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Economy

Iraq Economy - Fanack Chronicle
A drilling rig in the Miran block in the semi-autonomous Kurdistan region, Qazan, Iraq / Photo Corbis

Contents

Gross pomestic product
Foreign trade
Poverty
Agriculture
Energy
Service sector
Militarization
Shock Therapy
Reconstruction

Introduction

Iraq’s GDP growth slowed to -2.1% in 2017, according to World Bank data, a marked decline compared to the previous two years as domestic consumption and investment fell because of civil violence and a sluggish oil market. The Iraqi Government received its third tranche of funding from its 2016 Stand-By Arrangement (SBA) with the IMF in August 2017, which is intended to stabilize its finances by encouraging improved fiscal management, needed economic reform, and expenditure reduction. Additionally, in late 2017 Iraq received more than $1.4 billion in financing from international lenders, part of which was generated by issuing a $1 billion bond for reconstruction and rehabilitation in areas liberated from ISIL, According to CIA World Factbook.

Investment and key sector diversification are crucial components to Iraq’s long-term economic development and require a strengthened business climate with enhanced legal and regulatory oversight to bolster private-sector engagement. The overall standard of living depends on global oil prices, the central government passage of major policy reforms, a stable security environment post-ISIS, and the resolution of civil discord with the Kurdish Regional Government (KRG), The World Bank estimates the needs of post-ISIS reconstruction at US$88 billion.

Iraq’s largely state-run economy is dominated by the oil sector, which provides roughly 85% of government revenue and 80% of foreign exchange earnings, and is a major determinant of the economy’s fortunes. Iraq’s contracts with major oil companies have the potential to further expand oil exports and revenues, but Iraq will need to make significant upgrades to its oil processing, pipeline, and export infrastructure to enable these deals to reach their economic potential.

In 2017, Iraqi oil exports from northern fields were disrupted following a KRG referendum that resulted in the Iraqi Government reasserting federal control over disputed oil fields and energy infrastructure in Kirkuk. The Iraqi government and the KRG dispute the role of federal and regional authorities in the development and export of natural resources. In 2007, the KRG passed an oil law to develop IKR oil and gas reserves independent of the federal government. The KRG has signed about 50 contracts with foreign energy companies to develop its reserves, some of which lie in territories taken by Baghdad in October 2017. The KRG is able to unilaterally export oil from the fields it retains control of through its own pipeline to Turkey, which Baghdad claims is illegal. In the absence of a national hydrocarbons law, the two sides have entered into five provisional oil- and revenue-sharing deals since 2009, all of which collapsed.

Iraq is making slow progress enacting laws and developing the institutions needed to implement economic policy, and political reforms are still needed to assuage investors’ concerns regarding the uncertain business climate. The Government of Iraq is eager to attract additional foreign direct investment, but it faces a number of obstacles, including a tenuous political system and concerns about security and societal stability. Rampant corruption, outdated infrastructure, insufficient essential services, skilled labor shortages, and antiquated commercial laws stifle investment and continue to constrain growth of private, nonoil sectors. Under the Iraqi constitution, some competencies relevant to the overall investment climate are either shared by the federal government and the regions or are devolved entirely to local governments. Investment in the IKR operates within the framework of the Kurdistan Region Investment Law (Law 4 of 2006) and the Kurdistan Board of Investment, which is designed to provide incentives to help economic development in areas under the authority of the KRG, According to the CIA World Factbook.

Inflation has remained under control since 2006. However, Iraqi leaders remain hard-pressed to translate macroeconomic gains into an improved standard of living for the Iraqi populace. Unemployment remains a problem throughout the country despite a bloated public sector. Overregulation has made it difficult for Iraqi citizens and foreign investors to start new businesses. Corruption and lack of economic reforms – such as restructuring banks and developing the private sector – have inhibited the growth of the private sector.

Gross pomestic product

The GDP for the second quarter of 2018, about 56.745 billion dollars (67,016 billion Iraqi dinars) at current prices, up 17 percent from its value of 48.5 billion dollars for the first quarter of the same year, According to the Iraqi Ministry of Planning.

