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Iraq - Economy

The countrys national economy has been heavily dependent on global oil prices, covering 90 percent of government revenues. In the wake of the deadly pandemic and slump in oil markets, by mid 2020 Baghdad was struggling to pay the salaries of public servants. Iraq might also see nearly a 10 percent decrease in its gross domestic product (GDP) for 2020, which would be the worst economic outlook since 2003, according to World Bank estimates.

Assuming a resolution of the conflict in the coming years and a pickup in oil production together with the envisaged modest recovery in oil prices, Iraq's baseline medium-term outlook looked positive. Under improved security conditions, the macroeconomic scenario would continue to be driven by the expansion in oil revenue, assuming implementation of oil investment to increase oil production, and by fiscal adjustment. But risks remain very high, arising primarily from a further fall in oil prices, worsening of the conflict, political tensions, or poor policy implementation.

Economic decisions are calibrated towards serving Iranian interests. Iraqs energy policy, for instance, is an international laughing stock as one of the most energy-rich countries on the planet has to import energy from its neighbour and suzerain, Iran. The US continued to grant sanctions waivers to allow Iraq to trade with Iran, which Tehran has exploited masterfully to continue to ward off the worst of the Trump administrations maximum pressure sanctions campaign. Iraqi markets are also dominated by Iranian produce and goods, with even advanced exporters like Turkey not allowed to export pasta, eggs and other staples. The excuse? Iraq wants to boost its domestic production. That is, of course, commendable were it not for the fact that Iraqi politicians have allowed markets to be flooded by substandard and cheap goods from Iran, destroying domestic production and crippling the labor force.

Iraq faced a double shock arising from the ISIS attacks and the sharp drop in global oil prices. The conflict hurt the non-oil economy through destruction of infrastructure and assets, disruptions in trade, and deterioration of investor confidence. The impact of the oil price decline already felt in 2014 fully unfolded in 2015, affecting the budget, the external sector, and medium-term growth potential. The authorities responded to the crisis with a mix of fiscal adjustment and financing, maintaining their commitment to the exchange rate peg.

By early 2016 the general assessment was that low oil prices were likely to persist, and given the fluid situation in Iraq, security could deteriorate to the point of chaos. The authorities implemented fiscal consolidation that would contain public expenditure in line with available revenue and financing, and aim to reduce the non-oil primary deficit by US$20 billion or 12 percent of non-oil GDP between 2013 and 2016.

The government halted spending and imposed sever austerity measures, including the elimination of jobs, higher taxes, and salary cuts for public servants and pensioners. While the security forces would bear the brunt of the decline in revenues, cuts in spending would damage development and could be a precursor of worse things to come. The economic crisis led to street protests, and emerging troubles were expected to add a new source of instability to the ISIL violence and Iraq's fractious sectarian system.

By 2011 the severe unemployment problem (estimated to be as high as 30%) was the most daunting economic challenge facing Iraq. Iraqs bloated public sector simply can not afford to hire more employees and growing the private sector is the only path to increasing employment. A USAID analysis suggests 28%38% of the available labor force seeking work. In the politically volatile category of young men between 15 and 29 years old, the rate is higher still, with up to 40% unable to fi nd suitable employment.

The U.S. installed Coalition Provisional Authority (CPA) Privatisation measures did not have any long-term recovery effects on the economy. Quite to the contrary, major parts of Iraqs economy collapsed, forcing the country into a downturn spiral of unemployment and depression. The radical shift to private enterprise also inhibited the reconstruction and maintenance of the already weakened public institutions like electrical, hospital, water and sewage facilities. While the degree of economic decline varied across regions, it was the Sunni cities, largely harboring state facilities and government employees, which were most heavily affected.

The International Monetary Fund (IMF) and GOI both projected that Iraqs gross domestic product would grow by at least 12% during the year 2011, making it one of the worlds fastest growing economies. Iraqs recent economic growth is led by Iraqs booming oil sector. Historically, Iraq's economy was characterized by heavy dependence on oil exports and emphasis on development through central planning. Prior to the outbreak of the war with Iran in September 1980, Iraq's economic prospects were bright. Oil production had reached a level of 3.5 million barrels per day, and oil revenues were $21 billion in 1979 and $27 billion in 1980. At the outbreak of the war, Iraq had amassed an estimated $35 billion in foreign exchange reserves.

