 10.8, 10.5, 10.6, 10.6, 9.6, 8.5
    - Oil Revenue: 7.3, 6.4, 6.3, 6.1, 4.9, 3.9
    - Non-Oil Revenue: 3.5, 4.1, 4.3, 4.5, 4.6, 4.6
  - Expenditure (2021 through 2026): 6.7, 2.6, (1.7), (4.8), (7.1), (8.7)
    - Current Spending: 4.0, 2.3, (1.5), (4.3), (6.5), (7.8)
      - o/w wages and salaries: (2.8), (4.1), (5.6), (7.2), (8.8), (9.4)
      - o/w transfers: 2.0, 1.5, 1.2, 0.9, 0.7, 0.3
      - o/w COVID-19 related spending: 0.3
    - Capital Expenditure: 2.7, 0.2, (0.2), (0.5), (0.6), (0.9)
  - Cumulative change in fiscal balance relative to 2020 (2021 through 2026): 4.1, 7.9, 12.3, 15.4, 16.7, 17.2

### Risks and scenarios
- Downside risks are very high (Annex III).
  - Immediate significant risk: political constraints and new bouts of social unrest that could prevent implementation of economic reforms, including adoption of the 2021 budget.
  - In the downside scenario of non-implementation of the planned fiscal reforms, government debt would assume an unsustainable trajectory, and central bank reserves would be depleted in the medium term.
  - Other downside risks: delayed vaccine rollout and prolonged COVID-19 impact keeping non-oil activity subdued; uncertain oil market outlook and a "greener" global recovery holding back oil revenue; geopolitical tensions and security risks hampering activity and regional trade.
- Upside factors: stronger oil price recovery and successful mobilization of affordable external financing would strengthen fiscal sustainability and foreign exchange reserves.

### Policy discussions — Stabilizing the economy
- Priority: overcoming the health crisis requires additional fiscal resources and strong governance.
  - Recommendation: a comprehensive health crisis response plan with detailed costing and resource mobilization for vaccine acquisition and distribution.
  - Recommended institutional design: establish a dedicated COVID-19 fund combining budgetary and donor resources; form a Steering Committee with key ministries and international partners (notably WHO, UNDP, UNICEF and the World Bank); delegate procurement to specialized UN agencies for governance.
  - Authorities’ actions: draft health plan developed by the Ministry of Health; discussions initiated on establishing the dedicated COVID-19 fund; the draft 2021 budget includes an allocation of $0.5 billion to support this initiative.
  - Footnote: "Iraq has also committed to provide the COVID-19 vaccine for 20 percent of the population under the COVAX initiative and plans to acquire 1.5 million doses of the Pfizer-BioNTech vaccine in early 2021."
- Fiscal consolidation measures and safeguards:
  - Staff encouraged a more frontloaded effort to reverse the unsustainable expansion of the wage bill and additional measures to reduce inefficient oil and electricity subsidies and raise non-oil revenues.
  - Agreement on maintaining fiscal restraint over a longer period, limiting wage indexation in 2022 to no more than half of inflation, and implementing an attrition-based reduction in the government workforce by at least 2 percent per year over the medium term.
  - Contingency measures if slippages occur: extending the nominal freeze, cutting allowances of highest-paid civil servants, further reducing energy subsidies, and raising sales and excise taxes.
- Institutionalizing reforms:
  - Recommendation: adopt policies to contain the government wage bill as stand-alone law or amendments to the civil service law to be more binding than annual budget laws; reflect key fiscal revenue measures in permanent tax legislation.
  - Authorities agreed with the need for permanent legislation but noted the potentially lengthy process.
- Exchange rate and monetary-fiscal interaction:
  - Staff supported the exchange rate devaluation and emphasized the need for a strong fiscal framework to ensure credibility and minimize monetary financing of the budget.
  - Recommendation: set explicit limits on future central bank financing and repayment terms via an MoU between the CBI and the Ministry of Finance.
  - Consensus: maintaining the new dinar peg remains appropriate for now.
- Protecting the vulnerable:
  - The targeted cash transfer system currently supports about 1.4 million Iraqi households but excludes over half a million additional households below the poverty line.
  - Authorities plan to boost the allocation for cash transfers in the 2021 budget to expand coverage to all eligible households—amounting to over 20 percent of population—and raise assistance to shield the vulnerable from expected inflation increases.
  - Staff recommendations: legal changes to introduce automatic inflation indexation of cash transfer benefits; regular updates of the population registry and targeting criteria; limit eligibility for the Public Distribution System (PDS) to those in the social security database to free fiscal space for targeted assistance.
- Monetary and financial stability measures:
  - Measures to contain inflationary and financial sector impact of the exchange rate adjustment: raise the reserve requirement, limit increases in administered prices, restrict borrowing by SOEs.
  - Importance of contingency planning, maintaining liquidity provision to banks, clear public communication, enhanced monitoring of banks’ liquidity and balance sheets, and early corrective measures where necessary.

### Policy discussions — Supporting a durable and inclusive recovery
- Civil service reform:
  - Urgent priority: establish an effective IT system and centralized HR framework to enable monitoring, control, and accountability; conduct a comprehensive functional review to eliminate "ghost workers" and optimize staffing and processes.
  - Remuneration reform: align pay scales, optimize non-wage payments within an overall cap, and link compensation to productivity under a performance assessment framework.
  - Legal reform: revise the broader legal framework to eliminate hiring and compensation commitments outside the common HR framework.
  - Authorities support strengthening the Federal Civil Service Commission and involving the Federal Bureau of Supreme Audit and the Ministry of Finance to enforce compliance.
- Pension reform:
  - The pension system is fiscally unsustainable due to permissive eligibility and generous benefits.
    - Statutory retirement age: 50.
    - Minimum full-career pension obtained after 15 years of service.
  - Recommendation: withdraw recent proposal to extend public pension benefits to the private sector until a comprehensive sustainability analysis and pension reform strategy are developed; seek integration of public and private pension systems with adequate contributions to ensure financial sustainability.
- Electricity sector reforms:
  - Current trends: the sector is undermining fiscal and external sustainability and causing persistent power outages.
  - Risks: additional investment in generation and imported supply without achieving cost recovery would multiply the sector’s quasi-fiscal losses.
  - Recommended priorities: develop a coherent sector reform strategy; strengthen governance; improve collection through smart metering and reduce theft; introduce gradual tariff adjustment to increase cost recovery and reduce arrears; increase private sector participation.
  - Environmental and efficiency recommendations: enhance gas capture and reduce flaring to limit gas imports and contribute to environmental sustainability.

*Source: IMF staff calculations and IMF country report text.*

### 23. Continued efforts to diversify fiscal revenues and strengthen public financial

### 23. Continued efforts to diversify fiscal revenues and strengthen public financial

### Fiscal reform and public financial management (PFM)
- A comprehensive tax reform is needed to:
  - improve tax and customs administration;
  - develop a progressive and effective tax policy conducive to private sector development and poverty reduction.
- Strengthening PFM should prioritize:
  - setting up a Treasury Single Account (TSA);
  - accelerated implementation of IFMIS—an electronic system to replace paper-based procedures—to help tighten controls over budget commitments and cash management.
- Staff urged introduction and implementation of stricter control and accountability over unspent public investment funds by line ministries and local governments and a more transparent public investment management system.
- Authorities noted ongoing efforts to automate customs procedures and strengthen administration and expressed interest in additional technical assistance to continue improving PFM.

### Fiscal risks, off-budget exposures, and federal fiscal framework
- Reforms recommended to minimize fiscal risks stemming from off-budget expenditure, government guarantees, and arrears.
- Staff welcomed government approval of an enhanced framework for vetting and issuing government guarantees and encouraged immediate implementation.
- Staff recommended agreeing a permanent fiscal federalism framework between the Federal and the Kurdistan Regional Governments with clear revenue and risk-sharing arrangements and division of expenditure responsibilities to improve budget planning and fiscal sustainability across all levels of government.

### Governance, transparency, and anti-corruption
- Addressing governance weaknesses is critical to safeguard public resources and improve efficiency.
- Limited progress has been made implementing key recommendations from the 2019 Article IV Consultation.
- Staff underscored the need to:
  - strengthen understanding of corruption risks, including identification of key areas where illegal proceeds are generated;
  - simplify, digitalize and increase transparency of key public services to curb bribery and embezzlement—especially in public procurement;
  - publish key information on awarded contracts, including on beneficial ownership;
  - deploy sufficient resources for risk-based delivery inspections and ex-post audits of contracts;
  - align the authorities’ anti-corruption framework with international standards and conventions.

