Iraq pledges economic reform in meeting with World Bank

BAGHDAD — In a significant move towards addressing the country’s economic challenges, Iraqi Finance Minister Taif Sami announced on Monday the government’s dedication to implementing essential reforms in fiscal and monetary policies. This pledge was made during discussions with Winston Cole, the World Bank’s Financial Management Project Director, emphasizing the need to bolster the private sector’s role in development. The meeting marks a crucial step in the ongoing cooperation between Iraq and the World Bank to complete the economic reforms initiated by the Iraqi government.

“The Finance Minister Taif Sami Mohamed welcomed Winston Cole, the World Bank’s Financial Management Project Director, and the accompanying delegation this Monday,” began the ministry’s statement, setting the stage for a discussion on deepening the relationship between Iraq and the World Bank.

The Iraqi economy faces substantial hurdles, with recent criticism highlighting the government’s fiscal irresponsibility and overspending. The passage of the 2023, 2024, and 2025 federal budgets, totaling 198.9 trillion Iraqi dinars (approximately $153 billion), reflects an ambitious yet precarious fiscal policy heavily reliant on oil revenues. This reliance on a volatile commodity without significant structural reforms poses risks to the country’s economic stability. The budgets aim to fund local investment projects and hire hundreds of thousands of public sector employees, a move that may increase electability but exacerbates the challenges of an already overburdened public sector.

The World Bank has underscored the urgency of reforms, noting that without structural changes, Iraq’s oil-dependent development model will persist, threatening the private sector’s growth and job creation. The Spring/Summer 2023 edition of the Iraq Economic Monitor highlights the reemergence of growth constraints in the oil sector and the ‘expansionary’ nature of the new budget, which lacks the “structural reforms needed for a vibrant and sustainable economy.” Additionally, the report points to the critical condition of financial sector reforms and the modernization of its banking sector architecture as major barriers to economic diversification.

“Minister Sami reaffirmed the government’s determination to continue enhancing structural reforms related to fiscal and monetary policies and to maximize the private sector’s role in development,” highlighting the need for a strategic shift towards a more diversified and resilient economy.

Specifically, the World Bank’s analysis identifies the urgent need for reforms in financial intermediation, pointing to the low financial access in Iraq, with only 19 percent of adults owning a bank account. The banking sector, dominated by undercapitalized state-owned banks, and a weak private commercial banking sector hinder economic diversification and job creation. To address these challenges, the report recommends institutional reforms in state-owned banks and the promotion of digital financial services to boost financial inclusion.

Minister Sami’s acknowledgment of the partnership with the World Bank and the commitment to enhancing structural reforms presents an opportunity for Iraq to tackle its deep-rooted economic issues. However, the path to reform is complex, requiring a delicate balance between political will, public sector efficiency, and the strategic utilization of oil revenues for sustainable development.