Fiscal expansion will boost growth in Iraq this year but challenges persist, IMF says

The continuing fiscal expansion and boost in government spending will lead to economic growth in Iraq this year but the country continues to face several challenges including the worsening of domestic imbalances, the International Monetary Fund said on Thursday.

Iraq's fiscal and external accounts (such as trade balances) are expected to worsen and its economy will remain sensitive to fluctuations in oil prices, the fund said in a statement issued after a consultation with Iraq.

The country, Opec’s second-largest oil producer, could also be impacted by the spread of the conflict in Gaza and Israel. The Washington-based fund in January cut its growth forecast for the Mena region as Israel's war in Gaza compounded challenges for exposed economies.

These factors could pose risks to the country's financial stability and long-term economic health, the IMF said.

Without policy adjustment, the risk of medium-term sovereign debt stress is “high and external stability risks could emerge”.

Iraq's vulnerability to declining oil prices has increased as risks from larger declines or extended Opec+ cuts could affect its fiscal and external accounts.

In March, several members of the Opec+ group, including Saudi Arabia, the UAE and Kuwait, announced extensions to oil production cuts as part of efforts to support market balance and stability.

In total, Opec+ members are extending additional voluntary cuts of 2.2 million barrels a day to the end of the second quarter, the Opec secretariat said.

The move is in addition to the cuts announced in April last year, which have been extended until the end of December.

Iraq's economy remains heavily reliant on oil. The country's oil ministry also plans to increase production to 6 million barrels per day in the next five years, from about 4 million bpd currently. It exports around 3.3 million bpd.

The IMF noted that Iraq’s domestic stability has improved since the new government took office in October 2022 as it facilitated the country’s first three-year budget.

It was supported by the recovery in Iraq’s non-oil economy after a tightening in 2022, while the country was “largely unaffected” by the continuing conflict in the region, the IMF said in a statement.

Domestic inflation dropped to 4 per cent by end the end of last year, indicating lower global food prices, the currency revaluation as of February 2023, and the normalisation in trade finance, it added.

The IMF emphasised the importance of implementing effective macroeconomic strategies and structural changes to ensure fiscal and debt stability, promote economic diversification and bolster sustainable, inclusive growth driven by the private sector.

It urged Iraq to implement structural changes to stimulate private sector growth, offering equal opportunities to public and private sectors, increasing female workforce engagement, and revising education and labour legislation.

To ensure equitable financial growth, the IMF urged authorities to prioritise measures aimed at managing the public wage bill, gradually discontinuing mandatory hiring practices, and increasing non-oil revenue streams.

It also called for enhancing governance and combating corruption, recommending strong anti-money laundering and countering the financing of terrorism framework, and improving public procurement and business regulations.