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Overview

Iraq is one of the most oil‑dependent countries in the world. Over the last decade, oil revenues have accounted for more than 99% of exports, 85% of the government’s budget, and 42% of gross domestic product (GDP). This excessive dependence on oil exposes the country to macroeconomic volatility, while budget rigidities restrict fiscal space and any opportunity for countercyclical policy. As of January 2021, in a country of 40.2 million, Iraq’s unemployment rate was more than 10 percentage points higher than its pre‑COVID‑19 level of 12.7 percentage points. Unemployment among the displaced, returnees, women jobseekers, pre‑pandemic self‑employed and informal workers remains elevated.

The economy is gradually recovering from the oil and COVID‑19 shocks of 2020. Real GDP is estimated to have edged up by 1.3% in 2021, after a sharp contraction of 11.3% in 2020. Both oil and non‑oil growths are on track to reach their pre‑pandemic levels, as oil production increases and the easing of COVID‑19 restrictions restore domestic economic activity. The non‑oil economy grew by over 6% in the first nine months of 2021 (9M‑21) (year‑over‑year), owing to a solid performance in the services sectors as COVID‑19 containment measures were eased. This recovery outpaced the slowdown in the oil sector as Iraq adjusted to its OPEC+ quota early in the year.

Government revenues surged by 73% year‑over-year in 2021, spurred by higher oil prices which averaged at US$68.3/barrel in 2021 (78% increase year-over-year). These budgetary gains were in part boosted by the currency devaluation and measures to mobilize non‑oil domestic revenues mainly from customs. While recurrent expenditures – including the wage bill – remained high at 29% of GDP, improved oil receipts turned the overall fiscal balance to a surplus of 5.3% of GDP in 2021. The current account deficit also turned into a surplus of 8.3% of GDP in 9M-21, hence boosting the official reserves of the central bank.

While Iraq’s economic conditions are gradually improving as international oil markets recover, this recovery is fraught by major risks posed by structural bottlenecks. Risks include public investment management constraints that have impacted public service delivery, the slow clearance of arrears (especially those related to public wages) and large exposure of state‑owned banks and the central bank to the sovereign. These fragilities are aggravated by fragile political conditions, a weak healthcare system and rampant corruption that continue to trigger unrest across the country.

The turnaround in oil markets has significantly improved Iraq’s economic outlook in the medium term. Overall growth in 2022 is now forecast at 8.9% as OPEC+ quotas end, and Iraq’s production surpasses its pre‑pandemic level of 4.6 million barrels per day. Growth in the outer years is projected to remain modest at 3.7% on average as oil production moderates. Non‑oil GDP growth is projected to converge to its long‑term potential growth trend in part aided by higher investments that would be financed through the oil windfall. Growth is forecast to remain constrained by the economy’s limited absorptive capacity and other inefficiencies. Higher projected oil prices in 2022–2024 are forecast to keep Iraq’s fiscal and external balances in surplus. Iraq’s economic outlook remains subject to significant risks. The recent geopolitical tensions related to the war in Ukraine highlight risks for Iraq’s economy. While any further oil price hikes would improve Iraq’s fiscal balance, rising food prices and disruption to agriculture imports will exacerbate pre‑existing poverty trends and increase food security risks. The conflict also poses risks to Iraq’s crude oil production if operations of Russian oil companies in Iraq are impacted by international sanctions on Russia. Higher oil prices could hurt the longstanding need to reform, thereby deepening Iraq’s structural economic challenges. Further intensified climate change effects and water shortages will decrease agricultural production. Additionally, COVID‑19 vaccination in Iraq remains very low, among the lowest in the region and well below the global rate, and poses additional risks. It remains low even among the most vulnerable group, the elderly, and among those with high risk of exposure to the virus – poorer households and informal workers that are less likely to work from home and more likely to live in large households in cramped conditions. Other risks include the decline in oil prices and a deterioration of the security situation.

Last Updated: Jun 01, 2022

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

*Amounts include IBRD and IDA commitments
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