IMF Staff Completes 2019 Article IV Mission on Iraq

An International Monetary Fund (IMF) team led by Gavin Gray visited Amman from April 26 to May 2, to hold discussions with the Iraqi authorities in the context of the 2019 Article IV Consultation.

At the end of the visit, Mr. Gray made the following statement:

“The end of the war with ISIS and a rebound in oil prices provide an opportunity to rebuild the country and address long-standing socio-economic needs. However, the challenges to achieving these objectives are formidable. The economic recovery has been sluggish, post-war reconstruction is limited, and large current spending increases risk placing the public finances and central bank reserves on an unsustainable path. Moreover, combatting corruption is critical to promote the effectiveness of public institutions and to support private-sector investment and job creation.

“Near-term vulnerabilities subsided in 2018, with the budget in surplus and a build-up in central bank reserves. Non-oil growth is expected to increase to 5.4 percent in 2019 on the back of higher investment spending. However, fiscal deficits are projected to rise over the medium term, requiring financing that may crowd out the private sector or erode central bank reserves. In these circumstances, it would be hard to sustain capital spending, and growth would slow markedly.

“Policy changes and structural reforms—including to improve governance—are therefore essential to maintain medium-term sustainability and lay the foundations for inclusive growth.

“Fiscal policy should aim to scale up public investment gradually while building fiscal buffers. To make space for this, staff recommends budgetary savings of around 9 percent of GDP over the medium term through tight control of current spending, particularly public-sector wages, and phased measures to boost non-oil revenue. Setting ceilings on current expenditure in the 2020 budget onwards would strengthen the fiscal framework’s capacity to support higher capital spending and to adapt to oil price shocks. Key reforms should include:

  • Containing public-sector wages. Spending pressures could be dampened in the short run through compensation measures such as capping allowances, bonuses and other non‑base wage payments, and by not fully replacing retirees. Structural measures will be required over the medium term, based on a functional workforce review as well as deeper civil service reform once new HR management and information systems are in place.
  • Electricity reforms are key to addressing the weak quality of service and reducing the high budgetary costs, due to modest tariff rates, chronic non-payment of electricity bills, poor maintenance and over-reliance on expensive generation sources, coupled with losses throughout the generation, transmission, and distribution process. It would be important to ensure that the poor and most vulnerable are protected throughout this reform.
  • Bolstering public financial management. Enhancing the legal framework and improving commitment and other control systems are key to minimizing misuse of public resources and restoring budgetary discipline.

“In the financial sector, a robust plan to restructure the large public banks coupled with enhanced supervision is essential to secure financial stability and will help promote financial development and inclusion. Strengthening anti-money laundering and countering financing terrorism (AML/CFT) controls and oversight will help prevent Iraq’s financial sector from being misused for the laundering of criminal proceeds and terrorist financing.

“Addressing governance weaknesses and corruption vulnerabilities is critical to achieving the described policy objectives. As a first step, the authorities need to develop a comprehensive understanding of the corruption risks present in Iraq and then implement policies to tackle these risks in a coherent and coordinated manner. The legislative framework needs to be strengthened to effectively prevent officials from abusing their position or misusing state resources. To this end, laws strengthening the asset declaration regime and criminalizing illicit gains should be rapidly adopted. Furthermore, the independence and integrity of bodies involved in combatting corruption should be ensured and the AML/CFT regime should be mobilized to support anti-corruption efforts.

The team will prepare a report that, subject to management approval, is tentatively scheduled to be considered by the IMF’s Executive Board in July 2019.

“The IMF team would like to thank the authorities for the candid and constructive discussions during this visit.”

(Source: IMF)

By Dr. Layth Mahdi.

The opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The Challenges Facing the New Government: The End of Iraq or Its Revival

The liberation of Iraq has given the country freedom; however this democracy has transformed into chaos with the spread of corruption, militias, tribes and outlaws. The root of the looming crisis is the inability of the GOI to successfully implement initiatives to address the dire situation in Iraq.

Iraq suffers from an economic crises after 2003, the most important of which is the decline of non oil GDP, primarily in the manufacturing and agricultural sectors.

The manufacturing sector GDP fell from 14% to 1%. The majority of factories in Iraq are not operating due to the lack of resources, maintenance, or expertise. The Ministry of Industry has 192 major factories including poultry, dairy, cement, glass & steel not operating. The private sector has 40,000 factories, 95% of which are not operational. Prior to 2003 the government would provide subsidized utilities and limit imports to promote domestic production.

