IMF publishes Iraq Recommendations

By John Lee.
A team from the International Monetary Fund (IMF) has concluded a visit with Iraqi officials, concluding:
Economic Challenges: Iraq faces a highly uncertain global environment, declining oil prices, and acute financing pressures, which are harming economic activity and deepening existing vulnerabilities.
Iraq faces a highly uncertain global environment, declining oil prices, and acute financing pressures, which are harming economic activity and deepening existing vulnerabilities. Urgent Measures Needed: Contain the fiscal deficit by increasing non-oil tax revenues and controlling the public wage bill. Complete the restructuring of state-owned banks. Promote private sector growth through labour market reform, improved business environment, better governance, and anti-corruption efforts.
Central Bank Role: The Central Bank of Iraq (CBI) should continue: Modernizing the banking system. Supporting private banks in expanding correspondent banking relationships.
The Central Bank of Iraq (CBI) should continue: Recent Progress: There has been recent progress noted in financial sector reforms, though further steps are encouraged.
Full statement from the International Monetary Fund:
An International Monetary Fund (IMF) mission, led by Mr. Jean-Guillaume Poulain, met with the Iraqi authorities in Amman and Baghdad during May 4-13 to conduct the 2025 Article IV consultation. The following statement was issued at the end of the mission:
A highly uncertain global environment, falling oil prices, and acute financing pressures, are taking a toll on economic activity and exacerbating Iraq's existing vulnerabilities, calling for urgent measures to preserve fiscal and external stability. These include containing the fiscal deficit by mobilizing non-oil tax revenues and reining in the public wage bill, completing the restructuring of state-owned banks, and promoting private sector growth, by reforming the labor market, improving the business environment, enhancing governance and fighting corruption. Building on recent progress, the Central Bank of Iraq (CBI) should continue modernizing the banking system and supporting private banks in expanding their corresponding banking relationships.
Recent Economic Developments, Outlook and Risks
The non-oil sector grew at a slower pace last year and inflation remained subdued. Following a very strong growth of 13.8 percent in 2023, Iraq's non-oil GDP is expected to have considerably moderated to 2.5 percent in 2024, driven by a slowdown in public investment and in the services sector, as well as a weaker trade balance. The agriculture, manufacturing, and construction sectors remained resilient, benefiting from post-drought recovery, expanded refining capacity, and strong growth in credit to households. The decline in oil production weighed on overall growth, which contracted by 2.3 percent for the year. Inflation dropped to 2.7 percent by end-2024, amid lower food price inflation and liquidity absorption from the CBI.
The fiscal position has deteriorated, along with external balances. The 2024 fiscal deficit is estimated at 4.2 percent of GDP, compared to 1.1 percent in 2023, reflecting rising spending on wages and salaries and energy purchases. Financing constraints have led to reemergence of arrears notably in energy and capital expenditure. On the external front, the current account surplus narrowed sharply from 7.5 percent to 2 percent of GDP, due to a surge in goods imports. Nonetheless, external buffers remain strong, with reserves at US$100.3 billion at end-2024-covering over 12 months of imports.
Non-oil growth is projected to remain subdued in 2025 amid a challenging global environment and financing constraints. Non-oil GDP is projected to slow down to 1 percent this year as the impact of falling oil prices and financing constraints weigh on government spending and consumer sentiment. The current account is expected to weaken considerably in 2025 primarily due to declining oil export revenues. The deterioration in the external position is projected to weigh on foreign reserves.
Policy Priorities
Iraq's vulnerabilities have increased in recent years due to a large fiscal expansion. Beside weighing on prospects of private sector-led growth, current public employment policies and resulting wage costs are unsustainable given Iraq's low non-oil tax base. Accordingly, dependence on oil revenues has worsened, and the oil price required to balance the budget increased to around $84 in 2024, up from $54 in 2020.
These challenges have been exacerbated by the sharp decline in oil prices in 2025, requiring an urgent policy response. In the very short-term, the authorities should review current and capital spending plans for 2025 and limit or postpone all non-essential expenditure. At the same time, there may be scope to increase non-oil revenues by revising customs duties as well as introducing or raising excise taxes. The authorities should also explore options to diversify the creditors base for increasing financing availability. Monetary financing of the deficit should be avoided as it could fuel inflation, drain FX reserves, and weaken the CBI's balance sheet.
