Iraq Economic Monitor, Fall 2019 : Turning the Corner - Sustaining Growth and Creating Opportunities for Iraq’s Youth

Iraq’s economy is gradually rebounding in 2019. GDP grew at 4.8 percent year on year in the first half of 2019, reversing the contraction observed in the past two years. Growth comes mainly at the back of a rise in crude oil production (up 6.3 percent so far) and a rebound in non-oil economicactivity. The latter is underpinned by better rainfall and record agriculture yields, an improvement in electricity production, and an expansionary fiscal policy linked to growing wage bill and public consumption. Such positive developments are expected to bring the overall realGDP growth to an estimated 4.6 percent by end-2019, reversing a 0.6 percent contraction in 2018, with the non-oil economy likely to accelerate over 5 percent. Iraq’s economy has outperformed that of regional peers this year, but its population dynamics requires much higher growth to sustain current level of welfare. Despite recent improvements, Iraq continues to be in need of humanitarian assistance as more than 1.5 million Internally Displaced Persons (IDPs) are yet toreturn home. The Government of Iraq (GoI) maintains a policy of fiscal loosening based on expandingsubsidies and the public sector wage bill to ensure social peace amidst weak private sector job creation. In the absence of clear structural reforms and accelerated reconstruction efforts, growthrecovery in Iraq may be short-lived. This is particularly the case given the oil markets outlookwhere both prices and exports are expected to weaken given softer global demand and the uncertaintyaround the renewal of the OPEC agreement. Risks over the medium-term continue to be present both on the upstream and downstream. Lack of diversification and budget rigidities linked to the public sector wage bill reduce Iraq’s financial buffers and increase its vulnerability to external shocks. They also threaten to further delay reconstruction and outdo the recent positive government efforts especially in the electricity and agriculture sectors. Creating an adequate fiscal space for growth-enhancing programs will be key for diversification and job creation, without which the impressive increases in oil production will mean little for most Iraqis. With IDPs returning to their homes, there will be an increasing need to open economic opportunities and maintain flexible social assistance in these parts of the country.