A 2010 Citibank study on the fastest growing economies through midcentury placed Iraq second among the 10 nations with the most promising growth prospects for the 20102015 period and among the top fi ve countries with the best prospects for growth through 2050. Yet, for all its potential, Iraq remains one of the worlds toughest places to do business.

Americans still view Iraq as a war zone a perception not held by business executives from other countries. U.S. business was involved in less than 5% of the $42.67 billion in new foreign commercial activity registered in 2010, making it the fifth largest foreign investor ahead of China, but well behind Turkey, Italy, France, and South Korea. While the Italian and South Korean shares resulted from single mega-contracts, Turkish and French companies have been active across a broader front. Several factors may underlie the relatively modest U.S. share of foreign commercial activity in Iraq. Americans cite a greater sensitivity to corrupt business practices and the potential for violence.

Interest in investing in Iraq has risen strongly, following substantial improvements in its security situation in the last year. Potential investors still note security concerns, but now are more likely to cite regulatory hindrances and other practical barriers to doing business as their key issues. While the end of 2009 and early 2010 saw a series of high-profile bombings targeting hotels and government offices, the frequency of broader sectarian violence and acts of war and terrorism continued to decline during 2009. This provided the Government of Iraq (GOI) and the Iraqi private sector the opportunity to make substantial progress toward improving the business and investment climate. In particular, the GOI expanded the capacity and functionality of the National and Provincial Investment Commissions and passed an amendment to the National Investment Law to clarify land use issues; the private banking sector also enjoyed growth.

The Iran-Iraq war depleted Iraq's foreign exchange reserves, devastated its economy, and left the country saddled with foreign debt of more than $40 billion. However, after hostilities ceased in August 1988, oil exports gradually began to increase, with the construction of new pipelines and the restoration of damaged facilities. But Iraq's invasion of Kuwait in August 1990, subsequent international sanctions, damage from military action by an international coalition in January and February of 1991, and neglect of infrastructure devastated Iraq's economy again. Government policies that diverted government income to key supporters of the regime and sustained a large military and internal-security force further impaired the economy and left the typical Iraqi facing desperate hardships.

The UN created the Oil-for-Food (OFF) program in April 1995 (UN Security Council Resolution 986) as a temporary measure to provide for the humanitarian needs of the Iraqi people because of the effect of the continued sanctions regime. The OFF authorized nations to allow the importation of petroleum and petroleum products from Iraq worth $1 billion dollars (U.S.) every 90 days. The Security Council directed the Secretary General to create an escrow account that would hold the proceeds from the sales of oil, and allow Iraq to purchase food, medical supplies, and other goods for "essential" civilian needs. Although GDP fell in 2001-2002 largely as a result of the global economic slowdown and lower oil prices, per capita food imports increased and medical supplies and health care services improved. However, the military action of the U.S.-led coalition from March to April 2003 disrupted the central economic administrative structure. Since then, the rebuilding and enhancement of oil and utilities infrastructure and other production capacities has proceeded steadily, despite attacks on key economic facilities and internal security incidents. Iraq is now making progress toward establishing the laws and institutions needed to make and implement economic policy.

Iraq's economy is dominated by the oil sector, which provides about 90% of foreign exchange earnings. Oil production currently averages about 2.4 million barrels per day, of which about 1.9 million barrels per day are exported.

Iraq is seeking to pass and implement laws to strengthen the economy, including a hydrocarbon law that encourages development of the oil and gas sector and a revenue sharing law that equitably divides oil and gas revenues among the central government, the provinces, and the Kurdistan Regional Government (KRG). Implementing structural reforms, such as bank restructuring and private sector development, while simultaneously reducing corruption, will be key to Iraq's economic growth.

Foreign assistance has been an integral component of Iraq's reconstruction efforts since 2003. At a donors conference in Madrid in October 2003, more than $33 billion was pledged to assist in the reconstruction of Iraq. Following that conference, the UN and the World Bank launched the International Reconstruction Fund Facility for Iraq (IRFFI) to administer and disburse about $1.7 billion of those funds. The rest of the assistance is being disbursed bilaterally. Since 2003, international donors have pledged about $17 billion in financial and technical assistance, soft loans or potential loan facilities, and trade finance. International donors have exceeded their combined pledges for grants and technical assistance totaling about $5.3 billion by more than $700 million. Total soft loan pledges amount to about $11.8 billion, of which $4.7 billion has been committed. Japan is the leading soft loan contributor, having committed nearly $3.3 billion to projects around Iraq. New programs approved by the International Monetary Fund (IMF) and World Bank will substantially close the gap between soft-loan pledges and commitments.

