Iraq: 2019 Article IV Consultation and Proposal for Post-program Monitoring—Press Release; Staff Report; And Statement by the Executive Director for Iraq
Author: International Monetary Fund. Middle East and Central Asia Dept.
Publication Date:
26 Jul 2019
eISBN:
9781513508887
Language:
English
Keywords:
ISCR; CR; government; CBI governance; price; face challenge; debt; capital expenditure; fiscal policy; th e authorities; private sector; personal income; Oil prices; Global
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2019 Article IV Consultation and Proposal for Post-Program Monitoring-Press Release; Staff Report; and Statement by the Executive Director for Iraq

Abstract

2019 Article IV Consultation and Proposal for Post-Program Monitoring-Press Release; Staff Report; and Statement by the Executive Director for Iraq

Background: Improved Policy Environment but Medium-Term Risks on the Rise

A. Context

1. Despite its vast oil wealth, Iraq has major development needs and significant institutional weaknesses. It possesses the world’s fourth largest oil reserves, which are projected to last over 100 years at current production rates (Figure 1). Slow progress at channeling these resources into human and physical capital reflects decades of political upheaval and armed conflict as well as the resulting weakness of public institutions; weak governance and corruption are widely acknowledged elements of the problem.1 An exodus of skilled workers amidst poor security conditions since the second gulf war in 2003 has eroded human capital, while the more recent conflict with ISIS led to 100,000 deaths, five million internally displaced people and an estimated $46 billion of damage to infrastructure and property.2 As a result, Iraq’s development needs include large infrastructure gaps, poor basic services, subpar health and education outcomes, and widespread poverty; GDP has barely grown in per capita terms over the past five years.

Figure 1.
Figure 1.

Iraq: An Oil Dependent Economy, 1980–2018

Citation: IMF Staff Country Reports 2019, 248; 10.5089/9781513508887.002.A001

Sources: OPEC; Rystad Energy; World Bank; U.S. Energy Information Agency; World Economic Outlook; BACI International Trade database; and IMF staff calculations.
uA01fig01

Forty Years of Political and Oil Price Shocks

Citation: IMF Staff Country Reports 2019, 248; 10.5089/9781513508887.002.A001

Sources: World Economic Outlook; and IMF staff calculations.
uA01fig02

GDP Per Capita

(Index; 2008= 100)

Citation: IMF Staff Country Reports 2019, 248; 10.5089/9781513508887.002.A001

Sources: World Economic Outlook; and IMF staff calculations.
uA01fig03

GDP Per Capita

(Index; 2013 = 100)

Citation: IMF Staff Country Reports 2019, 248; 10.5089/9781513508887.002.A001

Sources: World Economic Outlook; and IMF staff calculations.

2. Weak fiscal policy frameworks, which are ill equipped to cope with oil price shocks, have contributed to these outcomes. The authorities have generally saved little during oil price booms, instead ramping up current spending— particularly the civil service payroll and other items that are hard to cut—leaving them with limited buffers when oil prices dipped, and necessitating sharp cuts in investment and the accumulation of arrears. Such procyclical patterns coupled with poor public financial management and inefficient public procurement have hindered investment in infrastructure, especially electricity,3 undermining both core public services and the overall business environment.

uA01fig04

Capital Stock

(Index 1980 = 100)

Citation: IMF Staff Country Reports 2019, 248; 10.5089/9781513508887.002.A001

Source: Penn World Tables.

3. The Fund provided a $5.3 billion SBA in 2016 and significant capacity development (see Annex I) to support the authorities’ response to the twin shocks of ISIS and the collapse in oil prices. The main achievements under the SBA were the preservation of the pegged exchange rate, a large fiscal consolidation (albeit mainly through capital expenditure cuts), a reduction in external arrears, and progress on AML/CFT. However, a number of structural fiscal measures were reversed or not enacted, and there has been limited progress at restructuring public banks or strengthening public institutions, while the authorities’ response to Fund advice in the context of the last Article IV has been mixed (see Annex II). The SBA went off track after the second review in August 2017, and expires in July 2019.

4. An improved security situation and the windfall from higher oil prices offer an opportunity to rebuild the country and tackle longstanding social problems. The government faces a wide range of socio-economic challenges, including repairing infrastructure and other property destroyed in the war, as well as improving the provision of electricity, water supply and other public services. A young and fast-growing population is exerting strains on public institutions, while job opportunities for the estimated 800,000 annual entrants to the labor market are limited.

