The International Monetary Fund (IMF) said Iraq's economy remained open to risks stemming from the armed conflict with ISIS and sluggish oil prices, even though medium-term prospects are positive.
"While medium-term growth prospects are positive, the medium-term growth outlook remains exposed to significant risks, arising primarily from oil price volatility, unstable security, political tensions, and weak administrative capacity," the Washington-based organization said in a statement after concluding its second review of the country.
Declining oil prices have caused Iraq’s international reserves to plunge to $45 billion at end-2016 from $54 billion at end-2015, according to the IMF.
Increased spending associated with volatile situation and lower oil prices have fueled a government deficit, which widened to 14 percent of gross domestic product (GDP) in 2016 from 12 percent in 2015 despite ongoing fiscal consolidation.
Iraq’s proven oil reserves were 153 billion barrels, the fifth largest in the world, according to BP Statistical Review of World Energy. The supply glut has weighed down prices to around US$50 a barrel despite Opec’s efforts to curb the lull in oil prices. This places added pressure on Iraq as it relies on hydrocarbon revenues to the tune of 90 per cent of government revenues and nearly 100 per cent of exports.
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The fund extended a $5.34 billion three year loan to Iraq last year and said that it would allow it to draw the equivalent of $824.8 million from that loan.
The IMF praised Iraqi authorities for maintaining the dinar's peg to the US dollar but said measures to prevent money-laundering, countering the financing of terrorism as well as strengthening anti-corruption legislation needed to be implemented.
The fund is projecting Iraq's economy will contract 0.4 per cent in 2017 before rebounding in 2018 when GDP is expected to expand 2.9 per cent.
The IMF said that during the second review it had approved Iraq's request for waivers of non-observance and applicability of performance criteria.
It noted the government had achieved further fiscal consolidation in 2016 but at a slower pace than planned because of weak control of investment spending and humanitarian needs.
The loan was made to Iraq to help it deal with the massive drop in oil prices that began in the summer of 2014 and the heavy cost of battling ISIS. It was also done to encourage others to lend money to Iraq. The so-called standby loan will be paid out in a total of 13 tranches up until June 2019 and the loan can be paid over an eight period. It comes with an interest rate ranging between 1 per cent and 1.3 per cent.
The IMF is not the only seeing encouraging signs in Iraq. Moody’s Investor Service last week assigned a Caa1 long-term issuer rating, seven steps below investment grade with a stable outlook to the government of Iraq.
The ratings agency said that the stable outlook reflected the balance struck between recent positive developments, such as security forces and support from the international community, and political and economic fragility.