Overview

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

The first World Bank Group Country Partnership Strategy (CPS) for Iraq, covering 2013-16, focuses on improving governance, social inclusion and reducing poverty, and supporting economic diversification for broadly shared prosperity. The midterm progress report underway confirmed the Strategy’s objectives to build stronger institutions and a more diversified and regionally integrated economy that can deliver services and create jobs. This is paramount given the fragile nature of the country and the rising threat of political and geographic fragmentation.

As of March 2015, the World Bank’s portfolio for Iraq consisted of five investment operations for a total net commitment of US$588 million (one IBRD loan, two IDA credits and two small recipient-executed grants financed by the Extractive Industries Transparency Initiative (EITI) and the Japan Social Development Fund. The current portfolio focuses on infrastructure (water, electricity, and roads), youth employment, and capacity and institution building. However, moving forward the Bank Group expects to engage in the critical issues of public financial management reforms, power, water, service delivery and transport through lending operations, and in the overall dialogue on fiscal status, trade and competitiveness, financial sector reform through a series of analytical and technical assistance activities.

International Finance Corporation (IFC):

IFC's investments in Iraq have steadily grown over the last several years, aimed at supporting the private sector and leveraging regional investments. Between FY11-15, IFC investments have totaled around US$654 million (including mobilization of US$253 million). In FY14, IFC committed around US$36 million including US$14 million in Arjaan Erbil, a multi-use extended stay greenfield property, and US$10.5 million (of which US$8.3 million was MIGA mobilization) in Nafith, a leading logistics company, to help manage freight in four major Iraqi ports. So far in FY15, IFC has committed around US$8 million equity to Ecocem to help build a Greenfield sanitary landfill and a mechanical bio-treatment facility to process municipal household waste and produce refuse-derived fuel (RDF) that would be used as fuel for cement plants. IFC also provides advisory support in the areas of capacity building (including SME banking, dairy farming), corporate governance, trainings, public private partnerships, and investment climate reforms. Through its Iraq Construction Permit Reform Project, IFC has helped simplify the construction permitting process as well as advised the government in developing new permitting laws. As the security situation stabilizes, IFC anticipates strong demand in investments in the infrastructure, particularly power, agribusiness, and financial sectors. IFC is also keen to help mobilize South-South capital flows for investments in Iraq.

Multilateral Investment Guarantee Agency (MIGA):

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. MIGA’s total portfolio as of March 2015, stands at US$11.8 million. 

 

Last Updated: Mar 01, 2015

Investments in Education, Health, Water Resource Management, and Telecommunications:

Improved drinking water has been provided to over 1.1 million people, improved sewer services to 130,000, and the rehabilitation of over 400 km of water networks and pipes and over 100 km of sewers and house connections. A master plan for municipal solid waste for Baghdad was developed. The Community Infrastructure Project is giving 5,400 people in rural areas access to water, creating employment and increasing major crop yields of wheat and barley.

In education, Bank supported projects financed the construction and restoration of schools. In health, a comprehensive, computerized, and coordinated emergency response system was established for three governorates; emergency units were rehabilitated; and pharmaceuticals procured. In the Marshlands area, refurbishing primary health care facilities and equipping them, as well as establishing four TB clinics and the training of medical staff in primary care protocols, women’s health volunteers in community outreach, and teachers in health education. 

Technical Assistance and Analytic Work: 

Provided policy advice to the Iraqi government on fiscal policy and management issues and institutionalized 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 and it’s Public Financial Management Action Plan. This increased momentum for state-owned enterprise reform, private sector regulatory reform, public-private dialogue, and public-private partnerships.

 

Last Updated: Mar 01, 2015

Seventeen donors contributed US$494.4 million to the World Bank-administered Iraq Trust Fund. Donors work together through the Iraq Partnership Forum. The World Bank has been cooperating closely with other donors in Iraq, including the United States, Japan, the European Union, and the Swedish Development Cooperation Agency. There has been coordination and consultation with USAID and the European Union on financial management reform, as well as with the United Kingdom Department for International Development and Swedish International Development Agency on the reform and expansion of the private sector, particularly in non-oil based sectors. The World Bank and the Agence Francaise de Developpement have been exploring co-financing possibilities in the water sector, and the Islamic Development Bank has co-financed the transport corridor project. 


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

*Amounts include IBRD and IDA commitments