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Prospects for the Iraqi Economy: Challenges and Opportunities to 2025 and Beyond
12/12/2024
Researcher Shaza Khalil*
The International Monetary Fund (IMF) provided a detailed assessment of the Iraqi economy, pointing to the challenges and opportunities that lie ahead for Iraq. According to the Fund, the Iraqi economy contracted by 2.2% in 2022, but the forecasts for 2024 and 2025 are more optimistic. The Fund expects the economy to grow by 1.4% in 2024 and 5.3% in 2025. However, the Fund warns that Iraq’s fiscal position remains worrisome, with the budget deficit expected to widen to 7.6% of GDP in 2024, compared to 1.3% in 2023. It also expects government debt to reach 48.2% of GDP in 2024 and 54.6% in 2025.
Domestic Stability and Recovery
Despite these fiscal concerns, Iraq has seen significant improvements in domestic stability. The IMF notes that domestic stability has improved since the new government took office in October 2022, creating an environment conducive to economic reforms. This stability was a key factor in the approval of Iraq’s first three-year budget, which, despite its fiscal expansion, has helped drive a strong recovery in the non-oil economy.
In addition, Iraq has been largely immune to regional conflicts, especially the ongoing conflicts between Israel and the Gaza Strip. This relative stability, combined with the recovery of the non-oil economy, has allowed Iraq to focus on internal economic adjustments.
Inflation and Fiscal Imbalance
One of the positive aspects of Iraq’s recent economic performance is the decline in domestic inflation, which fell to 4% by the end of 2023. This improvement is attributed to lower global food prices, the currency revaluation in February 2023, and the return of trade finance to normal.
However, the IMF warns that Iraq’s fiscal expansion, coupled with lower oil prices, could exacerbate economic imbalances. While the expected fiscal expansion in 2024 is expected to stimulate growth, it could lead to a further deterioration in fiscal and external accounts. Iraq remains vulnerable to oil price volatility, which accounts for a significant portion of its revenues.
Without urgent policy adjustment, the Fund warns that Iraq could face medium-term sovereign debt stress and external stability risks. These concerns are heightened by global uncertainties, such as the possibility of a sharp decline in oil prices or an escalation of conflict in the Middle East.
Fiscal and structural reforms
to stabilize the economy and reduce financial vulnerability The IMF stresses the need for significant fiscal adjustments. Iraq needs gradual but impactful fiscal policy reforms to stabilize debt over the medium term and rebuild financial buffers. The Fund recommends focusing on controlling the public wage bill, gradually eliminating mandatory employment policies, and enhancing non-oil revenue mobilization. In addition, better-targeted social support programs can help alleviate poverty and strengthen public finances.
The Fund also stresses the importance of implementing key structural reforms to support long-term economic development. Iraq’s priorities include strengthening the tax and revenue system, and implementing the “single treasury account” and reducing the use of extra-budgetary funds are critical steps in achieving effective fiscal consolidation. Other reforms include reducing cash financing, reforming the pension system, improving governance, and combating corruption.
Strengthening the financial sector
The Central Bank of Iraq has made efforts to improve monetary policy and strengthen liquidity management, and the IMF has commended these efforts. However, the Fund highlights the need for better coordination between fiscal and monetary operations to manage excess liquidity and improve the effectiveness of monetary policy.
Furthermore, the Fund sees restructuring large state-owned banks as essential to improving the efficiency of the financial sector. The Fund urges continued modernization of the private banking sector by facilitating correspondent banking relationships, reducing regulatory uncertainty, and increasing competition among private banks.
Unleashing the potential of the private sector
The future of the Iraqi economy depends largely on transforming its still underdeveloped private sector. The IMF recommends structural reforms to unleash the potential of the private sector, with a focus on creating equal opportunities between public and private sector jobs, increasing women’s participation in the labor market, and reforming education and labor laws to meet the needs of the modern economy.
In addition, Iraq needs to improve its governance systems, address efficiencies in public procurement, and address challenges in critical sectors such as electricity. These reforms are essential to creating a more sustainable and diversified economy. The Fund also noted Iraq’s renewed efforts to join the World Trade Organization (WTO), a move that could help Iraq integrate into the global economy and attract foreign investment.
Outlook 2025 and Beyond
By 2025, the Iraqi economy is expected to begin a significant recovery, with strong growth in its non-oil sector and increased investment in areas such as technology and infrastructure. If the required fiscal and structural reforms are implemented, Iraq may be able to reduce its dependence on oil and strengthen its private sector.
However, the Iraqi economy will remain vulnerable to global economic fluctuations, particularly with regard to oil prices. If oil prices continue to decline or if regional crises increase, Iraq may face challenges in sustaining its economic growth. In this context, it is essential for the Iraqi government to continue implementing reforms that enhance economic diversification, while emphasizing the building of strong financial reserves to protect the economy against future shocks.
Conclusion
The IMF’s assessment of Iraq’s economic outlook presents a mixed picture: while there are signs of recovery and positive growth projections for 2024 and 2025, significant challenges remain. The Iraqi economy remains highly dependent on oil revenues, making it vulnerable to price fluctuations. The Fund emphasizes the need for fiscal discipline, structural reforms, and a comprehensive plan to diversify the economy. If these challenges are addressed, Iraq has significant potential to lay the foundations for a more stable and prosperous economy in the coming years, especially after 2025.
Economic Studies Unit / North America Office
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