Iraq’s economic condition is gradually improving following the deep economic strains of the last three years. The defeat of ISIS in end-2017 now leaves the challenging task of rebuilding the infrastructure and providing services and job opportunities to the population. This is overlaid on the need to address the legacy of past conflict and neglect, including in the south, which was the poorest region of the country pre-ISIS. The World Bank estimates the cost of post-ISIS reconstruction at US$88 billion. US$30 billion worth of -commitments were made, mostly in the form of loans and guarantees, at the International Conference for the Reconstruction of Iraq, which took place in February 2018 in Kuwait. Reconstruction effort may be delayed due to political uncertainty following elections in May 2018.
The rebound of economic growth in 2017 was lower than expected. Iraq maintained oil production in line with OPEC+ agreement. In 2018, overall GDP growth is estimated to return positive at 1.9 percent thanks to a notable improvement in security conditions, higher oil prices, and expected higher public and private investment. Non-oil growth is estimated to show a strong rebound at 5.2 percent this year, underpinned by broad-based growth in agriculture, industry, and services. Inflation was low in 2017 at just 0.1 percent, but increased demand pushed inflation at 1.7 percent in July 2018. Higher domestic demand and increased credit to the economy (albeit from a low level) will likely further increase inflation to average 2.0 percent in 2018.
In 2018, the overall fiscal balance is estimated to post a surplus of 1.2 percent of GDP due mostly to higher oil prices. The plunge in world oil prices in 2015-16, increased security and humanitarian outlays and weak controls led to sharply lower oil revenues and rapidly widened the budget deficit. It narrowed in 2017 due to the pick-up in oil prices and measures adopted to contain current expenditures within the framework of IMF program and World Bank budget support series. With oil prices expected to rise, Iraq’s government will have ample fiscal space to finance reconstruction, provided that the process of fiscal consolidation continues.
Growth and the overall positive fiscal balance are estimated to further reduce the public debt-to-GDP ratio from 67.3 percent in 2016 to almost 55 percent. In 2018, higher oil prices will consolidate the current account surplus at 2.1 percent of GDP and the international reserves would increase to 8 months of imports, rebuilding buffers to external shocks.
The poverty rate has increased from 18.9 percent in 2012 to an estimated 22.5 percent in 2014. Recent labor market statistics suggest further deterioration of welfare. The unemployment rate, which was falling before the crises, has climbed back to the 2012 level. Almost a quarter of the working-age population is underutilized, i.e., they are either unemployed or underemployed. Internally Displaced Persons (IDPs) have been buffeted by multiple adverse shocks: they have lost much of their wealth through destruction of assets; they have seen family members die, get sick, or become injured at a higher rate; and they have faced loss of jobs or businesses. These shocks have occurred at a time when their capacity to cope with shocks has been further strained. Fewer IDP adults have a job, so each employed adult in an IDP household supports more than six other household members.
The outlook for Iraq is favorable and overall GDP growth is projected to accelerate to 6.2 percent in 2019 sustained by higher oil production. In the following years, oil production is expected to increase only marginally, reducing overall growth to an average of 2.5 percent until 2023, due to the limited capacity of the GoI to mobilize investment in the oil sector. 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. But sustained non-oil recovery will depend on the transition from an immediate rebound as security improves to implementation of a high-quality investment pipeline with sound financing. Thus, reconstruction will remain an upside risk for growth (rather than in the baseline) given the continued uncertainty about how it will evolve.
Last Updated: Oct 11, 2018