In February 2010, the IMF and World Bank approved $3.6 billion and $250 million of support to Iraq, respectively. Both programs are focused on helping the Iraqi Government maintain macroeconomic stability and mitigate Iraq's vulnerability to external shocks due to volatility in global oil markets. The Iraqi Government has worked closely with both institutions since 2003, including the December 2008 completion of an IMF Stand-By Arrangement (SBA), after which Iraq received the balance of the Paris Club's 80% debt reduction.

Agriculture is Iraq's second-largest economic sector (after the oil sector), producing about 12% of GDP, and the second-largest source of jobs (after the public sector), employing at least 15% of the labor force. However, despite its abundant land and water resources, Iraq is a net food importer. Obstacles to agricultural development, most of which existed prior to the removal of the Ba'ath regime in 2003, include government policies and subsidies that distort the market and undermine productivity and competition; outdated technology in plant and animal genetics, fertilizers, irrigation and drainage systems, and farm equipment; inadequate and unstable electricity; degradation of irrigation-management systems; insufficient credit and private capital; and inadequate market information and networks. In addition, the policy of the Ba'ath regime to destroy the "Marsh Arab" culture by draining the southern marshes and introducing irrigated farming to the region destroyed a natural food-producing area, while concentration of salts and minerals in the soil due to the draining left the land unsuitable for agriculture. Assistance from the U.S. Agency for International Development (USAID), the U.S. Department of Agriculture (USDA), and other international partners since 2003 has helped Iraq begin the necessary improvements. Current U.S. efforts are focused primarily on helping Iraq transition to a private-sector driven agricultural system.

The United Nations imposed economic sanctions on Iraq after it invaded Kuwait in 1990. Under the Oil-for-Food program, Iraq was allowed to export oil and use the proceeds to purchase goods for essential civilian needs, including food, medicine, and infrastructure-repair parts. With the lifting of UN sanctions after the Ba'ath regime was removed in 2003, Iraq is gradually resuming trade relations with the international community, including the United States. The United States designated Iraq as a beneficiary developing country under the Generalized System of Preferences (GSP) program in September 2004. Iraq was granted observer status at the World Trade Organization (WTO) in February 2004, and began its WTO accession process in December 2004. Iraq has participated in two Working Party meetings as part of the accession process, one on May 25, 2007, and the other on April 2, 2008. During this long-term process, Iraq must align its trade regime with the rules-based, multilateral international trade system. Through USAID technical assistance, the United States is continuing to support Iraq's accession to the WTO. Completion of the requirements for WTO membership will help Iraq establish a proven framework for fostering a more stable and transparent economy that will encourage both domestic and foreign investment.

In July 2010, Prime Minister al-Maliki unveiled Iraq's $186 billion National Development Plan (2010-2014) (NDP). Th e NDP outlines a five-year program for economic growth and social development, centering on 2,831 projects. The GOI expected to contribute 53.7% of the $186 billion in funds, with the private sector financing the remaining 46.3%. The GOI released additional details about how the NDP will allocate spending by province.

Iraqs Public Distribution System [PDS] is the worlds largest food ration program. In theory, it provides a basket of food and other household commodities to virtually every Iraqi citizen. Iraqi leaders acknowledge, however, that the PDS is inefficient, creates tremendous opportunities for corruption, distorts domestic commodity markets, and delivers only a fraction of the commodities promised. For these reasons, the GoI has committed to reforming and possibly monetizing the PDS over the long-term.

Implementing modern core banking systems is critical to the stateowned banks utilization of the Iraq Payments System and front-end, consumer-oriented technologies that will reduce Iraqs overreliance on cash. By mid-2010 a total of 42 banks existed in Iraq and the number of bank branches continued to increase, with more than 900 branches then available throughout Iraq. There were 20 banks with a functional core banking system, and 24 banks in Iraq were able to send and receive international payments electronically. Operationally, two of the largest state-owned banks, Rafidain and Rasheed, continued to undergo a comprehensive financial and operational restructuring with support and guidance from international donors and the World Bank, the International Monetary Fund, and the U.S. Treasury. The World Bank appointed a project manager who is tasked with coordinating the operational restructuring of both banks. In the interim, slow but steady progress was occurring in 2010 on the development and implementation of a core banking system for the Rafidain Bank. The MoF had delayed the initial recommendation for the Rasheed Banks core banking system.



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Page last modified: 27-08-2021 14:30:27 ZULU