Bank of America Merrill Lynch (BofAML) expected that the recent parliamentary elections in Iraq and the recovery in global oil prices would put the IMF-supported economic program on hold or off-track. It noted that higher oil prices would ease sovereign financing constraints for Iraq and postpone any external bond issuance in the near term. However, it anticipated that the lack of reforms under the IMF program would expose the sovereign's balance sheet to oil price volatility. It said that the IMF program aims to stabilize spending in order to gradually close the fiscal gap, mainly through reforms to the public-sector wage bill, pensions, the electricity sector and non-oil revenues, among others. In parallel, it considered that the 2018 budget is not consistent with the IMF program's conditionality due to the government's failure to implement non-oil revenue tax measures, as well as to the decline in transfers to the Kurdistan Regional Government. It added that the government did not meet prior actions that were required for the completion of the third IMF review. It anticipated that the IMF could resume its discussions over an economic program with Iraqi authorities, in case oil prices declined and a neutral Prime Minister takes office. In parallel, it indicated that fiscal pressures are receding and projected the fiscal deficit to reach 1.8% of GDP in 2018, which would reduce the authorities' incentives for reforms. It added that external pressures are also decreasing, with the Central Bank of Iraq's gross foreign assets reaching $52bn, or 22% of GDP, in April 2018. 

Further, BofAML pointed out that the alliance between Shia parties would reduce political instability and minimize risks of intra-Shia clashes following the election results. However, it expected that the formation of a new government of national unity could take several months, which would weaken the country's reform ability. It added that Iraq's relationships with the U.S. and the GCC countries depends on the appointment of a neutral figure as the next Prime Minister, on regional developments related to Iranian sanctions, as well as on incentives to maintain international financing prospects, mainly from Arab pledges.
Source: Bank of America Merrill Lynch