Economic growth is gradually recovering following last year’s pandemic-related contraction, partly due to higher non-oil activity. Improved global oil market conditions are expected to reinforce growth in the medium term and turn the fiscal and external balances to surpluses from 2021, and to reverse the recent surge in debt.
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 (COVID-19 containment measures were eased, aided by a pick-up in the vaccination campaign and the decline in COVID infection positivity rate). This recovery outpaced the slowdown in the oil sector, down by 10% in H1-21, as Iraq adjusted to its OPEC+ quota early in the year.
The prospects of Iraq’s economy have improved with the recovery in global oil markets, but the spread of new COVID-19 variants and climate change challenges are significant headwinds. 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 2021-23 due to the impact of the new COVID-19 Delta variant along with water and electricity shortages that impact agriculture and industries. Under this scenario, the fiscal balance is forecast to remain in surplus in the medium term leading the debt-to-GDP ratio to steadily improve.