Shafaq News/ The International Monetary Fund (IMF) has issued a pessimistic statement regarding the Iraqi economy, citing various factors, such as the interruption of the Kirkuk-Ceyhan oil pipeline and OPEC production cuts, following the post-pandemic recovery last year.
During a meeting between IMF experts and Iraqi authorities in Jordan from May 24 to 31, discussions were held regarding recent economic developments, expectations, and policy plans for the coming period. The experts highlighted that the growth momentum of the Iraqi economy has slowed in recent months after recovering to pre-pandemic levels last year. In addition, they projected a 5 percent contraction in oil production in 2023 due to OPEC+ production cuts, the outage of the Kirkuk-Ceyhan oil pipeline, and foreign exchange market volatility resulting from the Central Bank of Iraq's tightening of AML/CFT controls on foreign currency sales.
The experts estimated that non-oil real GDP contracted by 9 percent annually in the last quarter of 2022, reversing the growth experienced in the previous three quarters. However, with the foreign exchange market stabilizing due to measures implemented by the Central Bank, non-oil real GDP growth in Iraq is expected to resume and reach 3.7 percent in 2023, following a peak of 7 percent in January. In addition, inflation has begun to moderate, reflecting a decline in international goods and a 10 percent dinar revaluation. As a result, average inflation is projected to reach 5.6 percent in 2023.
While favorable conditions in the oil market have supported Iraq's financial and external situation, the experts noted that structural imbalances have continued to widen. In 2022, current account surpluses in public and external finances reached 7.6 percent and 17.3 percent of GDP, respectively, fueled by record-high oil revenues. The Central Bank's foreign exchange reserves have risen to US$97 billion, equivalent to 11 months of imports, including US$16.3 billion (6 percent of GDP) in fiscal savings accumulated by the government. However, a significant fiscal expansion has widened the non-oil primary deficit from 52 percent to over 68 percent of non-oil GDP in 2022.
The experts pointed out that the draft budget law 2023 envisages further fiscal easing, widening the primary non-oil fiscal deficit to 75 percent of non-oil GDP and resulting in a total budgetary deficit of 6.5 percent. This combination of increased government spending, dinar revaluation, and lower oil production has raised the fiscal breakeven price of oil to $96 a barrel.
In the short term, implementing the authorities' financial plans could lead to an inflation resurgence and fluctuations in the foreign exchange market. In the medium term, continuing current policies in the face of uncertainty surrounding oil prices pose significant economic stability risks. Without a substantial increase in oil prices, the current fiscal situation may result in widening deficits and mounting funding pressures in the coming years.
The experts emphasized the need for a more stringent fiscal policy to enhance flexibility and reduce the government's reliance on oil revenues while safeguarding critical social spending. In addition, they recommended more robust targeting of social assistance to ensure it reaches the most vulnerable individuals.
Improving public financial management remains of paramount importance, according to the experts. They cautioned against creating new extra-budgetary funds, expressing concerns about governance and efficiency. The experts strongly advocated adherence to budgeted government expenditures and urged the full implementation of the Government Guarantees Management Framework, including Parliamentary Guarantees. They also stressed the need for accelerated efforts to establish the Treasury Single Account to strengthen public financial management.
Furthermore, the IMF mission welcomed the progress made by the Central Bank of Iraq in improving liquidity management and frameworks for combating money laundering and terrorist financing. They emphasized the importance of closely aligning fiscal and monetary policies in managing the economy.
Economist Durgham Muhammad Ali has echoed the International Monetary Fund's (IMF) report, agreeing with its pessimistic view of the Iraqi economy. In addition, Ali highlighted concerns over the country's deficit and excessive spending.
In an interview with Shafaq News agency, Ali stated, "The percentage and size of the deficit in the general budget for the year 2023 are worrisome, and the volume of operating spending is very high, which would have required the House of Representatives to reconsider the items of operational spending."
He further emphasized the need for the House of Representatives to reassess estimates of oil resources by adjusting expectations of oil prices per barrel and export limits. Ali noted the pessimistic global growth outlook and increased competition in global oil markets, particularly with the availability of low-cost Russian oil.
Ali stressed that "the price of oil, as estimated in the budget, is considered high, in addition to the halt in Kurdistan's oil exports, which poses a loss to the public budget."
