Diversifying Iraq’s economy a mission impossible

Iraqi GDP growth remains at the mercy of the oil markets, with the economy growing 10.3% in 2008, slowing to 4.3% last year in the wake of the crash, and now expected to rebound to 7% this year as prices have recovered (according to the central bank’s latest forecast).  This state of affairs has led some Iraqi economists to call for the government to make more of an effort to diversify the economy.

Perhaps diversification is not an unreasonable goal.  While oil accounts for as much as 50% of GDP in some of Iraq’s fellow Arab OPEC members, in others the share is as low as  25%.  (See chart; shares are from the CIA’s World Factbook .)

But unlike these countries, Iraq has enormous reserves of oil that have yet to be tapped and an ambitious development plan to bring them online.  Current production of something like 2 million barrels per day is expected to reach 4.5 million b/d by 2014 and eventually peak at 12 million b/d (if the Oil Ministry is to be believed).  This makes diversifying away from oil a practical impossibility for the foreseeable future.

Reaching the 4.5 million b/d target on schedule would result in average annualized oil production growth of 18% from now until 2014.  Include the contribution of oil-related infrastructure investment to GDP during this period and the growth rate for the sector will certainly exceed 20%.  The non-oil sector would have to be growing even faster than this for its share to increase, and so, consequently, would the economy as a whole.

It’s clearly much too early to be talking about diversification.

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