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Iraq: improved economic outlook

Iraq: improved economic outlook



Economy picking up

Non-oil growth is expected to remain positive on the back of higher investment needed to rebuild the country’s damaged infrastructure network, private consumption and investment, says a report

August 2019

Iraq’s economy is gradually picking up following the deep economic strains of the last four years, an economic update from the World Bank has said.

Real GDP is estimated to have grown by 0.6 per cent in 2018, thanks to a notable improvement in security conditions and higher oil prices, reversing the contraction of 1.7 percent seen in 2017. The non-oil economy is picking up speed and grew at 4 percent, while oil production was slightly less than 2017 in line with the OPEC+ agreement.

Recently, the Iraqi economy has received a boost of confidence with the signing of several trade agreements with its neighbours. Reconstruction efforts have been proceeding at a moderate pace. Inflation remained low at 0.4 percent in 2018, but slightly up from 2017, due to higher domestic demand in addition to rising food and transportation costs.

The overall fiscal balance swung from deficit (1.7 per cent in 2017) to surplus (6.2 per cent) in 2018 but the composition of spending worsened. Non-oil taxation has been well below budgetary projections due to weak compliance and reversal of some policy measures. The composition of spending deteriorated towards current spending—particularly public-sector wages and transfers. Investment spending proceeded at a moderate pace in 2018, but non-oil investment spending continues to be slow and its execution lower than the budgeted amount.   

The recovery in oil prices has also been conducive to better outcomes on external balance. The current account surplus is estimated to have widened to 4.9 per cent in 2018. Higher oil prices have also supported a steady increase in international reserves from $49 billion in 2017 (or 6.9 months of imports), to $64 billion (7.8 months) in 2018, rebuilding buffers to external shocks. 

Growth and the positive overall fiscal balance in 2018 are estimated to reduce the public debt-to-GDP to 48.4 per cent in 2018 from 66 per cent in 2016. The government has also adopted a framework to control the issuance of guarantees, which peaked at $33 billion (or 20 per cent of GDP) in end-2016. 

Monetary poverty rate is expected to decline from the 2014 level (22.5 per cent) on the back of recent economic growth and improvement in the security situation but will remain unevenly distributed across the country. The standard of living in the conflict-affected areas is possibly still below the 2014 level because of disruptions in the labour market and general economic activity. IDPs have also likely experienced severe welfare loss through loss of jobs and livelihoods. These conditions have the potential to sustain a low-level but persistent insecurity focused in northern Iraq.

There has recently been an improvement in several non-income dimensions of welfare. The multidimensional poverty headcount ratio dropped from 6.8 per cent in 2014 to 3.3 per cent in 2017/18. Increase in school enrollment, expansion of drinking water provision and sewage disposal services have contributed to the fall in multidimensional poverty. 

However, labour market outcomes continue to be a concern, especially for women and youth. At 48.7 per cent, the country has one of the lowest labour force participation rates in the world, and in the region especially for women (12 per cent) and youth (26 per cent). The unemployment rate, which was falling before the ISIS and oil crises hit, has increased beyond the 2012 level to 9.9 per cent in 2017/18.

 Moreover, almost 17 per cent of the economically active population is underemployed. Underutilisation is particularly high among internally displaced persons, with almost 24 per cent of internally displaced persons (IDPs) unemployed or underemployed. The crises have eroded the gradual progress in the women’s employment; female unemployment rate rose from 11.3 per cent before the crises to 20.7 per cent in 2017. Also, more than a fifth of the economically active youth (ages 15 – 24) do not have a job, and more than a fifth of the economically active youth is neither in employment nor in education or training (Neet). 

 

OUTLOOK

The economic outlook has improved due to higher oil prices and the improving security situation, but constraints on capital spending will impede a recovery-driven growth acceleration. Growth is expected to spike to 8.1 per cent in 2020 due mainly to higher oil output, with OPEC+ agreement coming to an end in mid-2019.

Non-oil growth is expected to remain positive on the back of higher investment needed to rebuild the country’s damaged infrastructure network, private consumption and investment. However, the recently approved 2019 budget presents a sizable increase in recurrent spending, and unless there is a significant reorientation in fiscal policy to a comprehensive recovery approach, there will be limited fiscal space to sustain post-war recovery and longer-term development.

Higher spending together with easing oil prices will result in a high fiscal deficit projected at 5.4 per cent of GDP in 2019 before narrowing down to about 3 per  cent throughout 2020-2021.

Lower oil prices and increased imports will cause the current account balance to turn into deficit, financed partially by international reserves decumulation.




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