Sovereign Analysis /
Iraq

Iraq must make hay while the sun shines

  • The IMF’s projections have been revised up on high oil prices with Iraq now set to record large twin surpluses this year

  • But the longer-term outlook remains weak, with limited progress on structural reforms amid a political stalemate

  • With oil high, the risk of debt distress is very low, but it's essential the state reduces its economic dominance

Iraq must make hay while the sun shines
Patrick Curran
Tellimer Research
6 May 2022
Published by

Based on our discussions over the course of the IMF/WB Spring Meetings, as well as the Fund's recent World Economic Outlook, we present our key takeaways on Iraq. For more details, read our in-depth "IMF/WB Spring Meetings, April 2022 – country notes and global themes" report.

Iraq’s macro outlook is notably sunnier than it was in October given the sharp rise in oil prices, leading to a forecast of double-digit twin surpluses this year and a near-term boost to oil and non-oil growth in the context of relatively subdued inflation. With reserves rising above US$67bn (16 months of goods and services imports) in March and the next US$1bn eurobond maturity not due until next March, the risk of near-term distress is negligible.

That said, the longer-term outlook is still quite weak. The non-oil primary balance has actually widened, and discussions with the IMF on a potential reform programme have been stalled since before the October elections. The political situation has been in limbo since the elections, too, with a new government yet to be formed and the caretaker government lacking the authority to implement Iraq’s reform agenda.

Besides the December 2020 currency devaluation, there has been limited progress implementing the reforms outlined in the previous government’s White Paper for Economic Reforms. Without a major commitment to structural reforms and concerted efforts to reduce the state’s dominance of the economy, Iraq’s longer-term growth prospects will remain weak.

Furthermore, it is not clear how many more oil price booms Iraq will enjoy, so it is essential that the authorities use the current windfall to move towards a more sustainable growth model and rein in underlying fiscal imbalances that will be laid bare when oil prices recede. Against this backdrop, we retain our Hold recommendation on Iraq’s eurobonds, which have notably outperformed the index year-to-date (+1.6% in total return terms versus -14.5% for the EMBI Global through 4 May).

Iraq WEO