IMF calls for structural reforms in Iraq as economy set to contract

Covid-19 and a sharp drop in oil prices worsen the country's problems

An Iraqi man feeds seagulls on a bridge across the Tigris River in central Baghdad on December 11, 2020. / AFP / AHMAD AL-RUBAYE
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Iraq's government must carry out structural reforms to foster inclusive growth and emerge stronger from the pandemic, the International Monetary Fund said.

The country's economy is forecast to shrink by 11 per cent this year, the worst contraction in 17 years, due to lower oil output and the pandemic.

The sharp decline in oil revenue is expected to widen the fiscal and external account deficits to 20 per cent and 16 per cent of gross domestic product, respectively, the fund said on Sunday after a month-long series of talks with Iraqi authorities.

It called for measures to bolster public finances to meet critical health and social expenditure needs, reform the electricity sector, fight corruption and expand institutional capacity.

“The fallout of the Covid-19 pandemic and the sharp decline in oil prices and output have aggravated Iraq’s economic vulnerabilities,” said Tokhir Mirzoev, the IMF official who led the mission.

“A decisive recalibration of near-term economic policies will be critical to ensure macroeconomic stability and protect the vulnerable.”

Iraq, Opec’s second-largest producer, is highly reliant on oil revenue to foot 90 per cent of government expenditure, including $5 billion spent on salaries for public servants each month.

That leaves the government with difficult decisions that could raise the prospect of further civil strife.

The country had more than 574,600 Covid-19 cases, 12,579 deaths and more than 507,400 recoveries as of Sunday, according to Worldometer, which tracks the disease.

The fund said a comprehensive package of economic policies to overcome the pandemic was a top priority. It also called for a reduction of fiscal and external deficits.

In the next phase of the pandemic, additional fiscal resources will be needed to address the crisis, including the ability to buy and distribute the vaccine widely.

Reducing the fiscal and external imbalances will also play a critical role in easing financial constraints, ensuring debt sustainability and protecting international reserves, the IMF said.

Iraq’s 2021 budget should address areas of “fiscal vulnerability”, mainly reversing the “unsustainable expansion of wage and pension bills, reducing inefficient energy subsidies and raising non-oil revenue”, Mr Mirzoev said.

Measures to protect vulnerable segments of the population will be of “paramount importance”, he said.

Mr Mirzoez also called for policies to significantly boost and expand the coverage of cash transfers and to strengthen the social safety net.

“Uncertain medium-term oil market prospects and strong population growth further raise the urgency of advancing the reform agenda,” he said.

In the finance sector, a “decisive” strategy is needed to reform large state-owned banks and level the playing field, he said.

This will allow private sector development and secure financial stability.

Stronger governance controls, better supervision and an international audit of these large state-owned banks are important to provide options for their restructuring, the IMF official said.