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Download Iraq report: English
APRIL 2, 2021
COVID-19 repercussions and oil price volatility are deepening Iraq’s economic woes. GDP contracted sharply in 2020 driven by a steep decline in oil production and non-oil output. Twin surpluses turned into large deficits in 2020 putting pressure on public debt and foreign currency reserves. Economic outlook depends on oil market developments and reforms implementation. Key risks relate to the deteriorating security situation, delayed vaccination rollout and setbacks in oil markets, with severe consequences on poverty and unemployment.
The twin shocks took a heavy toll on Iraq’s economy, with GDP (at factor cost) posting a contraction of 10.4% in 2020. Growth was weighed down by depressed global oil demand and adherence to OPEC+ production cuts agreement which led to a 17.6% contraction in oil GDP. The non-oil economy also underwent a 9% contraction as the COVID-19 induced lockdown battered domestic demand with religious tourism and services sectors suffering the most. Weak domestic demand and cheaper imported goods kept inflation pressures low with headline and core inflation only edging up to 0.6 and 1.0% in 2020, respectively.
Iraq’s economic outlook hinges on the evolution of COVID-19, global oil markets prospects, and reforms implementation. The economy is forecast to gradually recover on the back of rising oil prices and OPEC+ production quotas. GDP growth in Iraq is projected to rise to 1.9% in 2021 and 6.3% on average over the subsequent two years. Delays in vaccine rollout would lead to additional lockdowns, which in turn impact economic activity. Non-oil GDP is forecast to recover in 2021, growing by 5.5% before converging to a historical potential GDP growth trend in 2022-23.
Oil price volatility and the pandemic have amplified Iraq’s economic woes, reversing two years of steady recovery.
These twin shocks have deepened existing economic and social fragilities, which further added to public grievances that existed pre-COVID-19.
The absence of fiscal space has limited the ability of the Government of Iraq (GoI) to provide a stimulus to an economy highly dependent on oil exports for growth and fiscal revenues.
As a result, the country experienced the largest contraction of its economy since 2003.
These crises have also impacted the economic welfare of Iraqi households, adding further pressures on unemployment especially among informal workers and those in self-employment.
Unemployment remained more than 10 percentage points higher than the pre-pandemic level.
Limited fiscal space has impacted transfers, including the universal Public Distribution System and remittances, where the share of households receiving transfers dropped by more than 8 percentage points.
The loss of household income and social assistance has increased vulnerability to food insecurity.
COVID-19 has also severely limited child learning as evidenced by the small proportion of students engaged in learning activities during school closure.
These impacts coupled with reduced access to market and healthcare services undermine human capital accumulation and economic mobility.
Recognizing the severity of the crisis, the GoI devised a national reform plan (the ‘White Paper’) that sets out a blueprint of reforms to achieve sustainable medium-term growth.
The 2021 budget proposes measures aimed at boosting domestic revenue mobilization and public financial management, as well as announcing an 18.5 percent devaluation of the IQD against the USD.
The ultimate success of reforms depends on political will and public support to implement the proposed measures and lead the country out of a long-standing fragility trap.
Amid persistently high perception of corruption and weak public service delivery, fiscal consolidation could give rise to social tensions and undermine reform implementation.
Other priorities include limiting the spread of COVID-19 and ensuring a quick vaccine rollout to manage the economic fallout from the pandemic.
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