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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 GDP. This excessive dependence on oil exposes the country to macroeconomic volatility, while budget rigidities restrict fiscal space and any opportunity of counter cyclical 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%. Unemployment among the displaced, returnees, women jobseekers, the pre-pandemic self-employed, and informal workers remains elevated.

Nevertheless, the economy is gradually recovering from the double oil and COVID-19 shocks of 2020. In the first half of 2021 (H1-21), GDP grew by 0.9% year on year (y/y). The non-oil economy grew by over 21% in H1-21 (y/y), owing to a solid performance in the services sectors as COVID-19 containment measures were eased, aided by a pick-up in the vaccination campaign. This recovery outpaced the slowdown in the oil sector as Iraq adjusted to its OPEC+ quota early in the year.

Important gains were made in budgetary revenues as average oil export prices trended above US$64/barrel. Customs and tax administration reforms outlined in the 2021 budget law started paying off, contributing to a 53% surge in domestic revenue mobilization. This was enough to turn the overall fiscal deficit (cash basis) into a small surplus of 0.6% of GDP despite spending rigidities. The current account deficit also turned into a surplus of 4.7% of GDP in Q1-21, 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 also fraught by major risks posed by structural bottlenecks, including 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 economy is forecast to gradually recover on the back of rising oil prices and OPEC+ production quotas, which are planned to be phased out in 2022. Oil GDP will be the main driver of growth in the medium term. Non-oil GDP is forecast to recover but remain under 3% on average in 2021–2023, due to the impact of the COVID-19 Delta variant, compounded by water and electricity shortages which effect agriculture and industries. As a result, the fiscal balance is forecast to remain in surplus in the medium term leading the debt-to-GDP ratio to steadily improve.

Iraq’s economic outlook is mired by significant downside risks that call for the accelerated implementation of structural reforms. These include: a potential decline in the oil price, a worsening COVID-19 crisis due to the spread of new variants, potential deterioration in security conditions, the intensification of climate change shocks, and additional macroeconomic volatility. Averting or mitigating the impact of these risks depends on the policies of the future government and commitment to comprehensive reforms in line with those envisioned in the Government of Iraq’s (GOI) White Paper, the government’s reform program.

Last Updated: Nov 01, 2021

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

*Amounts include IBRD and IDA commitments
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