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Challenges of the Iraqi economy and financial sustainability
Executive Council concludes Article IV consultations for 2019 with Iraq
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The Executive Board of the International Monetary Fund concluded on July 19, 2019 Article IV 1 consultations with Iraq:
Improved security and a recovery in oil prices have reduced short-term weaknesses.Fiscal and current account surpluses registered large surpluses in 2018 - about 8% and 6% of GDP, respectively - allowing the government to repay domestic debt and create fiscal spreads. By the end of 2018, total international reserves stood at US $ 65 billion.
But reconstruction and the post-war economic recovery have been slow. Non-oil GDP growth was limited to 0.8 percent year-on-year in 2018, due to poor implementation of reconstruction and other public investments. Gross domestic product contracted by about 0.6 percent as oil production was cut pursuant to the OPEC + agreement.
The 2019 budget includes a significant degree of fiscal easing that will further weaken recent weaknesses. Current spending is expected to rise by 27% year-on-year, partly due to a higher public sector wage bill, while revenues are weakened by the abolition of non-oil taxes. As a result, the budget is expected to return to a deficit of 4% of GDP in 2019, and reserves are expected to decline.
The fiscal and external positions are expected to continue to decline in the medium term unless policy changes occur - with reserves falling below sufficient levels and erosion of fiscal safety margins. Although the level of public debt will remain within tolerable limits, overall fiscal financing needs will increase. Non-oil GDP growth is expected to reach 5.5 percent in 2019, but will decline again in the medium term.
In the context of high volatility in oil prices, the main risk to prospects arises from the possibility of falling oil prices, which could reduce exports and reduce budget revenues, thus leading to a more severe decline in reserves or a higher rise in public debt. Other risks stem from geopolitical tensions, the potential for social unrest in the context of poor public services and lack of progress in fighting corruption.
Directors emphasized that building a strong fiscal framework is essential to maintain fiscal and macroeconomic stability and enhance safety margins. They urged the authorities to adopt a risk-based and rule-based fiscal policy approach, as part of broader reforms to more effectively manage oil revenues, reduce cyclical trends and shift spending to more pro-growth items. Directors supported a gradual increase in reconstruction and development spending in parallel with improved absorptive capacity.They stressed the need to strengthen public financial management to ensure that public expenditure is properly monitored and that vulnerabilities to corruption are minimized.In this context, managers welcomed the recent passage of the Federal Financial Management Act and urged its full implementation.
Directors emphasized that gradual fiscal consolidation, including containment of current initial spending and increased non-oil revenues, is essential to maintaining financial sustainability and keeping debt within sustainable limits. They recommended that containment of increased wage bill and reduction of subsidies for the electricity sector should be priorities in spending measures. Directors emphasized that the poorest and least-income groups should be protected from being affected by financial controls.
Directors stressed the need for a comprehensive reform of the banking sector in order to maintain financial stability. They urged the authorities to restructure large state-owned banks, strengthen supervision and implement other reforms to increase financial intermediation activities. Directors highlighted the benefits of increased financial inclusion, particularly for the SME sector, which has great potential to absorb new entrants into the labor market.
Directors agreed that building public institutions and strengthening governance were key to success and highlighted the scope for utilizing UNFPA capacity development activities to [You must be registered and logged in to see this link.] these efforts. They welcomed the progress made in the development of an anti-corruption framework and called for further amendments to the anti-corruption legal system while strengthening coordination between relevant government agencies and further strengthening the AML / CFT framework. Directors also recommended strengthening the public investment management framework to ensure that expenditure is properly channeled and that donor funds for reconstruction are used in the most efficient way possible.
Directors looked forward to continued close work between the authorities and UNFPA in the context of the subsequent follow-up to the program.
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Executive Council concludes Article IV consultations for 2019 with Iraq
[You must be registered and logged in to see this link.]
The Executive Board of the International Monetary Fund concluded on July 19, 2019 Article IV 1 consultations with Iraq:
Improved security and a recovery in oil prices have reduced short-term weaknesses.Fiscal and current account surpluses registered large surpluses in 2018 - about 8% and 6% of GDP, respectively - allowing the government to repay domestic debt and create fiscal spreads. By the end of 2018, total international reserves stood at US $ 65 billion.
