IMF Staff Concludes Staff Visit to Iraq

IMF News, May 19, 2022

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Real non-oil GDP rebounded by an estimated 20 percent in 2021.
Real non-oil GDP is poised to expand by around 5 percent this year.
Oil output is projected to reach its pre-pandemic level and bring overall real GDP growth to 10 percent in 2022.
The war in Ukraine is affecting Iraq mainly through its global impact on commodity prices.
Soaring oil revenues in 2022 will more than offset the increased food and energy import bills.
Fiscal and current account balances are projected to post double-digit surpluses in percent of GDP.
Headline inflation is expected to climb to 6.9 percent, up from 6 percent last year.

Cushioning the impact of surging food prices on the most vulnerable is the most urgent priority.
The absence of the 2022 budget limits current fiscal expenditures to last year’s level.
Policy actions recommended to protect the vulnerable:
- Strengthen spending efficiency.
- Maintain tight control over public hiring.
- Reprioritize expenditures within the overall budget cap to enable boosting targeted cash transfers to the most vulnerable and contain the poverty impact of rising cost of living.

In the short run:
- Maintain fiscal discipline.
- Taper the central bank’s lending support to the real estate sector to help avoid adding to inflationary pressures.
Against elevated global risks and uncertainty, policy focus should shift toward:
- Consolidating economic stability.
- Strengthening Iraq’s long-term economic resilience.
Given limited near-term absorptive capacity, fiscal vulnerability to oil price volatility, and global energy transition challenges:
- Build buffers for the future by saving a portion of oil revenues via a carefully designed sovereign wealth fund.
Despite large reconstruction and other investment needs, prioritize saving and buffer-building over immediate large-scale spending.

Use current favorable oil market conditions to accelerate structural reforms envisaged in the authorities’ “White Paper.”
Key reform areas:
- Civil service reform to strengthen the quality of public services and create fiscal space.
- Reduce inefficient energy subsidies.
- Diversify fiscal revenues.
- Strengthen governance.
- Fix the electricity sector to reduce fiscal costs and enable private sector productivity.
- Improve coverage and targeting of social assistance to better protect the most vulnerable.
- Enhance governance in large state-owned banks and complete their audits and restructuring to facilitate access to finance and job creation by the private sector.

The mission welcomes the authorities’ increased attention to the challenges of climate change and the release of Iraq’s first Nationally Determined Contribution document last year.
Recommended near-term climate actions:
- Prioritize preparation of national climate adaptation and mitigation plans.
- Develop green financing.
- Fully integrate climate-related priorities into the macroeconomic policy framework.
The IMF stands ready to support Iraq in these endeavors.

Press Release No. 22/159 (May 19, 2022), IMF Staff Concludes Staff Visit to Iraq.