IMF Executive Board Concludes 2020 Article IV Consultation with Iraq
February 11, 2021
Washington, DC: On February 8, 2021 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Iraq.
The COVID-19 pandemic and a sharp decline in oil revenues have exacerbated Iraq’s longstanding economic vulnerabilities. Real GDP contracted by an estimated 11 percent in 2020, reflecting a slowdown in non-oil activity and cutbacks in oil output as a result of OPEC+ decisions. Large fiscal and external current account deficits of 20 and 16 percent of GDP, respectively, constrained the government’s ability to mount an effective fiscal response to the crisis.
The authorities have begun to take much-needed steps towards ensuring macroeconomic stability while protecting the vulnerable. To help safeguard foreign exchange reserves and reduce the external imbalance, the Central Bank of Iraq has announced a devaluation of the exchange rate. Alongside, the draft 2021 budget, submitted to Parliament, aims to reduce the fiscal deficit through measures to contain the unsustainable expansion of government wage and pension bills and to raise non-oil revenues, while significantly boosting targeted assistance to shield the most vulnerable. The authorities have also set aside sizable resources in support of their efforts to minimize the loss of life to COVID-19, including through acquisition and distribution of a vaccine.
The economy is expected to gradually recover, and the imbalances to narrow, although the outlook remains challenging. Real GDP is projected to return to its pre-pandemic level by 2024. The fiscal and external current account deficits are projected to decline over the medium term. Government debt is expected to peak in 2023 and decline gradually thereafter.
This outlook hinges on strong implementation of reforms and is subject to significant downside risks. Political constraints ahead of the parliamentary elections, renewed bouts of social unrest, or security risks could undermine the reform efforts, putting macroeconomic stability at risk. Furthermore, pandemic‑related risks and oil market uncertainties could further complicate the economic situation.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They noted that the COVID 19 pandemic and the sharp decline in oil revenues have further exacerbated Iraq’s existing significant socio-economic fragilities. Directors also noted the authorities’ efforts to strengthen the health policy response, boost social safety nets, and reduce the fiscal and external deficits. Nevertheless, downside risks to the economic outlook remain significant amid a challenging socio-political environment. Directors emphasized that implementing strong policies and structural reforms is essential to ensure macroeconomic stability and achieve sustainable and inclusive growth.
Directors emphasized that reducing fiscal imbalances is critical to ensuring fiscal and debt sustainability. They welcomed the authorities’ planned fiscal reforms in the “White Paper” and encouraged their careful prioritization and swift implementation while minimizing the impact on the vulnerable. To create room for the much-needed reconstruction and social safety nets, Directors highlighted the importance of strengthening public finances. To this end, they called for a comprehensive civil service reform to contain the public wage bill and recalibration of the pension system to put it on solid financial footing. Priority also needs to be given to increasing non-oil revenues and strengthening public financial management to reduce the fiscal risks stemming from off-budget expenditures and government guarantees.
Directors concurred that the recent exchange rate adjustment would help reduce external imbalances and preserve foreign exchange reserves. They underscored that a strong fiscal framework remains critical to ensuring the credibility of the new exchange rate peg as well as minimizing future need for monetary financing of the budget. Directors also saw need for further monetary policy measures by the central bank to contain inflation.
Directors stressed that wide-ranging structural reforms are necessary to cement macroeconomic stability and pave the way for higher and more inclusive growth. They underscored that reform efforts should focus on stemming the financial losses in the electricity sector. This requires sustained efforts to strengthen governance and improve collection, as well as gradual adjustment of tariffs to increase cost recovery and reduce arrears. In addition, Directors emphasized the importance of reducing corruption in key public institutions, continued improvement and effective implementation of the AML/CFT framework, restructuring of large state-owned banks to foster financial stability, and developing the private sector.
Directors noted the authorities’ interest in emergency financing with the Fund to support their stabilization and reform efforts with some Directors encouraging a longer-term arrangement to address structural challenges.
It is expected that the next Article IV consultation with Iraq will take
place on the standard 12-month cycle.
