IMF Executive Board Concludes 2020 Article IV Consultation with Iraq

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IMF Executive Board Concludes 2020 Article IV Consultation with Iraq

February 11, 2021 Washington, DC: On February 8, 2021 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Iraq.

The COVID-19 pandemic and a sharp decline in oil revenues have exacerbated Iraq’s longstanding economic vulnerabilities. Real GDP contracted by an estimated 11 percent in 2020, reflecting a slowdown in non-oil activity and cutbacks in oil output as a result of OPEC+ decisions. Large fiscal and external current account deficits of 20 and 16 percent of GDP, respectively, constrained the government’s ability to mount an effective fiscal response to the crisis.

The authorities have begun to take much-needed steps towards ensuring macroeconomic stability while protecting the vulnerable. To help safeguard foreign exchange reserves and reduce the external imbalance, the Central Bank of Iraq has announced a devaluation of the exchange rate.

Alongside, the draft 2021 budget, submitted to Parliament, aims to reduce the fiscal deficit through measures to contain the unsustainable expansion of government wage and pension bills and to raise non-oil revenues, while significantly boosting targeted assistance to shield the most vulnerable. The authorities have also set aside sizable resources in support of their efforts to minimize the loss of life to COVID-19, including through acquisition and distribution of a vaccine.

The economy is expected to gradually recover, and the imbalances to narrow, although the outlook remains challenging. Real GDP is projected to return to its pre-pandemic level by 2024. The fiscal and external current account deficits are projected to decline over the medium term. Government debt is expected to peak in 2023 and decline gradually thereafter.

This outlook hinges on strong implementation of reforms and is subject to significant downside risks. Political constraints ahead of the parliamentary elections, renewed bouts of social unrest, or security risks could undermine the reform efforts, putting macroeconomic stability at risk. Furthermore, pandemic‑related risks and oil market uncertainties could further complicate the economic situation.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They noted that the COVID 19 pandemic and the sharp decline in oil revenues have further exacerbated Iraq’s existing significant socio-economic fragilities. Directors also noted the authorities’ efforts to strengthen the health policy response, boost social safety nets, and reduce the fiscal and external deficits.

Nevertheless, downside risks to the economic outlook remain significant amid a challenging socio-political environment. Directors emphasized that implementing strong policies and structural reforms is essential to ensure macroeconomic stability and achieve sustainable and inclusive growth.

Directors emphasized that reducing fiscal imbalances is critical to ensuring fiscal and debt sustainability. They welcomed the authorities’ planned fiscal reforms in the “White Paper” and encouraged their careful prioritization and swift implementation while minimizing the impact on the vulnerable. To create room for the much-needed reconstruction and social safety nets, Directors highlighted the importance of strengthening public finances. To this end, they called for a comprehensive civil service reform to contain the public wage bill and recalibration of the pension system to put it on solid financial footing. Priority also needs to be given to increasing non-oil revenues and strengthening public financial management to reduce the fiscal risks stemming from off-budget expenditures and government guarantees.

Directors concurred that the recent exchange rate adjustment would help reduce external imbalances and preserve foreign exchange reserves. They underscored that a strong fiscal framework remains critical to ensuring the credibility of the new exchange rate peg as well as minimizing future need for monetary financing of the budget. Directors also saw need for further monetary policy measures by the central bank to contain inflation.

Directors stressed that wide-ranging structural reforms are necessary to cement macroeconomic stability and pave the way for higher and more inclusive growth. They underscored that reform efforts should focus on stemming the financial losses in the electricity sector. This requires sustained efforts to strengthen governance and improve collection, as well as gradual adjustment of tariffs to increase cost recovery and reduce arrears.

In addition, Directors emphasized the importance of reducing corruption in key public institutions, continued improvement and effective implementation of the AML/CFT framework, restructuring of large state-owned banks to foster financial stability, and developing the private sector.

Directors noted the authorities’ interest in emergency financing with the Fund to support their stabilization and reform efforts with some Directors encouraging a longer-term arrangement to address structural challenges.

It is expected that the next Article IV consultation with Iraq will take place on the standard 12-month cycle

Iraq: Selected Economic and Financial Indicators, 2019–26 Act. Projections

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

1/ Converted from GDP in local currency using the period-average exchange rate (1191 in 2020).

2/ Negative price differential of about $2.9 per barrel compared to the average petroleum spot price (average of Brent, West Texas and Dubai oil prices) in 2020 - 2025.

