Falling oil prices deepen Iraq’s fiscal imbalances, says IMF

Iraq’s fiscal imbalances have worsened due to significant fiscal expansion and lower oil prices, according to the International Monetary Fund (IMF).

“The ongoing fiscal expansion is expected to boost growth in 2024 at the expense of a further deterioration of fiscal and external accounts and Iraq’s vulnerability to oil price fluctuations,” the Washington-based fund said in its latest Article IV consultation with Iraq.

The medium-term sovereign debt stress risk remains high, and external stability risks could emerge without policy adjustments.

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The key downside risks include much lower oil prices or a spread of the conflict in Gaza and Israel. 

More than 90 percent of Iraq’s government revenue comes from oil.

Opec’s second-largest oil producer overproduced its quotas by a cumulative 602,000 bpd in the first quarter of 2024, but it agreed to reduce its crude exports to 3.3 million barrels per day (bpd), out of the 4 million bpd it currently produces. 

It plans, however, to increase its production to at least 6 million bpd by 2030. 

Opec+ members extended additional voluntary cuts of 2.2 million bpd until the end of the first half of the year; they will meet again on June 1 to discuss further output policy.

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Iraqi oil minister Hayan Abdel Ghani said last weekend that the country “has reduced (output) enough and will not agree to any new cut.” 

The IMF said sound macroeconomic policies and structural reforms are needed to secure fiscal and debt sustainability, advance economic diversification, and achieve sustainable and private sector-led growth. It also called for combatting corruption and improving governance.

Domestic stability, however, improved since the new government took office in October 2022, facilitating the passage of Iraq’s first three-year budget, which included a large fiscal expansion starting in 2023. 

This supported the strong recovery in Iraq’s non-oil economy after a contraction in 2022, as Iraq was largely unaffected by the ongoing regional conflict. 

The 2023 budget was Iraq’s largest at 98.9 trillion Iraqi dinars ($150 billion), according to local media reports. The 2024 and 2025 budgets are expected to be at a similar level.

By the end of 2023, domestic inflation declined to 4 percent, driven by lower international food prices, a currency revaluation in February 2023, and the normalisation of trade finance.