### AML/CFT and central bank supervision
- The CBI needs to strengthen risk-based AML/CFT supervision.
- A sound assessment of ML/TF risks would inform effective allocation of resources for risk-based supervision.
- AML/CFT controls in banks and exchange houses should be enhanced through stronger due diligence, including identification of beneficial owners and politically exposed persons.
- More effective implementation of targeted financial sanctions against non-compliant persons or entities would help maintain the stability of correspondent banking relationships.
- The CBI highlighted recent measures to strengthen the AML/CFT regime and reiterated its commitment to continue making progress.

### State-owned banks (SOBs) and financial sector level playing field
- A decisive strategy to restructure the large SOBs and level the playing field in the financial sector is critical for private sector development.
- Limited progress has been made on restructuring large public banks which:
  - dominate the financial sector;
  - are poorly supervised by the CBI;
  - are routinely used for off-budget expenditures.
- Staff recommended:
  - undertaking an urgent international audit of the large SOBs to provide a more up-to-date assessment of their balance sheets and inform options for speedy restructuring;
  - enhancing CBI supervision of these banks and engaging the government in a robust discussion of restructuring options.
- Authorities viewed large SOBs as a risk to financial stability and private sector development and noted restructuring would require overcoming significant political constraints and close coordination between the CBI and the government.

### Iraq: macroeconomic outcomes, staff appraisal, and risks
- Socio-economic impact and fiscal strain:
  - The COVID-19 health crisis led to significant loss of life and strained the health system’s limited capacity.
  - Sharp decline in oil revenues and significant expansion of government wage and pension bills made the fiscal situation untenable.
  - The budget deficit reached 20 percent of GDP in 2020.
  - The external current account deficit was 15 percent of GDP.
  - Severe financing constraints precluded a meaningful fiscal response to the crisis.
- Growth and outlook:
  - After declining by 11 percent in 2020, real GDP is projected to reach its pre-crisis level by 2024.
- Policy recalibration and assessment:
  - Staff welcomes fiscal reforms in the authorities’ draft 2021 budget aimed at stemming the unsustainable expansion of wage and pension bills and strengthening non-oil revenues.
  - The exchange rate adjustment will help reduce the large external deficit and preserve central bank reserves.
  - Planned boosting of social safety nets to shield the vulnerable from reform side effects is of paramount importance.
  - Continued fiscal restraint, including measures to contain the government wage bill, is essential; embedding key fiscal measures in permanent legislation would help durability.
  - Government debt is assessed as sustainable, although not with high probability and conditional on significant fiscal consolidation over the medium term.
- Downside risks:
  - The most significant immediate risk is non-implementation of key fiscal and structural reforms (for example, due to political constraints or renewed social unrest), which would undermine macroeconomic stability and set government debt on an unsustainable path.
  - Pandemic-related risks and oil market uncertainties could further complicate the economic situation.

### Sectoral focus: electricity and energy
- Stemming the electricity sector’s downward spiral of mounting financial losses and power outages will help improve public finances and socio-economic conditions.
- Decisive implementation of a coherent sector reform strategy is critical, prioritizing:
  - strengthening governance;
  - improving collection and reducing theft;
  - gradually adjusting tariffs to increase cost recovery and reduce arrears.
- Realizing plans to enhance gas capture and reduce flaring is important to limit gas imports and contribute to environmental sustainability.

### Summary of key numeric figures and thresholds
- Budget deficit: 20 percent of GDP in 2020.
- External current account deficit: 15 percent of GDP.
- Real GDP decline: 11 percent in 2020.
- Real GDP projected to reach pre-crisis level by 2024.
- Outstanding credit has fallen below the SDR 1.5 billion threshold; Iraq no longer meets the criteria for post-program monitoring (PPM).

*Source: 1irqea2021002 - 23. Continued efforts to diversify fiscal revenues and strengthen public financial*

### 36. It is proposed that the next Article IV consultation take place on the standard

### 1irqea2021002 - 36. It is proposed that the next Article IV consultation take place on the standard

### Proposed Article IV timing
- It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

### Economic developments and medium-term projections (2015–26)
- Real GDP (percentage change): 15.2 -3.4 0.8 4.5 -10.9 1.2 3.9 5.7 4.1 3.1 3.4
- Non-oil real GDP (percentage change): 1.3 -3.1 4.7 5.7 -8.0 5.0 1.1 2.5 2.7 3.4 3.6
- GDP deflator (percentage change): -17.0 18.9 11.9 -1.8 -12.6 23.5 3.6 1.6 1.9 2.6 3.2
- GDP per capita (US$): 4,637 5,179 5,691 5,687 4,286 4,287 4,498 4,705 4,865 5,020 5,203
- GDP (in ID trillion): 197.9 227.3 256.4 262.9 204.8 255.9 275.5 295.7 313.7 332.1 353.2
- Non-oil GDP (in ID trillion): 129.5 137.1 137.0 148.9 140.4 160.9 177.5 191.6 205.0 220.4 238.4
- GDP (in US$ billion)1/: 167.7 192.3 216.9 222.4 172.0 176.5 190.0 203.9 216.4 229.1 243.6
- Oil production (mbpd): 4.63 4.47 4.41 4.58 4.00 3.95 4.18 4.50 4.73 4.87 5.01
- Oil exports (mbpd): 3.79 3.80 3.86 3.97 3.43 3.39 3.59 3.86 4.06 4.18 4.30
- Iraq oil export prices (US$ pb)2/: 35.64 48.76 55.25 59.73 38.24 47.04 45.84 45.24 44.84 44.84 44.7
- Consumer price inflation (percentage change; end of period): -1.5 0.2 -0.1 0.1 1.0 11.5 4.6 2.6 2.0 2.0 2.0
- Consumer price inflation (percentage change; average): 0.5 0.1 0.4 -0.2 0.5 7.1 7.1 3.3 2.3 2.0 2.0

Notes and data specifics:
- Note: 2020 data only contains January through September.
- Sources: Iraqi authorities; and IMF staff estimates and calculations.

### Oil sector and external sector highlights (figures)
- Export revenue (in billions of USD) and Iraq's oil export price (in USD per barrel) shown across 2015–25.
- Current account (in percent of GDP) and Stock of reserves (in billions of USD) provided for 2015–25.
- Central Bank of Iraq foreign currency cash sales, other sales, and exchange rate spread (2014–20) reported; note 2017 September data was not available.

### Fiscal and debt (2015–26) — summary from Figure 2 and Tables
Key fiscal aggregates (in percent of GDP unless otherwise indicated)
- Government revenue and grants: 28.0 33.6 41.2 37.8 30.0 40.8 40.5 40.6 40.6 39.5 38.4
- Government oil revenue: 23.9 29.3 37.9 35.2 27.0 34.3 33.4 33.3 33.1 31.9 30.8
- Government non-oil revenue: 4.2 4.2 3.2 2.6 3.0 6.5 7.1 7.4 7.5 7.6 7.6
- Expenditure: 42.5 35.1 33.0 36.9 50.3 57.0 52.9 48.6 45.5 43.2 41.6
- Current expenditure: 30.6 26.8 27.6 29.5 42.5 46.4 44.7 40.9 38.1 35.9 34.6
- Capital expenditure: 12.0 8.3 5.5 7.3 7.9 10.6 8.1 7.7 7.4 7.3 7.0
- Overall fiscal balance (including grants): -14.5 -1.5 8.2 0.9 -20.3 -16.2 -12.4 -8.0 -4.9 -3.7 -3.2

Debt and financing (memorandum items)
- Total government debt (in percent of GDP)5/: 67.0 59.6 50.6 48.5 83.1 83.0 89.7 91.6 91.3 89.9 87.7
- Total government debt (in US$ billion)6/: 112.2 114.6 109.9 107.9 117.4 146.6 170.5 186.8 197.5 205.9 213.7
- External government debt (in percent of GDP): 38.6 35.9 31.4 31.4 49.6 37.9 33.0 28.8 26.1 23.7 21.7
- External government debt (in US$ billion): 64.6 69.0 68.1 69.8 70.0 67.0 62.7 58.6 56.5 54.3 52.8

Footnotes and adjustments
- 1/ Converted from GDP in local currency using the period-average exchange rate (1191 in 2020).
- 2/ Negative price differential of about $2.9 per barrel compared to the average petroleum spot price (average of Brent, West Texas and Dubai oil prices) in 2020 - 2025.
- 3/–6/ Various adjustments noted concerning KRG transfers, arrears, and exchange rate conversions.

### Table 1 selected economic and financial indicators (2016–26)
- Gross domestic investment (percent of GDP): 21.1 16.6 12.8 15.1 17.2 19.1 16.8 16.4 16.1 16.0 15.9
- Gross national savings (percent of GDP): 13.6 11.9 17.3 15.6 2.0 15.0 13.4 13.6 13.4 13.7 13.9
- Current account (percent of GDP): -7.5 -4.7 4.5 0.5 -15.2 -4.1 -3.3 -2.7 -2.7 -2.4 -2.0
- Gross reserves (in US$ billion): 45.5 49.4 64.7 68.0 54.1 47.4 40.8 33.2 30.0 27.1 25.6
- Total GIR (in months of imports): 6.7 7.0 8.4 10.7 9.4 9.2 6.7 5.0 4.3 3.9 3.5
- Exchange rate (dinar per US$; period average): 1,180 1,182 1,182 1,182 1,191 1,450 1,450 1,450 1,450 1,450 1,450

### Central government fiscal accounts (Tables 2–4; 2016–26)
Selected levels (In trillions of Iraqi dinars)
- Revenues and grants: 55.5 76.3 105.6 99.3 61.4 104.5 111.6 120.1 127.3 131.3 135.8
- Oil revenues: 47.2 66.7 87.3 92.5 55.3 87.8 92.0 98.3 103.8 106.0 109.0
- Non-oil revenues: 8.3 9.6 8.3 6.8 6.2 16.7 19.6 21.7 23.4 25.2 26.8
- Expenditures: 84.2 79.7 84.7 96.9 103.1 146.0 145.7 143.7 142.7 143.4 147.0
- Current expenditures: 60.5 60.9 70.7 77.7 87.0 118.8 123.3 120.9 119.5 119.3 122.2
- Investment expenditures: 23.7 18.8 14.0 19.2 16.1 27.1 22.4 22.8 23.2 24.2 24.8
- Fiscal balance: -28.7 -3.4 20.9 2.3 -41.7 -41.5 -34.1 -23.6 -15.4 -12.2 -11.2

Financing components (2016–26)
- Domestic financing (trillions of ID): 26.7 0.7 -17.7 4.3 38.8 46.5 40.4 30.8 18.0 14.9 12.9
- Bank financing (trillions of ID): 21.9 1.5 -17.2 3.5 31.0 50.0 42.2 30.9 17.6 14.5 12.5
- Arrears (trillions of ID): 0.7 -3.0 -1.7 0.2 10.5 -3.1 -1.5 -0.6 0.0 0.0 0.0

Key fiscal ratios (percent of GDP)
- Revenues and grants: 28.0 33.6 41.2 37.8 30.0 40.8 40.5 40.6 40.6 39.5 38.4
- Expenditures: 42.5 35.1 33.0 36.9 50.3 57.0 52.9 48.6 45.5 43.2 41.6
- Fiscal balance: -14.5 -1.5 8.2 0.9 -20.3 -16.2 -12.4 -8.0 -4.9 -3.7 -3.2

Notes:
- The tables include adjusted non-oil primary expenditure and fiscal balances excluding KRG transfers for alternative metrics.

### Balance of Payments (Table 5; 2016–26)
Key flows (In billions of U.S. dollars)
- Trade balance: 2.1 8.0 29.5 22.8 -11.4 6.5 7.3 7.5 7.5 8.3 8.5
- Exports: 49.9 68.0 92.5 89.6 49.8 60.6 62.8 66.9 69.9 72.4 74.8
- Crude oil exports: 49.3 67.5 91.9 86.4 47.8 58.1 59.9 63.7 66.3 68.3 70.2
- Imports: -47.8 -59.9 -63.0 -66.8 -61.2 -54.1 -55.5 -59.4 -62.4 -64.1 -66.3
- Services, net: -12.8 -15.1 -16.7 -18.6 -11.4 -10.0 -9.7 -9.6 -9.8 -10.0 -9.6
- Current account: -12.5 -9.0 9.7 1.1 -26.2 -7.2 -6.4 -5.6 -5.8 -5.4 -4.9
- Financial account: 3.9 10.3 0.6 5.3 11.0 3.5 1.4 -1.0 2.6 2.5 3.4
- Overall balance (in percent of GDP): -3.9 2.6 6.5 0.8 -8.8 -2.1 -2.6 -3.2 -1.5 -1.3 -0.6

Reserve and financing items
- Gross International Reserves (GIR, end of period): 45.5 49.4 64.7 68.0 54.1 47.4 40.8 33.2 30.0 27.1 25.6
- GIR (in months of imports): 6.7 7.0 8.4 10.7 9.4 9.2 6.7 5.0 4.3 3.9 3.5
- Financing gap (increase -): 0.00 0.0 3.7 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Memorandum
- GDP (US$ billion): 167.7 192.3 216.9 222.4 172.0 176.5 190.0 203.9 216.4 229.1 243.6
- Of which: Non-oil GDP (US$ billion): 109.8 116.0 115.9 126.0 117.9 110.9 122.4 132.1 141.4 152.0 164.4

### Monetary and banking (Table 6; 2016–26)
Selected monetary aggregates (in billions of Iraqi dinars)
- Net foreign assets: 60,600 63,892 86,266 97,769 94,374 86,167 77,059 65,987 61,328 57,142 55,008
  - Of which: CBI: 49,550 52,864 71,212 76,062 74,810 66,603 57,495 46,423 41,764 37,578 35,444
- Net domestic assets: 29,726 28,818 8,977 5,522 37,099 89,060 133,043 165,972 186,733 204,646 220,890
- Broad money: 90,326 92,710 95,243 103,291 131,473 175,227 210,103 231,959 248,061 261,788 275,898
  - Currency outside banks: 42,075 40,343 40,498 47,639 61,899 85,882 106,240 118,812 127,388 134,229 141,127
  - Transferable deposits: 33,449 36,643 37,331 39,132 48,921 62,823 73,032 79,560 84,852 89,693 94,765
  - Other deposits: 14,802 15,724 17,414 16,520 20,653 26,522 30,831 33,587 35,821 37,865 40,006

Monetary indicators (percent and growth)
- Broad money (percentage growth): 7.1 2.6 2.7 8.4 27.3 33.3 19.9 10.4 6.9 5.5 5.4
- Credit to the economy (percentage growth): -0.5 2.1 -10.7 1.9 15.1 4.2 5.8 6.4 7.3 7.5 8.0
- Credit to the economy (in percent of GDP): 12.8 11.4 9.0 9.0 13.2 11.0 10.8 10.7 10.9 11.0 11.2

### Central bank balance sheet and reserve adequacy (Tables 7–8; 2016–26)
Central bank and reserves (selected)
- Net foreign assets (CBI, in ID bn): 49,550 52,864 71,212 76,062 74,810 66,603 57,495 46,423 41,764 37,578 35,444
- Foreign assets: 54,219 58,862 76,966 80,866 78,990 69,352 59,787 48,715 44,056 39,870 37,736
- Official reserve assets: 53,774 58,389 76,502 80,400 78,405 68,767 59,202 48,130 43,471 39,285 37,151
- Gold (tonnes/value): 3,957 4,433 4,689 5,572 8,446 9,037 9,579 10,058 10,461 10,774 11,098

Reserve adequacy metrics (2016–26)
- Reserves in USD billion (GIR): 45.5 49.4 64.7 68.0 54.1 47.4 40.8 33.2 30.0 27.1 25.6
- Reserves in months of imports of goods and services: 6.7 7.0 8.4 10.7 9.4 9.2 6.7 5.0 4.3 3.9 3.5
- Reserves in percent of reserve money: 78.1 88.9 109.2 99.1 61.3 47.3 33.0 24.1 20.4 17.5 15.8
- Reserves in percent of broad money: 59.4 63.0 80.3 77.8 49.0 39.2 28.2 20.7 17.5 15.0 13.5
- Reserves in percent of the IMF RA metric1/: 174 174 208 213 178 145 115 88 78 68 64
- Reserves in percent of the augmented IMF RA metric1/2/: 107 113 111 115 150 91 68 49 34 33 35

Notes:
- 1/ Reserves within 100–150 percent of the Reserve Adequacy (RA) metric are considered adequate.
- 2/ The augmented RA metric adds a buffer to account for the possibility of lower than projected oil prices.

### Indicators of Fund credit (Table 9; 2018–25)
- Outstanding Fund credit (SBA and RFI): 2,274 1,772 909 219 0 0 0 0 (in millions of SDRs, unless otherwise indicated)
- Repurchases and Charges (SBA, RFI and SDR charges): 166 55 78 85 71 52 38 18 11 3 (annual pattern across 2018–25 shown in table)
- GRA charges and interest and SDR charges and assessments detailed per year in table.

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

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### A. Current Account (CA)
- 2020 outcome:
  - CA balance estimated to have worsened from a surplus of 0.5 percent of GDP in 2019 to a deficit of 15.2 percent of GDP in 2020.
  - Oil exports accounted for more than 95 percent of total exports and 89 percent of total CA receipts over the past five years.
  - Imports declined by around 8 percent in dollar terms but rose by 6 percentage points relative to GDP due to loosening of the fiscal stance.
- Near- and medium-term outlook:
  - Devaluation of the dinar by 22.7 percent in December 2020, partial oil price recovery, and authorities’ planned fiscal consolidation are expected to reduce the CA deficit to 2 percent of GDP in staff’s baseline projections (which assume sustained implementation of reforms).
  - Sustained fiscal consolidation efforts are critical to ensure credibility of the new peg and to phase out monetary financing in the medium term.
- Model-based assessment (2020):
  - EBA-lite cyclically adjusted CA gap: -4.9 percent of GDP (more than half reflects contribution of policy gaps).
  - Investment-needs model CA gap: -2.7 percent of GDP.
  - Consumption-allocation model CA gap: -8.6 percent of GDP.
- Table model decomposition for 2020 (percent of GDP):
  - CA-Actual: -15.2
  - Cyclical contributions (from model): -5.4
  - COVID-19 oil shock adjustor: 7.0
  - COVID-19 tourism shock adjustor: -0.6
  - Natural disasters and conflicts: -0.7
  - Adjusted CA: -4.1
  - CA Norm (adjusted): 0.8
  - CA Gap: -4.9
  - o/w policy gap: -2.9
  - Elasticity: -0.28

### B. Real Effective Exchange Rate (REER)
- 2020 developments:
  - REER appreciated by 2.9 percent during the first eleven months of 2020 (y-o-y), compared to 1.4 percent in 2019.
  - Appreciation was mainly the result of NEER appreciation, largely owing to weakness of key trading partner currencies early in the year (notably the Turkish lira).
- Assessment:
  - EBA-lite CA model estimates point to a REER overvaluation in 2020, although estimates are imprecise and applicability of the EBA model to Iraq is not straightforward.
  - The recent devaluation of the dinar is expected to reduce potential misalignment.
- REER gap (model): 17.5

### C. Capital and Financial Accounts: Flows and Policy Measures
- 2020 financial account:
  - Estimated surplus of 6.4 percent of GDP, which fell short of financing the CA deficit.
  - Main inflows:
    - Direct investment: 2.7 percent of GDP (mostly in the oil sector).
    - Disbursement of long-term project loans: 1.1 percent of GDP.
    - Disposal of foreign assets by the private sector: 3.7 percent of GDP.
  - Main outflows:
    - Amortization of external debt: 1.4 percent of GDP.
- Policy implication:
  - Given difficult access to international financial markets, mobilizing donor financing in support of a credible reform plan will be essential to boost inflows in the coming years.

### D. FX Intervention and Reserves Level
- End-2020 reserves and adequacy:
  - Gross reserves at end-2020: $54.1 billion (31 percent of GDP or 178 percent of the ARA metric).
  - Reserves declined by $14 billion (about 8 percent of GDP) in the course of 2020 due to a large CA deficit and monetary financing of the budget.
- Projections and vulnerabilities:
  - Devaluation of the dinar and fiscal consolidation measures are expected to help ease reserve pressures.
  - Reserves are projected to decline further to reach $25.6 billion by 2026 (about 64 percent of the ARA metric).
  - Continued fiscal reforms will be essential to limit recourse to central bank financing of the budget and preserve FX buffers.
- Reserve adequacy indicators (selected levels reported):
  - Reserves in months of imports of goods and services: varied across 2016–26 (examples reported: 10.7 in 2020; projected 3.5 by 2026).
  - Reserves in percent of the IMF RA metric: 178 in 2020; projected 64 by 2026.
  - Note: Reserves within 100–150 percent of the Reserve Adequacy (RA) metric are considered adequate; the augmented RA metric adds a buffer for lower than projected oil prices.

*Source: IMF staff estimates and projections as presented in Annex I. External Sector Assessment.*

### 155.3 percent of GDP by 2025.

### 1irqea2021002 - 155.3 percent of GDP by 2025

### Debt levels and baseline projections
- Nominal gross public debt projections (in percent of GDP): 2018: 51.6; 2019: 50.6; 2020: 48.5; 2021: 83.0; 2022: 89.7; 2023: 91.6; 2024: 91.3; 2025: 89.9.
- Gross Nominal Public Debt series (figure): shows rise from 2018 through 2021 and projection through 2025 with peak levels above 80 percent of GDP.
- Gross financing needs (GFN) projections (in percent of GDP): 2020: 4.2; 2021: -8.2; 2022: -1.8; 2023: 27.4; 2024: 22.0; 2025: 19.4; additional years shown: 16.2; 13.0.
- High risk threshold indicated for Gross Financing Needs in figure (chart context).

### Guarantees and contingent liabilities
- At end-June 2017, stock of guarantees related to foreign currency service payments and debt amounted to $21.7 billion (12 percent of GDP).
- Composition of guarantees: $19.4 billion for service payments to independent power producers (IPPs) and $2.3 billion for debt.
- Change in stock of guarantees is included in “Residual, including asset changes” for projections.

### DSA methodology and shock assumptions
- 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 and the excessively large shock implied by the standard approach, staff consider a moderate 10 percent real rate shock in Iraq’s case.
- Effective interest rate (in percent) by year: 2018: 1.3; 2019: 2.8; 2020: 2.4; 2021: 2.2; 2022: 2.1; 2023: 2.5; 2024: 2.8; 2025: 3.0 (defined as interest payments divided by debt stock excluding guarantees at end of previous year).

### Contribution to changes in public debt (identified debt-creating flows)
- Change in gross public sector debt (cumulative): 2018: 0.9; 2019: -9.0; 2020: -2.1; 2021: 34.5; 2022: 0.0; 2023: 6.7; 2024: 1.9; 2025: -0.3; cumulative: -1.4; 41.4 (figure entries).
- Identified debt-creating flows (detailed rows): 2018: 2.1; 2019: -14.8; 2020: -2.0; 2021: 40.7; 2022: -0.4; 2023: 6.6; 2024: 2.0; 2025: -0.2; cumulative: -1.3; 47.3.
- Primary deficit (in percent of GDP): 2018: 4.0; 2019: -9.5; 2020: -1.9; 2021: 19.1; 2022: 15.0; 2023: 10.5; 2024: 5.8; 2025: 2.5; cumulative: 1.2; 54.0.
- Primary (noninterest) revenue and grants (in percent of GDP): 2018: 38.2; 2019: 41.1; 2020: 37.6; 2021: 30.0; 2022: 40.7; 2023: 40.4; 2024: 40.5; 2025: 40.5; cumulative: 39.5; 231.6.
- Primary (noninterest) expenditure (in percent of GDP): 2018: 42.2; 2019: 31.6; 2020: 35.7; 2021: 49.1; 2022: 55.7; 2023: 51.0; 2024: 46.3; 2025: 43.0; cumulative: 40.6; 285.6.
- Automatic debt dynamics contribution (in percent of GDP): 2018: -1.9; 2019: -5.3; 2020: -0.1; 2021: 24.4; 2022: -15.2; 2023: -3.9; 2024: -3.8; 2025: -2.7; additional years: -2.4; -3.6.
- Breakdown of automatic debt dynamics: real interest rate contribution and real GDP growth contribution are reported separately in the table (see rows “Of which: real interest rate” and “Of which: real GDP growth” with specific year-by-year values).

### Macroeconomic assumptions underlying baseline
- Real GDP growth (in percent) by year: 2018: 6.0; 2019: 0.8; 2020: 4.5; 2021: -10.9; 2022: 1.2; 2023: 3.9; 2024: 5.7; 2025: 4.1; additional: 3.1.
- Inflation (GDP deflator, in percent) by year: 2018: -0.1; 2019: 11.9; 2020: -1.8; 2021: -12.6; 2022: 23.5; 2023: 3.6; 2024: 1.6; 2025: 1.9; additional: 2.6.
- Nominal GDP growth (in percent) by year: 2018: 5.8; 2019: 12.8; 2020: 2.5; 2021: -22.1; 2022: 24.9; 2023: 7.7; 2024: 7.3; 2025: 6.1; additional: 5.9.
- Sovereign spreads and ratings shown: 5Y CDS (bp) 862; EMBIG-related spread measures in figures (bond spread values referenced elsewhere).

### External debt and external sustainability (Table AII.1 highlights)
- External debt (in percent of GDP) baseline series: 2015: 37.7; 2016: 38.6; 2017: 35.9; 2018: 31.4; 2019: 31.4; 2020: 49.6; 2021: 37.9; 2022: 33.0; 2023: 28.8; 2024: 26.1; 2025: 23.7.
- Change in external debt (in percent of GDP): 2015: 12.9; 2016: 0.9; 2017: -2.7; 2018: -4.5; 2019: 0.0; 2020: 18.2; 2021: -11.7; 2022: -4.9; 2023: -4.2; 2024: -2.6; 2025: -2.4.
- Current account deficit, excluding interest payments (in percent of GDP): series includes 2015: 6.1; 2016: 7.1; 2017: 4.3; 2018: -0.1; 2019: 6.9; 2020: 4.9; 2021: 1.0; 2022: -14.7; 2023: -3.6; 2024: -3.0; 2025: -2.4; -2.5; -2.2 (table contains multi-year entries).
- External debt-to-exports ratio (in percent): 2015: 108.7; 2016: 116.8; 2017: 93.2; 2018: 69.4; 2019: 72.0; 2020: 158.6; 2021: 102.6; 2022: 91.5; 2023: 79.8; 2024: 73.3; 2025: 67.8.
- Gross external financing need (in billions of US dollars): 2015: 12.7; 2016: 13.4; 2017: 10.2; 2018: -8.5; 2019: 1.2; 2020: 29.8; 2021: 11.2; 2022: 11.0; 2023: 10.6; 2024: 9.3; 2025: 9.0.
- Key macroeconomic assumptions under baseline (selected):  
  - Real GDP growth (in percent): 2015: 2.5; 2016: 15.2; 2017: -3.4; 2018: 5.5; 2019: 5.9; 2020: 0.8; 2021: 4.5; 2022: -10.9; 2023: 1.2; 2024: 3.9; 2025: 5.7; 2026/other: 4.1; 3.1 (table shows multi-period series).
  - GDP deflator in US dollars (change in percent): includes values such as -26.2; -18.0; 18.7; 1.2; 17.3; 11.9; -1.8; -13.2; 1.4; 3.6; 1.6; 1.9; 2.6 (table entries).

### Stress tests and alternative scenarios
- Alternative scenarios analyzed: Baseline; Historical Scenario; Constant Primary Balance Scenario.
- Constant Primary Balance Scenario primary balance assumption: -19.1 for 2020–2025 (Primary Balance row shows -19.1 repeatedly).
- Stress tests considered: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock.
- Example stress-test parameter outcomes (select entries):  
  - Primary Balance Shock: Real GDP growth path: -10.9; 1.2; 3.9; 5.7; 4.1; 3.1; Primary balance: -19.1; -17.0; -12.8; -8.2; -4.1; -1.8; Effective interest rate path shown: 2.2; 2.1; 2.7; 3.1; 3.3; 3.4.  
  - Real Interest Rate Shock: Effective interest rate path: 2.2; 2.1; 5.4; 7.3; 8.5; 9.3 (figure entries).
  - Combined Shock: Effective interest rate path: 2.2; 2.4; 6.2; 8.2; 9.1; 9.7 (figure entries).
- Stress-test outputs include projections of Gross Nominal Public Debt in percent of GDP and in percent of revenue under each shock.

### Risk assessment and heat map indicators
- Heat map logic: cells highlighted green/yellow/red/white depending on benchmarks and relevance; benchmarks cited in figure notes.
- Benchmarks listed: bond spreads 200 and 600 basis points; external financing requirement 5 and 15 percent of GDP; change in share of short-term debt 0.5 and 1 percent; public debt held by non-residents 15 and 45 percent; share of foreign-currency denominated debt 20 and 60 percent.
- Market perception indicators and values shown in figure: examples include bond spread measures (bp) and external financing requirement (percent of GDP) plotted over time; specific numeric labels in figure: 20, 60, 65%, 12, 200, 600, 829 bp, 12, 5, 15, 1%, 12, 0.5, 1, -2.7%, 12 (figure annotations).

### Forecast track record and realism checks
- Forecast errors (selected): Real GDP growth Iraq forecast error median: -2.28 (percent); Primary Balance Iraq forecast error median: -1.74 (percent of GDP); Inflation (Deflator) Iraq forecast error median: 1.25 (percent).
- Percentile ranks shown: Iraq median forecast error for Real GDP Growth has percentile rank of 2%; Primary Balance percentile rank of 20%; Inflation (Deflator) percentile rank of 51%.
- Assessment of fiscal adjustment realism: 3-year CAPB adjustment percentile rank reported as 15%; 3-year average level of CAPB percentile rank reported as 87%.

### Policy implications and responses (as presented in text and annex)
- For pandemic-related downside risks: redirect government spending towards boosting the capacity of the health system; strengthen the social safety net to protect the most vulnerable and increase support to private sector workers most affected by containment measures; strengthen the governance framework to ensure an efficient deployment of fiscal resources.
- For pandemic upside: mobilize resources to ensure a vaccine is widely available, including to vulnerable groups.
- For oil market oversupply and volatility: accelerate efforts to contain the public sector wage bill, reduce non-priority expenditure and mobilize non-oil revenue; over the long term, reorient the economy to reduce oil revenue dependence.
- For intensified geopolitical tensions and security risks: risk may delay reform agenda, threaten energy supply, and endanger the election process; implications noted without additional specific policy measures in the supplied excerpt.

*Source: IMF staff calculations and tables/figures from the supplied IMF document.*

### 2021. The nonrenewal of

### 2021. The nonrenewal of the U.S. sanctions waiver enabling Iraq to import gas from Iran

### Geopolitical shock and near-term fiscal risks
- The nonrenewal of the U.S. sanctions waiver enabling Iraq to import gas from Iran would directly affect the energy supply.
- Increased military and defense spending could add to budgetary pressures, while uncertainty may curtail foreign investment.
- Policy recommendations:
  - Prioritize near-term reform efforts to place the economy on a sounder fiscal footing and enable a reallocation of resources towards security spending, if needed.
  - Diversify the country’s sources of energy to reduce reliance on gas imports.
  - Address AML/CFT vulnerabilities that could affect correspondent banking relationships.

### Potential domestic shocks, likelihood, impact, and policy responses
- Widespread social discontent and political instability
  - Trigger: pandemic and inadequate policy response causing unemployment, higher incidence of poverty, shortages and higher prices of essentials; exacerbation of preexisting socioeconomic inequities.
  - Likelihood/Time Horizon: High / Short/Medium Term
  - Expected impact on economy: High — increased unrest and greater political polarization limit reform efforts and increase spending needs, resulting in a further deterioration of the fiscal position; efforts to curb the public sector wage bill are thwarted; confidence is dented and the recovery is more prolonged.
  - Policy response: Strengthen the social safety net and provide targeted support to vulnerable private sector workers, while building support for near-term reform efforts.

- Weak implementation of near-term fiscal reforms
  - Trigger: Delays in the approval of a 2021 Budget or political constraints limiting fast action to address the fiscal crisis and weakening commitment to a medium-term reform agenda.
  - Likelihood/Time Horizon: High / Short/Medium Term
  - Expected impact on economy: High — Double-digit fiscal and current-account deficits persist; government borrowing from the central bank persists, resulting in a rapid decline in central bank reserves and increased economic instability.
  - Policy response: Build a consensus on the immediate reform priorities and the implementation strategy. Ensure the passage of the 2021 Budget in a timely fashion.

### Annex IV — Public wage bill: findings, magnitudes, and implications
- Key findings:
  - The public sector wage bill has dominated government spending and undermined fiscal sustainability.
  - Public payroll shows a ratchet effect: increases when revenue is high and rarely falls when revenue declines. The only reduction in the past decade occurred in 2016 after a sharp oil price decline.
  - The wage bill was 24 percent of GDP in 2020.
  - Despite COVID-19 and tight fiscal constraints, the civil service expanded rapidly in 2020 through large-scale hiring of contractors and daily workers after social unrest in late 2019.
  - Combined with sizable new hiring commitments expected to take effect in 2021, this will result in a 33 percent nominal wage bill growth between 2019 and 2021.
- HR and data management weaknesses:
  - Public hiring is largely decentralized; payroll reporting by line ministries and local governments is irregular and often incomplete.
  - Official statistics report about 365,000 new hires between 2017 and 2020, bringing the total to 3.3 million in 2021 — a figure that excludes contractors, daily workers, local employees paid by the federal budget, and many SOE employees. Anecdotal evidence and news reports place the civil service size closer to 4 million people.
  - Compensation is not closely linked to performance; average employee receives non-wage payments of double the base salary. In some ministries, allowances amount to six to ten times the base salary.
  - A Federal Civil Service Commission has been created but is not yet fully operational.
- Structural implications:
  - The government’s role as employer of first resort is unsustainable. Public hiring has often been unproductive and disconnected from actual needs.
  - With youth unemployment already high and the wage and pension bills consuming nearly all oil revenues, the government’s future ability to absorb new job market entrants — estimated at 450,000 annually — is extremely limited.
  - Conclusion: A fundamental and urgent rethinking of the government’s approach to managing the labor market and the role of the state in Iraq’s economy is warranted.

### Annex V — Electricity sector challenges: performance, fiscal costs, and reform priorities
- Sector performance and deficits:
  - Electricity coverage averages 17 hours a day with significant regional variation.
  - Supply-demand gap at peak was close to 34 percent in 2020, widening marginally from 2019.
  - Only about a third of the nameplate generation capacity managed by the Ministry of Electricity (MoE) reaches consumers.
  - Half of Iraq’s gas production is being allowed to flare.
- Sources of inefficiency:
  - Obsolete stations, lack of maintenance and cooling facilities, suboptimal fuel mix due to natural gas shortages, and overloaded transmission and distribution systems.
  - More than half of domestically generated electricity does not yield any revenue to the MoE because of theft and non-collection.
- Fiscal magnitude and 2019 summary (preserve exact figures)
  - Revenue Due (A) 0.6 (in percent of GDP)         1.5 (in trillions of Iraqi dinars)
  - (-) Non-collection losses                         0.2                         0.6
  - Actual Revenue Collected (B)                      0.3                         0.9
  - Total Unsubsidized cost (C)                      5.8                        15.3
    - o/w Implicit fuel subsidy through MoO          2.4                         6.4
  - Subsidized cost                                  3.4                         9.0
    - o/w fuel                                       2.0                         5.2
    - o/w wages                                      0.5                         1.4
  - Deficit (B-D)                                   (3.0)                      (8.0)
  - Deficit including implicit subsidy (B-C)        (5.4)                     (14.4)
- Additional fiscal pressures:
  - Hiring of reportedly 60,000 employees in 2020 will add ID 0.6 trillion to the sector’s annual wage bill going forward.
  - Fiscal constraints in 2020 led to a significant buildup of both external arrears to Iran and domestic arrears to IPPs.
- MoE investment plans and liabilities:
  - MoE plans to add 8300 MW of generation capacity during 2021–023.
  - Given tight fiscal constraints, these investments are likely to be financed by additional government-guaranteed borrowing, adding to $5.1 billion in outstanding stock of such loans at end-2019.
  - Plans include increasing purchases from IPPs and imports through new interconnection lines with Turkey and the Gulf Cooperation Council.
  - Unless technical and collection issues are addressed, these plans imply a significant increase in fiscal costs and imports over the medium term.
- Reform priorities (policy recommendations):
  - Accelerate measures to enhance revenue collection, including through smart metering.
  - Gradual adjustment of tariff rates—especially for high energy consumers—to ensure cost recovery.
  - Calibrate investment plans to available resources and prioritize efficiency-enhancing investments: maintenance of existing capacities, converting simple cycle plants to combined cycle, installing cooling systems, and upgrading transmission and distribution networks.
  - Enhance gas capture and reduce flaring to reduce gas imports and improve environmental sustainability.
  - Strengthen governance and set up an appropriate regulatory framework to promote private investment into the sector.

### Annex VI — The Authorities’ Medium-Term Reform Program (“White Paper”)
- Background and scope:
  - Produced at the request of Parliament as part of the June 2020 emergency borrowing law; presented to parliament in October 2020; approved by the Council of Ministers.
  - Offers candid assessment of root causes of macroeconomic imbalances: sharp increase in public sector payroll, crowding out of private sector activity, weakness of financial institutions.
  - Emphasizes fiscal sustainability across five pillars: rehabilitating the financial sector; reforming state-owned production sectors; improving key infrastructure; enhancing provision of public services and social assistance; strengthening governance and legal environment.
- Fiscal proposals and quantitative targets:
  - Ambitious goal of reducing the fiscal deficit from 20 to 3 percent of GDP in three years.
  - Measures focused on expenditure rationalization, raising revenues, and strengthening public financial management (PFM).
  - Envisages reducing the wage bill — from 25 percent of GDP to 12.5 percent in three years — through restrictions on new employment, cutting transfers to SOEs and government subsidies, and a pension reform.
  - Revenue mobilization proposals include bringing electricity fees in line with the actual fuel price and reviewing fuel subsidies provided to the SOEs.
  - PFM proposals include accelerated implementation of the Integrated Financial Information Management System project (IFMIS) and strengthening institutional and technical capacity of the Ministry of Finance.
- Other area proposals:
  - Potential recapitalization of state-owned banks and accelerating efforts to introduce core-banking systems.
  - Electricity sector proposals: improving revenue collection, upgrading transmission, and incentivizing consumers to rationalize consumption.
  - Proposes phasing out financial support to SOEs, a law to restructure and transform them into private companies, and a public works program to help absorb redundancies in the labor market.
- Implementation:
  - Sequencing, prioritization, and costing of the proposed reforms are being elaborated.
  - Authorities are working on a separate detailed action plan and with the World Bank and bilateral partners to mobilize donor assistance.
  - IMF staff plans to follow up with the authorities on sequencing, costing, and consistency with fiscal objectives.

### Fund relations and selected macro-financial data (as of December 31, 2020)
- Membership status: Joined December 27, 1945; Article XIV.
- General Resources Account (SDR Million / Percent of Quota)
  - Quota 1,663.80 100.00
  - Fund Holdings of Currency 2,283.16 137.23
  - Reserve Tranche Position 289.95 17.43
- SDR Department (SDR Million / Percent of Allocation)
  - Net Cumulative Allocation 1,134.50 100.00
  - Holdings 1.32 0.12
- Outstanding Purchases and Loans
  - Stand-By Arrangements 909.30 54.65
- Latest financial arrangements (excerpt)
  - Stand-By  Jul 07, 2016  Jul 06, 2019  3,831.00  1,494.20
  - Stand-By  Feb 24, 2010  Feb 23, 2013  2,376.80  1,069.56
  - Stand-By  Dec 19, 2007  Mar 18, 2009    475.36    0.00
- Overdue obligations and projected payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
  - Forthcoming
    - 2021 Principal 690.23
    - 2021 Charges/Interest 7.93
    - 2022 Principal 219.08
    - 2022 Charges/Interest 2.18
    - 2023 Charges/Interest 0.92
    - 2024 Charges/Interest 0.92
    - 2025 Charges/Interest 0.92
  - Total (presented row): 698.15 221.25 0.92 0.92 0.92
- Safeguards and exchange arrangements:
  - Most recent safeguards assessment of the Central Bank of Iraq (CBI) completed April 2016; concluded CBI continues to face capacity constraints and difficult security situation; progress in strengthening internal audit and financial reporting has been slow.
  - Exchange rate arrangement: classified as a conventional peg arrangement.
  - Effective December 20, 2020, the official exchange rate was set at ID 1,460 per U.S. dollar including the Central Bank commission (ID 1,450 plus ID 10 (fees)). Previously, on May 24, 2018, the official exchange rate was set at ID 1,190 per U.S. dollar including the Central Bank commission (ID 1,182 plus ID 8 (fees)).
  - The CBI provides foreign exchange at the official exchange rate for permissible transactions through daily auctions; many transactions take place at parallel market exchange rates for excluded transactions.

*Source: IMF staff report excerpts from the Iraq 2020 Article IV consultation informational annex and related annexes.*

### 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 under Article VIII, Section 3

### Multiple Currency Practice (MCP)
- 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.

### Recent IMF Engagement and Resident Representation
- Last Article IV consultation concluded on July 19, 2019; staff report (IMF Country Report No. 19/248) published on July 26, 2019.
- Resident Representative: Mr. Gazi Shbaikat, based in Amman, since January 2021.

