International Monetary Fund
An IMF mission, led by Mr. Jean-Guillaume Boulain, met with Iraqi authorities in Amman and Baghdad from May 4–13, 2025, to conduct the 2025 Article IV Consultation. The following statement was issued at the end of the mission:
Overview
Global uncertainty, declining oil prices, and acute financing pressures are impacting economic activity in Iraq. These factors are intensifying the country's current challenges, requiring urgent action to maintain financial and external stability. Key priorities include curbing the fiscal deficit by mobilizing non-oil tax revenues, containing the public wage bill, completing the restructuring of state-owned banks, and promoting private-sector growth through labor market reforms, improving the business environment, strengthening governance, and fighting corruption. Building on recent progress, the Central Bank of Iraq (CBI) should continue to modernize the banking system and support private banks in expanding correspondent banking relationships.
Recent Economic Developments, Outlook, and Risks
The non-oil sector slowed in 2024, and inflation remained low. After strong growth of 13.8% in 2023, Iraq’s non-oil GDP is estimated to have slowed to 2.5% in 2024 due to weaker public investment, slower service sector growth, and increasing trade balance vulnerabilities. Agriculture, industry, and construction showed resilience—benefiting from post-drought recovery, expanded oil refining capacity, and strong housing loan growth. However, oil production cuts reduced overall GDP growth, which contracted by 2.3%. Inflation declined to 2.7% by end-2024 due to lower food prices and CBI-led liquidity absorption.
The fiscal and external positions deteriorated. The 2024 fiscal deficit is estimated at 4.2% of GDP, up from 1.1% in 2023, driven by rising wage and energy-related expenditures. Financing constraints have led to the reemergence of arrears, particularly in the energy and capital spending sectors. Externally, the current account surplus dropped sharply from 7.5% to 2% of GDP due to a surge in goods imports. Nevertheless, external buffers remain strong, with foreign reserves reaching $100.3 billion by end-2024—covering more than 12 months of imports.
In 2025, non-oil growth is expected to remain weak amid a challenging global environment and financing constraints. Non-oil GDP is projected to slow to 1%, as falling oil prices and limited fiscal space weigh on government spending and consumer confidence. The current account is also expected to weaken further, primarily due to declining oil export revenues, which may put pressure on foreign reserves.
Policy Priorities
Iraq's macroeconomic vulnerabilities have intensified due to fiscal expansion in recent years. Public sector employment policies and the related wage bill are unsustainable, given Iraq’s limited non-oil tax base. As a result, reliance on oil revenues has increased, with the breakeven oil price for balancing the budget rising to $84 per barrel in 2024—up from $54 in 2020.
These challenges are compounded by the steep oil price drop in 2025, calling for an urgent policy response. In the very short term, the authorities should review current and capital expenditure plans for 2025 and cut or postpone non-essential spending. There is also room to raise non-oil revenues by revising customs tariffs and introducing or increasing selective consumption taxes. Authorities should explore options to diversify the creditor base and expand financing. Monetary financing of deficits must be avoided, as it risks increasing inflation, depleting foreign reserves, and weakening the CBI’s balance sheet.
Broader fiscal adjustment is necessary to reduce macro-fiscal risks, ensure debt sustainability, and rebuild fiscal buffers. On the revenue side, beyond customs and consumption taxes, there is scope to gradually reform personal income taxes by reducing exemptions and raising rates. Enhancing tax administration through digitalization, law enforcement, and better collection is crucial. A more effective tax administration would pave the way for implementing a general sales tax system.
On the spending side, curbing current expenditures—especially through wage bill reforms, limiting mandatory hiring, and adopting natural attrition policies—can yield large savings. The mission welcomed recent efforts to better target general distribution systems, though further improvements are needed, ideally shifting to cash-based social safety nets. Public pension reform is also urgent, including raising the retirement age and lowering replacement rates to enhance sustainability.
Implementing these reforms would create space for higher capital spending. Expanding non-oil investment—especially in trade and transport infrastructure—can aid economic diversification. Significant investments are also needed in electricity modernization and gas resource development to improve energy security and reduce reliance on imports. Enhancing procurement and public financial management, alongside anti-corruption efforts, will improve the effectiveness of public investment.
Monetary Policy, Banking Sector, and Governance
Additional efforts are needed to absorb excess liquidity to strengthen monetary policy transmission. The CBI has made progress, but further steps can improve effectiveness, including increasing the issuance of short-term central bank bills (14 days) at the policy rate, adjusting bidding limits, and enhancing liquidity forecasting tools. The CBI should continue avoiding monetary financing of deficits to safeguard its credibility and balance sheet.
The mission praised the CBI’s successful transition to the new trade financing system. Commercial banks now process trade finance transactions entirely through correspondent banks. These efforts have also helped narrow the gap between the official and parallel exchange rates. Nonetheless, more work is needed to close this gap, including enforcing the use of the Iraqi dinar in real estate and auto transactions, strengthening customs controls to curb smuggling, and streamlining foreign currency access.
Initial state-owned bank reforms are promising, but broader efforts are needed to strengthen the financial sector. Authorities should complete the restructuring plan for state-owned banks, including addressing non-performing loans and increasing capital. Simultaneously, the mission welcomed progress in digitalization and the authorities’ intent to implement comprehensive banking reforms—focusing on governance, digital infrastructure, cybersecurity, and a greater role for private banks. Continued improvements in AML/CFT measures are vital, especially in addressing deficiencies identified in the MENAFATF mutual evaluation report.
Electricity, Energy, and Anti-Corruption
Chronic energy shortages, electricity losses, and over-subsidized tariffs continue to constrain the economy. Fixing inefficiencies in the electricity sector is critical for fiscal sustainability and productivity. In 2024, distribution losses reached 55%, driven by theft and illegal connections, resulting in large financial losses. Authorities are deploying smart meters and implementing other billing improvements, but faster progress is needed. Once billing collection improves significantly, achieving cost recovery will require increasing tariffs while offering targeted subsidies for low-income users.
Recent disruptions in electricity imports from Iran highlight the need to diversify supply sources and invest in gas development projects.
Governance and Corruption
Fighting corruption and governance weaknesses is essential for supporting economic development. The mission welcomed steps taken under the national anti-corruption strategy and noted improvements in corruption perception indices as positive signs.
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