IMF Wraps Up 2025 Article IV Consultation in Iraq
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Iraq and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis [2] .
Executive Board Assessment
Iraq’s economy is facing considerable headwinds. Iraq’s non-oil sector growth slowed from 13.8 percent in 2023 to an estimated 2.5 percent in 2024, impacted by reduced public investment, a weaker trade balance, and financing constraints that led to the accumulation of arrears. Going forward, financing constraints, subdued investment and constrained growth potential are expected to weigh on growth and intensify preexisting fragilities.
The large fiscal expansion in recent years has increased Iraq’s vulnerabilities, which are further exacerbated by the recent decline in oil prices. As spending expanded and non-oil revenues stagnated, the oil price required to balance the budget increased to around $84 in 2024, up from $54 in 2020. The financing constraints that emerged in 2024 are expected to worsen this year in light of the oil price drop. Furthermore, risks of sovereign debt stress have risen, calling for urgent policy action.
A sizable fiscal adjustment is needed to mitigate macro-fiscal risks, contain liquidity risks and stabilize debt in the medium term. In the very short term, the authorities should review current and capital spending plans for 2025 and limit or postpone all non-essential expenditure.
There is also scope to boost non-oil revenues through increases in excises and custom duties. Over the medium term, stabilizing debt would require an additional fiscal consolidation of 1–1.5 percent of non-oil GDP per year.
On the revenue side, besides strengthening tax administration, there is scope to increase customs duties and excise taxes, reform personal income tax including by limiting exemptions, and introducing a general sales tax in the medium term. On the spending side, comprehensive public wage bill reforms through limiting mandatory hiring and adopting an attrition rule would yield significant savings. Recent efforts to better target the public distribution system are welcome, but there is scope to further improve targeting and eventually shift to cash-based social safety nets. Finally, it is urgent to reform the public pension system by raising the retirement age and reducing both the accrual and replacement rates.
Implementing the proposed reforms could generate fiscal space for increased non-oil capital spending. Crucial non-oil capital expenditures should be protected given the need to expand investment in trade and transportation infrastructure to promote economic diversification; and modernize the electricity sector and develop natural gas resources, which are crucial for enhancing energy security and decreasing reliance on gas imports. Additionally, improving procurement, public financial management, and addressing corruption would boost the effectiveness of any new public investments.
Further efforts are needed to absorb the remaining excess liquidity and improve monetary policy transmission. This could be achieved by increasing the issuance of CB-bills, focusing on short-term instruments piloted by the policy rate, adjusting bid size limits, and refining liquidity forecasting tools.
Efforts to strengthen the domestic financial system should continue and accelerate. The CBI should be commended for the successful transition to the new trade finance system now fully managed by commercial banks through their CBRs, contributing to a reduction in the spread between the official and parallel market exchange rates.
While initial reforms of state-owned banks are promising, a comprehensive restructuring plan addressing nonperforming loans and capital shortfalls is necessary, along with improvements in corporate governance and digital infrastructure. Furthermore, the CBI has started to explore reform options to strengthen the private banking sector. Priority areas are the ownership structure, business model sustainability, regulatory requirements, and elements to support mutual confidence between banks and their customers, such as a credit bureau and stronger deposit guarantee scheme. Alongside these efforts, addressing weaknesses in anti-money laundering and counter-terrorism financing remains paramount.
A comprehensive structural reform agenda is vital to unlock growth potential. Estimates suggest that reforms in the labor market, business regulation, financial sector, and governance could double non-oil potential GDP growth in the medium term. Key priorities include enhancing labor force participation, especially among women, by improving education and removing legal barriers, as well as reforming public sector hiring to boost productivity. Improving vocational training programs can align skills with market needs, while simplifying regulations and reducing bureaucratic obstacles will encourage formal economy participation and support private sector development.
Electricity sector reform is also critical given how chronic power shortages and inefficiencies weigh on productivity and economic growth. The authorities are encouraged to speed up their efforts to improve billing and collection. Once collection substantially improves, achieving cost recovery will also require electricity tariff increases, with carefully calibrated subsidies targeted to low-income users.
These efforts would be supported by further combatting pervasive corruption and addressing governance weaknesses. While progress has been made in implementing the national anti-corruption strategy and improving corruption perception, significant challenges remain. Strengthening accountability in state-owned and private enterprises, complying strictly with EITI standards, enacting a Law on Transparency and Access to Information, aligning legal frameworks with international best practices, and enhancing the independence of NAZAHA are essential measures for effective enforcement and protecting economic rights. It would also enhance the effectiveness of core state functions that are critical to economic activity, such as fiscal governance and financial sector oversight.
Data deficiencies persist. Major data deficiencies in Iraq can significantly undermine the robustness of IMF surveillance by leading to incomplete or inaccurate assessments of the economic situation and possibly jeopardizing effective policy recommendations. Building on the numerous CD Iraq has received, it is essential to focus on the most pressing data gaps and incorporate pilot initiatives into disseminated data in a timely manner.
[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
https://www.imf.org/en/News/Articles/2025/07/08/pr-25243-iraq-imf-executive-board-concludes-2025-article-iv-consultation