Ministry of Finance: IMF refers to a gradual recovery of the Iraqi economy as a result of the government’s “reform” steps
The head of the International Monetary Fund mission, Tokher Mizorov, confirmed in a press interview that I followed (the Fourth), that the Iraqi economy is gradually recovering, but it is still weak.
He said policies must remain focused on reducing vulnerabilities, supporting economic recovery, and enhancing resilience through broad-based structural reforms. Increased inflation, fueled by rising global commodity prices, calls for strengthening targeted social safety nets to help the most vulnerable while avoiding measures that impair fiscal sustainability and weaken competitiveness.
Here is the text of the interview:
What is the International Monetary Fund’s assessment of the Iraqi economy during the coming period, and what are the policies recommended by the Fund to achieve economic growth?
The good news is that the Iraqi economy is witnessing a gradual recovery, and it is expected that the balances of public finances and the external current account will shift from a double deficit in 2020 to a double surplus in 2021, especially with expectations that the gradual recovery trend will continue.
At the same time, however, the economic recovery remains fragile, incomplete, and subject to challenges—real non-oil GDP has not yet reached pre-pandemic levels—and global inflation presents a new challenge.
Public finances are still mainly dependent on oil revenues, which threatens that any reversal in the oil market conditions will easily cause pressure on public finances to be financed again.
Accordingly, it will be important for economic policies to continue to focus on reducing vulnerabilities and on supporting economic recovery without exacerbating domestic inflation.
This will help enhance the resilience and sustainability of the Iraqi economy, enabling it to better face future challenges. In addition, diversifying the economy and promoting private sector development are the most important factors for achieving development in Iraq.
This requires carrying out wide-ranging reforms, the most important of which are those aimed at enhancing public resources and reducing their dependence on oil while creating the necessary space to increase much-needed spending on the investment and social protection sides. combating corruption and improving the governance and efficiency of the public sector; In addition to reforming the electricity sectors, the financial sectors.
How do you explain the increase in inflation in Iraq and do you attribute this to the devaluation of the dinar in 2020? As in many countries around the world, inflation in Iraq largely reflects rising prices globally. Due to a combination of different factors such as the rapid recovery in global demand, supply chain disruptions, and the deterioration of production capacity due to the global pandemic, global commodity prices have risen sharply over the past year.
International energy prices have more than doubled, while world prices for wheat, rice, aluminum, copper and nickel have risen by 20-50 percent. All of this increase, in turn, has led to an increase in the costs of production and transportation for a wide range of consumer products whose prices are increasing globally, including in Iraq.
In our assessment, it appears that the impact of the devaluation of the dinar on inflation was limited. In general, it is very unusual for a one-time adjustment of the exchange rate to continue to affect inflation in any significant way after fourteen months. Does the fund support maintaining the current exchange rate or returning to what it was in order to reduce inflation and help vulnerable groups?
Policies aimed at containing inflation and its impact should take into account the fragility of the recovery in Iraq and the long-term goals of diversifying the economy and strengthening the private sector.
Thus, the first policy priority is to avoid making the problem worse by adopting domestic policies that increase inflation, for example through expansionary policies. The second priority is the implementation of policies specifically targeted to protect the most vulnerable.
At the same time, it will be important to avoid any measures that could weaken Iraq’s economic capabilities without addressing the problem. For example, measures that undermine the competitiveness of domestic producers and encourage imports will not, if at all, bring significant benefits to vulnerable groups. This explains the scarcity of countries with a fixed exchange rate to revalue their currency in economic history.
For the same reasons, it would not be advisable for Iraq to do so. What should the government do to contain the social impact of inflation in Iraq? Higher prices erode the purchasing power of household income and savings. Since more than a fifth of Iraq’s population lives in poverty, protecting vulnerable groups from the effects of inflation is of paramount importance.
To achieve this, the 2022 budget should prioritize strengthening targeted cash transfers to help the poorest families during these difficult times. Continuing to work on improving the coverage of the social protection network will also contribute to ensuring that those who really need it most are helped. Moreover, linking the increase in pensions and salaries of low-paid civil servants to inflation will contribute to protecting the purchasing power of their incomes and prevent them from falling into poverty. International experience has shown that such measures are most effective in protecting the livelihoods of vulnerable groups.
What should the monetary policy of Iraq and the Central Bank of Iraq focus on? The main objective of the Central Bank is to maintain price stability, support growth, and maintain the stability of the financial sector. To achieve this objective, in the short term, the central bank should closely monitor domestic liquidity conditions to contain potential inflation expectations, while ensuring that sufficient credit is available to support a gradual recovery path.
Continuing to build foreign exchange reserves will also contribute to strengthening and enhancing Iraq’s ability to sustainably meet its external obligations. Advancing banking sector reforms and enhancing financial inclusion will also be of paramount importance to support job creation in the private sector and achieve sustainable growth, during the next phase.