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COVID-19 and Low Oil Prices Push Millions of Iraqis into Poverty

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The twin shocks of COVID-19 pandemic and the collapse of oil prices have caused significant economic challenges and pushed millions of Iraqis into poverty, according to the new issue of the World Bank’s Iraq Economic Monitor.

The new Fall 2020 edition of the Iraq Economic Monitor titled “Protecting Vulnerable Iraqis in the Time of a Pandemic: The Case for Urgent Stimulus and Economic Reforms” finds that even under a benign impact scenario, up to 5.5 million more Iraqis could fall into poverty due to the twin crises. Furthermore, the potential reduction of the public wage bill and pensions could push an additional 0.4 to 1.7 million Iraqis into poverty unless the rightsizing exercise is introduced in a progressive and efficient fashion.

The economic monitor estimates that Iraq’s GDP is set to contract by 9.5% in 2020. While oil production plummeted to a five-years low, Iraq’s economy contracted by 6.8% during the first half of the year; of which non-oil GDP contracted by 9.2% as lockdowns and other COVID-19 related containment measures affected services sectors. 

According to the report, the Iraqi government revenues fell by 47.5% in the first 8 months of 2020 while expenditures remained high as a result of the public wage bill and pensions. Such budget rigidities put pressure on government financing needs which are expected to reach a staggering 25.8% of GDP by end of 2020.

Multiple security and economic crises in recent years have left unequal imprints across regions and groups in Iraq, yet the horizon on the country’s economic outlook revolves around the global prospects of the oil markets and the capacity of the healthcare sector to cope with the pandemic.

Conscious of the situation, the Government approved in October 2020 a comprehensive policy and reform White Paper which sets out a blueprint for reforms over the next 3 to 5 years that if implemented could mark a turning point for Iraq’s economy. The White Paper aims to rebalance the economy and put it back on track by enabling the state in taking necessary actions to create a dynamic and diversified economy. This in turn leads to the creation of jobs for citizens to have a decent living.

The magnitude of economic challenges facing Iraq need a long-term solution and long overdue structural reforms,” said Saroj Kumar Jha, World Bank Mashreq Regional Director. “The reforms outlined in the Government’s White Paper, if implemented, will boost job creation, especially in the private sector, as well as economic growth, which are key to improving the livelihood of Iraqis.

There are large economic gains to be made through the implementation of the long-awaited reforms. The World Bank simulates that such reforms could add as much as 58.4% to Iraq’s per capita GDP growth. Overall, the ultimate success of this reform initiative is dependent on the political will and the garnering of public support to lead Iraq out of the fragility trap that it has been grappling with for so long.

The policy response requires working towards health and livelihood protection in the short term, including usage of tools like cash transfers, public works, or active labor market programs, but also addressing structural issues through a deeper reforms program.

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Archipelagic Economies: Spatial Economic Development in the Pacific

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A new World Bank report on the challenges facing the Pacific region’s outer island communities identifies investment in people and livelihoods as a key for inclusive economic growth.    

Archipelagic Economies: Spatial Economic Development in the Pacific looks at the challenges Pacific governments must address to provide services and infrastructure to populations spread across hundreds of islands spanning the vast Pacific Ocean. The report puts forward a series of practical steps that countries can take to overcome these challenges in a way that supports resilient and inclusive economic growth.

“Many Pacific countries are faced with significant challenges in delivering services and connecting remote, outer island communities; with difficult decisions around resources and how to best invest often limited resources into outer island communities,” said the report’s lead author, World Bank Lead Economist for Fiscal Policy and Sustainable Growth Robert Utz.

“This report aims to provide Pacific governments, development partners and decision-makers with evidence to assess options for fostering development for the people in those outer islands, so they can make stronger contributions to the larger economic development of the whole country.”   

The report identifies six guiding economic policy principles:

1)     Policy solutions that seek to achieve equitable increases in living standards need to be grounded in an understanding of the economic implications of the Pacific region’s unique economic geography.

2)     Outer islands’ development should be assessed from a spatial perspective; one that considers interactions with the country’s main island and the region beyond.

3)     A balanced approach that combines investments in urban areas to accommodate migration from outer islands to main islands with support for outer island populations is likely to achieve better welfare and equity outcomes than an approach that neglects one side or the other.

4)     Growth-enhancing investments should be guided by clearly-identified opportunities, rather than by a desire to try to equalize economic opportunities across islands.

5)     With limited scope to close the gap in economic opportunities between outer and main islands investments to promote livelihoods and human development should be given preference.

6)     Outer islands are subject to a complex political economy of intra-island and outer island-main island relationships that need to be considered in development interventions.

“This is an important and timely study,” said Denton Rarawa, Senior Economic Advisor at the Pacific Islands Forum Secretariat. “The current COVID-19 crisis has highlighted the need to address the institutional, service delivery and capacity gaps of nations across the Pacific. As we strive for greater vaccination rates and begin to think about how we’d like to rebuild after the pandemic, I believe this report has a lot to offer the future of the Pacific, especially in our efforts to leave no one behind.”   

The Archipelagic Economies report is a companion publication to the World Bank’s Pacific Possible series, which in 2017 and 2018 looked at opportunities for economic growth in Pacific Islands Countries across key sectors including tourism, fisheries, and labour mobility. 

The World Bank works in partnership with 12 countries across the Pacific, supporting 87 projects totaling US$2.09 billion in commitments in sectors including agriculture, aviation and transport, climate resilience and adaptation, economic policy, education and employment, energy, fisheries, health, macroeconomic management, rural development, telecommunications and tourism.

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Global economic recovery continues but remains uneven

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The global economy is growing far more strongly than anticipated a year ago but the recovery remains uneven, exposing both advanced and emerging markets to a range of risks, according to the OECD’s latest Interim Economic Outlook.

The OECD says extraordinary support from governments and central banks helped avoid the worst once the COVID-19 pandemic hit. With the vaccine roll-out continuing and a gradual resumption of economic activity underway, the OECD projects strong global growth of 5.7% this year and 4.5% in 2022, little changed from its May 2021 Outlook of 5.8% and 4.4% respectively.

Countries are emerging from the crisis with different challenges, often reflecting their pre-COVID 19 strengths and weaknesses, and their policy approaches during the pandemic. Even in the countries where output or employment have recovered to their pre-pandemic levels, the recovery is incomplete, with jobs and incomes still short of the levels expected before the pandemic.

Large differences in vaccination rates between countries are adding to the unevenness of the recovery. Renewed outbreaks of the virus are forcing some countries to restrict activities, resulting in bottlenecks and adding to supply shortages.  

There is a marked variation in the outlook for inflation, which has risen sharply in the US and some emerging market economies but remains relatively low in many other advanced economies, particularly in the euro area.

A rapid increase in demand as economies reopen has pushed up prices in key commodities such as oil and metals as well as  food, which has a stronger effect on inflation in emerging markets. The disruption to supply chains caused by the pandemic has added to cost pressures. At the same time, shipping costs have increased sharply.

But the Interim Outlook says that these inflationary pressures should eventually fade. Consumer price inflation in the G20 countries is projected to peak towards the end of 2021 and slow throughout 2022. Wage growth remains broadly moderate and medium-term inflation expectations remain contained.

The report warns that to keep the recovery on track stronger international efforts are needed to provide low-income countries with the resources to vaccinate their populations, both for their own and global benefits.

Macroeconomic policy support is still needed as long as the outlook is uncertain and employment has not yet recovered fully, but clear guidance is called upon from policymakers to minimise risks looking forward. Central banks should communicate clearly about the likely sequencing of moves towards eventual policy normalisation and the extent to which any overshooting of inflation targets will be tolerated. The report says fiscal policies should remain flexible and avoid a premature withdrawal of support, operating within credible and transparent medium-term fiscal frameworks that provide space for stronger public infrastructure investment.

Presenting the Interim Economic Outlook alongside Chief Economist Laurence Boone, OECD Secretary-General Mathias Cormann said: “The world is experiencing a strong recovery thanks to decisive action taken by governments and central banks at the height of the crisis. But as we have seen with vaccine distribution, progress is uneven. Ensuring the recovery is sustained and widespread requires action on a number of fronts – from effective vaccination programmes across all countries to concerted public investment strategies to build for the future.”

Ms Boone said: “Policies have been efficient in buffering the shock and ensuring a strong recovery; planning for more efficient public finances, shifted towards investment in physical and human capital is necessary and will help monetary policy to normalise smoothly once the recovery is firmly established.”

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Financing Options Key to Africa’s Transition to Sustainable Energy

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A new whitepaper outlining the key considerations in setting the course for Africa’s energy future was released today at the 2021 Sustainable Development Impact Summit. The report, “Financing the Future of Energy,” outlines Africa’s electricity landscape and financing options in context with the global drive to reduce carbon emissions.

Africa’s power sector will play a central role in the transition from fossil fuel-driven power generation to a renewable-strong energy mix. According to the whitepaper written in collaboration with Deloitte, the migration to a multi-stakeholder-oriented net-zero power grid is being driven by “the 3Ds:”

  • Decarbonization: moving from fossil fuel sources to renewables
  • Decentralization: Shifting from centrally managed generation, transmission, and distribution to decentralized systems
  • Digitalization: Leveraging digital technology to advance the transition

The report contends that new coalitions and investments with developed nations and NGOs including the World Economic Forum must coordinate and enable countries to leapfrog existing technologies and infrastructure.

“The need for digitally smarter utility platforms and sustainable development programs will guide global leaders in helping to shape equitable and inclusive recovery programs,” said Chido Munyati, Head of Africa at the World Economic Forum. “The entire continent remains vulnerable, but this whitepaper offers a view on what are viable financing options that exist today for clean energy sustainability and equitable recovery for all of Africa.

Funding will be the biggest hurdle to ensuring Africa’s sustainable transition to Renewables at scale; there are many financing solutions available,” said Mario Fernandes, Director, Africa Power Utilities and Renewables, Deloitte. “Africa’s winners will be the ones that are able to leverage what exists while creating an enabling environment for the private sector through a Renewables Energy Investment facility.”

Case studies in China and India showed that financing solutions for a clean energy transition often involve long cycles. Economic booms in these countries resulted in a significant shift in carbon emissions. Since similar economic booms are expected across Africa, the report highlights how crucial it is to anchor growth in technologies that can enable lower emissions.

While Africa’s contribution to greenhouse gas emissions from fossil fuel significantly lags behind those of other continents, it still carries a huge potential to accelerate the transition to a net-zero future. Currently, half of the continent lives without adequate access to electricity. As energy demands increase, the energy gap could be bridged through clean energy alternatives, if the financing solutions are employed now.

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