Iraq: Economic Reforms Critical to Reap the Benefits of Oil Windfall and Address Human Capital Crisis

BAGHDAD  – Iraq is gradually emerging from a deep recession, caused by the COVID-19 pandemic and the plunge in oil prices in 2020. Although the economy is projected to grow by 5.4% on average a year between 2022 and 2024, the country’s macroeconomic outlook is subject to a significant degree of risk due to high dependence on oil, budget rigidities, and delays in the formation of a new government. Oil dependency could also hurt the domestic drive for reforms, thereby deepening structural economic challenges.

The World Bank’s Spring 2022 edition of the Iraq Economic Monitor, “Harnessing the Oil Windfall for Sustainable Growth,” released today, finds that, after contracting by more than 11% in 2020, Iraq’s economy grew by 2.8% in 2021 with the easing of COVID-19 movement restrictions, supported by a solid expansion of non-oil output, in particular services. Oil GDP also started growing in the second half of 2021 as OPEC+ production cuts started to be phased out. Higher oil revenues pushed Iraq’s overall fiscal and external balances into a surplus in 2021. However, fiscal rigidities and a high level of unaccounted arrears remain.

“Iraq has a unique opportunity to undertake urgent, wide-ranging structural reforms by drawing on fiscal space resulting from its recent oil windfall,” said Saroj Kumar Jha, World Bank Mashreq Regional Director. “Reorienting government expenditure toward programs that improve growth is critical for economic diversification and job creation, and for addressing the country’s human capital crisis.”

The Spring edition of the Iraq Economic Monitor finds that Iraq’s existing food security challenges have intensified amid the current surge in global commodity prices, while domestic food production falls short of demand against a rapidly growing population. Severe droughts and other climate change factors have exacerbated the situation. While subsidies and direct transfers can help mitigate the impact in the short run, attaining food security calls for coordinated efforts to improve domestic food production and more efficient management of water resources.

Iraq’s fiscal and socio-economic fragilities underscore the need to accelerate much needed macro-fiscal and structural reforms to address the barriers to private sector development, scale up investments in water efficiency and agri-food systems, transition towards more sustainable sources of energy, and decarbonize the transport sector.

Further delays in government formation, and in the ratification of the 2022 budget, could restrict the use of the country’s revenue windfall from oil as de-facto limits from the 2021 budget are reached, and new investment projects are put on hold, which could reduce economic growth. The Government of Iraq’s White Paper outlining a comprehensive program of reforms toward economic diversification remains, for now, a bold blueprint.

The Special Focus section of the Monitor, “COVID-19 and the Human Capital Crisis: Recovering Educational Losses for Future Productivity and Growth,” examines the pandemic’s impact on Iraq’s existing challenges of building human capital. A child born in Iraq just before the COVID-19 pandemic could expect to be only 41% as productive by age 18 as they could be with complete education and full health. The pandemic took a toll on Iraq’s human capital by negatively affecting the health and economic well-being of today’s workers, as well as by reducing the potential productivity of the next generation. Addressing these challenges calls for an education reform path for better learning and skills development.

 

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