The agricultural GDP dropped from 12% to 2% as the programs and policies in place were unable to effectively revive the agricultural farms. This was due to the GOI eliminating the previously subsidized programs and implemented a free market over night. Which led to the farmers abandoning their lands and migrating to the cities seeking employment. Iraq is now faced with a reluctance of their population returning back to the farmlands outside of the cities.

According to official statistics of the Ministry of Planning for 2018 and some other sources, the population of Iraq is 38 million people, and the proportion of youth reached 28% (10.5 million) making up 36% of the workforce (6.7 million). In addition, the percentage of poverty in the areas liberated from ISIS reached 40%, 30% in the south, 23% in the center and 12% in the Kurdistan region. More than 12 million people live below the poverty line ($ 3 / day). The percentage of poor children in the south has exceeded 50% and the illiteracy rate has spread to a large extent and reached 25%, especially in the poor and remote areas.

The Ministry of Planning and the World Bank announced the Poverty Reduction Strategy Project (2018-2022) with the aim to drop the poverty rate 25% by 2022. I believe this is very ambitious and unattainable with the current leadership and government, as the population of Iraq (38 m) will increase by one million annually. The state should provide over 250 thousand jobs annually to alleviate the poverty rate, and this is not possible because the private and public sector is disabled. The poverty rate will instead increase annually.

Previous National Development Programs of 2010-2014 and 2013-2017 have failed to alleviate the poverty rate because of the lack of vision and inefficiency of directors involved in the projects.

Job creation and poverty reduction are linked to several Ministries and other Government Institutions. These Ministries are influenced by different parties are not cooperating with each other, so the proposed poverty reduction project will fail.

The Prime Minister Dr. Adil Abd Al Mahdi, faces major challenges to improve the economy, create jobs and reduce poverty before it is too late. He should establish a centralized office that will lead all Ministries together to achieve the project goals.

Iraq must also cooperate and include the American expertise in line with the 2008 Strategic Framework Agreement between the USA and Iraq.

I presented a proposal and solution personally to the Prime Minster in December 2018, however without success. I still believe that this is the only right path to the success of the Prime Minister’s tasks. He has no other choice.

By John Lee.

GDP growth in Iraq is expected to hit 4.1 percent in 2019, up from 2.8 percent this year, acccording to data from Moody’s.

The gain is based on an expectation of oil prices averaging $75 per barrel, and would be the highest level since 2016’s 13.1 percent expansion.

The National quotes the report as saying:

“Higher oil prices and output, as well as an expected increase in investment spending because of the improved security situation, have bolstered Iraq’s economic outlook … However, oil price volatility and potential further social unrest that could weaken Iraq’s economic infrastructure, as well as Iraq’s vulnerability to environmental risks, exacerbated by outdated infrastructure are continued risks to growth.”

More here

[In April, Fitch predicted 4.5 percent growth for 2019. – Ed.]

(Source: The National)

On August 1, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV consultation with Iraq.

Iraq is facing a double shock arising from the conflict with ISIS and the plunge in oil prices.

In 2016, real GDP increased by 11 percent owing to a 25 percent increase in oil production, which was little affected by the conflict with ISIS. This year, economic activity is expected to remain muted due to a 1.5 percent contraction in oil production owing to the OPEC + agreement to reduce oil production and only a modest recovery of the non-oil sector.

The decline in oil prices has driven the decline of Iraq’s international reserves from $54 billion at end-2015 to $45 billion at end-2016. Fiscal pressures are ongoing, with the government deficit increasing from 12 percent of GDP in 2015 to 14 percent in 2016 despite the ongoing fiscal consolidation, due to weaker oil prices and rising humanitarian and security spending.

The authorities have appropriately maintained the exchange rate peg. The simplification of documentation requirements implemented by the Central Bank of Iraq led to a decline in the parallel market spread to 6 percent in June 2017.

Medium-term growth prospects are positive. Growth will be driven by the projected moderate increase in oil production and the rebound in non-oil growth supported by the expected improvement in security and implementation of structural reform. Risks remain very high, however, arising primarily from volatile security, political tensions, and poor policy implementation.

The Fund is supporting Iraq through a three-year Stand-By Arrangement in the amount of SDR 3.831 million ($5.380 billion), equivalent to 230 percent of quota.

Full statement here.

30-page report can be downloaded here.

(Source: IMF)

By John Lee.

The International Monetary Fund (IMF) has predicted average growth of 3.1 percent annually in Iraq’s non-oil real GDP until the end of 2022.

This compares to an average fall of 7.2 percent per annum from 2014 to 2016, following the insurgency by the Islamic State group (IS, ISIS, ISIL, Daesh).

