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IMF Country Report No. 19/248: Iraq 2019 Article IV Consultation Summary

Core Content

The IMF conducted the 2019 Article IV consultation with Iraq, assessing the country's economic and financial situation, and recommending policy measures to enhance macroeconomic stability and promote sustainable growth. The consultation took place from April 25 to May 2, 2019, with the staff report finalized on July 3, 2019. The Executive Board concluded the consultation on July 19, 2019, and highlighted both recent improvements and ongoing challenges.

Main Findings and Key Issues

Economic Performance

• Real GDP growth in 2018 was -0.6 percent, with non-oil GDP rising by 0.8 percent year-on-year.
• GDP per capita increased from $5,047 in 2015 to $5,882 in 2018, but remained below pre-war levels.
• Non-oil GDP is projected to grow by 5.4 percent in 2019, but will subside in the medium term.
• Inflation remained stable in 2018, with a year-on-year change of -0.1 percent.

Fiscal and External Position

• Fiscal surplus in 2018 was around 8 percent of GDP, allowing the government to retire domestic debt and build fiscal buffers.
• Gross international reserves reached $65 billion by end-2018, exceeding standard adequacy metrics.
• Public debt stood at 49 percent of GDP at the end of 2018, with a significant portion being external debt (30.6 percent of GDP).
• The 2019 budget implies a large fiscal loosening, with current spending expected to rise by 27 percent year-on-year, shifting the fiscal balance to a deficit of 4 percent of GDP.

Challenges and Risks

• Post-war reconstruction has been slow, with limited capital spending on infrastructure and public services.
• Oil price volatility remains a key risk, as a decline could lead to reduced exports and budgetary revenues, thereby threatening fiscal and external sustainability.
• Weak public financial management (PFM), procyclical fiscal policies, and inefficient public procurement have hindered investment in essential sectors like electricity.
• Geopolitical tensions, including U.S. sanctions on Iran, have complicated energy reforms and economic progress.
• Corruption and institutional weaknesses continue to undermine public services and deter private investment.

Key Policy Recommendations

• Strengthen fiscal frameworks: Establish expenditure ceilings, implement phased measures to reduce current spending and increase non-oil revenues, and build fiscal buffers.
• Reorient public expenditure: Focus on curbing the public-sector wage bill, reducing electricity subsidies, and ensuring efficient allocation of resources to protect vulnerable groups.
• Overhaul the financial sector: Audit and restructure the two largest state-owned banks, enhance bank supervision, and promote financial inclusion, especially for SMEs.
• Combat corruption: Implement a comprehensive anti-corruption strategy, including legal reforms, stronger coordination among agencies, and enforcement of AML/CFT measures.
• Improve governance: Strengthen public institutions and promote inclusive growth through better fiscal management and policy implementation.

Critical Observations

• The IMF's 2016 Stand-by Arrangement (SBA) of $5.3 billion expired in July 2019, and the country has faced challenges in maintaining fiscal discipline.
• The new General Financial Management Law (GFML) was adopted in May 2019, but gaps remain, such as the need for a treasury single account and addressing fiscal federalism issues.
• The exchange rate remained pegged at around 1,182 dinars per U.S. dollar, with a narrowing gap between official and market rates.
• Non-oil real GDP has shown limited growth, and the government has limited capacity to manage non-oil revenue streams effectively.

Conclusion

The IMF acknowledged Iraq's improved economic conditions due to better security and higher oil prices but emphasized the need for sustained policy reforms to address long-standing structural issues. The focus is on fiscal consolidation, financial sector reform, and anti-corruption measures to ensure macroeconomic stability and inclusive growth in the medium term. The country's development needs remain significant, and the Fund is ready to support these efforts through capacity development and post-program monitoring.