Real GDP growth reached 7 percent in 2022 but oil related growth constraints have reemerged.
BAGHDAD, July 31, 2023 – Iraq's economy continued its oil-driven recovery after the sharp pandemic-induced recession in 2020, but non-oil sectors have stagnated, and growth constraints have reemerged. Despite a record oil windfall and a long-awaited new budget, Iraq nevertheless remains at risk of missing the opportunity to push ahead overdue reforms that are critical to boost private sector growth and create the millions of jobs needed in the next decade.
The Spring/Summer 2023 edition of the Iraq Economic Monitor, titled "Reemerging Pressures: Iraq’s Recovery at Risk ", finds that real gross domestic product (GDP) growth accelerated to 7.0 percent in 2022 driven by the oil sector, but fell to 2.6 percent year-on-year in the first quarter of 2023. Consumer price inflation, which had moderated in 2022, ticked up in early 2023, fueled by the depreciation of the Iraqi dinar in the parallel market. Favorable oil market dynamics in the first nine months of 2022 brought total reserves, excluding gold, up to a record US$89.0 billion, though the trend slowed in early 2023. More recently, Iraq’s newly approved 2023-2025 budget signals a significant expansionary fiscal stance that could lead to a rapid depletion of the oil windfall and renewed fiscal pressures. It also defers longstanding structural reforms needed to develop a vibrant and sustainable economy.
The Monitor concludes that without structural reforms Iraq's highly oil dependent development model is set to endure. Overall GDP is forecasted to contract by 1.1 percent in 2023, driven by a projected 4.4 percent contraction of oil GDP given the agreed OPEC+ production quotas for the year. A low appetite for reforms, even amid softening oil prices, would do little to reduce public sector dominance and increase non-oil growth potential and job creation, thereby constraining long-term economic growth prospects. Stronger risks lie ahead for Iraq’s economy, largely due to unaddressed deep structural challenges, that leave it highly vulnerable to oil shocks, inflationary pressures, heightened climate change impacts and further commodity price volatility, which would intensify existing poverty trends and raise food insecurity.
“Iraq is emerging strongly after years of turmoil, but it cannot continue to rely solely on oil windfalls for short-term relief. Short of a strong political commitment to adopt and implement necessary reforms it has itself advocated for a long time now, Iraq runs the risk of rapidly depleting its reserves and returning to square one in a very short time,” said Jean-Christophe Carret, World Bank Middle East Country Director. “Urgent action is needed to accelerate economic diversification, address pre-existing drivers of economic fragility and pressing climate related challenges, and secure the long-term welfare of the Iraqi people.”
The Special Focus of the Monitor, titled "Financial Intermediation in Iraq", examines Iraq's financial sector landscape, and finds that its dominant undercapitalized state-owned banks and weak private commercial banking sector remain major barriers to economic diversification. The report underscores the importance of banking reforms and promoting digital financial services to increase financial intermediation and promote financial inclusion. These recommendations aim to transform the financial sector into a catalyst for economic diversification.