Abstract
IMF Country Report No. 23/75
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IMF Country Report No. 23/75
IRAQ
2022 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT
February 2023
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2022 Article IV consultation with Iraq, the following documents have been released and are included in this package:
A Press Release for the Article IV consultation with Iraq.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on a lapse-of-time basis, following discussions that ended on December 6, 2022, with the officials of Iraq on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 9, 2023.
An Informational Annex prepared by the IMF staff.
The documents listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2023 International Monetary Fund
Press Release
PR23/31
IMF Executive Board Concludes 2022 Article IV Consultation with Iraq
FOR IMMEDIATE RELEASE
Washington, DC – February 3, 2023: On January 27, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Iraq, and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.2
Iraq’s economy has been gradually recovering, supported by strong oil revenues and accommodative policies. Domestic inflation has been contained with the pass-through from high global commodity prices muted by domestic food and fuel subsidies. The economy has been largely shielded from the tightening of global financial conditions due to a largely closed capital account and limited private external borrowing.
The formation of a new government in October 2022 provides Iraq with an opportunity to rekindle the reform momentum, which has been stalled for over a year amid political uncertainty. The near-term outlook is positive with high oil revenues expected to produce fiscal and external current account surpluses. At the same time, Iraq’s dependence on oil and vulnerability to future oil price volatility have increased. In the baseline of gradually declining oil prices, fiscal and external deficits and financing pressures could re-emerge in the medium term, barring significant reforms.
Executive Board Assessment
In concluding the 2022 Article IV consultation with Iraq, Executive Directors endorsed the staff’s appraisal, as follows
The economy is recovering well, and the near-term outlook is positive amid a large oil windfall. Real GDP is estimated to have increased by 8 percent in 2022, driven by a 12-percent expansion in oil production, which is projected to continue rising from 4.4 to 5 million barrels per day by 2027. Real non-oil GDP growth is expected to accelerate from 3.2 percent in 2022 to 4 percent in 2023, helped by the stimulus from the Emergency Law for Food Security and Development, and settle at 3.5 percent in the medium term. Inflation remains subdued due to significant subsidies and price controls. Owing to strong oil revenues, fiscal and current account surpluses are expected to reach 6.1 and 8.1 percent of GDP, respectively, in 2023, boosting foreign exchange reserves to US$105 billion (10 months of prospective imports).
Nonetheless, the underlying vulnerabilities have increased and could manifest themselves in the medium term. The non-oil primary fiscal deficit has widened from 45 percent of non-oil GDP in 2019 to an estimated 63 percent of non-oil GDP in 2022 and is projected to remain elevated. With gradually declining global oil prices, both fiscal and external current account balances are expected to turn into deficits over the medium term, resulting in renewed financing pressures, drawdown of foreign exchange reserves, and exhaustion of fiscal savings. This outlook is subject additional downside risks related to a faster decline in oil prices, social unrest, escalation of geopolitical tensions, and realization of contingent liabilities, notably in the electricity sector.
Near-term policies should focus on addressing the cost-of-living crisis and saving the bulk of the oil windfall. Providing adequate indexation of targeted cash transfers and low-income pensions will be important to protect the vulnerable from the rising cost of living. The central bank should stand ready to tighten domestic financial conditions should inflation risks begin to materialize. The 2023 budget law should avoid a procyclical spending boost and aim to increase savings with a gradual tightening of the fiscal stance.
A sound fiscal framework would allow to better manage Iraq’s oil wealth and reduce vulnerabilities in a highly uncertain global environment. Adopting a fiscal rule targeting a gradual reduction of the non-oil primary fiscal deficit and building a fiscal stabilization buffer would help to carefully balance the goals of improving resilience to oil price volatility and long-term sustainability; containing the growth of current expenditures—most importantly the government wage bill—while raising non-oil revenues to create the space for priority social and development needs; and reducing Iraq’s dependence on oil.
Achieving sustainable and inclusive private sector-led growth in the medium term will entail accelerated structural reforms aimed at better protecting the vulnerable, creating a level playing field in the labor market, and improving private sector’s access to electricity and finance. To these ends, the authorities should prioritize enhancing the social safety net, including by making the pension system more sustainable and equitable, developing a national employment strategy, stemming losses and improving reliability of the electricity sector, and revitalizing the financial sector through restructuring of state-owned banks and continued enhancement of the AML/CFT framework.
The authorities should continue to advance their anti-corruption agenda. In addition to strengthening of public financial management, key priorities include advancing digitalization of key public institutions and business processes, expanding capacity of the Integrity Commission, and improving the legal framework and institutional structure for anti-corruption efforts.
Staff will continue to support the authorities’ efforts to improve data provision which still has serious shortcomings that significantly hamper surveillance.
It is expected that the next Article IV consultation take place on the standard 12-month cycle.
