The International Monetary Fund's 2025 Article IV consultation with Iraq, concluded in May and formally endorsed in July, presents a comprehensive assessment of the country's economic position and reform imperatives. The findings underscore both Iraq's resilience in maintaining domestic stability amid regional turbulence and the acute challenges posed by falling oil prices, financing constraints, and structural imbalances that have accumulated over two decades of post-conflict recovery. The IMF's analysis emphasizes that Iraq stands at a critical juncture: urgent measures to preserve fiscal and external stability must be coupled with ambitious structural reforms capable of unlocking the country's substantial growth potential.
Iraq's non-oil sector growth decelerated sharply from 13.8 percent in 2023 to an estimated 2.5 percent in 2024, reflecting reduced public investment, weaker trade balances, and financing constraints that led to arrears accumulation. This slowdown occurred despite inflation remaining subdued amid weakened demand. Oil revenues, which constitute more than 93 percent of government income, face downward pressure from lower global prices—with current levels around $67 per barrel falling well short of the approximately $84 per barrel needed to balance Iraq's budget. Without significant policy adjustments, the IMF projects further deterioration in fiscal deficits and external accounts over the medium term.
The Reform Imperative: Structural Versus Cyclical Solutions
The IMF's recommendations distinguish between immediate stabilization measures and deeper structural transformations necessary for sustainable growth. On the stabilization front, priorities include containing fiscal deficits through mobilized non-oil tax revenues and controlling the public wage bill, which consumed 59 percent of Federal Government of Iraq expenditures in the first half of 2025. More than 40 percent of Iraq's workforce is employed in public-sector or state-owned enterprises, creating both fiscal strain and labor market distortions that reduce overall economic productivity.
Iraq's repeated pattern—implementing emergency reforms when oil prices collapse, then abandoning them when markets recover—has prevented lasting institutional change. The 2020 White Paper on Emergency Cell for Financial Reforms and the 2016 IMF Stand-By Arrangement both represented serious reform efforts that lost momentum once petroleum revenues rebounded. This cycle perpetuates rentier dynamics and entrenched public expectations of state largesse, making politically difficult reforms even harder to sustain.
The current fiscal crisis differs from previous episodes in one crucial respect: global energy markets face structural uncertainties that may prevent the robust price recovery Iraq has historically relied upon. The transition toward renewable energy, increased energy efficiency in major consuming nations, and geopolitical realignments in oil markets suggest that persistently high prices can no longer be assumed. This reality makes structural diversification not merely economically optimal but existentially necessary for Iraq's fiscal sustainability.
Growth Potential Through Comprehensive Reform
The IMF's analysis includes a striking quantitative assessment: a comprehensive reform package addressing labor markets, business regulation, the financial sector, and governance could double non-oil potential GDP growth over the medium term. Current projections place non-oil growth at 3-4 percent, driven primarily by demographics rather than productivity gains. Doubling this rate would fundamentally alter Iraq's economic trajectory, creating employment opportunities for a young, rapidly growing population while reducing dependence on volatile oil revenues.
Labor market reforms represent a particularly high-impact opportunity. Iraq's labor force participation rates, especially among women, rank among the lowest in the region. Priorities include improving female education, removing legal and cultural barriers to women's work and mobility, and reforming public sector hiring practices that distort markets and suppress productivity. Better alignment between educational curricula and labor market needs through enhanced vocational training could address the widespread skills mismatch that leaves many Iraqis unemployed while businesses struggle to find qualified workers.
Business environment improvements focus on simplifying regulations and reducing bureaucratic impediments in company registration, licensing, and tax administration. Iraq's ranking in the World Bank's 2024 Business Ready Report placed the country in the bottom tier for regulatory framework, reflecting excessive red tape, corruption, and unclear procedures that discourage formal sector participation. Streamlining these processes would encourage entrepreneurship, enable small and medium enterprises to operate legally and access financing, and support private sector expansion.