But reconstruction and the post-war economic recovery have been slow. Non-oil GDP growth was limited to 0.8 percent year-on-year in 2018, due to poor implementation of reconstruction and other public investments. Gross domestic product contracted by about 0.6 percent as oil production was cut pursuant to the OPEC + agreement.
The 2019 budget includes a significant degree of fiscal easing that will further weaken recent weaknesses. Current spending is expected to rise by 27% year-on-year, partly due to a higher public sector wage bill, while revenues are weakened by the abolition of non-oil taxes. As a result, the budget is expected to return to a deficit of 4% of GDP in 2019, and reserves are expected to decline.
The fiscal and external positions are expected to continue to decline in the medium term unless policy changes occur - with reserves falling below sufficient levels and erosion of fiscal safety margins. Although the level of public debt will remain within tolerable limits, overall fiscal financing needs will increase. Non-oil GDP growth is expected to reach 5.5 percent in 2019, but will decline again in the medium term.
In the context of high volatility in oil prices, the main risk to prospects arises from the possibility of falling oil prices, which could reduce exports and reduce budget revenues, thus leading to a more severe decline in reserves or a higher rise in public debt. Other risks stem from geopolitical tensions, the potential for social unrest in the context of poor public services and lack of progress in fighting corruption.
Evaluation of the Executive Board 2
The Executive Directors agreed with the guidelines for the evaluation of the Fund's experts. They saw the recent improvement in the Iraqi economy as encouraging, but acknowledged the daunting challenges still facing the country. Social conditions remain harsh, progress in post-war reconstruction is slow, development needs are significant, and institutional weaknesses are significant. There are additional difficulties posed by the volatility of oil prices and the difficulty of the regional and geopolitical environment.Directors urged the authorities to seize the opportunity to improve security and high oil prices to implement structural policies and reforms aimed at ensuring macroeconomic and financial stability, addressing long-standing social problems and promoting sustainable and inclusive growth.Directors emphasized that building a strong fiscal framework is essential to maintain fiscal and macroeconomic stability and enhance safety margins. They urged the authorities to adopt a risk-based and rule-based fiscal policy approach, as part of broader reforms to more effectively manage oil revenues, reduce cyclical trends and shift spending to more pro-growth items. Directors supported a gradual increase in reconstruction and development spending in parallel with improved absorptive capacity.They stressed the need to strengthen public financial management to ensure that public expenditure is properly monitored and that vulnerabilities to corruption are minimized.In this context, managers welcomed the recent passage of the Federal Financial Management Act and urged its full implementation.
Directors emphasized that gradual fiscal consolidation, including containment of current initial spending and increased non-oil revenues, is essential to maintaining financial sustainability and keeping debt within sustainable limits. They recommended that containment of increased wage bill and reduction of subsidies for the electricity sector should be priorities in spending measures. Directors emphasized that the poorest and least-income groups should be protected from being affected by financial controls.
Directors stressed the need for a comprehensive reform of the banking sector in order to maintain financial stability. They urged the authorities to restructure large state-owned banks, strengthen supervision and implement other reforms to increase financial intermediation activities. Directors highlighted the benefits of increased financial inclusion, particularly for the SME sector, which has great potential to absorb new entrants into the labor market.
Directors agreed that building public institutions and strengthening governance were key to success and highlighted the scope for utilizing UNFPA capacity development activities to [You must be registered and logged in to see this link.] these efforts. They welcomed the progress made in the development of an anti-corruption framework and called for further amendments to the anti-corruption legal system while strengthening coordination between relevant government agencies and further strengthening the AML / CFT framework. Directors also recommended strengthening the public investment management framework to ensure that expenditure is properly channeled and that donor funds for reconstruction are used in the most efficient way possible.
Directors looked forward to continued close work between the authorities and UNFPA in the context of the subsequent follow-up to the program.
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