IMF Warns Iraq It Needs To Change Its Priorities But Baghdad Unresponsive

The International Monetary Fund released a report on Iraq’s budget and economy in July 2019. It repeated warnings it has been making for the last several years. Namely that Iraq needed to changed its spending, focus upon investment, reform its economy, and fight corruption. This message has been delivered to Iraq by the IMF, the World Bank, and the United States for years, and yet there has been no change. That’s because Iraq’s elites benefit from the way the system currently works.

Iraq has failed to invest its oil revenue into development for decades due to war, bad governance and corruption. The result is poor services, bad health and education, poverty, and little per capita GDP growth for years. Added to that is the fact that the government makes no plans for changes in oil prices. The petroleum industry always goes through booms and busts. When oil prices are up the government doesn’t save, but instead increases spending on public wages, which leads to large deficits when profits inevitably go back down. The 2019 budget is expected to grow 27% due to petroleum prices going up leading to increases in government workers and pay. In fact, wages for public workers are supposed to exceed the budget because there are weak controls over spending. Right now taking care of public sector workers is 17% of GDP. The IMF provided Iraq with $5.3 billion in 2016 to help with the cost of the war against the Islamic State and a collapse in the energy business. In turn, Iraq was supposed to carry out structural reforms, but didn’t. Baghdad should be using its money to rebuild and improve services, but it’s not. The fact that the country has widespread war damage and yet there is no reconstruction program was very disappointing for the IMF. In 2018 for instance, Iraq only expended 0.5% of its spending on rebuilding. The World Bank also provided the Iraqi government with support during this period and also asked that it carry economic changes in return. Baghdad has done this again and again. Whenever it has faced deficits it goes to the IMF and World Bank and makes promises it never fulfills. This is due to the fact that the ruling parties use the state as their own patronage system. When revenues are up they expand the public work force and dish out those jobs in return for support and votes. The economic costs of this policy is never discussed because the politicians lack an understanding of economics and will never give up their power base. This is far more important than even rebuilding the areas of the country that were destroyed during the war.

Iraq is one of the most oil dependent countries in the world, and always talks about diversifying but again, never follows through. In 2018 non-petroleum GDP rose 0.8% due to weak execution of its investment budget that is supposed to develop other elements of the economy. That sector is expected to grow in 2019-20 but not at a sustainable rate because the government can’t sustain its investment. The IMF has been pushing development and reconstruction, and Baghdad has agreed, but in practice nothing has happened. The United States pushed this issue during the U.S. occupation as well, but it didn’t have much more success than the Monetary Fund. Again, this is simply not a priority, and therefore things will not change.

GDP Growth

2015 2.5%

2016 15.2%

2017 -2.5%

2018 -0.6%

Projected 2019 4.6%

Projected 2010 5.3%

Projected 2021 2.6%

Projected 2022 2.3%

Projected 2023 2.1%

Projected 2024 2.1%

Non-Oil GDP Growth

2015 -14.4%

2016 1.3%

2017 -0.6%

2018 0.8%

Projected 2019 5.4%

Projected 2020 5.0%

Projected 2021 4.1%

Projected 2022 3.4%

Projected 2023 2.7%

Projected 2024 2.7%

GDP Per Capita

2015 $5,047

2016 $4,843

2017 $5,263

2018 $5,882

Projected 2019 $5,728

Projected 2020 $6,017

Projected 2021 $6,172

Projected 2022 $6,326

Projected 2023 $6,486

Projected 2024 $6,666

SOURCES

International Monetary Fund, “IMF Executive Board Concludes 2019 Article IV Consultation with Iraq,” 7/26/19

- “Staff Report For The 2019 Article IV Consultation And Proposal For Post-Program Monitoring,” 7/3/19