Op-ed: A tale of two shocks in Iraq by Masood Ahmed

The following are excerpts from the Op-ed. The entire Op-ed can be found at http://www.imf.org/external/np/vc/2015/011115.htm

The impact of conflict and declining oil prices

The ISIS insurgency has led to more than 2.1 million internally displaced people and several casualties among the civilian population.  It has also has a significant negative affect on the non-oil economy through destruction of infrastructure and assets, trade disruptions, impeded access to fuel and electricity, and deterioration of investor confidence. These negative effects led to the IMF’s revision of GDP growth in Iraq in 2014 from over 6 percent in the spring to about 0.5 percent.

With oil export revenues accounting for over 90 percent of total government revenues, Iraq has always been highly vulnerable to oil price volatility. Falling oil prices are already reducing government revenues while security and humanitarian expenditure due to the conflict are increasing. 

In addition, international reserves have fallen from over $77 billion at end-2013 to about $67 billion at end-November due to the combination of lower oil revenues and relatively high imports.

Hard choices
How should Iraqi policy makers react to this difficult situation? The government’s highest priority is clearly resolving the security situation. But to do so, it needs a realistic and coherent fiscal policy that can support an effective use of the oil resources.

"The recent collapse in world oil prices has added to the tensions caused by the ISIS insurgency and is complicating efforts to deal with it".

The draft 2015 budget still relies on relatively optimistic revenue assumptions and envisages a large deficit which will be difficult to finance, even if oil prices do not decline further. Therefore, the government might have to face hard choices in reducing the spending envelope even more than the draft budget. 

Looking forward
The author provides three main areas for imrpvoments to increase the capacity of the economy in Iraq: 

1. For Iraq to push ahead with the transition to a market-based economic system. This requires a continued effort to reduce the role of the government by restructuring state-owned banks and enterprises

2. Iraq would benefit from a strengthened capacity to manage oil resources through better public financial management practices,

3. Iraq could look into how its huge oil resources are redistributed among the population to enhance fairness and sense of belonging among all citizens.

The challenge for Iraq's new leadership is to address not only the current crisis and provide for the millions of refugees who are in dire need of assistance, but also to lay the foundations to address the long-standing weaknesses of its economy.

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