The Iraqi economy is facing severe and pressing challenges. The decline in oil prices in 2015 and 2016 and the ISIS insurgency have contributed to a sharp deterioration of economic activity and have rapidly increased the fiscal and current account deficits. Macroeconomic risks remain elevated due to Iraq’s continued exposure to a volatile oil market, but the medium-term outlook seems more favorable, thanks to an expected increase in oil prices in 2017 and important gains against ISIS. The government is facing the challenge of maintaining macroeconomic stability, undertaking structural reforms to improve the delivery of public services, reconstructing core physical infrastructure in the areas liberated from ISIS and assisting the 3.4 million people displaced by the conflict.
The double shock has severely dented growth, diverted resources away from productive investment, and increased poverty, vulnerability and unemployment. Private consumption and investment remain subdued due to an unstable security and political situation and a poor business environment. The non-oil economy contracted by almost 14 percent in 2015 following a 5 percent fall in 2014. After slowing at 0.1 percent in 2014, Iraq’s economy grew by 2.9 percent in 2015 on the back of about 19 percent increase in oil production, as the vast majority of Iraq's oil fields are beyond ISIS’s reach. Growth in 2016 is expected to further increase to 4.8 percent, sustained by an increase in oil production, but non-oil GDP is expected to contract by 8.2 percent, due to low demand driven by continued fiscal consolidation. Inflation rate is expected to remain low at 2 percent in 2016, with the government subsidizing electricity, food and fuel, but is likely underestimated in ISIS-occupied areas.
The shocks have also deteriorated the country's fiscal and external balances in 2015 and 2016. Low oil prices have sharply reduced oil revenues, which decreased by about US$35 billion in 2015 compared to 2014. Despite the government efforts to prioritize expenditure, low oil revenue coupled with high humanitarian and security spending have rapidly widened the budget deficit which reached 13.5 percent of GDP in 2015 and the current account deficits which has turned into a deficit of 6.1 percent of GDP in 2015 form a surplus of 2.7 percent of GDP in 2014. Due to persistent low oil export prices in 2016 (which are expected to average $ 35.5 a barrel, $10 lower than in 2015), the fiscal deficit is estimated at 12 percent of GDP in 2016. Weakness of oil exports and large import needs also to maintain develop oil infrastructure would further widen the current account deficit to 11 percent of GDP in 2016. Given Iraq’s severe challenges and substantial financing needs, the IMF approved a three year Stand-By Arrangement in July 2016 for US$5.34 billion. In parallel, the World Bank has started a series of three DPFs to span over three years, the first (USD1.2 billion) delivered in December 2015, the other two (1 billion USD each) planned for December 2016 and December 2017. On July 20, 2016, a donor conference co-hosted by the US Government pledged a total of US$2.1 billion for 2016-2018, with the aim of securing financial support for Iraq’s humanitarian crisis. The resumption of the production sharing agreement between the federal government and the Kurdistan Regional Government (KRG) in August 2016 will help KRG address its growing fiscal crisis.
Iraq continues to face severe security challenges. As a result of the ongoing conflict, the death toll continues unabated, with casualties reaching 20,169 in 2014―the most since 2006 and 2007 when the violence killed an average of 27,744 Iraqis―17,502 in 2015 and 10,497 since the beginning of 2016. The widespread insecurity since 2014 has also led to major humanitarian crisis with 10 million people in need and over 3.4 million persons internally displaced.
The population remains extremely vulnerable to the ongoing security problems and reduction in oil prices. The standard of living has deteriorated and a noticeable share of the population has fallen into poverty or is extremely vulnerable to falling into poverty. Poverty, as estimated by the Iraqi government reached 22.5 percent in 2014 nationwide; and in the ISIS-affected governorates, the direct impact of economic, social and security disruptions are estimated to have doubled poverty rates to 41.2 percent.
Iraq has one of the lowest employment-to-population ratios in the region, even among men, and the 2014 crisis has led to an estimated reduction in employment by 800,000 people. The Public Distribution System provides the only safety net for the vast majority of the poor, and is currently stretched to its limits. Many IDPs received a one-time cash grant of ID 1 million per month in 2015, but the 2.8 million new poor are left largely uncovered by any public safety net. However, Iraq in April 2016 launched a new poverty targeting program aimed at reforming the social security network toward improving its targeting efficiency.
Last Updated: Oct 01, 2016