### Technical Assistance (2015–20) — Areas and Activities
- FAD (Public Financial Management, Revenue Administration, Treasury and Budgeting)
  - 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
  - August 2016: Implementing a commitment controls system (METAC)
  - 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 2017: Seminar on Commitment Control System
  - January 2018: Assist in the development of an IT System
  - February 2018: Commitment controls, cash management and TSA (FAD-METAC)
  - March 2018: Improved Integration of Asset and Liability Management Framework
  - April 2018: Follow-up on establishment and functioning of large taxpayer office
  - July 2018: Follow-up on Treasury Single Account and Cash Flow Management Unit (METAC)
  - July 2018: Budget Classification and Chart of Accounts (METAC)
  - August 2018: Implementation Plan for New Sales Taxes (METAC)
  - March 2019: Budget Classification and Chart of Accounts (METAC)
  - June 2019: Managing guarantees and extra-budgetary funds (METAC)
  - December 2020: Operationalizing the guarantee framework (METAC)

- LEG (Legal and AML/CFT; Central Bank Law)
  - May 2015: Desk review of the draft AML/CFT Law
  - June 2015: Article VIII acceptance
  - September 2015: Desk review of the draft AML/CFT Law
  - January 2016: Anti-money laundering activities
  - March 2016: Cross-border financial flows
  - June 2016: AML/CFT: Review of the framework to implement targeted financial sanctions
  - December 2016: UNODC seminar on Strengthening the Legal Regime Against Terrorism in Iraq
  - December 2016: Program TA in Central Bank Law
  - December 2017: Review of AML/CFT law and integration of internal comments
  - January 2018: Review of the "AML/CFT Regulations for Dealers in Precious Metals and Stones"
  - January 2018: Review of the "Process for Implementing Targeted Financial Sanctions"
  - June 2019: Guarantees and extra-budgetary funds management

- MCM (Financial sector, banking supervision, reserve management)
  - May 2015: Asset management
  - November 2015: Banking supervision (METAC)
  - November 2015: Prudential regulations: review and assessment (METAC)
  - March 2016: Seminar on foreign exchange regimes and controls (Joint LEG/MCM)
  - September 2016: Reserve management workshop
  - November 2016: Regulations on capital adequacy and liquidity (METAC)
  - March 2017: Regulations on credit risk (METAC)
  - March 2017: Banking supervision: upgrade CBI prudential regulations (METAC)
  - April 2017: Banking supervision (METAC)
  - June 2017: Improving Regulatory Framework (METAC)
  - February 2018: Improving Regulatory Framework—Follow-up (METAC)
  - September 2018: Regulatory Framework of Internal Audit (METAC)
  - November 2018: Training on dealing with weak banks (METAC)
  - November 2018: Forecasting and Policy Analysis System (FPAS)
  - September 2019: Implementation of Basel III (METAC)
  - January 2020: Basel II & III capital adequacy requirements (METAC)
  - June 2020: Basel II & III capital adequacy requirements (METAC)

- STA (Statistics: government finance, CPI, national accounts, external sector, FSIs)
  - March 2015: Government finance statistics (ArabStat)
  - May 2015: Government finance statistics
  - November 2015: Consumer price index (METAC)
  - January 2016: National accounts statistics (METAC)
  - March 2016: Government finance statistics
  - March 2016: External sector statistics
  - April 2016: Financial stability indicators
  - January 2017: National accounts (METAC)
  - January 2017: External sector statistics (METAC)
  - February 2017: Price statistics (METAC)
  - August 2017: National accounts (METAC)
  - April 2018: External sector statistics (METAC)
  - August 2018: National accounts (METAC)
  - October 2018: Price statistics (METAC-EDDI2)
  - December 2018: Government finance statistics
  - December 2018: FSI: Financial soundness indicators
  - July 2019: Consumer price index and producer price index (METAC)
  - September 2019: External sector statistics (METAC)
  - February 2020: FSI: Financial soundness indicators
  - February 2020: National accounts (METAC)
  - July 2020: Producer price index (METAC)
  - September 2020: Consumer price index and Producer price index
  - October 2020: National accounts (METAC)
  - December 2020: Producer price index

### Relations with Other International Financial Institutions
- World Bank: http://projects.worldbank.org/search?lang=en&searchTerm=&countrycode_exact=IQ

### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of December 23, 2020)
- General
  - Data provision to the Fund has serious shortcomings that significantly hamper surveillance.
  - The 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 by production at current and constant (2007) prices and annual GDP by expenditure in current prices.
  - Quarterly national accounts available from 2018Q2 to 2020Q3.
  - National accounts mainly follow the 1968 System of National Accounts (SNA, 1968).
  - Lack of regular, reliable and comprehensive source data for some industries and for GDP by expenditure undermines national accounts quality.
  - Volume estimates of GDP suffer from 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 TA from METAC is helping CSO introduce a new base/benchmark year, develop supply and use tables, and improve compilation methodology and coverage based on 2008 SNA guidelines.
  - Access to administrative data would enhance coverage and timeliness, but requires strong ministerial support and proactive collaboration.

- Price Statistics
  - CSO compiles monthly CPI for all-Iraq (including Kurdistan) and for each governorate; CPI covers only urban areas.
  - In 2016, the CPI was rebased to 2012, based on the 2012 Household Social and Economic Survey (HSES).
  - A new survey is planned for June 2021.
  - Since June 2014, official CPI data exclude the four conflict-affected governorates.
  - 2020 TA mission assisted CSO to compile a quarterly producer price index (PPI) according to international guidelines, primarily to rebase to 2020 using weights from the 2018 HSES.
  - Further TA requested to improve export and import price indexes and industrial production index and to begin compiling a residential property price index.

- Government Finance Statistics (GFS)
  - Security situation impacts data compilation and analysis; infrequent submission and delays; coverage of Kurdistan remains sketchy.
  - Authorities taking measures to address shortcomings.
  - STA GFS TA missions proposed a work plan to improve frequency and timeliness of fiscal reporting and set a migration plan to GFSM 2014.
  - Iraq resumed reporting GFS for publication in the IMF GFS database.
  - Shortcomings exist in classification of revenue (mainly related to oil revenues) and in expenditure as data by functions of government are not reported.
  - Reporting of stock and transactions in assets and liabilities, especially currency and deposits and external debt, is limited.

- Monetary and Financial Statistics
  - CBI reports monetary statistics for the central bank and other depository corporations for publication in the IMF’s International Financial Statistics (IFS), using standardized report forms (SRFs).
  - Timeliness hampered by capacity constraints; SRFs have not been updated since August 2019.
  - According to the CBI, some foreign-owned companies operating in Iraq are classified as nonresidents; alignment with international residence concept will be needed.
  - Iraq reports some Financial Access Survey (FAS) data, including two indicators adopted by the UN to monitor Target 8.10 of the SDGs.

- Financial Sector Surveillance
  - After April 2016 mission, CBI compiled 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 and February 2020 workshop assisted authorities in compiling sectoral FSIs covering the entire banking sector, merging state-owned and private bank FSIs, and preparing metadata.
  - Provisional data under review by STA have been submitted.

- External Sector Statistics
  - CBI compiles and reports annual and quarterly balance of payments data in BPM6 format to the IMF.
  - CBI compiles and disseminates an annual international investment position (IIP) statement; IIP dissemination suspended starting in 2016, latest data refers to 2014.
  - Latest TA mission on external sector statistics (ESS) was in September 2019.
  - Net errors and omissions (NEOs) remain high and persistently negative, suggesting capital flight.
  - STA will continue assisting CBI to address large NEOs sources: 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 the IFS since end-2006.

- External Trade Statistics
  - External trade data have serious problems of timeliness and quality due to absence of reliable customs data.
  - A new customs form for imports is available but not being used at the customs border due to security situation and lack of Customs Department resources.
  - Compilation hampered by lack of interinstitutional coordination among key data providers.
  - Coverage of private sector imports constrained by lack of data sources; only goods paid through the Iraqi banking system are captured.
  - Goods imported under external payments arrangements (e.g., imports for direct investment projects by international oil companies) are not recorded in the balance of payments.
  - Coverage excludes Kurdistan; no estimates for smuggling are made.
  - Export data from the oil sector are received from the Balance of Payments Statistics Division at the CBI.
  - Non-oil exports amount to the equivalent of 3–5 percent of total exports; non-oil export data derived from customs export form and provided to CBI monthly for crosschecking.
  - 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 yet launched a National Summary Data Page for key macroeconomic statistics.
  - Metadata for key macroeconomic indicators were updated in early 2016 and are available on the IMF’s Dissemination Standards Bulletin Board country page.

