World Bank: Reliance On Oil Will Expose Iraq To Macroeconomic Fluctuations, 6 MAY

 World Bank: Reliance On Oil Will Expose Iraq To Macroeconomic Fluctuations

Economy  Saturday, May 4, 2024 9:21 AM  Follow-up/National News Center

The Iraqi economy is expected to return to growth in 2024 at a rate of 1.4%, compared to a contraction of 2.2% in 2023, with the growth rate next year jumping to 5.3%, according to data from the latest IMF report on global economic prospects issued this month.

The contraction in Iraq's GDP last year comes despite a strong return to growth in the non-oil sector, recording 6%, with inflation receding, according to Fund estimates.

According to the statement of the IMF mission to conduct Article IV consultations, last March, the Fund expects that overall growth will rise again in 2024, with the momentum of non-oil growth continuing during the year, while risks tend towards an increase amid increasing uncertainty.

This comes while the Fund expects, in the medium term, that non-oil growth will stabilize at around 2.5% due to the obstacles that limit the development of the private sector.

Iraq is one of the countries most dependent on oil in the world, and oil revenues accounted for more than 99% of its exports, 85% of its government budget, and 42% of its gross domestic product over the past decade, according to World Bank data.

The World Bank believes that this excessive dependence on oil exposes the country to macroeconomic fluctuations, while budgetary rigidities restrict the available spending space in public finances, and limit any opportunity to develop policies to counter cyclical fluctuations.

The balance of public finances went from a surplus of 10.8% of GDP in 2022, to a deficit of 1.3% in 2023.

This is due to a decrease in oil revenues and an increase in spending by 8% of GDP, which contributed to the increase in salaries. Contractual pensions are 5%, according to the IMF.

The Fund expects the public finance deficit to reach 7.6% of GDP in 2024, in the absence of new policy measures, and to expand further after that with the expected gradual decline in oil prices in the medium term.

The increase in the public finance deficit will result in a nearly doubling of public debt from 44% of GDP in 2023 to 86% of GDP by 2029, according to Fund estimates.

Expectations that the current account will turn into a deficit

The IMF estimates the current account surplus at 2.6% of GDP at the end of last year, expecting it to turn into a deficit by 3.6% during 2024, and for this deficit to expand to 5.1%.

Indicators have improved:

Overall inflation declined from 7.5% in January 2023 to 4% by the end of last year, according to IMF estimates, which reflected the decline in food and energy prices at the international level, and the impact of the currency revaluation process. Iraq in February 2023.

The International Monetary Fund expects the inflation rate to stabilize at 4%, whether as an average for the year or as a level by the end of the year during the years 2024 and 2025.

The Fund also estimates that international reserves will rise to 112 billion US dollars by the end of 2023, compared to about 97 billion dollars at the end of 2022.

The Iraqi government reduced external debt from 19.729 billion dollars in 2022 to 15.976 billion dollars in 2023, according to what was reported by the official Iraqi News Agency. According to Iraqi government spokesman Bassem Al-Awadi, this April.

Al-Awadi said that the government took a series of executive measures and adopted a package of financial decisions, which resulted in reducing the external public debt by more than 50%, bringing the debt down from $19.729 billion at the end of 2022, to $15.976 billion in 2023, reaching $19.729 billion in late 2022. Approximately $8.9 billion this year.

Other steps for a greater role for the non-oil sector

The IMF believes that reducing the level of dependence on oil, and ensuring financial sustainability, while at the same time working to protect the very important social and investment spending, will require a major adjustment to public financial conditions, based on controlling the public finance bill. Public sector wages and increased non-oil revenues.

In parallel, the situation will require achieving high economic growth to absorb the rapidly growing workforce, boost non-oil exports, and expand the tax base.

The IMF believes that there is a need to implement an ambitious adjustment to public financial conditions, to help stabilize debt in the medium term, and rebuild protective safety margins for public finances, while maintaining necessary capital spending.

Most aspects of controlling public finances come from reducing current spending, especially controlling the wage bill by reducing mandatory appointments, and from working to gradually implement the rule of natural attrition for workers in the public sector.

The Fund indicated the need to increase non-oil revenues by expanding the income tax base on individuals, making it more progressive, reviewing the customs tariff structure, and considering imposing new taxes on luxury items.

The Fund also believes that there is a need to undertake broad structural reforms to enhance private sector development and economic diversification.

He explained that Iraq needs to raise growth rates in the non-oil sector in a sustainable manner to accommodate the rapidly increasing workforce, and to increase non-oil exports and government revenues, in addition to reducing the economy’s exposure to oil price shocks.

The Iraqi Prime Minister, Muhammad Shiaa Al-Sudani, said last January that his country had set a goal in a three-year budget to reduce dependence on oil revenues from 95% to 80%, in a discussion session at the World Economic Forum in Davos.    https://nnciraq.com/254947/