Emphasis on Reducing Inflation and Strengthening the Iraqi Dinar in September 2024
In September 2024, Iraq faces significant challenges in managing its economy, particularly in the areas of inflation reduction and strengthening its national currency, the Iraqi dinar. The country's heavy dependence on oil exports has left it vulnerable to global price fluctuations, exacerbating inflationary pressures and impacting the value of the dinar.
Struggling with Macro-Economic Volatility
Iraq's reliance on oil revenues, which account for over 99% of its exports, 85% of the government budget, and 42% of its gross domestic product (GDP), has exposed the country to macro-economic volatility. This dependence has been a double-edged sword, fueling economic growth during periods of high oil prices but leading to severe budgetary constraints and economic instability when oil prices drop.
Government's Fiscal Challenges
The government's budget rigidities have restricted fiscal space and the ability to implement countercyclical policies during economic downturns. Inflation has been a persistent issue, impacting the living standards of Iraqis and complicating fiscal management. The IMF has noted that domestic inflation declined to 4% by the end of 2023, partly due to the currency revaluation in February 2023 and the normalization in trade finance, but imbalances have worsened due to the large fiscal expansion and lower oil prices.
Efforts to Strengthen the Dinar
The Iraqi dinar's value has become a contentious issue, especially after the Central Bank of Iraq devalued the currency in December 2020 in response to the sharp decline in global crude prices. The devaluation led to immediate increases in the prices of imported goods, affecting the purchasing power of ordinary Iraqis and sparking political debates.
The IMF's Perspective
The International Monetary Fund (IMF) has projected that Iraq's economy will grow by 1.4% in 2024 and accelerate to 5.3% in 2025. However, the IMF has also emphasized the need for ambitious fiscal adjustments to stabilize debt in the medium term and rebuild fiscal buffers.
Future Outlook
Iraq's ongoing fiscal expansion is expected to boost growth in 2024, but at the expense of further deteriorating fiscal and external accounts, making the country more vulnerable to oil price fluctuations. The IMF has warned that without policy adjustments, the risk of medium-term sovereign debt stress is high, and external stability risks could emerge.
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