Iraq

major macro economic indicators

(e): Estimate (f): Forecast

Risk assessment

A recovery led by the oil industry

Despite some (limited) state support, the Iraqi economy was hard hit by the COVID-19 pandemic and the global economic pause in 2020, especially because of its under-diversification and dependence on oil activity (60% of GDP and 90% of state revenue). In 2022, growth will increase, driven by the recovery of the world economy and the associated demand for hydrocarbons. Between January and September 2021, the price of oil rose by 54%, prompting the country to increase its production, notably at the Kirkuk field. However, this expansion was hampered by the application, albeit partial, of restrictions under the OPEC+ agreement. Iraq’s OPEC+ quota is expected to increase in 2022, alongside monthly output increases planned for all members. Iraq will benefit handsomely from this increase in prices and production, via export revenues. The non-oil economy will also rebound owing to spillover from oil wealth.

Despite a slight improvement, the recovery of household consumption remains slow and fragile, a lasting consequence of the 25% dinar devaluation by the Central Bank of Iraq in 2020 (from ID 1,190 per USD 1, to ID 1,450), which reduced Iraqis’ buying power, particularly for imported products. This devaluation has had a damaging impact on domestic consumption in an economy that is so dependent on imports and so under-diversified. Thus, while 25% of the population lives below the poverty line, the prices of foodstuffs, electricity (unreliable supply) and water have all increased, feeding severe inflationary pressures.

Investment will be driven by international projects, as illustrated by the USD 27 billion contract signed by the Total Group with Iraq, consisting of four parts spread over 25 years and covering oil and gas development and the construction of a photovoltaic plant. This is the largest investment by a foreign company in Iraq. Non-oil and public investment will lag behind.

Moderate public deficit, but comfortable current account surplus

The Iraqi current account balance is mainly determined by oil revenues, which increased substantially in 2021 and will continue on this trend in 2022. Other Iraqi exports (jewellery, precious metals, aluminium, and agricultural products) will also benefit from strong demand and rising prices. Thus, despite the resumption of imports linked to the rebound in domestic demand, oil revenues will ensure that Iraq has a significant current account surplus.

The budget deficit, which widened considerably in 2020 due to the fall in oil revenues and increased spending to deal with the pandemic, will remain in moderate deficit, despite the surge in hydrocarbon income, which forms the mainstay of government revenue. In 2022, government revenue is not expected to return to pre-crisis levels. The budget balance will remain in deficit, in the absence of a reduction in the public wage bill and reforms to pensions, which absorb much of the resources. The deficit is financed by drawing on foreign exchange reserves.

Public debt, whose share of GDP jumped in 2020 due to the devaluation of the Iraqi dinar, the increase in the deficit and the reduction in domestic product, remains relatively high. Its external portion (48% of GDP in 2020) has increased and is a source of concern. Debt sustainability and reduction will depend on structural measures, notably involving public sector wages.

Much uncertainty after the recent elections

The political and social situation remains unstable, as illustrated by the numerous anti-government protests led by the Tishreen movement across the country since 2019. Protestors are demonstrating against unemployment, corruption, the breakdown of public services, violence by armed militias, sometimes with foreign links (notably to Iran), and are calling for a regime change. To calm the unrest, Prime Minister Mustafa al-Kadhimi, who has been in place since April 2020, was entrusted with organising early legislative elections in October 2021 instead of in 2022 as initially planned. The day before the elections, protest movements called for a boycott. As a result, only 34% of the voters went to the polls. The party of the Shia leader Moqtada al-Sadr (nationalist party) became the leading force in parliament, with 73 seats out of 329, ahead of the Kurdish parties (58), the Sunni party Taqaddum (43), the Shia State of Law coalition led by former Prime Minister Al-Maliki (37), and about 30 independents, some of which emerged from the protest movement. The pro-Iranian Fatah Alliance coalition, which was previously a major political force in parliament, saw a sharp decline from the 2018 elections, taking only around 20 seats, down from 48. Despite high expectations, the likelihood of reform is low for 2022, considering the poor turnout, foreign influences, the lack of a solid majority due to the fragmented parliament, and the stranglehold of traditional parties with regional, religious or ethnic bases and their leaders, who are often backed by armed militias.

On the foreign policy front, while Iraq has tried to maintain balanced relations with its main allies, the U.S. and Saudi Arabia on the one hand, and Iran on the other, the rise of Sadr's anti-American and anti-Iranian party in parliament could change things.

Last updated: February 2022