Iraq: Concluding Statement of the 2025 IMF Article IV Mission
IMF News, May 15, 2025
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- Published: May 15, 2025
Mission overview
- An IMF mission, led by Mr. Jean-Guillaume Poulain, met with the Iraqi authorities in Amman and Baghdad during May 4–13 to conduct the 2025 Article IV consultation.
- The mission issued this concluding statement at the end of the mission.
Recent economic developments, outlook and risks
- Non-oil sector growth and inflation:
- Non-oil GDP grew 13.8 percent in 2023 and is expected to have moderated to 2.5 percent in 2024.
- Non-oil GDP is projected to slow to 1 percent in 2025.
- Overall growth contracted by 2.3 percent in 2024.
- Inflation dropped to 2.7 percent by end-2024.
- Sectoral and external developments:
- Agriculture, manufacturing, and construction sectors remained resilient, benefiting from post-drought recovery, expanded refining capacity, and strong growth in credit to households.
- Decline in oil production weighed on overall growth.
- Current account surplus narrowed from 7.5 percent to 2 percent of GDP in 2024 due to a surge in goods imports.
- External buffers: reserves at US$100.3 billion at end-2024—covering over 12 months of imports.
- Risks and outlook:
- A highly uncertain global environment, falling oil prices, and acute financing pressures are taking a toll on economic activity and exacerbating vulnerabilities.
- The current account is expected to weaken considerably in 2025 primarily due to declining oil export revenues.
- The deterioration in the external position is projected to weigh on foreign reserves.
Fiscal position and financing
- Fiscal deterioration and financing constraints:
- 2024 fiscal deficit is estimated at 4.2 percent of GDP, compared to 1.1 percent in 2023.
- Rising spending on wages and salaries and energy purchases contributed to the deterioration.
- Financing constraints have led to reemergence of arrears notably in energy and capital expenditure.
- Oil-dependence and fiscal breakeven:
- Dependence on oil revenues has worsened; the oil price required to balance the budget increased to around $84 in 2024, up from $54 in 2020.
Policy priorities and recommendations
- Immediate/very short-term actions:
- Review current and capital spending plans for 2025 and limit or postpone all non-essential expenditure.
- Explore increasing non-oil revenues by revising customs duties and introducing or raising excise taxes.
- Explore options to diversify the creditors base to increase financing availability.
- Avoid monetary financing of the deficit to prevent fueling inflation, draining FX reserves, and weakening the CBI’s balance sheet.
- Medium-term fiscal consolidation and revenue measures:
- Implement a sizable fiscal consolidation to mitigate macro-fiscal risks, ensure debt sustainability, and rebuild fiscal buffers.
- Revenue-side reforms:
- Gradually reform personal income tax by limiting exemptions and increasing rates.
- Strengthen tax administration through digitalization, improved enforcement, and better collection.
- A more effective tax administration should allow for eventually introducing a general sales tax.
- Spending-side reforms:
- Curb current expenditures, particularly via comprehensive wage bill reforms, limiting mandatory hiring, and adopting attrition rules.
- Further improve targeting of the public distribution system and eventually shift to cash-based social safety nets.
- Urgently reform the public pension system through raising the retirement age and reducing both the accrual and replacement rates.
- Reallocation to capital spending:
- Implementing reforms would create fiscal space to increase capital spending, especially non-oil investment in trade and transportation infrastructure.
- Substantial investments needed to modernize the electricity sector and develop natural gas resources.
- Improve procurement, public financial management, and corruption control to enhance effectiveness of public investment.
Monetary policy and banking system
- Central Bank of Iraq (CBI) guidance:
- Continue modernizing the banking system and supporting private banks in expanding their corresponding banking relationships.
- Continue to avoid financing the government deficit to safeguard the CBI’s balance sheet and preserve credibility.
- Liquidity management measures recommended:
- Further mop up excess liquidity to improve monetary policy transmission.
- Increase issuance of CB-bills, focusing on the short maturity (14-day) at the policy rate.
- Revise size limits on individual banks’ bids.
- Improve liquidity forecasting tools and practices.
- Trade finance and exchange rate considerations:
- Commended the CBI for successful transition to the new trade finance system; trade finance now fully processed by commercial banks through their correspondent banking relationships.
- This has supported a recent decline in the spread between the official and parallel market exchange rates.
- Additional measures to further reduce the spread include imposing Iraqi dinar usage for car and real estate transactions, improving customs controls to curb smuggling, and simplifying FX access.
Financial sector reform and AML/CFT
- State-owned banks and restructuring:
- Initial steps to reform state-owned banks are encouraging; the restructuring plan should be finalized without delay.
- Restructuring should encompass treatment of non-performing loans and recapitalization needs.
- Broader banking sector reforms:
- Undertake a comprehensive banking sector overhaul, including enhancing corporate governance, digital infrastructure, and cybersecurity, while promoting a stronger role for private banks.
- AML/CFT:
- Continue efforts to enhance AML/CFT measures by tackling deficiencies identified in the MENAFATF Mutual Evaluation report.
Electricity sector
- Key challenges:
- Chronic power shortages, electricity losses and excessive tariff subsidization continue to weigh on the economy.
- In 2024, distribution losses reached 55 percent, driven by theft and illegal connections, leading to significant financial losses.
- Recent disruptions in electricity imports from Iran underscore the need for diversified supply and development of gas projects.
- Policy measures:
- Deploy smart meters and accelerate measures to enhance billing and collection.
- Once collection substantially improves, achieve cost recovery through electricity tariff increases, with carefully calibrated subsidies targeted to low-income users.
- Invest in modernization of the electricity sector and gas development to improve energy security and reduce dependence on gas imports.
Governance, anticorruption, and structural reforms
- Anticorruption and governance:
- Steps taken in implementation and upgrade of the national anticorruption strategy and improvements in corruption perception indices are positive.
- Corruption remains a significant hurdle for growth.
- Priorities include strengthening accountability frameworks for state-owned and private enterprises in the oil, electricity and construction sectors.
- Ensure thorough compliance with Extractives Industries Transparency Initiative standards and enact the law on Transparency and Access to Information.
- Align anticorruption legal frameworks with international covenants and best practice and strengthen the independence of the judiciary.
- Structural reform agenda to unlock growth:
- A comprehensive set of reforms covering the labor market, business regulation, the financial sector and governance could double non-oil potential GDP growth over the medium term (mission estimate).
- Labor market reforms:
- Increase labor force participation, particularly among women, by improving female education and reducing barriers to work and mobility.
- Reform public sector hiring practices that distort labor markets and reduce productivity.
- Intensify efforts to better align skills with labor market needs.
- Business environment reforms:
- Simplify regulations and reduce bureaucratic impediments in areas such as business registration and tax administration to increase participation in the formal economy and help private sector development.
Closing
- The mission thanked the Iraqi authorities and various stakeholders for their hospitality, cooperation, and candid discussions during the mission.
Iraq: Concluding Statement of the 2025 IMF Article IV Mission (May 15, 2025).