Iraqi Economy – Strengths and Weaknesses 2020

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World’s fourth-largest proven crude oil reserves; second-largest OPEC producer and sixth-largest in the world
Low oil-extraction costs
Strong growth in the labour force
International financial support (IMF and bilateral loans)


Undiversified economy; highly dependent on the oil sector
Severe tensions between the ruling Shia majority and the rest of the country
Tensions with autonomous Kurdistan, which is a major contributor to the oil sector
Cost of reconstruction and assistance to victims following armed conflict
Small GDP share of non-oil and gas private sector
Weak and limited banking sector
Deficiencies in institutions, as well as in education, health, and welfare systems
Widespread corruption

Risk assessment

A recovery hampered by multiple factors
The war against the Islamic State, which officially ended in December 2017, has taken a heavy human and material toll, which continues to weigh on the Iraqi economy. The World Bank estimates the financing requirement for reconstruction at USD 88 billion. Although the international community has pledged to contribute USD 30 billion, external project financing remains limited (less than USD 1 billion in 2018), although it is expected to rise in 2020. This is largely due to Iraq’s lack of institutional capacity.
The economic recovery is closely tied to the increase in oil production, which was boosted in 2019 by the ramp-up of the Majnoon and Halfaya fields. Production capacity will continue to increase in 2020, thanks to new developments, including the extension of the Kirkuk field. Nevertheless, the expansion of production will be severely hampered by compliance, albeit partial, with OPEC restrictions, which are likely to continue into 2020. At the same time, non-oil activity is contributing, if modestly, to the rebound in growth. Construction will continue to grow briskly in 2020, thanks to increased public investment to rebuild infrastructure. However, the execution rate of capital expenditure remains limited. In addition, agricultural production is expected to increase, as should electricity production, of which the expansion is a government priority. To address chronic electricity shortages and reduce imports from Iran, the objective is to improve the existing grid and build new power plants in order, ultimately, to almost double production capacity. Meanwhile, the sharp increase in public spending from 2019 onwards, particularly the wage bill, is helping to revive household consumption. That said, household consumption will continue to be stymied by multiple factors, including the weak banking system and the lack of jobs in the non-oil private sector, which suffers from poor governance and corruption. Finally, the further deterioration in the political and social situation since October 2019 has created significant short-term uncertainty, which could have a severe effect on an already very difficult business environment.

Public and external accounts dependent on oil exports

Continuing on where 2019 left off, the public accounts will be in extremely poor shape in 2020. Government revenues, 90% of which come from oil, should be stable, as higher production is offset by a slight decline in the price of oil per barrel. At the same time, spending will continue to increase, but much less than in 2019, when it jumped by about 20%. The wage bill has increased significantly compared with 2018 and remains the main item in the budget, accounting for just over half of expenditures. How the budget is distributed between the provinces remains a major issue of contention, particularly for the autonomous region of Kurdistan, although an agreement was reached at the end of 2019 to make payment of Kurdistan’s share of the federal budget conditional on the region handing over a portion of its oil production to the central government. Reflecting the deterioration in the public accounts, public debt is expected to increase. While the debt’s GDP share remains limited, and although it is still mainly concessional and long-term, changes in its structure create a risk. The government is currently refinancing itself by borrowing on the domestic market over short maturities and at high rates, which will increase debt service in the coming years.
In 2020, the current account surplus should continue to decline. The trade surplus is likely to narrow slightly, reflecting import growth driven by public investment and flat oil revenues. At the same time, the balance of services (mainly oil-related) will remain in deficit. Accordingly, the central bank’s foreign exchange reserves will probably shrink slightly in 2020, representing about nine months of imports, a comfortable level that will allow the Iraqi dinar to remain pegged to the dollar.

Popular protests shake the government

Since October 2019, the country has seen a wave of large-scale demonstrations. The protesters are denouncing widespread corruption, the lack of public services, the lack of employment opportunities, and Iranian interference in Iraqi politics. More generally, they feel that they are not benefiting from the nation’s oil wealth and are calling for the political system to be overhauled. The demonstrations have been violently repressed by Iraqi security forces, but sometimes also by pro-Iran militias, resulting in the deaths of more than 400 people in less than two months. Yielding to popular pressure, as well as to that from the influential Ayatollah Ali al-Sistani, Prime Minister Adil Abdul-Mahdi resigned on November 30, 2019, just over a year after his appointment. His departure increases the political uncertainty hanging over the country and complicates the reconstruction process, especially as demonstrators seem determined to continue their protests.

Last update: February 2020



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