Twilight News / Experts from the International Monetary Fund on Thursday called on Iraq to “vigilant and be wary” about the economic weaknesses that may affect it in the medium term, and while they indicated that the Iraqi economy is “recovering gradually,” they urged Iraqi officials to adopt necessary economic steps, most notably diversifying government revenues, strengthening the social welfare network, and correct
The International Monetary Fund said in a “concluding statement” related to “inigential” conclusions reached by experts at the conclusion of a mission they carried out to Iraq, describing as representing their views and not necessarily the views of the Executive Board of the Fund, that “the rise in oil prices provided the Iraqi economy with much-neededed breathing space, after it approached to entering
But the experts’ report said “fundamentsic imbalances persisted, and dependence on oil continued to increase.”
In their report, the experts called for “the need to start a meaningful economic transformation, accompanied by a prudent, careful and disciplined fiscal policy aimed at building buffer margins of financial reserves, reducing dependence on oil, and reorienting the path of spending towards priority investments and meeting social needs.
“The careful adjustment and alignment of the 2023 budget with this transformation is a crucial step in maintaining the gains made by recent policy efforts,” the report also considers that decisive structural reforms represent a critical trend towards improving social and economic conditions and promoting the development of the private sector as the main engine of growth and employment through job creation.
Economic prospects and risks
Although the experts’ report considered that “the Iraqi economy is gradually recovering in the midst of the basic and growing fundamental weaknesses, as the real GDP is expected to grow by 8% in 2022, due to the increase in oil production by 12%, experts also saw that real non-oil GDP will increase at a more moderate pace, amounting to 3%, after recovering by 21% in 2021.”
The report added that “inflation has been relatively contained, reaching an average of 5% during the first ten months of 2022, given that the subsidies provided for food and fuel have disrupted the passage of high global commodity prices and their transfer to the Iraqi market.”
The report added that “thanks to the rise in oil prices, the balance of current account balances of public finances and the balance of external balances (i.e. for their surplus / deficit) for this year are expected to achieve a surplus of (6 percent) and (11 percent), respectively, while the volume of foreign currency reserves of the Central Bank of Iraq is likely to reach more than 90
But the experts’ report pointed out that “these surpluses obscure the expansion of the balance of non-oil public finances (surplus/deficit), with Iraq’s dependence on oil continues to increase, and the need to use the price of oil to balance the government budget (the price of a barrel of oil required to reach zero deficit), to reach $66 a
While the report noted that “the economic outlook is positive in the near term,” “weaknesses can be evident in the medium term.”
While oil production is expected to “gradually rise from 4.4 million barrels to 5 million barrels per day by 2027, real non-oil GDP growth is expected to accelerate to 4% in 2023, thanks to the incentive created by the Emergency Support for Food Security and Development Act, before approaching that percentage to 3.5 percent in the medium term.”
The report pointed out that “with the expectations of the baseline for the decline in global oil prices, and the continuation of the expansionist position of fiscal policy, the balance of public finances and the balance of external balance are expected to decline, and turn into deficits by 2025.”
“The central bank’s foreign currency reserves could peak, at nearly $100 billion in 2024, and then decline rapidly over the medium term,” the report said.
The report warned that “these prospects may be exposed to significant potential negative risks in the midst of many looming challenges,” explaining that “it is possible that the decline in global oil prices at a faster pace to activate financial pressures early, and government funds in particular may be exposed to the accumulation of losses at a faster pace in the electricity sector, and the depletion of the
“A sound financial framework is a critical element in overcoming the economic challenges facing Iraq,” the IMF experts’ report said, calling for careful balance between the goals of saving extraordinary and unexpected oil profits, in order to enhance resilience in the face of future oil price volatility, increase critical social spending, and spending on public investments, while gradually reducing the level of dependence on oil.”
The experts recommended that Iraq “commit to a fiscal base aimed at achieving the gradual reduction of the main non-oil fiscal deficit, to build a preventive reserve margin to stabilize public finances, in order to improve the government’s ability to facilitate spending in response to the decline in oil prices in the future.”