3/ 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.

4/ Adjusted to exclude full year estimate of federal government transfers to the Kurdistan Regional Government.

5/ 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). The 14 percentage points increase in 2020 is partly attributed to a devaluation in mid-December 2020 which led to an upward revision of external debt.

6/ Converted from the total government debt in local currency using the end-of-period exchange rate (1450 in 2020).

7/ 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:

https://www.imf.org/en/News/Articles/2021/02/11/pr2137-iraq-imf-executive-board-concludes-2020-article-iv-consultation?cid=em-COM-123-42639

Iraq : 2020 Article IV Consultation-Press Release; Staff Report; And Statement By The Executive Director For Iraq

Author/Editor:International Monetary Fund. Middle East and Central Asia Dept.Publication Date:February 11, 2021 Electronic Access:Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:Iraq's socio-economic fragilities have been severely aggravated by the pandemic and the sharp decline in oil revenues, which arrived on the heels of widespread social unrest and political instability. The health system’s limited capacity has been strained, while the fiscal position has become untenable as oil revenues declined sharply to a level that barely covers the government’s large wage and pension bills.

Although the number of new infections declined recently, Iraq registered the second-highest COVID-related fatalities in the region, and the fiscal response to the pandemic has been one of the lowest. A six-month political paralysis preceding the formation of the government in May 2020 and plans to hold early parliamentary elections in mid-2021 have been weighing on political support for reforms. Risks of social unrest, geopolitical tensions, and insecurity remain elevated. https://www.imf.org/en/Publications/CR/Issues/2021/02/10/Iraq-2020-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-Executive-50078?cid=em-COM-123-42639

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DeepWoodz: From imf website…..”When a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny of the international community. It also makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, to avoid manipulating exchange rates for unfair competitive advantage, and to provide the IMF with data about its economy. The IMF's regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. This process is known as surveillance. imo

MilitiaMan: "Monetary policy addresses interest rates and the supply of money in circulation, and it is generally managed by a central bank.

"Fiscal policy addresses taxation and government spending, and it is generally determined by government legislation"

MilitiaMan: It is hard to imagine that the IMF feels the Appraisal of the circumstances to stay with the recent "needed" devaluation of 23% to the local currency, is going to not harm the citizens and all the while creating an environment that will support them and their new private sector in doing so.

They didn't have a private sector at 1190, why would 1460 be any different? Maybe the key words are found in the Monetary and Fiscal issues they speak of. If they meant that the recent exchange rate is the one that they are to peg to seems odd they talk too about it as the new exchange rate peg will minimize future need for monetary financing.

Were they not just telling us they need no new Foreign loans for 2021? An article talks about that today. They are to be rejected and cancelled.

A new exchange rate to allow internal borrowing is one way of dealing with that, also they talk about the electronic taxation at the borders today. An article speaks of that today as well. So this seems to be somewhat confusing, as taxation at the borders is revenue stream, sure, but, devaluation is inflationary, as we saw in food, goods and services of 30-50% increases.

So to minimize the impact on the vulnerable they need to have a priority on non oil revenues. Fair enough, but, is that going to strengthen the private sector? I think not. I will be cautious with this one, as banker speak can be confusing and on purpose too. Alan Greenspan was King.. imo.. We shall see what the weekend brings.

They did tell us they could change the rate in the fiscal year of 2020 and they did. They also said the could or may again in early 2021. imo ~ MM

"Directors concurred that the recent exchange rate adjustment would help reduce external imbalances and preserve foreign exchange reserves. They underscored that a strong fiscal framework remains critical to ensuring the credibility of the new exchange rate peg as well as minimizing future need for monetary financing of the budget. Directors also saw need for further monetary policy measures by the central bank to contain inflation."

Directors emphasized that reducing fiscal imbalances is critical to ensuring fiscal and debt sustainability. They welcomed the authorities’ planned fiscal reforms in the “White Paper” and encouraged their careful prioritization and swift implementation while minimizing the impact on the vulnerable. To create room for the much-needed reconstruction and social safety nets, Directors highlighted the importance of strengthening public finances. To this end, they called for a comprehensive civil service reform to contain the public wage bill and recalibration of the pension system to put it on solid financial footing. Priority also needs to be given to increasing non-oil revenues and strengthening public financial management to reduce the fiscal risks stemming from off-budget expenditures and government guarantees.