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Iraq: Structural Reforms Critically Needed to Manage a Multi-Faceted Crisis

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Faced with a combination of acute shocks which the country is ill-prepared to manage, Iraq’s economic outlook has markedly worsened over the past 6 months. GDP growth is projected to contract by 9.7 percent in 2020, down from a positive growth of 4.4 percent in 2019, making it the country’s worst annual performance since 2003, according to a new World Bank report released today.  

The Spring 2020 edition of the Iraq Economic Monitor, “Navigating the Perfect Storm (Redux)” discusses the recent economic and policy developments and highlights some of the main macroeconomic policy challenges facing the country. The report finds that Iraq’s pre-existing conditions going into this crisis limit its ability to manage and mitigate the socio-economic impact resulting from low oil prices, reduced oil production quotas and disruptions due to the COVID 19 lockdown measures. Iraq’s highly oil-dependent and state-owned economy impedes the creation of the needed private sector jobs for a predominantly young population. Furthermore, the growing discontent over poor service delivery, rising corruption, and lack of jobs persists and is coupled with political impasse over the formation of a new government.

Fiscal discipline and Economic diversification through more private sector participation are critical to reduce Iraq’s vulnerabilities to external shocks,” said Saroj Kumar Jha, World Bank Mashreq Regional Director. “A reform oriented and growth enhancing program will help sustain the reconstruction efforts and preserve the positive improvements achieved in the electricity and agriculture sectors over the past year.  Such a program is also key to create the much-needed jobs for the youth and help restore the confidence of Iraqi citizens.” 

The unsustainable stimulus package introduced since last October – including a rising public sector employment, lower retirement age, and various transfers – coupled with weaker oil revenues are expected to have detrimental fiscal effects. In case oil prices stabilize in the low-30s and no reform measures are taken, the budget deficit would exceed 29 percent of GDP in 2020 and gross financing needs would reach US$67 billion (over 39 percent of GDP).

Under this situation, financing options might be limited. Heavy reliance on local financing can crowd-out the available liquidity for private sector credit and weaken the balance sheet of the Central Bank of Iraq creating pressures on inflation and the exchange rate. At the same time, access to international markets may prove to be difficult given global market conditions and Iraq’s weak macro-framework. 

With this context, it has become critical for Iraq to embark on a comprehensive forward-looking economic reform agenda to enable private sector led growth, diversification and job creation. Such a program could be based on two pillars: i) Tackling cross-cutting impediments to private-sector led diversification through fiscal sustainability and economic governance, financial sector reforms, business environment reforms, Improving human capital outcomes, as well as social protection and labor system reforms; and ii) Improving governance and promoting private sector participation in selected productive sectors like agriculture and agri-food Industries, electricity and gas.

The Iraq Economic Monitor also includes a Special Focus section that highlights the importance of digital transformation for Iraq and the urgency behind it. The benefits of a robust digital economy are numerous. Leveraging the digital economy will help Iraq improve economic opportunities, particularly for its youth, and thus address the demands of citizens.

The digital transformation of the Iraqi economy will require economic reforms and longer-term development priorities along the five pillars of the digital economy framework by ensuring affordable access to high-speed internet, achieving widespread adoption of cashless payments, delivering digital government services and improving access to data, upskilling youth with technological know-how, and scaling up the digital entrepreneurship ecosystem. An example of the relevance and urgency of digital transformation has recently materialized with the deployment of innovative digital solutions in the fight against the COVID 19 pandemic across the globe. 

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ADB, JICA to Strengthen Collaboration to Help Asia in Fight Against COVID-19

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Asian Development Bank (ADB) President Masatsugu Asakawa and Japan International Cooperation Agency (JICA) President Shinichi Kitaoka today reaffirmed their commitment to strengthen collaboration to assist ADB’s developing member countries (DMCs) in their response to the novel coronavirus disease (COVID-19) pandemic.

“ADB and JICA have a long history of collaboration and partnership in a number of key areas including supporting DMCs to accelerate progress toward achieving universal health coverage (UHC) and cofinancing on quality infrastructure,” said Mr. Asakawa. “COVID-19 poses serious health, social, and economic threats to the region. It is important that we find ways to enhance our collaboration, including cofinancing, to help developing member countries address the pandemic.”

In their call, the two presidents discussed the economic and social status of Asian and Pacific economies in the wake of the pandemic and their organization’s respective assistance packages.

ADB announced a $20 billion assistance package on 13 April to address the needs of its DMCs as they respond to the COVID-19 pandemic. The package includes $13 billion for quick and affordable budget support to help DMCs counter the severe macroeconomic impacts arising from the pandemic with countercyclical expenditure with the focus on the poor and the vulnerable. Some $2.5 billion of the package is available as concessional and grant resources, and about $2 billion is earmarked for loans and guarantees to the private sector to rejuvenate trade and supply chains. ADB will expand its technical assistance to DMCs in designing, improving, implementing, and monitoring health and other sector actions against COVID-19.

JICA is preparing a COVID-19 crisis response emergency support loan program to strengthen countries’ capacity to respond to COVID-19 and revitalize economic activities in those hit hard by the pandemic. Its assistance will be provided as standalone loans or cofinancing with multilateral development banks, including ADB.

