By John Lee.
A new report from the World Bank Group forecasts real GDP growth (at constant market prices) of 2.8 percent this year in Iraq, increasing to 8.1 percent next year:
Iraq’s economy is gradually picking up following the deep economic strains of the last four years. Real GDP is estimated to have grown by 0.6 percent in 2018, thanks to a notable improvement in security conditions and higher oil prices, reversing the contraction of 1.7 percent seen in 2017.
The non-oil economy picked up speed and grew at 4 percent, while oil production was slightly less than 2017 in line with the OPEC+ agreement. Recently, the Iraqi economy has received a boost of confidence with the signing of several trade agreements with its neighbors.
Reconstruction efforts have been proceeding at a moderate pace. Inflation remained low at 0.4 percent in 2018, but slightly up from 2017, due to higher domestic demand in addition to rising food and transportation costs.
The economic outlook has improved due to higher oil prices and improving security situation, but constraints on capital spending will impede a recovery-driven growth acceleration. Growth is expected to spike to 8.1 percent in 2020 due mainly to higher oil output, with OPEC+ agreement coming to an end in mid- 2019.
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. However, the recently approved 2019 budget presents a sizable increase in recurrent spending, and unless there is a significant reorientation in fiscal policy to a comprehensive recovery approach, there will be limited fiscal space to sustain post-war recovery and longer-term development.
Higher spending together with easing oil prices will result in a high fiscal deficit projected at 5.4 percent of GDP in 2019 before narrowing down to about 3 percent throughout 2020-2021.
Lower oil prices and increased imports will cause the current account balance to turn into deficit, financed partially by international reserves decumulation.