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IMF Executive Board Concludes 2019 Article IV Consultation with Iraq







July 26, 2019















On
July 19, 2019,
the Executive Board of the International Monetary Fund (IMF) concluded the
Article IV consultation


[1]

with

Iraq.

An improved security situation and the recovery in oil prices have improved
near-term vulnerabilities. Large fiscal and current account
surpluses—around 8 and 6 percent of GDP, respectively—were recorded in
2018, allowing the government to retire domestic debt and accumulate fiscal
buffers. Gross international reserves reached $65 billion by end-2018.

However, post-war reconstruction and economic recovery have been slow.
Non-oil GDP rose by only 0.8 percent year-on-year in 2018 in a context of
weak execution of reconstruction and other public investment. Overall GDP
contracted by around 0.6 percent as oil production was cut to comply with
the OPEC+ agreement.

The 2019 budget implies a sizable fiscal loosening that will reverse the
recent reduction in vulnerabilities. Current spending is expected to
increase by 27 percent year-on-year, in part due to a higher public sector
wage bill, while revenues will be dampened by the abolition of non-oil
taxes. As a result, the budget is projected to shift to a deficit of 4
percent of GDP in 2019, and reserves are projected to decline.

The fiscal and external positions are expected to continue to deteriorate
over the medium term absent policy changes—with reserves falling below
adequate levels and fiscal buffers eroded. Although the level of public
debt will remain sustainable, gross fiscal financing needs will increase.
Non-oil GDP growth is projected to reach 5½ in 2019 but subside over the
medium term.

In a context of highly volatile oil prices, the major risk to the outlook
is a fall in oil prices which would lower exports and budgetary revenues,
leading to an even sharper decline in reserves or higher public debt.
Geopolitical tensions, the potential for social unrest in a context of weak
public services and lack of progress in combatting corruption pose further
risks.

Executive Board Assessment

[2]

Executive Directors agreed with the thrust of the staff appraisal. They
were encouraged by the recent strengthening of Iraq’s economy but
recognized that the country continues to face daunting challenges. Social
conditions remain harsh, post-war reconstruction progress is slow,
development needs are large, and institutional weaknesses are significant.
Volatile oil prices and a difficult regional and geopolitical environment
pose additional difficulties. Directors encouraged the authorities to seize
the opportunity presented by the improved security situation and higher oil
prices to implement policies and structural reforms aimed at ensuring
macroeconomic and financial stability, tackling long-standing social
problems, and promoting sustainable and inclusive growth.

Directors emphasized that building a robust fiscal framework is essential
to maintain fiscal and macroeconomic stability and strengthen buffers. They
encouraged the authorities to adopt a risk‑ and rules-based approach to
fiscal policy as part of broader reforms to manage oil revenue more
effectively, reduce tendencies for procyclicality, and shift to a more
growth-friendly composition of expenditure. Directors supported scaling up
reconstruction and development expenditure gradually in line with improving
absorptive capacity. They underscored the need to strengthen public
financial management to ensure public spending is appropriately monitored
and to reduce vulnerabilities to corruption. In this context, Directors
welcomed the newly adopted General Financial Management Law and encouraged
its full implementation.

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Directors emphasized that gradual fiscal adjustment, including containing
current primary spending and boosting non-oil revenues is essential for
maintaining fiscal and debt sustainability. They recommended that spending
measures should give priority to containing the growth in wage bill and
lowering subsidies to the electricity sector. Directors emphasized that the
poorest and the most vulnerable must be protected from the adjustment
process.

Directors underscored that an overhaul of the banking sector is necessary
to maintain financial stability. They encouraged the authorities to
restructure the large state-owned banks, enhance their supervision, and
implement other reforms to increase financial intermediation. Directors
highlighted the benefits of increasing financial inclusion, especially for
the SME sector, which has a large potential to absorb entrants to the labor
market.

Directors agreed that building public institutions and enhancing governance
is key for success, and highlighted the scope for Fund capacity development
to support these efforts. They welcomed progress in developing an
anti-corruption framework and called for further modifications to the legal
regime for combatting corruption coupled with stronger coordination between
the relevant government agencies, while continuing to strengthen the
framework for Anti-money laundering and combatting the financing of
terrorism (AML/CFT). Directors also recommended strengthening Public
Investment Management framework to ensure that spending is well directed
and that donor funds targeting reconstruction are put to the most efficient
use.

Directors looked forward to continued close engagement between the
authorities and the Fund in the context of post program monitoring.




Iraq: Selected Economic and Financial Indicators,
2015–24

(Percent of GDP, except were indicated)

Projections

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Economic growth and prices

Real GDP (percentage change)

2.5

15.2

-2.5

-0.6

4.6

5.3

2.6

2.3

2.1

2.1

Non-oil real GDP (percentage change)

-14.4

1.3

-0.6

0.8

5.4

5.0

4.1

3.4

2.7

2.7

GDP deflator (percentage change)

-26.1

-13.4

14.6

15.4

-4.5

2.3

2.6

2.8

3.1

3.3

GDP per capita (US$)

5,047

4,843

5,263

5,882

5,728

6,017

6,172

6,326

6,486

6,666

GDP (in ID trillion)

207.2

206.7

231.0

265.0

264.8

285.4

300.4

315.9

332.3

350.4

Non-oil GDP (in ID trillion)

137.3

138.3

140.8

145.6

158.1

173.2

188.1

202.8

217.1

232.6

GDP (in US$ billion)

177.7

175.2

195.5

224.2

224.1

241.5

254.1

267.3

281.1

296.5

Oil production (mbpd)