The World Bank expects GDP growth to accelerate to 6.2 percent in 2019 sustained by higher oil production. In the following years, and oil production is expected to in-crease only marginally, reducing overall growth to an average of 2.5 percent until 2023, due to the limited capacity of the GoI to mobilize investment in the oil sec-tor. Non-oil growth is expected to remain positive on the back of higher investment needed to rebuild the country’s damaged infrastructure network, private consumption and investment. But sustained non-oil recovery will depend on the transition from an immediate rebound as security improves to implementation of a high-quality investment pipeline with sound financing. Thus, reconstruction will re-main an upside risk for growth (rather than in the baseline) given the continued uncertainty about how it will evolve, According to the World Bank.

Indicatorsmeasuring unit20162017Change ±
GDP (at constant 2010)Billion US$213.012208.595-4.417
GDP growth (annual)%13.02-2.07-15.09
GDP per capita (constant 2010)US$5,725.75,450.0-275.7
GDP (at current value)Billion US$170.560192.06121.501

Source: World Bank.

Foreign trade

Iraq has witnessed many economic and political transformations, which are reflected in various economic sectors, of which foreign trade is the most important. Exports continue to dominate the economy, which depends mainly on the export of crude oil and raw materials. Exports grew between 2003-2012, with a compound growth rate of 24.2 per cent and positive annual growth rates. The growth rate reached its highest level of 76.6 per cent in 2014. Analysts attribute this to the 48 per cent increase in crude oil exported, as well as the rise of crude oil prices to $30 from $22 in 2003.

The relatively good recovery of developed economies following the adoption of fiscal stimulus policies during the second half of 2009 and the first half of 2010, in addition to the rise in crude oil prices, was reflected in the increase in Iraq’s exports in 2010 by 31.3 per cent compared to 2009. This positive trend continued in 2011, with a growth rate of about 54 per cent that was mainly driven, according to analysts, by the 36.2 per cent rise in the oil barrel price that year. In 2012, the value of exports increased to about $94.13 billion, with a growth rate of 18.2 per cent compared to 2011 as a result of increased export revenues from crude oil and petroleum products.

Crude oil accounted for 99 per cent of Iraq’s exports, according to the CIA’s World Factbook and 2017 estimates. India accounted for 21.2 per cent of exports, followed by China (20.2 per cent), the United States (15.8 per cent), South Korea (9.4 per cent), Greece (5.3 per cent), the Netherlands (4.8 per cent) and Italy (4.7 per cent).

Iraq’s imports are classified into seven main groups: food and beverages; raw materials; mineral fuels; oils and greases; chemicals; machinery & transport equipment; and manufactures. According to 2017 estimates, Turkey was the largest exporter of Iraqi imports (27.8 per cent), followed by China (25.7 per cent), South Korea (4.7 per cent) and Russia (4.3 per cent).

Poverty

Violence, conflict and displacement continue to determine the course of growth and development in Iraq. The national poverty rate declined from 22.4 per cent to 18.9 per cent between 2007 and 2012, according to the World Bank, thanks to the relative drop in violence and increased per capita GDP. The poverty rate is measured at $5.50 per person per day (2011 purchasing power parity), which fell from 62.2 per cent to 57.3 per cent in that period. Growth in labour income has played a significant role in reducing poverty, leading to an increase in per capita household consumption across the board and modest consumption growth of 0.5 per cent annually for the poorest 40 per cent of the population. The Gini index of income inequality increased from 28.6 to 29.5.

The country was shocked twice in 2014 because of the decline in oil prices in the international market and the occupation of a large part of the country by Islamic State. As a result, the poverty rate rose to the 2007 level of 22.5 per cent. Income inequality also continued to rise, with the Gini index rising to 33. A survey completed in 2018 showed that labour market results have worsened since 2014, with nearly a quarter of the labour force unemployed. However, the World Bank expects the poverty rate to fall below 2014 levels against the backdrop of recent economic growth and improvement in the security situation. Even so, it remains above the 2012 level in the governorates that have been worst affected.

IndicatorsNumber of Poor (thousand)Rate (%)
National Poverty Line6,194.818.9
International Poverty Line 2022.7 in Iraqi dinar (2012) or US$1.90 (2011 PPP) per day per capita806.32.5
Lower Middle Income Class Poverty Line 3406.7 in Iraqi dinar (2012) or US$3.20 (2011 PPP) per day per capita5,851.817.9
Upper Middle Income Class Poverty Line 5855.2 in Iraqi dinar (2012) or US$5.50 (2011 PPP) per day per capita18,795.357.3

Poverty indicators in 2012. Source: The World Bank.

Agriculture

Iraq Economy - Fanack Chronicle
Iraq Land Use

About a quarter of the total land area of Iraq is suitable for intensive cultivation and animal husbandry. A considerable part of that lies in the hilly and mountainous north, in Iraqi Kurdistan. The annual precipitation in this region is large enough to make agriculture possible without irrigation. Iraq’s most important agricultural land, however, lies in the plains south of Baghdad, where it is irrigated from the Tigris and Euphrates.

Throughout history, the region that is now known as Iraq derived its wealth from agriculture, thanks to the existence of a complex and widespread irrigation system. After the destruction of the irrigation system by the Mongols, still more areas were lost to production as their poorly drained soils were poisoned by salts deposited from evaporating irrigation water. By the 19th century, much of the once fertile Mesopotamia was inhabited by nomads, who used the land to graze their herds.

Until well into the last century, only about a quarter of the available arable land was sown each year, partly as a result of the common practice of letting some of a farm’s fields lie fallow each year, in order to restore its fertility. The introduction of artificial fertilizers reduced the need for fields to lie fallow, but the build-up of salts caused the loss of much previously arable land. The disastrous effects of warfare, the UN embargo, and, over recent years, lower levels of precipitation, and the growing frequency of dust storms from the Arabian Desert, have put additional strains on the agricultural sector.

Energy

For an in-depth overview of Iraq’s energy sector click the button below.


Service sector

The sharply rising oil incomes also provided a powerful stimulus for the service sector. Even under the Baath regime, internal commerce remained in private hands, though foreign trade was controlled by the state. Western Europe, Japan, and the United States were the most important customers for Iraqi oil in those years and, after the oil boom, also supplied most goods and services. The share of the Eastern Bloc rose in the 1960s but stagnated in the 1970s. The Soviet Union nevertheless remained Iraq’s largest weapons supplier during the war with Iran.

Investment in welfare and education was responsible for a large part of the growth in the service sector. From the mid-1970s on, Iraq had nearly free health care and free education up through university level. In 1979 a large-scale and successful literacy programme began. Older Iraqis remember how, thanks to the increase in oil revenues, their standard of living rose in the course of the 1970s.

Militarization

The Iraqi economy has suffered from the devastating wars it waged. The turning point was the war with Iran, which began in 1980 and dragged on for eight years. As an extension of the war, a far-reaching militarization of the Iraqi economy took place. The budget was largely swallowed up in waging the war and in military purchases. Towards the end of the war, Iraq had almost a million men under arms.

During the early years of the conflict, Saddam Hussein’s regime did everything it could to protect the civilian population from the negative economic effects of the war, in a guns-and-butter policy. They were able to do so thanks to the monetary reserves Iraq held on the eve of war, estimated at about 35 billion dollars. As the war dragged on, and certainly after Syria shut down the pipeline across its territory in 1982, the regime began to feel the pressure economically.Wealthy neighbouring states, such as Saudi Arabia and Kuwait, which feared an Iranian victory, provided extensive financial support in those years, and the West, Japan, and the Eastern Bloc came to Baghdad’s aid, with credits. With the construction or expansion of capacity in oil pipelines via Saudi and Turkish territory, oil income again rose. All of this enabled Iraq to continue its war efforts.

Shock Therapy

After the fall of the Saddam Hussein regime, Washington undertook a fundamental restructuring of Iraq’s economy, in violation of international law, which denies an occupying power this authority. In imitation of the economic ‘shock therapy’ previously applied in Eastern Europe, the economy was completely opened up, the role of the state minimized, and the free market given unrestrained play.

Official rhetoric notwithstanding, Operation Iraqi Freedom was inspired primarily by economic motives and geopolitical considerations closely related to them. At stake was the conquest of a market which had until then been closed to the United States, in a country that possesses one of the largest oil reserves in the world. This became clear soon after the fall of the regime of Saddam Hussein.

On the basis of decrees issued by Paul Bremer, the head of the Coalition Provisional Authority (CPA), steps were taken to transform a government-guided economy into a free-market economy. Unprecedented favourable conditions were created for foreign (i.e., primarily US) capital. For instance, with the exception of the energy sector, the entire economy was opened up for foreign investment; foreign investors can set up businesses without a permit and without a local partner, and there is no requirement to reinvest even a portion of the profits in Iraq; import tariffs were eliminated and replaced by a tax of 5 percent for financing reconstruction; the maximum income tax rate was reduced to 15 percent.

This policy, which led to considerable social polarization, ran into resistance from Washington’s Iraqi partners, whereupon the plans were modified though not abandoned. Although the Oil-for-Food Program formally ended in late 2003, the distribution of basic food packets has continued, anxious as Washington and the new Iraqi government are about the political backlash that stopping the program would provoke.

Reconstruction

As a result of UN Security Council Resolution 1483 (22 May 2003), the UN trade embargo, which had been in force since August 1990, was ended. All of Iraq’s frozen funds in foreign banks, together with proceeds from the Oil-for-Food Program which had not yet been spent, plus all oil revenues generated after 22 May 2003, were deposited in the Development Fund for Iraq (DFI). This fund was managed by the Coalition Provisional Authority (CPA) until 28 June 2004; a twelve-member Program Review Board controlled the expenditures. Although this was Iraqi money, Iraqis formed a minority on the Board. On the eve of the installation of the Interim Government on 28 June 2004, nearly the entire DFI reserve had been spent. Large US corporations such as Halliburton and Bechtel received enormous orders, without competitive bidding. In the absence of adequate audit control, this led to waste of financial resources and fraud.

After 28 June 2004, the role of the CPA was taken over by the US embassy; with about 3,000 staff, it is the largest US embassy in the world. It had at its disposal the vast majority of the 18 billion dollars that the US Congress appropriated in October 2003 for reconstruction. Even after the formal transfer of power to the Interim Government on 28 June 2004, the United States was able, from its position of power and influence, to push through the further restructuring of the Iraqi economy and acquire a strong if not dominant position in a potentially rich market.

Conditions

Economic recovery was only conceivable if Iraq found relief for its huge debt. It was thus one of Washington’s priorities, working through the Paris Club (an organization of wealthy nations), to gain remission of 90 percent of the debt, arguing that the Iraqi people should not be paying for generations for the irresponsible policies of a dictator (the so-called ‘odious debt’ principle). This remission has not yet been granted.

A second condition for economic restoration was that there be large-scale investment in reconstruction and development, particularly in infrastructure, which had been destroyed or badly damaged. The World Bank had already calculated that 55 billion dollars would be necessary. Priority should go to the oil sector, so that Iraq could begin to finance further reconstruction from its own resources as quickly as possible. Until that point is reached, Iraq will be dependent on financial support from the international community. A large donor conference in Madrid in October 2003 produced pledges of 33 billion dollars,18 billion of it from the United States. The donors have made good on only small portions of their pledges since then, because of the undiminished dominance of the United States in Iraq. Washington soon had to pour in large sums of its own to keep the reconstruction on track.

The third condition for economic restoration was that peace, as well as law and order, should be restored.

Violence

Although economic recovery would have been difficult in any case, things became even worse after 2003, due mainly to the insurgency, which targeted not only foreign forces and Iraqi government officials and facilities, but also economic facilities such as oil pipelines. In addition, after the bombing of the Golden Mosque in Samarra in February 2006 sectarian violence soon escalated to unprecedented levels, and many thousands of civilians were killed. About four million others were displaced within Iraq or ended up as refugees in neighbouring Arab countries. Among them were many well-trained people who could have made a valuable contribution to the recovery of the economy. Kurdish authorities (Kurdistan Regional Government, KRG) allowed Arab businessmen and highly skilled technicians to transfer their economic activities to the Kurdish provinces, but their number was limited.From the end of 2008 on, due to a combination of factors (see Chaos subsides), the level of violence did gradually decrease, except for a spike from August 2009 until 2011, when it levelled off again. American troops left Iraq at the end of that year.

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