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