More broadly, a sizable fiscal consolidation is needed to mitigate macro-fiscal risks, ensure debt sustainability, and rebuild fiscal buffers. On the revenue side, besides customs duties and excise taxes, there is scope to gradually reform personal income tax by limiting exemptions and increasing rates. Strengthening tax administration-through digitalization, improved enforcement, and better collection-is essential. A more effective tax administration should allow for eventually introducing a general sales tax. On the spending side, curbing current expenditures, particularly via comprehensive wage bill reforms, limiting mandatory hiring, and adopting attrition rule, would yield significant savings. Recent efforts to better target the public distribution system are welcome, but there is scope to further improve targeting and eventually shift to cash-based social safety nets. Finally, it is urgent to reform the public pension system through raising the retirement age and reducing both the accrual and replacement rates is needed to enhance its sustainability.
Implementing these reforms would also create fiscal space to increase capital spending. Expanding non-oil investment, especially in trade and transportation infrastructure should help economic diversification. Substantial investments are also required to modernize the electricity sector and develop natural gas resources, both of which are essential for improving energy security and reducing dependence on gas imports. Improved procurement, public financial management, and corruption control would enhance the effectiveness of any additional public investment.
Further efforts are needed to mop up excess liquidity in order to improve monetary policy transmission. While the CBI has made progress in absorbing excess liquidity, additional adjustments could enhance the effectiveness of the framework. Key measures include increasing the issuance of CB-bills, focusing on the short maturity (14-day) at the policy rate, revising size limits on individual banks' bids, and improving liquidity forecasting tools and practices. To safeguard its balance sheet and preserve credibility, the CBI should continue to avoid financing the government deficit.
The mission commended the CBI for the successful transition to the new trade finance system. Trade finance is now fully processed by commercial banks through their correspondent banking relationships. This has also supported the recent decline in the spread between the official and parallel market exchange rates. Nonetheless, further efforts are needed to further reduce the spread, including by imposing Iraqi dinar usage for car and real estate transactions, improving customs controls to curb smuggling, and simplifying FX access.
While initial steps to reform state-owned banks are encouraging, broader efforts are needed to strengthen the financial sector. The restructuring plan for state-owned banks should be finalized without delay, encompassing treatment of non-performing loans, and recapitalization needs. In parallel, the mission welcomed progress in digitalization and the authorities' intention to undertake a comprehensive banking sector overhaul. Reforms should include enhancing corporate governance, digital infrastructure, and cybersecurity, while promoting a stronger role for private banks. Efforts to enhance AML/CFT measures by tackling the deficiencies identified in the MENAFATF Mutual Evaluation report should continue.
Chronic power shortages, electricity losses and excessive tariff subsidization continue to weigh on the economy. Addressing inefficiencies in the electricity sector is important for fiscal sustainability and improving productivity. In 2024, distribution losses reached 55 percent, driven by theft and illegal connections, leading to significant financial losses. The authorities are deploying smart meters and have introduced other measures to enhance billing and collection. However, progress should be accelerated. Once collection substantially improves, achieving cost recovery will also require electricity tariff increases, with carefully calibrated subsidies targeted to low-income users. Recent disruptions in electricity imports from Iran further underscore the need for diversified supply and the development of gas projects.
Combating corruption and governance weaknesses is imperative to support economic development. Steps taken in the implementation and upgrade of the national anticorruption strategy and the improvements in corruption perception indices are positive developments. However, corruption remains a significant hurdle for growth. Strengthening accountability frameworks for the operation of state-owned and private enterprises in the oil, electricity and construction sectors is critical, and thorough compliance with Extractives Industries Transparency Initiative standards and the enactment of the law on Transparency and Access to Information should be prioritized. Additionally, aligning anticorruption legal frameworks with international covenants and best practice, and strengthening the independence of the judiciary are essential for effective enforcement and for the protection of economic rights.
A comprehensive structural reform agenda is essential to unlock growth potential. The mission estimates that a comprehensive set of reforms covering the labor market, business regulation, the financial sector and governance could double non-oil potential GDP growth over the medium term. On labor market, priorities include increasing labor force participation, particularly among women, by improving female education and further reducing barriers to their work and mobility, and reforming public sector hiring, which distort labor markets and reduce productivity. Efforts to better align skills with labor market needs should intensify. More generally, simplifying regulations and reducing bureaucratic impediments in e.g. business registration or tax administration should increase participation in the formal economy and help private sector development.
The mission would like to thank the Iraqi authorities and various stakeholders for their excellent hospitality and cooperation and candid discussions during the mission.
(Source: IMF)

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