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Iraq: Selected Economic and Financial Indicators, 2019–26 |
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Act. |
Projections |
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|
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
|
|
Economic growth and prices |
||||||||
|
Real GDP (percentage change) |
4.5 |
-10.9 |
1.2 |
3.9 |
5.7 |
4.1 |
3.1 |
3.4 |
|
Non-oil real GDP (percentage change) |
5.7 |
-8.0 |
5.0 |
1.1 |
2.5 |
2.7 |
3.4 |
3.6 |
|
GDP deflator (percentage change) |
-1.8 |
-12.6 |
23.5 |
3.6 |
1.6 |
1.9 |
2.6 |
3.2 |
|
GDP per capita (US$) |
5,687 |
4,286 |
4,287 |
4,498 |
4,705 |
4,865 |
5,020 |
5,203 |
|
GDP (in ID trillion) |
262.9 |
204.8 |
255.9 |
275.5 |
295.7 |
313.7 |
332.1 |
353.2 |
|
Non-oil GDP (in ID trillion) |
148.9 |
140.4 |
160.9 |
177.5 |
191.6 |
205.0 |
220.4 |
238.4 |
|
GDP (in US$ billion) 1/ |
222.4 |
172.0 |
176.5 |
190.0 |
203.9 |
216.4 |
229.1 |
243.6 |
|
Oil production (mbpd) |
4.58 |
4.00 |
3.95 |
4.18 |
4.50 |
4.73 |
4.87 |
5.01 |
|
Oil exports (mbpd) |
3.97 |
3.43 |
3.39 |
3.59 |
3.86 |
4.06 |
4.18 |
4.30 |
|
Iraq oil export prices (US$ pb) 2/ |
59.7 |
38.2 |
47.0 |
45.8 |
45.2 |
44.8 |
44.8 |
44.7 |
|
Consumer price inflation (percentage change; end of period) |
0.1 |
1.0 |
11.5 |
4.6 |
2.6 |
2.0 |
2.0 |
2.0 |
|
Consumer price inflation (percentage change; period average) |
-0.2 |
0.5 |
7.1 |
7.1 |
3.3 |
2.3 |
2.0 |
2.0 |
|
National Accounts (in percent of GDP) |
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|
Gross domestic investment |
15.1 |
17.2 |
19.1 |
16.8 |
16.4 |
16.1 |
16.0 |
15.9 |
|
Of which: public |
7.3 |
7.9 |
10.6 |
8.1 |
7.7 |
7.4 |
7.3 |
7.0 |
|
Gross domestic consumption |
83.0 |
96.0 |
82.9 |
84.5 |
84.6 |
85.0 |
84.7 |
84.6 |
|
Of which: public |
23.6 |
35.2 |
37.0 |
34.5 |
32.2 |
29.4 |
27.4 |
26.4 |
|
Gross national savings |
15.6 |
2.0 |
15.0 |
13.4 |
13.6 |
13.4 |
13.7 |
13.9 |
|
Of which: public |
8.7 |
-12.6 |
-5.7 |
-3.7 |
-1.1 |
1.7 |
2.8 |
3.1 |
|
Saving - Investment balance |
0.5 |
-15.2 |
-4.1 |
-3.3 |
-2.7 |
-2.7 |
-2.4 |
-2.0 |
|
Public Finance (in percent of GDP) |
|
|
|
|
|
|
|
|
|
Government revenue and grants |
37.8 |
30.0 |
40.8 |
40.5 |
40.6 |
40.6 |
39.5 |
38.4 |
|
Government oil revenue |
35.2 |
27.0 |
34.3 |
33.4 |
33.3 |
33.1 |
31.9 |
30.8 |
|
Government non-oil revenue |
2.6 |
3.0 |
6.5 |
7.1 |
7.4 |
7.5 |
7.6 |
7.6 |
|
Expenditure, of which: |
36.9 |
50.3 |
57.0 |
52.9 |
48.6 |
45.5 |
43.2 |
41.6 |
|
Current expenditure |
29.5 |
42.5 |
46.4 |
44.7 |
40.9 |
38.1 |
35.9 |
34.6 |
|
Capital expenditure |
7.3 |
7.9 |
10.6 |
8.1 |
7.7 |
7.4 |
7.3 |
7.0 |
|
Overall fiscal balance (including grants) |
0.9 |
-20.3 |
-16.2 |
-12.4 |
-8.0 |
-4.9 |
-3.7 |
-3.2 |
|
Non-oil primary fiscal balance, accrual basis (percent of non-oil GDP) |
-48.8 |
-59.4 |
-68.8 |
-57.9 |
-52.4 |
-46.8 |
-42.5 |
-39.7 |
|
Adjusted Non-oil primary fiscal balance, accrual basis (excl. KRG, percent of non- oil GDP) 2/ |
-45.2 |
-56.1 |
-63.9 |
-54.8 |
-50.0 |
-44.9 |
-40.9 |
-33.6 |
|
Adjusted non-oil primary expenditure (excl. KRG, percent of non-oil GDP) 3/ |
49.7 |
56.0 |
68.4 |
60.3 |
55.9 |
51.0 |
47.2 |
44.8 |
|
Adjusted non-oil primary expenditure (excl. KRG, annual real growth, percent) 4/ |