According to the experts, “the financial strategy should, at the same time, seek to allocate sufficient resources to public investments and the social safety net, in order to support the critical development needs of Iraq and support vulnerable populations.”
IMF experts also recommended “saving a significant portion of the potential unforeseen oil profits by targeting the major non-oil fiscal deficit of IQD 114 trillion (58% of non-oil GDP) in 2023 and, more importantly, by containing growth in the government’s wage bill, and increasing non-oil revenues.”
In light of the high inflation risks, the expert report called for “vigilance on the part of monetary policy, because although inflation has remained stable in recent months, there are still a significant risk of accelerating inflation in the near term, in light of a more lenient stance in fiscal consolidation, and the emergence of indirect secondary price effects of higher global commodity prices.”
In addition, the report considered that “there must be sustainable policy efforts in many key areas, namely:
1. Raising the efficiency of public financial management, especially through the establishment of the unified treasury account and the urgent implementation of the Integrated Financial Management Information System (IFMIS), in addition to strengthening control over contingent liabilities and liabilities.
2. Diversify government revenues, including by making wage tax more upward, eliminating regressive exemptions, strengthening tax and customs administration, and taxing sales of selected non-essential goods and services.
3. Reducing the government wage bill, which consumes about 40% of the annual budget, leading to crowding out and exclusion of other priorities. That bill cannot be sustained in the long run, encouraging importance to job creation by the private sector.
The report also called for “the need to adopt a complex approach that focuses on strengthening the control of the wage bill, developing and implementing a strategy to reduce public sector employment based on the natural decrease in staff numbers, and closely aligning the wages and allowances paid by the government with what the private sector.”
In parallel, the report urges “the development of civil service reforms (public sector workers), the development and implementation of a national employment strategy to improve the level of workforce participation, remove obstacles to private sector employment, and reduce the level of employment in the informal sector.”
4. Strengthening the social safety net as determining eligibility for the non-targeted ration card program would significantly strengthen the budget allocated to cash transfers. Linking cash transfers to record numbers (to a set of indicators) automatically would also ensure adequate protection for beneficiaries.
In addition, pension reform is an increasingly urgent issue, the most important of which is to restore the financial sustainability of the State Employees’ Pension Fund. In order to move forward with the reform, there is a need to harmonize pension systems with each other, or integrate them for workers in the private and public sectors, in order to facilitate the possibility of movement of workers between the two sectors,
5. Correct the trajectory of the electricity sector, which suffers annual losses in excess of 3% of GDP, while this sector is considered unable to meet domestic demand. Therefore, the comprehensive reform strategy for this sector should focus on strengthening the issues of monitoring and transparency of the costs of this sector, reviewing the structure of electricity tariffs, implementing investments in gas capture and harvesting, and in renewable energy sources, and continuing efforts to improve the collection of receivables and reduce losses and losses for technical reasons.
6. Promote financial stability where accelerating the implementation of core banking systems and initiating the restructuring of major government banks remains a critical priority.
In this context, the IMF team of experts welcomed the completion by Iraq of the first national AML/CFT risk assessment and is in line with the plans of the Iraqi authorities to move forward in accelerating the implementation of the key recommendations contained in the assessment. The experts also “supported the central bank’s efforts to strengthen transaction control through the foreign exchange auction, and its plans to explore alternative mechanisms for trade finance in order to facilitate them.”
The mission also recommended “developing tools for cash management in order to better support exchange rate stability.”
7. Improving governance: IMF experts welcomed the efforts of the Iraqi authorities to implement the National Integrity and Anti-Corruption Strategy, 2021-2024. UNAMI stressed the importance of continuing to strengthen governance (methands and means of public administration), including through the timely completion and publication of government audit reports, improving the legal framework, streamlining the institutional structure to combat corruption, and upgrading the digitization process (using digital technology in) government institutions.
translated by: Shafaq News