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Iraq’s Economic Outlook- October 2016


The double shock of ISIS insurgency and fall in oil prices have negatively impacted the economy since mid-2014. The non-oil economy contracted deeply because of the war against ISIS and the ongoing fiscal consolidation. The authorities have responded with a mix of fiscal adjustment, financing, and structural reforms to stabilize the economy, protect social spending and public service delivery. Higher oil production, investments, implementation of structural reforms and IMF program, and an improvement in security would support growth in 2016.

Outlook

The Iraqi economic outlook is highly uncertain as military attacks by ISIS have undermined confidence, while the fall in oil prices saps the economy, government finances, and the external position. Given the planned investments in oil production, overall real GDP growth is expected to reach 4.8% in 2016, but the non-oil economy will continue to contract as a result of the conflict and fiscal consolidation. Low oil prices in 2016 (expected to average US$35.5 per barrel compared to US$45 assumed in the 2016 budget) and increased humanitarian and military spending would keep the overall fiscal deficit large at 12% of GDP and increase current account deficit to 11 of% of GDP. In light of the difficulty of implementing additional fiscal consolidation in 2016–17, fiscal and current account deficits are expected to be financed by an increase in indirect monetary financing by the Central Bank of Iraq (CBI), additional drawdown of foreign exchange reserves, and domestic and external borrowing. Total public debt would increase to about 70% of GDP in 2016 from 56% of GDP 2015. In light of the successful offensive that Iraq continues to make against ISIS, and under much improved security conditions, growth is expected to pick up in 2016, and non-oil sector growth is projected to recover to 0.2% in 2017, assuming the implementation of structural reform to diversify the economy and support private sector development.

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