IMF: without prudent economic transformation, Iraq might suffer from the vulnerabilities of oil reliance

Iraq’s Gross Domestic Product (GDP) is projected to grow by 8 percent in 2022, the International Monetary Fund (IMF) said in a report this week, but warned of overwhelming reliance on oil.

The IMF said that “high oil prices have provided Iraq’s economy with much-needed respite after a near-crisis in 2020” and urged authorities to take advantage of the opportunity to maximize the benefits through the implementation of a “prudent, patient, and disciplined fiscal policy aimed at building financial buffers, reducing oil dependence, and reorienting expenditures toward priority investment and social needs.”

“Real GDP is projected to grow by 8 percent in 2022, driven by a 12-percent expansion in oil output,” the IMF said, assuring that that inflation has been “relatively contained”.

OPEC’s second-largest exporter mainly depends on oil revenues to pay the salaries of civil servants and cover operational costs. The country’s economy is once again booming as oil prices are increasing globally despite suffering in much of 2021 due to record-low oil prices.

According to the IMF, the profit boom from soaring oil prices could ensure that the foreign exchange reserves of Iraq’s central bank will surpass the $90 billion mark by the end of 2022.

However, a drop in oil prices can be detrimental for the country’s gains.

“A faster decline in global oil prices could reignite financing pressures sooner. Government finances are particularly vulnerable to faster accumulation of losses in the energy sector and the depletion of the State Pension Fund, as well as the rising costs of climate change,” the IMF warned, urging Iraq to adopt” a sound fiscal framework”.

The fund also advised Iraq to carefully calibrate its 2023 budget in accordance with the prospect of declining oil prices again “to provide adequate indexation of targeted cash transfers and low-income pensions to protect the most vulnerable from the rising cost of living” while reiterating government’s need to reduce its dependence on oil revenues.

The ministers from the 13-nation OPEC group – which Iraq is a member of- and Russian-led exporters met in Vienna in October and agreed to cut oil production by two million barrels starting from November.

Oil prices increased amid shortfalls following Russia’s invasion of Ukraine in February, with the US repeatedly urging members of the oil cartel to increase their oil production in an effort to balance the market.

In November, Iraq earned nearly a billion dollars less than it did in October, as the country exported over 99 million barrels of crude oil at an average rate of 3.3 million barrels a day with each barrel selling for $82.4. The country’s total revenue was over $8.2 billion, which fell nearly a billion short of October’s $9.25 billion revenue.

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