Iraq: Selected Economic Indicators, 2022–24
Positive means appreciation.
Iraq: Selected Economic Indicators, 2022–24
| Population: 43.5 million (2021 est.) | Per capita GDP: US$ 5,021 (2021) | ||
| Quota: SDR 1,663.8 million | Poverty rate: 23 percent (2014) | ||
| Main products and exports: Crude oil | |||
| Key export markets: United States, India, China, Soutd Korea | |||
| 2022 | 2023 | 2024 | |
| Est. | Proj. | ||
| Output | |||
| Real GDP (% change) | 8.1 | 4.2 | 3.1 |
| Non-oil real GDP (% change) | 3.2 | 4.2 | 4.0 |
| Prices | |||
| Inflation, end of period (%) | 4.5 | 3.7 | 2.5 |
| Central Government Finances | |||
| Revenues and grants (% of GDP) | 41.0 | 45.4 | 43.4 |
| Oil revenue (% of GDP) | 38.9 | 42.8 | 40.6 |
| Expenditure and net lending (% of GDP) | 34.7 | 39.3 | 41.1 |
| Wages and pensions (% of GDP) | 14.6 | 17.8 | 18.6 |
| Fiscal balance (% of GDP) | 6.3 | 6.1 | 2.3 |
| Non-oil primary balance (% of non-oil GDP) | -63.0 | -63.3 | -63.3 |
| Total government debt (% of GDP) | 42.9 | 40.3 | 37.1 |
| Money and Credit | |||
| Broad money (% change) | 6.6 | 20.7 | 15.3 |
| Credit to the economy (% change) | 9.0 | 10.4 | 9.1 |
| Balance of Payments | |||
| Current account (% of GDP) | 11.6 | 8.1 | 4.1 |
| Foreign direct investment (% of GDP) | 0.0 | -0.1 | 0.4 |
| Gross reserves (US$ billions) | 90.2 | 104.7 | 113.2 |
| In months of imports | 9.7 | 10.4 | 10.7 |
| Total external debt (% of GDP) | 23.0 | 22.2 | 21.0 |
| Exchange Rate | |||
| Exchange rate (dinar per US$; period average) | 1450 | 1450 | 1450 |
| REER (% change, end of period)1/ | … | … | … |
| Oil and Gas Sector | |||
| Crude oil production (millions of barrels/day) | 4.4 | 4.6 | 4.7 |
| Crude oil exports (millions of barrels/day) | 3.6 | 3.9 | 4.0 |
| Average crude oil export price (US$/barrel) | 96.9 | 83.1 | 77.8 |
| Crude oil exports (US$ billions) | 128.9 | 117.8 | 114.6 |
Positive means appreciation.
Iraq: Selected Economic Indicators, 2022–24
| Population: 43.5 million (2021 est.) | Per capita GDP: US$ 5,021 (2021) | ||
| Quota: SDR 1,663.8 million | Poverty rate: 23 percent (2014) | ||
| Main products and exports: Crude oil | |||
| Key export markets: United States, India, China, Soutd Korea | |||
| 2022 | 2023 | 2024 | |
| Est. | Proj. | ||
| Output | |||
| Real GDP (% change) | 8.1 | 4.2 | 3.1 |
| Non-oil real GDP (% change) | 3.2 | 4.2 | 4.0 |
| Prices | |||
| Inflation, end of period (%) | 4.5 | 3.7 | 2.5 |
| Central Government Finances | |||
| Revenues and grants (% of GDP) | 41.0 | 45.4 | 43.4 |
| Oil revenue (% of GDP) | 38.9 | 42.8 | 40.6 |
| Expenditure and net lending (% of GDP) | 34.7 | 39.3 | 41.1 |
| Wages and pensions (% of GDP) | 14.6 | 17.8 | 18.6 |
| Fiscal balance (% of GDP) | 6.3 | 6.1 | 2.3 |
| Non-oil primary balance (% of non-oil GDP) | -63.0 | -63.3 | -63.3 |
| Total government debt (% of GDP) | 42.9 | 40.3 | 37.1 |
| Money and Credit | |||
| Broad money (% change) | 6.6 | 20.7 | 15.3 |
| Credit to the economy (% change) | 9.0 | 10.4 | 9.1 |
| Balance of Payments | |||
| Current account (% of GDP) | 11.6 | 8.1 | 4.1 |
| Foreign direct investment (% of GDP) | 0.0 | -0.1 | 0.4 |
| Gross reserves (US$ billions) | 90.2 | 104.7 | 113.2 |
| In months of imports | 9.7 | 10.4 | 10.7 |
| Total external debt (% of GDP) | 23.0 | 22.2 | 21.0 |
| Exchange Rate | |||
| Exchange rate (dinar per US$; period average) | 1450 | 1450 | 1450 |
| REER (% change, end of period)1/ | … | … | … |
| Oil and Gas Sector | |||
| Crude oil production (millions of barrels/day) | 4.4 | 4.6 | 4.7 |
| Crude oil exports (millions of barrels/day) | 3.6 | 3.9 | 4.0 |
| Average crude oil export price (US$/barrel) | 96.9 | 83.1 | 77.8 |
| Crude oil exports (US$ billions) | 128.9 | 117.8 | 114.6 |
Positive means appreciation.
