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The International Monetary Fund (IMF) said on Thursday that Iraq’s economy contracted by 2.2% in 2022, projecting a growth by 1.4% in 2024 and 5.3% in 2025.

The international monetary organization expected fiscal deficit to widen to 7.6% of GDP in 2024 from 1.3% in 2023, noting that Iraq requires an ambitious fiscal adjustment to stabilize debt in the medium term and rebuild buffers.

The findings came in the context of the 2024 Article IV consultation with Iraq. The IMF released documents showing that domestic stability in the country has improved since the new government took office in October 2022, facilitating the passage of Iraq’s first three-year budget, which entailed a large fiscal expansion starting in 2023.

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

“Domestic inflation declined to 4% by end-2023, reflecting lower international food prices, the currency revaluation as of February 2023, and the normalization in trade finance. However, imbalances have worsened due to the large fiscal expansion and lower oil prices,” the IMF said in a statement.

Moreover, it said 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.

“Without policy adjustment, the risk of medium-term sovereign debt stress is high and external stability risks could emerge. Key downside risks include much lower oil prices or a spread of the conflict in Gaza and Israel,” the IMF added.

In Iraq, real GDP growth would reach 1.4% in 2024 and accelerate to 5.3% in 2025, the IMF said, also projecting deficit to widen from 1.3% in 2023 to 7.6% of GDP in 2024.

It noted that Iraq’s public debt-to-GDP ratio is expected to reach 48.2% in 2024 and 54.6% in 2025.

IMF directors emphasized that a gradual, yet sizeable fiscal adjustment is needed to stabilize debt in the medium term and rebuild fiscal buffers.

They encouraged the authorities to focus on controlling the public wage bill, phasing out mandatory hiring policies, and mobilizing non-oil revenues, while better targeting social assistance.

The Directors agreed that prompt implementation of customs and revenue administration reforms, a full implementation of the Treasury Single Account, and a strict control and limit of the use of extrabudgetary funds and government guarantees are key to support fiscal consolidation.

Limiting monetary financing and reforming the pension system are also important, they stressed.

They commended the central bank’s efforts to tighten monetary policy and enhance its liquidity management framework. Improving coordination between fiscal and monetary operations would help absorb excess liquidity and bolster monetary policy transmission.

They concurred that accelerating the restructuring of the large state-owned banks is also essential.

They also encouraged further modernizing the private banking sector, including by facilitating the establishment of correspondent banking relationships, reducing regulatory uncertainties, and promoting efficiency and competitiveness of private banks.

Furthermore, they emphasized the need for structural reforms to unlock private sector development. They encouraged leveling the playing field between public and private jobs, boosting female labor force participation, and reforming education and labor laws.

The directors agreed that improving governance and combatting corruption are also key, in addition to bolstering public procurement and business regulations, and addressing electricity sector inefficiencies.

They welcomed the renewed efforts toward the World Trade Organization (WTO) accession and encouraged the authorities to improve the coverage and timeliness of statistics.