Iraq’s economic growth to decline in 2023, 2024 due to oil production cuts: IMF

January 14, 20240

IMF warned of “fiscal and external sustainability risks” from “large” budget law expansion

Baghdad, Iraq

The International Monetary Fund (IMF) has predicted a decline in Iraq’s Gross Domestic Product (GDP) growth due to oil production cuts by OPEC+ and the interruption of the pipeline with Turkey. However, the IMF noted that Iraq’s economic activity is recovering despite these challenges.

The Fund projected that Iraq’s non-oil GDP would grow in the current year, thanks to the expansion of public finances under the three-year budget law.

“Continued budget execution should help sustain strong non-oil growth in 2024,” the IMF stated.

Moreover, the Fund expected inflation in Iraq to stabilize in the coming months, attributing this to tighter monetary policies, higher exchange rates, lower food prices, and improved compliance with anti-money laundering and terrorist financing measures. Additionally, the experts at the IMF anticipate a shift from a budget surplus in 2022 to a deficit in 2023.

Further widening of the Government’s fiscal deficit

The Fund’s statement also highlighted that experts anticipate a further widening of the Government’s fiscal deficit in 2024, reflecting the full annual impact of the budget procedures. Also, the Fund emphasized that the substantial expansion of public finances, including an increase in the number of public sector associates and retirees, creates a permanent need for increased public spending, which will strain public funds in the medium term.

“Ensuring fiscal sustainability, in context of uncertain outlook for oil prices, requires gradually tightening the fiscal policy stance while safeguarding critical infrastructure and social spending needs. This would require mobilizing additional non-oil revenues, containing the large government wage bill, and reforming the pension system. These measures should be supported by moving toward a more targeted social safety net that better protects the vulnerable.”

Moody’s

Last month, Moody’s Credit Ratings downgraded the assessment of Iraq’s economic strength to ba2. This downgrade was attributed to a combination of factors, including unstable economic growth, poor infrastructure, and a lack of diversification, despite the country’s large size and abundant natural resources.

Moody’s final assessment was two points below the baa3 level, reflecting the significant damage to Iraq’s productive capacity and infrastructure caused by years of armed conflict. These factors have weakened the competitiveness and resilience of the economy, hindering its ability to achieve faster growth and diversify beyond the oil and gas sector.

Moody’s also highlighted the heavy dependence of Iraq’s economy on the oil sector, which accounted for 45 percent of nominal GDP in 2021. Furthermore, the rating agency projected that Iraq would not be able to fully recover to pre-coronavirus levels of economic output until 2024, despite the ongoing economic recovery. It is worth noting that Iraq currently possesses one of the largest economies in the Middle East and North Africa (MENA), with a nominal gross domestic product of $264 billion in 2022.

Source: Economy Middle East Newsletter, December 20, 2023

https://economymiddleeast.com/news/iraq-economic-growth-oil-imf/