Title page
IRAQ
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION
January 9, 2023
KEY ISSUES
Context: Significant socio-economic fragilities continue to persist. The formation of a new government in October 2022 provides an opportunity to rekindle the reform momentum, which has been stalled for over a year amid political uncertainty. The economy has been gradually recovering, supported by strong oil revenues and accommodative policies. Inflation has been relatively contained as the pass-through from high global commodity prices has been muted by food and fuel subsidies. Despite fiscal and external current account surpluses, Iraq’s dependence on oil and vulnerability to future oil price volatility continued to increase.
Outlook: The near-term outlook is positive with high oil revenues expected to produce fiscal and current account surpluses and growth supported by accommodative fiscal and monetary policies. However, the underlying structural imbalances will likely continue to widen, and in the baseline of gradually declining oil prices, fiscal and external deficits are projected to re-emerge in the medium term.
Main policy recommendations:
Fiscal policy: The near-term priority is to protect the vulnerable through higher and better targeted cash transfers while refraining from a procyclical expenditure boost. Over the medium term, a sound fiscal framework, supported by a fiscal rule targeting gradual improvement of the non-oil primary fiscal balance, is needed to carefully balance the goals of strengthening resilience to future oil price volatility, making space for priority spending, and gradually reducing dependence on oil.
Monetary and financial sector policies: The central bank should closely monitor domestic inflationary pressures and, should they intensify, tighten domestic financial conditions by phasing out its lending initiatives and raising interest rates and reserve requirements. Restructuring large state-owned banks and continuing to improve the AML/CFT framework remain essential to enhance financial sector stability and facilitate private sector development.
Structural reforms: Accelerated efforts are needed to upgrade public financial management, mobilize non-oil revenues, reduce the oversized government payroll, enhance the social safety net, improve the electricity sector’s efficiency, and reduce corruption.
Approved By
Taline Koranchelian (MCD) and Kristina Kostial (SPR)
Discussions were held in Amman during November 28– December 6, 2022 and in Baghdad during December 7-9, 2022. The team comprised of Tokhir Mirzoev (head), Gazi Shbaikat (Resident Representative), Ali Abbas, Moheb Malak, Ling Zhu (all MCD), Roberto Perrelli (FAD), Chen Ke (LEG), and Ghadeer Noufal (local economist). Mr. Al-Kohlany (OED) participated in mission meetings. Jiayi Ma (MCD) provided research assistance and Regina De La Cruz and Cecilia Pineda (MCD) provided document management. The mission met with the Prime Minister, Ministers of Finance and Planning, Governor of the Central Bank of Iraq, Members of the Parliamentary Finance Committee, other senior officials from Ministries of Water Resources, Labor, Oil, and Electricity, as well as private sector representatives and trade unions.
Contents
CONTEXT
RECENT DEVELOPMENTS
OUTLOOK AND RISKS
POLICIES
A. Enhancing the Fiscal Framework
B. Diversifying Government Revenues
C. Reining in the Government Wage Bill
D. Strengthening Social Safety Nets
E. Fixing the Electricity Sector
F. Enhancing Financial Stability
G. Improving Governance and Statistics
STAFF APPRAISAL
BOXES
1. CBI Lending Initiatives
2. Labor Market Conditions
FIGURES
1. Economic Developments and Medium-Term Projections, 2015–27
2. Fiscal and Debt, 2015–27
3. Social, Governance, and Labor Market Indicators, 2012–21
TABLES
1. Selected Economic and Financial Indicators, 2019–27
2. Central Government Fiscal Accounts, 2019–27 (In trillions of Iraqi dinars)
3. Central Government Fiscal Accounts, 2019-27 (In percent of GDP)
4. Central Government Fiscal Accounts, 2019–27 (In percent of non-oil GDP)
5. Balance of Payments, 2019–27
6. Monetary Survey, 2019–27
7. Central Bank Balance Sheet, 2019–27
8. Selected Financial Sector Indicators for Iraqi Banking System, 2017-22
ANNEXES
I. Implementation of the 2020 Article IV Recommendations
II. External Sector Assessment
III. Public and External Debt Sustainability Analysis
IV. Risk Assessment Matrix
V. Embedding the Challenges of Climate Change into Macroeconomic Policies
VI. Summary of Country Engagement Strategy
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