ADB and JICA have a strategic partnership to cofinance $10 billion in quality public infrastructure investment between 2016 and 2020. The two organizations also established in 2016 the $1.5 billion Leading Asia’s Private Sector Infrastructure (LEAP) Trust Fund to promote private financing for infrastructure development, including through public-private partnerships.

The two organizations are also collaborating at country and regional levels in the areas of health security, UHC, and specific health issues concerning the elderly under a partnership signed in May 2017.

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New $25 Million Support Will Help Djibouti Grow its Economy and Improve Access to Services

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The World Bank’s Board of Executive Directors approved on May 29, 2020, two new projects totaling US$25 million in credit from the International Development Association (IDA), the World Bank’s arm for the poorest countries. The new financing will help Djibouti address vulnerability, foster inclusive economic growth and improve service delivery. 

The first operation, the US$15 million Economic Management and Statistics Development for Policy Making project, will support the Government of Djibouti to fill data gaps, improve the quality and reliability of key official statistical products and processes, make data more accessible and enhance dissemination practices, and contribute to strengthening the institutional and technical capacity as well as the infrastructure of the National Institute of Statistics of Djibouti (INSD).

High-quality data are critical to measure progress in growing the economy, reducing poverty and fostering shared prosperity,” said Ilyas Moussa Dawaleh, Minister of Economy and Finance, in charge of Industry. “Djibouti took a major leap and placed itself at the forefront of the open data agenda, but more needs to be done to ensure statistical data are current and updated regularly in order to make the right decisions. Our public policies must impact the daily lives of our citizens and therefore must be based on reliable data. To succeed, we will make a qualitative leap by using the latest technologies, such as artificial intelligence and big data.”

Addressing data deficiencies has the potential to drive better decision making and lasting change. In Djibouti, the lack of reliable data remains a critical roadblock to the country’s understanding of poverty, welfare and economic developments. This operation will support the long-awaited Population Census, the first ever Economic Census, preparation of national accounts and a program of economic and household surveys to update statistics and produce data in a sustained manner. 

Through this project, we will gain a better understanding of the economic situation in the country and help support evidence-based planning and decision making that better meets the needs of the population, including vulnerable groups,” said Marina Wes, World Bank Country Director for Egypt, Yemen and Djibouti.

New waves of displacement from Ethiopia, Eritrea, Somalia and Yemen have further exacerbated Djibouti’s already fragile public services. Moreover, most recently, the crisis of COVID-19 and the locust outbreak have resulted in significant public health and economic impacts, threatening food security and livelihood opportunities.

In response, the additional financing of US$10 million approved today under the Development Response to Displacement Impacts Project in the Horn of Africa will help address these vulnerabilities. The operation will improve access to social and economic services so that the country can adapt to the changing context and create economic opportunities for both refugees and the communities hosting them. The project will also include a Contingent Emergency Response Component (CERC) to support Djibouti’s emergency preparedness and response capacity.

The burden of displacements falls largely on host countries,” said Boubacar-Sid Barry, World Bank Resident Representative in Djibouti. “Our program will help Djibouti strengthen economic and social conditions in areas welcoming refugees and assist both refugees and host communities.”

The World Bank’s portfolio in Djibouti consists of 14 IDA-funded projects totaling US$209 million. The portfolio is focused on education, health, social safety nets, energy, rural community development, urban poverty reduction, modernization of public administration, governance and private sector development, with emphasis on women and youth.

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Greater investment in clean, secure and sustainable electricity systems amid Covid-19 crisis

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Energy ministers and electricity industry CEOs from around the world took part in a roundtable discussion today about the impact of the Covid-19 crisis on the electricity sector and the need to mobilise investments for secure and sustainable power systems. The high-level virtual meeting was co-hosted by the International Energy Agency and the Government of the United Kingdom.

The discussion focused on the implications of the Covid-19 crisis for investments in the power sector that are needed to support clean energy transitions, as well as the opportunities for international co-operation and collaboration. The participants recognised the critical importance of the electricity sector in the response to the Covid-19 pandemic to keep essential services running, hospitals open, and communication flowing. They applauded the efforts of electricity companies and their employees in keeping the lights on despite the health risks involved.

Participants included 11 government ministers and 9 company CEOs, representing 5 continents and 60% of the global electricity system. The discussion was co-chaired by Dr Fatih Birol, the IEA Executive Director, and Kwasi Kwarteng, the United Kingdom’s Minister for Business, Energy and Clean Growth. The list of high-profile attendees and a link to the Chairs’ Summary can be found below.

“Resilient electricity systems are vital for modern societies today and for a sustainable energy future, but they need much greater investment,” Dr Birol said. “It was highly encouraging to see so many global energy leaders focused on this critical issue today. The IEA’s World Energy Investment 2020 report this week highlighted that global investment in the power sector is set to fall 10% this year, compounding previous declines. The drop in investment in electricity grids, an essential but often overlooked part of the shift to cleaner energy, is set to be even steeper. Renewables like wind and solar won’t be able to fulfil their great promise without robust infrastructure that reliably delivers the power they produce to consumers.”

Today’s roundtable discussion on electricity systems was one in a series leading up to the IEA Clean Energy Transitions Summit, which will take place on 9 July.

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