Iraq Economy Rebounds but Economic Diversification Remains an Urgent Priority

BAGHDAD, November 17, 2022 - Iraq's economy is rebounding with GDP growth forecast to accelerate to 8.7% in 2022 driven by rising oil output and a post-pandemic recovery in non-oil sectors, according to the latest issue of the World Bank's Iraq Economic Monitor released today. Yet, without effective implementation of deep structural reforms and economic diversification, Iraq's dependence on oil leaves it vulnerable to commodity price volatility and weakening global demand.

The Fall 2022 edition of the Monitor titled "A New Opportunity to Reform" presents recent economic developments and examines Iraq's economic outlook and possible risks. The report finds that after growing by 2.8%in 2021, GDP growth accelerated to 10.5% in the first half of 2022. Record oil exports in conjunction with high oil prices have brought in record oil revenues for the Iraqi government and pushed international reserves to their highest levels in more than two decades.

In the absence of a ratified budget for 2022, investment projects and implementation of economic reforms were impacted by the delays in government formation. Rising food prices have exacerbated pre-existing poverty trends and increased food security risks. Any further erosion of purchasing power due to inflation, and continued electricity and water shortages could compound risks of social unrest.

Looking ahead, the report finds that Iraq's economic outlook will be supported by persistent high oil prices, but growth is expected to gradually ease over the medium-term as oil production will be constrained by more sluggish global demand. Furthermore, Iraq's dependence on oil increases its exposure to the global transition towards a decarbonized world that would gradually diminish oil's prominent role in fueling the global economy.

"Iraq's socio-economic vulnerabilities are further amplified by intensifying climate change shocks including temperature rises, increasing water scarcity and more frequent extreme events," said Jean-Christophe Carret, World Bank Mashreq Country Director. "With record oil revenues, Iraq's new Government has a unique opportunity to pursue economic diversification and address longstanding structural and climate-related challenges and put the economy on a more resilient and sustainable path."

The Special Focus section of the Monitor sheds light on how climate change is amplifying Iraq's existing economic vulnerabilities. Iraq's intertwined development and climate realities call for urgent action. This requires broad adaptation efforts, with a focus on the water-agriculture-poverty nexus. Mitigation measures should help bridge the supply-demand gaps while decarbonizing Iraq's energy value chain. The report makes it clear that fiscal and structural reforms remain critical to contain the substantial macro-fiscal implications of the transition to a resilient and low-carbon economy.