5. The obstacles to progress are formidable. Geopolitical strains are a distraction, with the re-imposition of U.S. sanctions on Iran complicating energy reforms. 4 Weak governance and corruption have impeded public institutions and discouraged private-sector investment and job creation. More positively, relations between Baghdad and the Kurdistan Regional Government (KRG) have improved over the past year.

B. Recent Developments: Slow Post-War Recovery

6. Post-war reconstruction and economic recovery have been slow. The large-scale reconstruction effort that was expected in liberated areas has not yet materialized, with capital spending in these areas totaling just ID 100 billion ($85 million) in 2018, or less than 0.5 percent of the estimated damage. Non-oil GDP rose by only 0.8 percent year-on-year in 2018 on account of weak execution of public investment (including reconstruction) and power outages, while overall GDP contracted by around 0.6 percent as oil production was cut to comply with the OPEC+ agreement. Inflation was flat over the year as a whole (Tables 1–2).

Table 1.

Iraq: Selected Economic and Financial Indicators, 2015–24

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.

Negative price differential of about $3.6 per barrel compared to the average petroleum spot price (average of Brent, West Texas and Dubai oil prices) in 2018–23.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude full year estimate of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Includes arrears. The debt stock includes legacy arrears to non-Paris Club creditors on which th e authorities have requested (but not yet obtained) Paris-Club comparable relief. Implementing comparable terms will substantially reduce debt (e.g. by 15 percent of GDP in 2017).

Positive means appreciation.

Table 2.

Iraq: Central Government Fiscal Accounts, 2015–24

(In trillions of Iraqi dinars, unless otherwise indicated)

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.

Five percent of oil exports as mandated by U.N. Security Council Resolution 1483 to finance war reparations to Kuwait.

Includes unidentified financing only.

Adjusted to exclude full year estimates of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government.

The non-oil primary fiscal balance on cash basis adjusts the non-oil primary balance measured on accrual basis by subtracting the spending financed by arrears’ accumulation during that period, and adding the repayment of arrears from previous years.

7. The fiscal and external positions improved significantly in 2018 due to the rebound in oil prices and underexecution of the capital budget (Tables 3–5).

  • A large fiscal surplus—around 8 percent of GDP—was recorded in 2018 due to larger than expected oil revenues and a significant underexecution of the capital budget. However, the underlying fiscal position barely improved as non-oil revenue collection declined significantly (due to weak compliance) and current spending expanded by 5 percentage points of non-oil GDP.

  • The government retired some domestic debt, including unwinding ID 1 trillion (about$0.9 billion) of indirect monetary financing, and accumulated fiscal buffers (about $17 billion). Public debt fell to 49 percent of GDP at end-2018 (Table 1).

  • Higher oil prices and the modest improvement in the underlying fiscal position also led to a large current account surplus in 2018 (5¾ percent of GDP). Gross international reserves reached $65 billion by end-December, outstripping standard reserve adequacy metrics.

  • The spread between official and market FX rates has narrowed to below 2 percent in recent months, from 6.25 percent at end-2017, as the comfortable reserve position has allowed the CBI to satisfy banks’ FX demand.

Table 3.

Iraq: Central Government Fiscal Accounts, 2015–24

(In percent of GDP)

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.

Five percent of oil exports as mandated by U.N. Security Council Resolution 1483 to finance war reparations to Kuwait.

Includes unidentified financing only.

Adjusted to exclude full year estimates of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government.

The non-oil primary fiscal balance on cash basis adjusts the non-oil primary balance measured on accrual basis by subtracting the spending financed by arrears’ accumulation during that period, and adding the repayment of arrears from previous years.

Table 4.

Iraq: Central Government Fiscal Accounts, 2015–24

(In percent of non-oil GDP)

article image
Sources: Iraqi authorities; and Fund staff estimates and projections.

Five percent of oil exports as mandated by U.N. Security Council Resolution 1483 to finance war reparations to Kuwait.

Includes unidentified financing only.

Adjusted to exclude full year estimates of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non oil tax revenues from the KRG to the federal government.

The non-oil primary fiscal balance on cash basis adjusts the non-oil primary balance measured on accrual basis by subtracting the spending financed by arrears’ accumulation during that period, and adding the repayment of arrears from previous years.