The International Monetary Fund calls on Iraq to cut spending, increase taxes, and reform pensions.
The International Monetary Fund calls on Iraq to cut spending, increase taxes, and reform pensions.
2025-07-09 01:12
Shafaq News – Baghdad / Erbil
The International Monetary Fund warned on Wednesday that the Iraqi economy faces significant challenges due to a slowdown in non-oil sector growth from 13.8% in 2023 to an estimated 2.5% in 2024. This is impacted by a decline in public investment, a weak trade balance, and financing constraints that have led to the accumulation of arrears.
Financing constraints, weak investment, and limited growth potential are expected to weigh on growth and exacerbate existing vulnerabilities, according to the Fund.
The International Monetary Fund Board said during the conclusion of Article IV consultations with Iraq in Washington, in a statement seen by Shafaq News Agency, that the significant fiscal expansion in recent years has exacerbated Iraq’s vulnerabilities, which have been further exacerbated by the recent decline in oil prices.
According to the statement, with expanding spending and stagnant non-oil revenues, the oil price required to balance the budget has risen to approximately $84 in 2024, compared to $54 in 2020. Financing constraints that emerged in 2024 are expected to worsen this year in light of lower oil prices. Furthermore, the risk of sovereign debt distress has increased, necessitating urgent policy action.
He pointed out that a significant fiscal adjustment is needed to mitigate macroeconomic risks, contain liquidity risks, and stabilize debt over the medium term. In the very short term, the authorities should review current and capital spending plans for 2025 and reduce or postpone all non-essential expenditures.
The Council also stated in its statement that there is scope to boost non-oil revenues through increased taxes and customs duties. In the medium term, debt stabilization and additional fiscal consolidation of 1-1.5% of non-oil GDP per year are required.
He pointed out that, on the revenue front, in addition to strengthening tax administration, there is scope for increasing customs duties and excise taxes, reforming the personal income tax, including reducing exemptions, and imposing a general sales tax in the medium term. On the expenditure front, comprehensive reforms to the public wage bill, by reducing employment and adopting a baseline for employee reductions, would help.
The statement welcomed recent efforts to improve the targeting of the public distribution system, adding, “However, there is still room to further improve targeting and ultimately transition to cash-based social safety nets. Finally, it is urgent to reform the public pension system by raising the retirement age and reducing the accrual and replacement rates.”
The Council indicated that implementing the proposed reforms would provide fiscal space for increasing non-oil capital spending, stressing that these vital capital expenditures must be protected given the need to expand investment in trade and transportation infrastructure to promote economic diversification; and to modernize the electricity sector and develop natural gas resources, which are critical to enhancing energy security and reducing dependence on gas imports.
He also noted that improving procurement, public financial management, and addressing corruption would enhance the effectiveness of any new public investments.
The IMF Board emphasized the need for further efforts to absorb the remaining excess liquidity and improve monetary policy transmission. This can be achieved by increasing the issuance of central bank bills, focusing on short-term instruments guided by the key interest rate, adjusting auction size limits, and improving liquidity forecasting tools.
He also noted that efforts to strengthen the domestic financial system should continue and accelerate, commending the Central Bank of Iraq for its successful transition to the new trade finance system, which is now fully managed by commercial banks through their central banks, thus contributing to narrowing the gap between the official exchange rate and the parallel market exchange rate.
Regarding Iraq’s banks, the Fund stated that initial reforms at state-owned banks are promising, but a comprehensive restructuring plan to address non-performing loans and capital shortages is essential, along with improvements to corporate governance and digital infrastructure. Furthermore, the Central Bank of Iraq has begun exploring reform options to strengthen the private banking sector.
Priority areas include ownership structure, business model sustainability, regulatory requirements, and elements that foster mutual trust between banks and their customers, such as credit bureaus and enhanced deposit guarantee systems. Alongside these efforts, addressing weaknesses in combating money laundering and the financing of terrorism (AML/CFT) remains critical, the IMF statement said.
Regarding the electricity sector, the IMF noted that reforming the electricity sector is critical given the impact of chronic energy shortages and inefficiencies on productivity and economic growth. Authorities are encouraged to accelerate their efforts to improve the billing and collection system. Once collection improves significantly, cost recovery will also require electricity tariff increases, with carefully targeted subsidies for low-income users.
The Fund warned that these efforts will be supported by continuing to combat rampant corruption and address governance weaknesses. Despite the progress made in implementing the National Anti-Corruption Strategy and improving perceptions of corruption, significant challenges remain.
The statement promised to strengthen accountability in government and private institutions, strictly comply with the Extractive Industries Transparency Initiative (EITI) standards, enact a transparency and access to information law, align legal frameworks with international best practices, and enhance the independence of the National Commission for Integrity and Transparency. These measures are essential for effectively enforcing and protecting economic rights. This will also enhance the effectiveness of core state functions that are vital to economic activity, such as financial governance and financial sector oversight.
The Fund concluded that there are still data gaps, and these significant data gaps in Iraq could significantly undermine the robustness of IMF surveillance, leading to incomplete or inaccurate assessments of the economic situation and potentially jeopardizing effective policy recommendations.
The Fund’s statement concluded by saying that, based on the numerous reports Iraq has received, it is essential to focus on the most pressing data gaps and integrate pilot initiatives into the published data in a timely manner.
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