Foreign exchange market volatility and reduced oil production have affected Iraq’s growth momentum.
IMF News, May 31, 2023
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- Published: May 31, 2023
Growth, production, and inflation: recent developments and near-term outlook
- Mission dates: visited Amman, Jordan from May 24-31.
- Oil production:
- "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.
- Real non-oil GDP:
- "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 FX market stabilizing, "growth of real non-oil GDP is expected to resume and reach 3.7 percent in 2023."
- Inflation:
- "After spiking to 7 percent in January, inflation has begun to moderate" and "is projected to average 5.6 percent in 2023."
- Drivers include lower international commodity prices and a "10-percent revaluation of the dinar."
Fiscal and external positions, balances, and reserves
- 2022 outcomes:
- "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."
- "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."
- Draft 2023 budget implications:
- 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."
- Combined effects of increased government spending, exchange rate revaluation, and reduced oil production would "bring the fiscal break-even oil price to $96 per barrel."
Risks, scenarios, and macroeconomic stability concerns
- Short-run risks:
- "implementation of the authorities’ fiscal plans could re-ignite inflation and FX market volatility."
- Medium-term risks:
- "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."
Key policy recommendations and priorities
- Fiscal policy and revenue:
- "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."
- Priorities include:
- "diversifying fiscal revenues"
- "reducing the oversized government wage bill"
- "reforming the pension system to make it financially sound and more inclusive"
- while supporting increased social assistance, the mission "recommends stronger targeting" to reach the most vulnerable.
- Public financial management and governance:
- "The mission cautions against the planned establishment of new extrabudgetary funds" and "strongly recommends adhering to on-budget government expenditures."
- 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."
- Calls for "accelerated efforts to establish a Treasury Single Account."
- Monetary and financial sector:
- "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."
- Structural and growth-enhancing reforms:
- "Creating an enabling environment for private sector development" with priorities:
- "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"
- "improving the broader business environment."
IMF engagement
- The statement reflects IMF staff preliminary findings; "the views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board."
- "The IMF staff team stands ready to support the authorities in their reform efforts."
IMF Staff Concludes Staff Visit to Iraq — Press Release No. 23/188 (May 31, 2023).