IMF issues Iraq Report: Forecasts Growth of 3.1%

Iraq Business

7 days ago

By John Lee.
The International Monetary Fund (IMF) has said that Iraq's economy is facing considerable headwinds, with non-oil sector growth slowing from 13.8 percent in 2023 to an estimated 2.5 percent in 2024, impacted by reduced public investment, a weaker trade balance, and financing constraints that led to the accumulation of arrears.
Real GDP growth is projected at 3.1 percent for 2025, with inflation of 2.9 percent.
The IMF has warned that Iraq's large fiscal expansion in recent years has left the economy highly vulnerable, especially as global oil prices decline. The required oil price to balance the budget has risen from $54 in 2020 to around $84 in 2024. The IMF projects that financing constraints, lower investment, and limited growth prospects will persist, placing additional stress on public finances.
Key recommendations to stabilise Iraq's economy include: A substantial fiscal adjustment to mitigate risks and stabilise public debt.
Reviewing spending plans for 2025, postponing non-essential expenditures, and implementing public sector wage reforms.
Increasing non-oil revenues through higher excise taxes, customs duties, and personal income tax reforms.
Introducing a general sales tax (VAT) and implementing a comprehensive public pension reform.
On the revenue side, the IMF suggests improving tax administration and focusing on customs duties, while on the expenditure side, it calls for reforming public sector hiring practices and reducing unnecessary spending.
In addition, the IMF stresses the importance of supporting infrastructure projects that foster economic diversification, particularly in transportation, trade, electricity, and energy sectors. Reforming the electricity sector and expanding natural gas development are highlighted as crucial for long-term economic growth and energy security.
The IMF also recommended improving Iraq's financial system by continuing reforms to state-owned banks and exploring options to strengthen the private banking sector. Further efforts to combat money laundering and terrorism financing are also critical.
In the medium term, structural reforms across the labour market, business regulations, and governance are vital to unlocking Iraq's economic growth potential. Enhancing labour force participation, particularly among women, and tackling bureaucratic obstacles are seen as key drivers of non-oil GDP growth.
Efforts to reduce corruption and strengthen governance, particularly within state-owned enterprises, are central to building investor confidence and ensuring the sustainability of Iraq's reforms.
However, significant challenges remain due to ongoing data deficiencies, which hinder the IMF's ability to fully assess Iraq's economic situation and provide effective policy recommendations. Full statement from the International Monetary Fund:
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Iraq and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis[2]. Iraq has managed to uphold domestic stability despite regional turmoil and global uncertainty. At the same time, the non-oil economy slowed down in 2024 following a very strong growth in 2023. Inflation has remained subdued amid weaker demand. Financing constraints and lower oil revenues are expected to constrain fiscal spending, taking an additional toll on economic activity.
Against a baseline of low oil prices, fiscal deficits and external accounts are projected to deteriorate further over the medium term unless significant reforms are undertaken to increase non-oil revenues, control the public wage bill, and boost non-oil growth potential through an ambitious structural reform agenda.
Executive Board Assessment
Iraq's economy is facing considerable headwinds. Iraq's non-oil sector growth slowed from 13.8 percent in 2023 to an estimated 2.5 percent in 2024, impacted by reduced public investment, a weaker trade balance, and financing constraints that led to the accumulation of arrears. Going forward, financing constraints, subdued investment and constrained growth potential are expected to weigh on growth and intensify preexisting fragilities.
The large fiscal expansion in recent years has increased Iraq's vulnerabilities, which are further exacerbated by the recent decline in oil prices. As spending expanded and non-oil revenues stagnated, the oil price required to balance the budget increased to around $84 in 2024, up from $54 in 2020. The financing constraints that emerged in 2024 are expected to worsen this year in light of the oil price drop. Furthermore, risks of sovereign debt stress have risen, calling for urgent policy action.
A sizable fiscal adjustment is needed to mitigate macro-fiscal risks, contain liquidity risks and stabilize debt in the medium term. In the very short term, the authorities should review current and capital spending plans for 2025 and limit or postpone all non-essential expenditure.
There is also scope to boost non-oil revenues through increases in excises and custom duties. Over the medium term, stabilizing debt would require an additional fiscal consolidation of 1-1.5 percent of non-oil GDP per year.
On the revenue side, besides strengthening tax administration, there is scope to increase customs duties and excise taxes, reform personal income tax including by limiting exemptions, and introducing a general sales tax in the medium term. On the spending side, comprehensive public wage bill reforms through limiting mandatory hiring and adopting an attrition rule would yield significant savings. Recent efforts to better target the public distribution system are welcome, but there is scope to further improve targeting and eventually shift to cash-based social safety nets. Finally, it is urgent to reform the public pension system by raising the retirement age and reducing both the accrual and replacement rates.
