The Executive Board of the International Monetary Fund (IMF) has concluded its Article IV consultation with Iraq, endorsing the staff appraisal without a formal meeting. The IMF's assessment indicates that Iraq's economy is experiencing significant challenges, particularly in its non-oil sector. Growth in this area slowed from 13.8% in 2023 to an estimated 2.5% in 2024 due to reduced public investment and a weaker trade balance.
Iraq's fiscal expansion has increased vulnerabilities, exacerbated by declining oil prices. The required oil price to balance the budget rose to approximately $84 in 2024 from $54 in 2020. With financing constraints worsening, risks of sovereign debt stress have increased, necessitating urgent policy action.
The IMF suggests a sizable fiscal adjustment to mitigate macro-fiscal risks and stabilize debt over the medium term. In the short term, authorities are advised to review spending plans for 2025 and limit non-essential expenditures. Enhancing non-oil revenues through excise increases and customs duties is recommended.
Revenue-side reforms could include strengthening tax administration and introducing a general sales tax over time. On spending, reforms like limiting mandatory hiring could yield savings. Efforts to improve targeting within the public distribution system are noted as positive steps.
Non-oil capital expenditure should be protected due to its importance for economic diversification and energy security enhancement through infrastructure modernization.
Monetary policy transmission improvements are suggested via CB-bills issuance adjustments and liquidity forecasting tools refinement.
Strengthening Iraq's domestic financial system remains crucial, with commendations for transitioning trade finance management to commercial banks aiding exchange rate stability efforts.
State-owned bank reforms show promise but require comprehensive restructuring plans addressing loans and governance issues. The private banking sector needs exploration into reform options focusing on ownership structure and regulatory requirements.
Structural reforms across labor markets, business regulation, financial sectors, and governance could potentially double non-oil GDP growth medium-term if implemented effectively. Key priorities include enhancing workforce participation among women through education improvements and removing legal barriers.
Electricity sector reform is critical due to chronic power shortages affecting productivity; improving billing collection systems is encouraged alongside tariff adjustments for cost recovery purposes.
Efforts against corruption continue with progress reported under national strategies; however, significant challenges remain requiring further measures like transparency law enactment and alignment with international standards for effective enforcement.
Data deficiencies persistently undermine economic assessments; thus focus on addressing data gaps is essential following numerous capacity development initiatives received by Iraq.
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