Overview

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

The Progress and Learning Review updated the Bank Group’s FY13-FY16 Country Partnership Strategy (CPS) for Iraq. The Strategy is now focused on delivering basic public services, especially in areas where the security threat has diminished, to reduce poverty and enhance citizens’ trust in government institutions; and to address and help manage the country’s critical fiscal situation and increase opportunities for private sector investment.

As of September 2016, the World Bank’s portfolio for Iraq consisted of three operations for a total net commitment of US$ 1.905 billion. The current portfolio includes a Transport Corridor Project being implemented in the northern and southern parts of the country and an Emergency Operation for Development which repairs key infrastructure and restores public services in municipal areas liberated by the government. In December 2015 the Bank provided a Development Policy Financing operation, for US$1.2 billion to help Iraq weather the fiscal crisis and advance reforms in the following three areas:

- Improving the management of public finances  
- Securing a more stable and sustainable supply of energy
- And supporting more efficient and transparent state-owned enterprises.

The Iraq Systematic Country Diagnostic (SCD) and the FY 17-21 Country Partnership Strategy (CPF) are under preparation.

International Finance Corporation (IFC):

IFC has played a strong counter-cyclical role in Iraq over the last several years. Between FY11-16, IFC investments have totaled a little over US$1 billion (including mobilization of US$361 million). In FY15, IFC committed (i) around US$8 million equity to Ecocem to build a greenfield sanitary landfill and facility to process municipal household waste to be used as fuel for cement plants; and (ii) total of US$ 18million in an agribusiness company to support job creation in the non-oil sector as well as assure food security. Despite the difficult environment, in FY16 IFC committed (i) $375 million (of which $125 is mobilization) in MGES Power to support leading local private power investor help meet the critical infrastructure needs of the country; and (ii) $25 million for the expansion of the Karbala cement plant with Lafarge.  Other projects in the pipeline include investments in the power, manufacturing, and services sectors. IFC's committed portfolio in Iraq has grown considerably over the last five years, and currently stands around US$448 million in 11 companies across the power, telecoms, manufacturing, agribusiness, logistics, and services sectors. IFC’s portfolio continues to hold well with no NPLs on the investment side, thanks to proactive portfolio management. IFC’s advisory program has focused in the areas of capacity building (including SME banking, dairy farming), corporate governance, Business Edge trainings, public private partnerships (PPPs), and investment climate reforms. The challenging environment however has affected IFC’s advisory portfolio with delays in implementation.

Multilateral Investment Guarantee Agency (MIGA):

As of September 2016, MIGA’s outstanding gross exposure in Iraq stood at US$8 million. The Multilateral Investment Guarantee Agency’s first engagement in Iraq was in FY11 when it signed a water bottling plant in Baghdad. In FY 2014, MIGA has also provided a guarantee for a project in the telecom sector in the northern region of Iraq. In conjunction with IFC, MIGA is supporting the construction of a 1,260MW greenfield natural gas fired, independent power plant, located in Zakho, in the Kurdistan Region of Iraq.  MIGA will issue guarantees (in respect of transfer restriction, expropriation, war and civil disturbance and breach of contract risks) of up to US$ 400 million to cover non-shareholder loans to a group of yet-to-be-identified lenders for up to 15 years. As an FCV country, Iraq is eligible for projects to be supported by the Conflict-Affected and Fragile Economies Facility, a multi-donor trust fund aimed at enabling MIGA to assume higher risk and insure more investment projects in FCVs.

Last Updated: Oct 01, 2016

  • Investments in water resource management resulted in improved quality of the drinking water to over 1 million people in Ghammas, Al-Nasr and Wasit. Work is in progress to repair bridges, roads, electricity, water and wastewater networks and deliver health services in the 7 municipal areas that have been liberated from ISIS by the government forces. Already, 7 bridges and 65 kilometers of roads are currently being repaired; electrical transformers, substation and cables are being procured; 60 municipal waste compactors and 2,200 trash bins are being supplied; and several water and wastewater subprojects are being prepared for procurement. Furthermore, 280 kilometers of Expressway No. 1 in the Southern Iraq are currently being maintained by qualified international contractors.
  • The Bank has provided policy advice to the Iraqi government on fiscal policy and management issues and has supported the newly established state pension fund. The deployment of the Social Safety Net (SSN) Information System in Baghdad and the rest of the governorates allowed for the processing of beneficiary payments using a central data base resulting in savings of over US$30 million to the SSN budget.
  • Advice on the completion of the first Extractive Industries Transparency Initiative report for Iraq reconciled US$41.25 billion in oil revenues. Analytic work supporting the first and second household income and expenditure surveys fed into Iraq’s poverty reduction strategy. TA is being provided in Public Financial Management, Energy, doing business indicators, Central Bank payment system, Anti Money laundering capacity building and social safety nets. For KRG the Bank supported the preparation of a reform road map, which proposed short, medium and long term reforms under 10 sectors.

Last Updated: Oct 01, 2016


LENDING

Iraq: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments