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.