It also forecasts a steady fall in government debt as a percentage of GDP, and an improving trade balance, but makes no prediction for the exchange rate of the Iraqi dinar to the US dollar.

The full data table can be viewed here.

(Source: IMF)

By John Lee.

The International Monetary Fund (IMF) has revised down its forecast GDP growth for Iraq from 0.5 per cent to a contraction of 3.1 per cent this year, due to the oil production cuts agreed within OPEC.

Forecasts for 2018 and 2019 are 2.6 percent and 1.6 percent growth respectively.

Consumer price inflation is expected to run at a steady 2 percent per annum over the coming three years.

(Sources: IMF, The National)

Statement at the End of an IMF Mission on Iraq:

  • In 2016, real GDP growth was sustained at 11% supported by a large increase in oil output that benefitted from past oil investments
  • In 2017, economic activity is expected to remain muted due to a 1.5% contraction in oil production and only a tepid recovery of the non-oil sector.
  • Further reforms to create fiscal space for inclusive growth, strengthen the business environment, reduce corruption and repair the banking sector are needed to support private sector-led growth and diversification of the economy

The Iraqi authorities and the staff of the International Monetary Fund (IMF) held discussions in Amman from March 5–17, 2017 on the 2017 Article IV Consultation and the second review of Iraq’s 36-month Stand-By Arrangement (SBA) approved by the IMF Executive Board on July 7, 2016 (See Press Release No. 16/321).

The SBA aims to restore fiscal and external balance and to improve public financial management while protecting social spending. The first review under the SBA was completed on December 5, 2016 ( See Press Release No. 16/540).

Mr. Christian Josz, Mission Chief for Iraq, issued the following statement:

Iraq has been hard hit by the conflict with ISIS and the plunge in global oil prices since 2014. The government has responded to the fiscal and balance of payments crisis with a large but necessary fiscal adjustment supported by financial assistance from the international community. In 2016, real GDP growth was sustained at 11 percent supported by a large increase in oil output that benefitted from past oil investments.

“Nevertheless, the non-oil economy experienced an 8 percent contraction due to the conflict and the fiscal consolidation. In 2017, economic activity is expected to remain muted due to a 1.5 percent contraction in oil production under the agreement reached by the Organization for Petroleum Exporting Countries, and only a tepid recovery of the non-oil sector.

“The plunge in oil prices has driven the decline of Iraq’s gross international reserves from $53.7 billion at end 2015 to the still comfortable level of $46.5 billion at the end of December, 2016. Fiscal pressures remain significant with the government deficit remaining at 12 percent of GDP in 2016, due to continuing weak oil prices and rising humanitarian and security spending. Total public debt increased from 32 to 64 percent of GDP during 2014-16. Credit growth decelerated and non-performing loans in state-owned and private banks increased significantly in 2016.

“The authorities have maintained the exchange rate peg which remains a key nominal anchor. Medium term growth prospects remain modest driven by projected flat oil production and investments in the face of the revenue constraint and modest pickup in non-oil growth supported by the expected improvement in security and implementation of structural reform. Further reforms to create fiscal space for inclusive growth, strengthen the business environment, reduce corruption and repair the banking sector are needed to support private sector-led growth and diversification of the economy once post- ISIS reconstruction is underway. Risks remain high, arising primarily from uncertainty in the oil price outlook, security and political uncertainties, and administrative weaknesses.

“The Iraqi authorities and IMF staff started discussions on the second review of the SBA. These discussions will continue during the upcoming IMF and World Bank Spring Meetings from April 21–23, 2017 in Washington, DC.

“During the visit, the team met with the Acting Minister of Finance Prof. Abdulrazzaq A. Jaleel Essa, Acting Governor of the Central Bank of Iraq (CBI), Dr. Ali Mohsen Ismail Al-Allaq, the Financial Adviser to the Prime Minister Dr. Mudher Saleh, and officials from the ministries of finance, oil, planning, the State Oil Marketing Organization, the Central Statistical Office, the Central Bank of Iraq, and representatives from the Kurdistan Regional Government, and the Board of Supreme Audit. The team would like to thank the Iraqi authorities for their cooperation and the open and productive discussions.”

(Source: IMF)

By Dr. Layth Mahdi.

Prior to the 2003 Iraq had adopted an agricultural policy based on the financial, administrative, technical and technological support from the government for the development of the agricultural and industrial sectors. This policy led to the domestic production to provide 75% of the food requirement and a GDP contribution of 7.5%.

