Insecurity and violence have escalated in Northern Iraq but the situation in Baghdad and the south is improving. The June 2014 advances by ISIS have thrown parts of Iraq into violent chaos and instability. ISIS controls nearly one third of Iraq's territory including major cities such as Mosul, Tel Afar and Fallujah. According to Iraq Body Count, 17,073 civilians were killed in 2014. 1.5 million people have been displaced since the fighting erupted. Regional dynamics have exacerbated an already complex environment. The Syrian conflict has resulted in the flow of refugees and armed groups in and out of the country. Escalating violence in Iraq is threatening the development of non-oil economic activity in much of the country. The interruption in the supply lines and the distribution systems had serious impacts on the private sector disrupting the move of merchandise between the northern regions and the rest of the country.
Iraqi lawmakers approved a new government on September 8, 2014, amid an unprecedented security crisis. Iraq's new Prime Minister has a challenging task to unify a deeply divided country. On November 13, 2014, Baghdad and the Kurdistan Regional Government (KRG) reached a formal agreement to end years long oil export and budget disputes between the two parties and on January 29, Iraq’s parliament approved the 2015 budget of 119 trillion Iraqi Dinars (US$105 billion). The budget assumes oil export prices of US$56, average oil exports of 3.3 mbpd, and the implementation of austerity measures. As financing in 2015 will be limited, it is expected that the government deficit will widen further to 11% of GDP. While these unfavorable prospects are unfolding, the government has the opportunity to push further in systematically rationalizing expenditures, for example by reducing subsidies, particularly in the electricity sector; streamlining public employment; phasing out transfers to state-owned enterprises; and prioritizing investment projects.
Iraq’s economy suffers from structural weaknesses. The public sector is very large even by regional standards, government and state-owned enterprises employ approximately half of the labor force, but the quality of public services has been weak. The non-oil sector represents only 46% of the economy and services. Construction, transport, and a small agricultural sector are highly dependent on government spending and thus on oil revenues. Unemployment is high. Demographic pressure is strong, with 41% of the population under 15 years. The labor force needs training on basic skills. The business environment is weak. Poor governance, inconsistent regulations, and security issues keep Iraq at low ratings of global rankings for doing business.
The economy remains extremely vulnerable to the country’s ongoing security problems, which impede investment and inhibit private economic activity. Furthermore, high dependence on the oil sector is making the economy more vulnerable to declining oil prices. The non-oil sector represents only 46% of the economy and services. Non-oil growth has deteriorated since the start of the conflict due to the destruction of infrastructure, impeded access to fuel and electricity, low business confidence, and disruption in trade. Non-oil GDP growth declined by 5.2% in 2014. In 2015, real GDP growth is projected to decline by 1% due to lower oil prices and the impact of the conflict.
The prevailing insecurity has seriously hampered trade and investment, and disrupted northern oil exports for most of 2014. Due to the regional conflict, the economy contracted by 0.5% in 2014, from 4.2% growth in 2013, despite better than expected oil exports from the south (Basra). Economic diversification remains a challenge for the Iraqi government to promote income-creating opportunities for the majority of the Iraqi population.
The 2012 household survey indicates that Iraq’s headcount poverty was reduced by about 4 percentage points during 2007-12, and national poverty fell from 23.6% in 2007, to 19.8% in 2012. However, poverty reduction has been spatially uneven. In Baghdad, by far the most populous governorate in the nation, poverty did not change significantly, while in the (KRG), poverty declined, albeit at a small rate. In contrast, poverty increased sharply in five governorates – Nineveh in the north and Qadisiya, Thi Qar, Missan and Muthanna in the south.
Last Updated: Mar 01, 2015