IMF praises Iraqi steps towards inflation reduction

BAGHDAD — Central Bank of Iraq says its recent efforts to stabilize the economy have garnered praise from the International Monetary Fund, particularly for measures aimed at reducing inflation and maintaining equilibrium in the foreign exchange market.

The Central Bank highlighted the IMF’s acknowledgment of its initiatives that contributed to economic stability. This discussion took place during meetings in Amman, Jordan, where the IMF noted both strengths and areas for improvement within Iraq’s economic framework.

Iraq’s economy heavily depends on oil revenues, which often leads to vulnerabilities due to fluctuating global oil prices.

The IMF’s feedback indicates a cautious optimism, recognizing the Central Bank’s role in addressing some of these vulnerabilities. 2022 financial statements showed just 5% of government revenues derived from non-oil sources.

In 2023, the non-oil sector of Iraq’s economy showed a promising growth of 6%, rebounding from a downturn in 2022. This improvement, alongside a reduction in inflation from 7.5% at the start of the year to 4% by its end, suggests a degree of economic resilience. The decline in inflation aligns with a drop in international food and energy prices, as well as streamlined trade financing operations and a more stable foreign exchange market.

However, the path to these achievements wasn’t without its challenges. The implementation of stringent anti-money laundering and counter-terrorism financing controls initially disrupted cross-border payments. It took concerted efforts by the Central Bank to minimize transaction processing times and regain stability in trade financing, ensuring the private sector could access foreign currency for essential imports and travel.

The IMF’s report highlighted the nascent steps towards establishing a Treasury Single Account (TSA), aiming to enhance cash management by consolidating government funds. This move, while in its early stages, is pivotal for better fiscal oversight and efficient resource allocation.

Efforts to tackle excess liquidity in the economy were also noted. By raising interest rates on monetary policy instruments, increasing mandatory reserve requirements, and issuing short-term treasury bills, the Central Bank has been working to absorb surplus cash. Such measures are crucial for curbing inflation and promoting economic stability, although their success hinges on careful implementation and monitoring.

The IMF’s recommendations underscore the importance of consolidating government deposits into the TSA, steering clear of pro-cyclical fiscal policies that could amplify economic booms and busts, and enhancing public debt management. The emphasis on avoiding reliance on cash financing, coupled with initiatives to digitalize the economy and improve financial inclusion, reflects a broader strategy to modernize Iraq’s financial landscape.