Økonomiske studier
Iraq

Iraq

Population 38.9 million
GDP 4,950 US$
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Country risk assessment
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Synthesis

major macro economic indicators

 

 

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 11.0 -0.8 3.1 2.8
Inflation (yearly average, %) 0.4 0.1 2.0 2.0
Budget balance (% GDP) -13.9 -2.3 0.3 -0.6
Current account balance (% GDP) -8.6 0.7 0.2 -1.6
Public debt (% GDP) 64.4 58.0 54.7 54.4

 

(e): Estimate. (f): Forecast.

STRENGTHS

  • World’s fourth largest proven crude oil reserves
  • Low oil extraction costs
  • International financial support (IMF and bilateral loans)

WEAKNESSES

  • Undiversified economy; highly dependent on the oil sector
  • Severe tensions between the Shia majority and the rest of the country
  • Tensions with autonomous Kurdistan, a major contributor to the oil sector
  • Cost of reconstruction and assistance to victims following armed conflict
  • Small GDP share of non-oil and gas private sector
  • Weak and limited banking sector
  • Deficiencies in education, health, and welfare systems

Risk assessment

Economic activity poised to surge in 2019

A year after the conflict ended, the war against the Islamic State has taken a heavy toll. Basic infrastructure was damaged, and some cities such as Mosul and Tal Alfar were 70% destroyed. The World Bank estimates the cost of the damage at USD 45 billion and puts the financing needs for reconstruction at USD 88.2 billion. At the reconstruction conference held in Kuwait in February 2018, the international community pledged USD 30 billion, mainly in the form of credit facilities and investment. In 2018, excluding oil, investment in infrastructure remained the main driver of the economy. As the second largest OPEC producer and fifth largest in the world, Iraq is highly dependent on the oil sector. Despite the OPEC agreement on reducing output, the more favourable oil situation in 2018 allowed the economy to return to growth. In 2019, the ramp-up of the Majnoun and Halfaya oil fields should lead to an increase in production of more than 450,000 barrels per day over three years. At the same time, the likely increase in OPEC quotas in 2019 should give the Iraqi authorities more flexibility to raise exports. Continued high oil prices should also give the government additional room for manoeuvre to substantially increase spending. Among the significant investments, the authorities have signed a memorandum of understanding with General Electric and Siemens to rebuild and upgrade the country's electricity grid. This project is expected to generate up to 25 gigawatts of electricity and create more than 65,000 direct and indirect jobs.

 

Small current account and government deficits

The 2018 Finance Act was the first budget passed since the country declared victory over the Islamic State in 2017. With 90% of budget revenues coming from oil, the rise in oil prices allowed the government to post a small budget surplus in 2018. Despite the increase in oil revenues, the public accounts are expected to show a small deficit in 2019. The 2019 budget provides for a 23% increase in expenditures over 2018. Public investment is set to increase by 32% and should focus on key sectors such as energy and security. However, the distribution of the budget between the provinces is likely to be the subject of continued disagreement among the political parties, and especially between the central government and the autonomous Kurdistan region. The central government decided last year to reduce the region’s allocation from 17% to 12%, sparking a political crisis in November 2018.

Despite increased export revenues, import growth driven by higher public investment is expected to weigh on the trade surplus, while the services and income balances will remain in deficit. The small current account deficit will be partially financed by FDI in the oil sector, as well as by multilateral and bilateral loans for reconstruction. Finally, downward pressure on the Iraqi dinar is expected to ease as the security situation improves and oil prices rise, allowing the central bank to maintain the US dollar peg.

 

A fragile political situation

The May 2018 parliamentary elections were the first elections held in the country after Mosul was taken over by Iraqi national forces. Due to ethnic and religious divisions, the election was followed by a long period of negotiations. Barham Salih from the Patriotic Union of Kurdistan (PUK) was finally elected as Iraqi President in October, ending several months of deadlock. He appointed independent Shia politician Adel Abdul Mahdi to the key position of Prime Minister. Presented as the minister for reconciliation, Adel Abdul Mahdi has the difficult task of responding to widespread public discontent. The country has emerged divided by the conflict, and demonstrations have increased since the fighting ended. The May elections featured a low turnout (44.5%) and a high number of independent candidates. They highlighted a growing lack of interest among Iraqis in their political system, which has been rocked by a string of corruption scandals.

 

Last update: February 2019

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