Implementing the proposed reforms could generate fiscal space for increased non-oil capital spending. Crucial non-oil capital expenditures should be protected given the need to expand investment in trade and transportation infrastructure to promote economic diversification; and modernize the electricity sector and develop natural gas resources, which are crucial for enhancing energy security and decreasing reliance on gas imports. Additionally, improving procurement, public financial management, and addressing corruption would boost the effectiveness of any new public investments.
Further efforts are needed to absorb the remaining excess liquidity and improve monetary policy transmission. This could be achieved by increasing the issuance of CB-bills, focusing on short-term instruments piloted by the policy rate, adjusting bid size limits, and refining liquidity forecasting tools.
Efforts to strengthen the domestic financial system should continue and accelerate. The CBI should be commended for the successful transition to the new trade finance system now fully managed by commercial banks through their CBRs, contributing to a reduction in the spread between the official and parallel market exchange rates.
While initial reforms of state-owned banks are promising, a comprehensive restructuring plan addressing nonperforming loans and capital shortfalls is necessary, along with improvements in corporate governance and digital infrastructure. Furthermore, the CBI has started to explore reform options to strengthen the private banking sector. Priority areas are the ownership structure, business model sustainability, regulatory requirements, and elements to support mutual confidence between banks and their customers, such as a credit bureau and stronger deposit guarantee scheme. Alongside these efforts, addressing weaknesses in anti-money laundering and counter-terrorism financing remains paramount.
A comprehensive structural reform agenda is vital to unlock growth potential. Estimates suggest that reforms in the labor market, business regulation, financial sector, and governance could double non-oil potential GDP growth in the medium term. Key priorities include enhancing labor force participation, especially among women, by improving education and removing legal barriers, as well as reforming public sector hiring to boost productivity. Improving vocational training programs can align skills with market needs, while simplifying regulations and reducing bureaucratic obstacles will encourage formal economy participation and support private sector development.
Electricity sector reform is also critical given how chronic power shortages and inefficiencies weigh on productivity and economic growth. The authorities are encouraged to speed up their efforts to improve billing and collection. Once collection substantially improves, achieving cost recovery will also require electricity tariff increases, with carefully calibrated subsidies targeted to low-income users.
These efforts would be supported by further combatting pervasive corruption and addressing governance weaknesses. While progress has been made in implementing the national anti-corruption strategy and improving corruption perception, significant challenges remain. Strengthening accountability in state-owned and private enterprises, complying strictly with EITI standards, enacting a Law on Transparency and Access to Information, aligning legal frameworks with international best practices, and enhancing the independence of NAZAHA are essential measures for effective enforcement and protecting economic rights. It would also enhance the effectiveness of core state functions that are critical to economic activity, such as fiscal governance and financial sector oversight.
Data deficiencies persist. Major data deficiencies in Iraq can significantly undermine the robustness of IMF surveillance by leading to incomplete or inaccurate assessments of the economic situation and possibly jeopardizing effective policy recommendations. Building on the numerous CD Iraq has received, it is essential to focus on the most pressing data gaps and incorporate pilot initiatives into disseminated data in a timely manner. Iraq: Selected Economic Indicators, 2024-26 Population: 44.4 million (2024 est.) Per capita GDP: US$ 6,183 (2024) Quota: SDR 1,663.8 million Poverty rate: 23 percent (2014) Main products and exports: Crude oil Key export markets: United States, India, China, South Korea 2024 2025 2026 Est. Proj. Output Real GDP (% change) -2.3 3.1 1.4 Non-oil real GDP (% change) 2.5 1.0 1.5 Prices Inflation, end of period (%) 2.7 2.9 2.9 Central Government Finances Revenues and grants (% of GDP) 39.3 36.9 34.6 Oil revenue (% of GDP) 36.0 33.3 31.0 Expenditure and net lending (% of GDP) 43.5 44.4 43.8 Wages and pensions (% of GDP) 22.0 24.0 24.5 Fiscal balance (% of GDP) -4.2 -7.5 -9.2 Non-oil primary balance (% of non-oil GDP) -59.3 -54.2 -51.8 Total government debt (% of GDP) 47.2 47.2 62.3 Money and Credit Broad money (% change) -4.3 9.6 4.9 Credit to the private sector (% change) 14.3 5.4 8.4 Balance of Payments Current account (% of GDP) 2.0 0.2 -1.9 Foreign direct investment (% of GDP) 0.0 0.0 0.0 Gross reserves (US$ billions) 100.3 91.0 79.2 In months of imports 11.1 11.1 9.6 Total external debt (% of GDP) 20.6 20.8 21.0 Exchange Rate Exchange rate (dinar per US$; period average) 1300 1300 1300 REER (% change, end of period)1/ ... ... ... Oil and Gas Sector Crude oil production (millions of barrels/day) 3.9 4.1 4.1 Crude oil exports (millions of barrels/day) 3.4 3.5 3.5 Average crude oil export price (US$/barrel) 80.6 65.9 62.0 Crude oil exports (US$ billions) 99.2 84.2 79.2 Sources: Iraqi authorities; and Fund staff estimates. 1/ Positive means appreciation.
[1] 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.
[2] 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.
See original report here.
(Source: IMF)