10.4 |
5.7 |
30.5 |
-9.1 |
-3.2 |
-4.5 |
-2.4 |
0.6 |
|
Memorandum items |
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|
Total government debt (in percent of GDP) 5/ |
48.5 |
83.1 |
83.0 |
89.7 |
91.6 |
91.3 |
89.9 |
87.7 |
|
Total government debt (in US$ billion) 6/ |
107.9 |
117.4 |
146.6 |
170.5 |
186.8 |
197.5 |
205.9 |
213.7 |
|
External government debt (in percent of GDP) |
31.4 |
49.6 |
37.9 |
33.0 |
28.8 |
26.1 |
23.7 |
21.7 |
|
External government debt (in US$ billion) |
69.8 |
70.0 |
67.0 |
62.7 |
58.6 |
56.5 |
54.3 |
52.8 |
|
Monetary indicators (percentage change) |
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|
Growth in reserve money |
15.8 |
29.5 |
38.3 |
23.3 |
11.5 |
6.9 |
5.0 |
4.8 |
|
Growth in broad money |
8.4 |
27.3 |
33.3 |
19.9 |
10.4 |
6.9 |
5.5 |
5.4 |
|
External sector (in percent of GDP) |
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|
Current account |
0.5 |
-15.2 |
-4.1 |
-3.3 |
-2.7 |
-2.7 |
-2.4 |
-2.0 |
|
Trade balance |
10.3 |
-6.6 |
3.7 |
3.8 |
3.7 |
3.5 |
3.6 |
3.5 |
|
Exports of goods |
40.3 |
29.0 |
34.3 |
33.0 |
32.8 |
32.3 |
31.6 |
30.7 |
|
Imports of goods |
-30.0 |
-35.6 |
-30.7 |
-29.2 |
-29.1 |
-28.8 |
-28.0 |
-27.2 |
|
Overall external balance |
0.8 |
-8.8 |
-2.1 |
-2.6 |
-3.2 |
-1.5 |
-1.3 |
-0.6 |
|
Gross reserves (in US$ billion) |
68.0 |
54.1 |
47.4 |
40.8 |
33.2 |
30.0 |
27.1 |
25.6 |
|
Total GIR (in months of imports of goods and services) |
10.7 |
9.4 |
9.2 |
6.7 |
5.0 |
4.3 |
3.9 |
3.5 |
|
Exchange rate (dinar per US$; period average) |
1,182 |
1,191 |
1,450 |
1,450 |
1,450 |
1,450 |
1,450 |
1,450 |
|
Real effective exchange rate (percent change, end of period) 7/ |
-1.2 |
... |
... |
... |
... |
... |
... |
... |
|
Sources: Iraqi authorities; and IMF staff estimates and projections. |
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1/ Converted from GDP in local currency using the period-average exchange rate (1191 in 2020). |
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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. |
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3/ Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non-oil tax revenues from the KRG to the federal government. |
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4/ Adjusted to exclude full year estimate of federal government transfers to the Kurdistan Regional Government. |
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5/ Includes arrears. The debt stock includes legacy arrears to non-Paris Club creditors on which the authorities have requested (but not yet obtained) Paris-Club comparable relief. Implementing comparable terms will substantially reduce debt (e.g. by 15 percent of GDP in 2017). The 14 percentage points increase in 2020 is partly attributed to a devaluation in mid-December 2020 which led to an upward revision of external debt. |
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6/ Converted from the total government debt in local currency using the end-of-period exchange rate (1450 in 2020). |
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7/ Positive means appreciation. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
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