Falling oil prices have taken toll on Iraqi economic activity, IMF says

Fund asks authorities to review capital spending plans for this year and limit or postpone non-essential expenditure

A snack vendor waits for customers in Baghdad. Iraq's non-oil gross domestic product is expected to have moderated to 2.5 per cent in 2024, the IMF said. AFP

A highly uncertain global environment, falling oil prices and acute financing pressures are taking their toll on Iraqi economic activity, exacerbating the country's existing vulnerabilities, the International Monetary Fund said on Thursday.

The fund called for urgent measures to preserve fiscal and external stability, it said in a statement issued at the end of a mission to Iraq.

“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,” said the IMF.

Iraq, Opec’s second-largest oil producer, can contain the fiscal deficit by mobilising non-oil tax revenues and reining in the public wage bill, the Washington-based fund recommended.

Other initiatives Baghdad can take include completing the restructuring of state-owned banks, promoting private sector growth by reforming the labour market, improving the business environment, enhancing governance and fighting corruption, the fund said.

“Building on recent progress, the Central Bank of Iraq should continue modernising the banking system and supporting private banks in expanding their corresponding banking relationships,” the fund said.

The IMF mission, led by Jean-Guillaume Poulain, met with Iraqi authorities in Amman and Baghdad from May 4 to 13.

Iraq has endured decades of conflict − a devastating war with Iran in the 1980s, the First Gulf War in 1990 and then the 2003 US-led invasion. This was followed by years of internal conflict, then battles with insurgents and years of bombings.

The conflicts, which have killed millions of Iraqis, showed no signs of slowing until Iraq removed the ISIS threat from most parts of the country in 2017, and initiated a political process to restructure its governance and plot the country's recovery.

Following 13.8 per cent growth in 2023, Iraq's non-oil gross domestic product is expected to have moderated to 2.5 per cent in 2024, driven by a slowdown in public investment and in the services sector, as well as a weaker trade balance, the IMF said.

Iraq’s agriculture, manufacturing and construction sectors remained resilient. However, the decline in oil production weighed on overall growth, which contracted by 2.3 per cent for the year.

Inflation dropped to 2.7 per cent by the end of 2024, amid lower food price inflation and liquidity absorption from the central bank.

The 2024 fiscal deficit is estimated at 4.2 per cent of GDP, compared to 1.1 per cent in 2023, reflecting “rising spending on wages and salaries” and energy purchases, the IMF said.

On the external front, the current account surplus narrowed from 7.5 per cent to 2 per cent of GDP, due to a surge in goods imports. However, external buffers remained strong, with reserves at $100.3 billion at the end of last year, covering more than 12 months of imports, the fund added.

“Iraq’s non-oil GDP is projected to slow down to 1 per cent this year as the impact of falling oil prices and financing constraints weigh on government spending and consumer sentiment,” the fund said.

The IMF said current public employment policies and resulting wage costs are unsustainable given Iraq’s low non-oil tax base. Dependence on oil revenues has worsened, and the oil price required to balance the budget increased to around $84 per barrel in 2024, up from $54 in 2020, the statement outlined.

The fund recommended that in the short term, the authorities should review current and capital spending plans for this year and limit or postpone all non-essential expenditure.

There may also 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, it added. There is scope to gradually reform personal income tax by limiting exemptions and increasing rates, it suggested.

The fund also recommended curbing current expenditures, particularly through comprehensive wage bill reforms, limiting mandatory hiring and adopting attrition rule to yield significant savings. It is urgent to reform the public pension system through raising the retirement age, it added.

The IMF mission also asked Iraq to finalise the restructuring plan for state-owned banks “without delay”.

The mission estimated that a “comprehensive set of reforms” covering the labour market, business regulation, the financial sector and governance could double Iraq’s non-oil potential GDP growth over the medium term.