### Table of Common Indicators Required for Surveillance (As of December 23, 2020) — Selected entries
- Exchange rates: Date of Latest Observation 08/2020; Date Received 10/2020; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- International reserve assets and reserve liabilities of the monetary authorities1: Date of Latest Observation 08/2019; Date Received 11/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4–6-week lag
- Reserve/Base money: Date of Latest Observation 09/2020; Date Received 11/2020; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4–6-week lag
- Broad money: Date of Latest Observation 09/2020; Date Received 11/2020; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4–6-week lag
- Central bank balance sheet: Date of Latest Observation 10/2020; Date Received 11/2020; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4–6-week lag
- Consolidated balance sheet of the banking system: Date of Latest Observation 09/2020; Date Received 11/2020; Frequency of Data M; Frequency of Reporting M; Frequency of Publication Q, 4–6-week lag
- Interest rates2: Date of Latest Observation 01/2017; Date Received 02/03/2017; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M, 4–6-week lag
- Consumer price index: Date of Latest Observation 11/2020; Date Received 12/22/2020; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Revenue, expenditure, balance and composition of financing—general government3—4: Date of Latest Observation 12/2020; Date Received 12/2020; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication A
- Revenue, expenditure, balance and composition of financing—central government3: Date of Latest Observation 12/2020; Date Received 12/2020; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication A
- Stocks of central government and central government-guaranteed debt5: Date of Latest Observation 12/2019; Date Received 12/2020; Frequency of Data A; Frequency of Reporting A; Frequency of Publication N/A
- External current account balance: Date of Latest Observation Q2/2020; Date Received 10/2020; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q
- Exports and imports of goods and services: Date of Latest Observation Q2/2020; Date Received 10/2020; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q
- GDP/GNP: Date of Latest Observation Q3/2020; Date Received 12/2020; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q
- Gross external debt: Date of Latest Observation 12/2019; Date Received 12/2020; Frequency of Data A; Frequency of Reporting A; Frequency of Publication N/A
- International investment position6: Date of Latest Observation 12/2014; Date Received 12/06/2016; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q

Footnotes in table (preserved as in source):
- 1 Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.
- 2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes, and bonds.
- 3 Foreign, domestic bank, and domestic non-bank financing.
- 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- 5 Including currency and maturity composition.
- 6 Includes external gross financial asset and liability positions vis-à-vis nonresidents.
- 7 Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

### Economic and Policy Developments (Statement by Executive Director and Authorities, February 8, 2021)
- Macroeconomic shocks and social impact
  - Iraq faced multi-dimensional challenges in the past year from the COVID-19 pandemic, the collapse in international oil prices, and the decline in oil production owing to OPEC+ commitments.
  - The pandemic could push 4.5 million Iraqis, 12 percent of population, into poverty, potentially increasing the poverty rate to 32 percent.
  - Real GDP contracted by an estimated 11 percent in 2020.
  - Large fiscal and external deficits emerged: fiscal deficit of 20 percent of GDP and external deficit of 16 percent of GDP.

- Policy priorities and reform agenda
  - Authorities’ immediate focus: minimizing loss of life from COVID-19, strengthening social safety nets, and ensuring macroeconomic stability.
  - December 2020: Council of Ministers approved and sent to Parliament a draft 2021 budget proposing wide-ranging fiscal consolidation measures while increasing health spending and targeted cash transfers to the vulnerable.
  - December 19, 2020: Central Bank of Iraq announced a 22.7 percent devaluation of the Iraqi dinar/USD exchange rate to narrow the external deficit and mitigate pressures on foreign exchange reserves.
  - Government unveiled a White Paper in October 2020 aiming for sustainable and inclusive medium term growth with objectives: rehabilitating the financial sector; reforming state-owned production sectors; improving key infrastructure; enhancing provision of public services and social assistance; strengthening governance and legal environment.
  - Authorities preparing an action plan to operationalize White Paper reforms and working with the World Bank and other bilateral partners on mobilizing donor assistance.
  - General elections planned for October 2021; consensus-building and broad social acceptance are essential for reform implementation.

- IMF financing requests
  - Authorities requested emergency financing under the Fund’s Rapid Financing Instrument and expressed interest in a follow-up Extended Fund Facility.

### COVID-19 Response Measures
- Health and social measures
  - CBI established a fund to collect donations from financial institutions which raised a total of US$37 million.
  - Supreme Committee for Health and National Safety introduced a US$254 million cash transfer scheme targeting families of private sector workers without government salaries or benefits.
  - Ministry of Health approved use of a number of vaccines; authorities prepared a draft health plan for acquisition and distribution of a vaccine.
  - Authorities agree with staff proposal to establish a dedicated COVID-19 fund to combine budgetary and donor resources; draft 2021 budget allocates US$0.5 billion to the initiative.
  - Key ministries and partners (WHO, UNDP, UNICEF, World Bank) will manage the fund's resources; specialized UN agencies will be responsible for procurement.

- Monetary and macro-financial measures
  - CBI reduced reserve requirement from 15 percent to 13 percent.
  - At onset of crisis, CBI announced a moratorium on interest and principal payments by SMEs through the “one trillion ID” initiative and encouraged banks to extend maturities of loans as appropriate.
  - CBI later offered additional support to existing SMEs under the “one trillion ID” initiative and reduced interest rates on loans under the scheme.
  - CBI encouraged electronic payments and instructed vendors to eliminate commissions on such payments for six months.

### Fiscal Policy and Reforms (draft 2021 budget and measures)
- Draft 2021 budget measures include:
  - A nominal freeze of government wages, allowances, and pensions;
  - A hiring freeze;
  - Removal of the exemption of government allowances from the payroll tax;
  - A considerable increase in the domestic price of crude oil;
  - An increase in excise and sales taxes on alcohol, tobacco, car sales, and shopping malls; and personal income tax.
- Additional measures:
  - Introduction of a 40 percent solidarity tax on the incomes of the Prime Minister, the President, Speaker of Parliament, and Head of the Judiciary.
  - Introduction of a 30 percent tax on the incomes of ministers and their deputies.
- Fiscal adjustment aims to avoid cuts to critical social and infrastructure spending; budgetary allocations for these were increased in the draft 2021 budget.
- Authorities acknowledge a larger short-term fiscal adjustment may be needed for debt sustainability but stress consideration of fragile security, political, and social context.
- Fiscal reforms in the White Paper include civil service reform, pension reform, automation of customs procedures, and strengthening administration.
- Council of Ministers adopted an enhanced framework for vetting and issuing government guarantees to minimize fiscal risks from off-budget expenditure, government guarantees, and arrears.

### Monetary and Exchange Rate Policies
- December 19, 2020: CBI announced a 22.7 percent devaluation of the IRD/USD exchange rate.
  - Objectives: narrow the external deficit, mitigate pressures on foreign exchange reserves, help improve the fiscal balance, and reduce the need for monetary financing of the budget.
- Devaluation was accompanied by contingency planning, efforts to maintain liquidity provision to banks, and a public communication strategy.
- Authorities and staff concur that a strong fiscal framework is essential to ensure credibility of the exchange rate peg and minimize future needs for monetary financing.

### Social Protection and Inclusive Growth
- Expected socio-economic impacts
  - Poverty expected to rise sharply due to COVID-19, projected increase in inflation following exchange rate devaluation, and proposed reduction in public wage bill and pensions.
- Social protection measures in draft 2021 budget
  - Increase in allocation for cash transfers by IRD 2.5 trillion (79 percent) to:
    - Expand coverage to all eligible households; and
    - Raise the amount of assistance to shield the vulnerable from expected inflation increases.
  - Intent to reform the Public Distribution System food rationing program to improve implementation and targeting to protect the poorest groups.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### Conclusion

### Conclusion

### Main challenge
- Iraq faces the serious challenge of maintaining economic stability, while ensuring durable social stability, peace and inclusive growth.

### Appreciation and engagement with the Fund
- The Iraqi authorities would like to express their deep appreciation for the Fund’s Executive Board, management, and staff for their continued support.
- They particularly appreciate staff’s hard work and constructive engagement, as well as the valuable capacity development they are receiving in support of their stabilization and reform efforts.

*Source: 1irqea2021002 - Conclusion*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1irqea2021002.pdf_