Electricity sector reform emerges as critical given how chronic power shortages and inefficiencies constrain productivity and growth. Distribution losses reached 55 percent in 2024, driven by theft and illegal connections, resulting in massive financial losses that burden the state budget through subsidies while depriving citizens and businesses of reliable power. The authorities have deployed smart meters and introduced collection improvements, but progress remains insufficient. Achieving cost recovery will require both enhanced billing and collection systems and carefully calibrated tariff increases with targeted subsidies protecting low-income users.
Financial Sector Modernization and Institutional Credibility
The IMF commended Iraq's successful transition to a new trade finance system where commercial banks process transactions through correspondent banking relationships rather than through centralized government channels. This shift has contributed to a recent decline in the spread between official and parallel market exchange rates—a positive signal for monetary policy credibility. However, the Fund emphasized that further efforts are needed to narrow this spread, including mandating Iraqi dinar usage for car and real estate transactions, improving customs controls to curb smuggling, and simplifying foreign exchange access procedures.
State-owned bank restructuring requires urgent completion, encompassing treatment of non-performing loans, recapitalization needs, and governance improvements. These institutions hold significant deposits and conduct much of Iraq's domestic financial intermediation, making their health essential to overall financial stability. The government's engagement of Ernst & Young to develop restructuring plans represents progress, but implementation must accelerate to prevent accumulated weaknesses from becoming systemic risks.
The broader banking sector overhaul, being conducted with Oliver Wyman's support, addresses compliance with international anti-money laundering and counter-terrorism financing standards—deficiencies identified in the MENAFATF Mutual Evaluation report. Tackling these gaps is essential for Iraqi banks to maintain and expand correspondent relationships with international financial institutions, without which Iraq cannot fully participate in global trade and investment flows.
Monetary Fundamentals in an Oil-Dependent Economy
Iraq's challenges in building long-term monetary credibility stem fundamentally from its extreme dependence on a single volatile commodity. Currencies of highly oil-dependent states face inherent instability because government revenues, foreign exchange earnings, and economic activity all correlate strongly with petroleum prices—leaving the entire economy vulnerable to external shocks beyond policymakers' control.
Diversification addresses this vulnerability by creating alternative sources of growth, employment, and revenue. When non-oil sectors expand as a share of GDP, the economy becomes more resilient to oil price fluctuations, fiscal policy gains flexibility, and monetary authorities can focus on domestic price stability rather than managing oil revenue volatility. Nations that have successfully diversified away from resource dependence—examples include Norway's balanced approach and various Gulf states' recent economic transformation initiatives—typically demonstrate more stable currencies and more sustainable growth trajectories.
The structural reforms the IMF outlines relate to currency fundamentals through several mechanisms. Improved governance and reduced corruption enhance institutional credibility, which influences international investor confidence and capital flow stability. Labor market reforms that boost productivity and expand workforce participation increase potential output and competitiveness. Financial sector modernization that establishes transparent, well-regulated banking systems facilitates efficient capital allocation and reduces the risk of financial crises that can devastate currency values.
Iraq's capacity to implement these reforms amid fiscal constraints and approaching elections (scheduled for November 2025) remains uncertain. Political economy dynamics—entrenched patronage networks, rent-seeking behaviors, and resistance from interests benefiting from the status quo—have historically prevented sustained reform momentum. However, the depth of current fiscal pressures may create conditions where meaningful change becomes politically feasible, particularly if policymakers can demonstrate that reforms ultimately protect living standards better than continued dependence on volatile oil markets.
The IMF's assessment provides a roadmap grounded in economic analysis rather than speculative projections. While implementation challenges are substantial, the direction is clear: Iraq's long-term economic stability and monetary credibility depend on its ability to transform structural conditions that currently constrain growth, perpetuate oil dependency, and limit the private sector's ability to generate sustainable prosperity.
Disclaimer: This content is for informational and educational purposes only and does not constitute financial advice. Currency and economic outcomes are subject to numerous variables, and readers should conduct their own research or consult qualified professionals.