3.72

4.63

4.47

4.41

4.59

4.84

4.93

5.01

5.10

5.18

Oil exports (mbpd)

3.35

3.79

3.80

3.86

4.03

4.25

4.33

4.40

4.47

4.55

Iraq oil export prices (US$ pb) 1/

45.9

35.6

48.7

65.2

56.0

55.8

54.9

54.4

54.4

54.8

Consumer price inflation (percentage change; end of period)

2.3

-1.5

0.2

-0.1

2.0

2.0

2.0

2.0

2.0

2.0

Consumer price inflation (percentage change; average)

1.4

0.5

0.1

0.4

0.8

2.0

2.0

2.0

2.0

2.0

National Accounts

Gross domestic investment

24.9

20.8

16.7

12.9

18.8

16.7

16.0

15.6

15.6

15.4

Of which: public

15.6

11.5

8.3

5.3

10.6

8.4

7.5

7.0

6.8

6.6

Gross domestic consumption

81.2

87.0

80.8

79.1

84.5

85.4

86.8

87.9

88.6

89.6

Of which: public

22.6

22.6

21.8

21.2

26.5

26.3

26.4

26.2

26.2

26.3

Gross national savings

18.4

12.5

18.6

19.8

13.6

12.5

11.7

11.1

10.3

9.4

Of which: public

3.1

-2.0

7.0

13.4

6.5

5.2

4.1

3.2

1.8

0.8

Saving – Investment balance

-6.5

-8.3

1.8

6.9

-5.2

-4.2

-4.3

-4.6

-5.3

-6.0

Public Finance

Government revenue and grants

30.6

26.8

33.0

39.8

40.5

39.6

37.9

36.5

35.5

34.6

Government oil revenue

27.8

22.9

28.9

36.7

37.2

36.3

34.5

33.1

32.0

31.0

Government non-oil revenue

2.8

4.0

4.2

3.1

3.3

3.3

3.4

3.4

3.5

3.5

Expenditure, of which:

43.4

40.7

34.6

32.0

44.6

43.1

41.2

40.5

40.5

40.5

Current expenditure

27.8

29.3

26.4

26.7

33.9

34.7

33.6

33.5

33.7

33.9

Capital expenditure

15.6

11.5

8.3

5.3

10.6

8.4

7.5

7.0

6.8

6.6

Overall fiscal balance (including grants)

-12.8

-13.9

-1.6

7.9

-4.1

-3.5

-3.3

-4.0

-5.0

-5.9

Non-oil primary fiscal balance, accrual basis (percent of
non-oil GDP)

-46.5

-43.3

-39.4

-42.4

-56.9

-52.1

-49.2

-47.1

-46.2

-45.3

Adjusted Non-oil primary fiscal balance, accrual basis
(excl. KRG, percent of non-oil GDP) 2/

-44.7

-43.3

-39.4

-40.5

-50.1

-46.0

-43.6

-41.8

-41.0

-40.2

Adjusted non-oil primary expenditure (excl. KRG, percent of
non-oil GDP) 3/

48.9

49.2

46.3

46.2

55.6

51.5

49.1

47.2

46.3

45.5

Adjusted non-oil primary expenditure (excl. KRG, annual
real growth, percent) 3/

-24.7

0.9

-4.5

2.8

29.9

-0.6

1.4

1.6

3.1

3.2

Memorandum items

Total government debt (in percent of GDP) 4/

56.2

64.2

58.9

49.3

51.4

50.5

50.6

51.5

53.6

56.4

Total government debt (in US$ billion) 4/

99.9

112.5

115.2

110.4

115.3

121.9

128.5

137.5

150.7

167.3

External government debt (in percent of GDP)

37.2

37.1

35.6

30.6

32.2

31.5

30.5

28.4

26.8

24.9

External government debt (in US$ billion)

66.1

65.0

69.5

68.7

72.2

76.2

77.6

75.8

75.3

73.8

Monetary indicators

Growth in reserve money

-12.0

9.2

-4.4

6.7

2.5

5.4

4.7

4.9

5.1

4.6

Growth in broad money

-9.1

7.1

2.6

2.7

2.5

6.2

5.4

6.0

5.9

5.3

External sector

Current account

-6.5

-8.3

1.8

6.9

-5.2

-4.2

-4.3

-4.6

-5.3

-6.0

Trade balance

-0.1

-1.7

7.6

13.4

3.5

4.1

3.2

2.0

1.3

0.5

Exports of goods

31.8

28.6

34.8

41.2

37.0

36.2

34.4

33.1

32.0

31.2

Imports of goods

-31.9

-30.3

-27.1

-27.8

-33.5

-32.0

-31.2

-31.1

-30.8

-30.7

Overall external balance

-6.7

-3.7

2.5

6.3

-2.5

-1.1

-1.6

-3.5

-3.8

-4.7

Gross reserves (in US$ billion)

54.1

45.5

49.4

64.7

57.2

53.5

48.5

38.8

28.2

14.3

Total GIR (in months of imports of goods and services)

9.3

7.8

7.3

8.0

6.8

6.2

5.5

4.2

2.9

1.4

Exchange rate (dinar per US$; period average)

1,166

1,180

1,182

1,182

1,182

1,182

1,182

1,182

1,182

1,182

Real effective exchange rate (percent change, end of
period) 5/

6.5

1.8

-5.1

4.9

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

1/ 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.

2/ 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.

3/ 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.

4/ Includes arrears. The debt stock includes legacy arrears
to non-Paris Club creditors on which the 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).

5/ 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]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.imf.org/external/np/sec/misc/qualifiers.htm

.


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