Iraq: Selected Issues

May2024 IRAQ SELECTEDISSUES IMFCountryReportNo.24/129 ThisSelectedIssuespaperonIraqwaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedontheinformationavailableatthetimeitwascompletedonMay13,2024. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.org InternationalMonetaryFundWashington,D.C. ©2024InternationalMonetaryFund April10,2024 IRAQ SELECTEDISSUES PreparedBySergejsSaksonovs(FAD)andGaziShbaikatandGhadeerNoufal(MCD) ApprovedBy MiddleEastandCentralAsiaDepartments CONTENTS AROADMAPFORRAISINGNON-OILREVENUES2 A.Introduction2 B.TaxandTariffLandscapeinIraq4 C.TheNeedandPlansforInstitutionalReformsofRevenueandCustomsAdministration5 D.ARoadmapforPoliciestoIncreaseNon-OilRevenue8 E.StructuralReformsandEconomicDiversification10References12 ADDRESSINGLABORMARKETCHALLENGES:AREASFORREFORM14 A.LaborMarketStructure14 B.DriversofLaborMarketChallenges15 C.AssessingDriversofInformalityintheIraqiLaborMarket19 D.EmpoweringWomentoExpandEconomicPotential20 E.PolicyImplicationsandKeyReformAreas22References37 BOXES 1.TheEducationSectorinIraq26 2.ContributorstoPotentialGrowth27 3.ResponsivenessofEmploymenttoGrowth30 FIGURES 1.SelectedLaborMarketIndicators31 2.InformalityDistancetoFrontierEconomies32 3.DriversofInformality33 4.GenderInequality-SelectedIndicators34 5.UnemploymentandGrowthUnderDifferentScenarios36 AROADMAPFORRAISINGNON-OILREVENUES Non-oilrevenuesinIraqremainpersistentlylowrelativetoallpeercountrygroups.Raisingnon-oilrevenueshouldbeakeypolicypriorityincontextoftheprospectivetransitionawayfromoilandIraq’slargedevelopmentneeds.Thispaperoffersaroadmapfortaxpolicymeasuresandstructuralreformsthatcouldbeusedtoraisenon-oilrevenues.Toraiserevenuesinthenear-term,theauthoritiesshouldreviewthetariffstructuretoeliminateexemptionsandraisetariffsonluxuries.Thereisscopetomakethepersonalincometaxesmoreprogressiveandbroadentaxbases.Overthemedium-term,theauthoritiesshouldmovetowardsadoptingthevalueaddedtaxandtacklestructuralobstaclestorevenuemobilization–informality,lackofeconomicdiversification,lowlevelsoffinancialinclusionandhighrelianceoncash.Inparallel,theauthoritiesshouldsignificantlyaccelerateinstitutionalreformsofrevenueandcustomsadministrationwithsupportofIMFandotherdonorcapacitydevelopmentefforts. A.Introduction 1.Non-oilrevenuesinIraqremainpersistentlylowcomparedtoregionalpeers,otheroilexportersaswellasfragileandconflict states.From2019to2023,non-oilrevenuesasaratiotoGDPhavefluctuatedbetween1.9and4.5percent,averaging 2.9percentofGDP.Thiswasthelowestaveragenon-oilrevenuetoGDPratioamongMENAPoilexporters(OE),otheroilexporters,andoilexportingfragileandconflictstates(belowYemen’s3.9percentofGDP).Thesamepatternholdswhenalonger-termaverage(from2011to2023)isconsidered. 2.Thecompositionofnon-oilrevenueshasbeenvolatile,witharoundthreequartersreceivedfromnon-taxrevenuesanddirecttaxes.From2011to2023,non-taxrevenueshave,onaverage,accountedforaround52percentoftotalnon-oilrevenues(rangingbetween 30percentin2017and75percentin2015),whiledirecttaxesaveraged 26percentofthetotal(rangingbetween12percentin2014and45percentin2016).Non-taxrevenuesprimarilyinclude 2INTERNATIONALMONETARYFUND feesforgovernmentservices,dividendsfrom(non-oil)state-ownedenterprises,aswellasrevenuesfromdisposalofassets.1Corporateincometaxandpayrolltaxesmakeupmostofthedirecttaxes. 3.Raisingnon-oilrevenuesisakeyprioritybecauseoftheexpecteddeclineinoilprices,aswellastheneedtoensurelong-termfiscalsustainabilityandmeetsizeablespendingneeds.First,asnotedinthe2024ArticleIV,undercurrentpoliciesandprojectedoilprices,Iraq’sfiscalpositionisexpectedtodeteriorateoverthemedium-termputtingfiscalandexternalsustainabilityatrisk.Althoughmuchofthefiscaladjustmentwillneedtorelyonreducingexpenditure,raisingnewrevenueswouldstillbeessentialtostabilizedebtoverthemedium-term.Second,ensuringlong-termsustainabilityastheworldmovesawayfromfossilfuelswouldrequireasignificantreductionofIraq’sdependenceonoilonapotentiallyacceleratedtimetable(IMF,2023).Third,Iraqhassubstantialspendingneedstoaccommodatelargeinvestmentsforpost-warreconstruction,meetingSustainableDevelopmentGoals(SDGs)adaptingtoclimatechange,endinggasflaring,aswellasboostingelectricitygenerationandsocialspending(IMF,2023). 4.ThereisconsiderablepotentialforraisingtaxrevenueinIraq.IMF(2022)computedcountries’taxrevenuegapsbasedonamodeloftax revenuesasafunctionofmacroeconomicdeterminants(e.g.,realGDPpercapita,inflation,tradeopenness,etc.)andtheunobservedcountryspecificfactorsthatpreventagivencountryfromachievingitstaxcapacity.Thedifferencebetweenpotentialandactualtaxrevenueswasestimatedtobe15.3percentofnon-oilGDPinIraq,asof2019,thesecondlargestgapamongMENAPandCCAoilexporters.Closingthisgap,however,willbeadifficultprocessrequiringprolongedinstitutionalreform. 5.Theadjustmentscenarioenvisagedinthe2024