After 2003, Iraq suddenly shifted to a free market without any government plan or support.  The four Ministries (Agricultural, Water & Resources, Industry and Trade) managing this transition did not take the necessary steps to accommodate for this new change. In addition, rising prices for inputs such as fertilizer, seeds and fuel led to reduction in productivity followed by very high unemployment and poverty. More than 50% of Iraq’s cultivable land is abandoned with farmers migrating from the rural areas into the urban cities seeking opportunity.

In 2014 the agricultural GDP dropped to its lowest point. The reason for this sharp economic and social decline is due to lack of leadership, vision, planning and management from the state Ministries and the deterioration of agriculture and industrial sectors. The lack of economic activities in the private sector have also had an impact on unemployment, as well as administrative and financial corruption in the government sectors.

The heavy reliance on oil as a basic rule of economic strength, is nothing but a form of non-sustainable development. Despite the large financial and labor availability along with the water sources, the agriculture sector seems to stay unproductive. The government has spent more than USD 2 billion for an Agricultural Initiative program (2008-2014) to reform and develop the agricultural sector resulting in lower domestic production and increased unemployment.

One example of the failed program is the government purchase of wheat crops. The government was offering farmers a subsidized price of USD 600/ton when the average global price is USD 400/ton. Due to the attractive price and corruption, neighboring countries have been smuggling wheat into Iraq where it is being sold as domestic produce.

Before 2003 the average local wheat production was 1.6 million tons and imported 2.1 million tons. Despite the significant decline in agriculture and security the Ministry of Agriculture has announced that Iraq produced 3.2 million tons of wheat during 2015 however the true domestic production cannot be verified.

The Ministry of Planning announced for 2015, that the population was at 36 million. The labor force between the ages of 14-60 years makeup 58% (21 million) of the population. The government estimates unemployment rate to be at 25% (5.25 million), however; the actual rate is more than 50% with more than 12 million people living below the poverty line ($ 2/day). Those underprivileged have no access to food other than through the Public Distribution System which lacks the necessary proteins and micronutrients.

Reducing Iraq’s unemployment will increase stability and security in the nation. The Strategic Framework Agreement (SFA) signed in 2012 agreed to expand U.S.-Iraq cooperation in the areas of health, agriculture, water, and private-sector development. Unfortunately the SFA was not properly implemented and the agricultural sector continued to decline.

With the guidance of foreign agencies, Iraq must rebuild its agricultural sector to decrease unemployment. A sustainable program needs to be developed that will train & encourage the Iraqi population to return to their farms. The abandoned farms require enhanced irrigation efficiency, improved agricultural services and implement laws favoring domestic produce.

Farming can provide over 1 million jobs for the poorly skilled population therefore strengthening the GDP and decreasing instability.

By Hal Miran, Editor-in-Chief, Bite.Tech.

Tech has grown in prominence as a key sector in global economic health. It is now commonly accepted that an economy in which entrepreneurs have the freedom and resources to create and innovate tend to perform much more robustly.

Intriguingly, one study on the effect of tech on a country’s economy has said that there is a much greater positive spillover effect than has been widely thought1.

The world has entered the new dawn of the technology era. Sure, we’ve had major waves of technological advances since the start of the Industrial Revolution in the late 18th century4. But nothing like this.

Artificial Intelligence, the Internet of Things, Robotics and Automation are set to disrupt the entire world, with virtually every major sector already recently disrupted by technological innovation.

It is a safe bet to assume that global tech is set to grow exponentially. The bottom line is that tech has already demonstrated its crucial importance to economic health, which is only set to increase.

What this means is that more than ever, tech entrepreneurs will be needed in this new tech-driven world to power economic growth.

Tech entrepreneurship in Iraq: Breaking the country’s dependence on oil

The oil sector has not been reliable since 2014, with prices fluctuating wildly. So long core for the Iraqi economy, the country can no longer depend exclusively on the fuel. What has occurred in global oil markets in the last few years is a warning that Iraq must pay attention to.

Iraq is so dependent on the fuel that the government, recently asked for the country to be exempt from the OPEC production cut agreement5, as it is desperate to produce as many barrels of oil as it can.

Tech entrepreneurship can break this dependence and help the economy to grow in ways that the oil sector, crucial as it has been for Iraq for so long, can never achieve.

How have other countries benefited from a booming tech sector?

In the U.S, the tech sector accounts for 7% of GDP and employs almost 7 million people2. In the UK, tech accounts for 8% of British GDP3. In these countries and indeed around the globe it is set to grow further, both in developed and developing economies.