Iraq Economic Monitor Navigating the Perfect Storm (Redux) With a Special Focus on Laying the Foundation for a New Economy in Iraq: Digital Transformation SPRING 2020 M croeconomics, Tr de & Investment Middle East and North Africa Region Iraq Economic Monitor Navigating the Perfect Storm (Redux) With a Special Focus on Laying the Foundation for a New Economy in Iraq: Digital Transformation SPRING 2020 M croeconomics, Tr de & Investment Middle East and North Africa Region TABLE OF CONTENTS Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix ‫ الملخص التنفيذي‬. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Chapter 1  Recent Economic and Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Oil and Gas Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Monetary Policy and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Business Environment and Private Sector Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Chapter 2  Laying the Foundation for a New Economy in Iraq: Digital Transformation . . . . . . . . . . 19 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 The Importance of the Digital Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Current State of Iraq’s Digital Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Digital Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Digital Financial Services (DFS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Digital Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Digital Skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Digital Entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 iii List of Figures Figure 1 Non-oil GDP Has Grown by Nearly 5 Percent in 2019, Outperforming Previous Three Years . . 3 Figure 2 Nevertheless, Growth Was Not Sufficient to Make a Change in Per Capita Terms . . . . . . . . . . .3 Figure 3 Oil, Agriculture and Services Have Been the Pillars for Growth in 2019 . . . . . . . . . . . . . . . . . . . .3 Figure 4 … with Oil Recording the Largest Contribution Given Its Weight in the Economy. . . . . . . . . . . . 3 Figure 5 Private Consumption Picked Up in 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 6 While FDI Halved to US$2.9 Billion in 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Figure 7 The Collapse in Oil Prices Has Outpaced the Rise in Production, Putting a Large Toll on Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 8 Oil Prices Stood at US$5 Above the 2019 Budgeted Price, Compared to a US$19.5 Spread in 2018, and Continue to Plunge as COVID-19 Situation Develops in 2020 . . . . . . . . . 5 Figure 9 Fiscal Loosening Has Markedly Reduced the Budget Surplus in 2019 . . . . . . . . . . . . . . . . . . . . 7 Figure 10 The Wage Bill Dominates Recurrent Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 11 … and Is Among the Highest in the World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure 12 Despite the Improvement in Public Investment Execution Rates, It Remains Below Recurrent Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure 13 Fifty Two Percent of Total Debt Stock Is External . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Figure 14 Sixty Six Percent of That Stock is Long Term and 9 Percent Is Legacy Debt Prior to 1990 . . . 9 Figure 15 CAB is Expected to Turn from a Small Surplus in 2019 Into a Markable Deficit in 2020 . . . . . 10 Figure 16 Driven by Less Favorable Trade Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 17 The Decline in Oil Prices Due to COVID-19 Caused the Official Reserves to Decline in the Start of 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Figure 18 Reserve Coverage Is thus Expected to Decline from 10 Months of Imports in 2019 to 6 Months in 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 19 Inflation Remained Subdued in 2019, but Slightly Edged Up in the Start 2020 . . . . . . . . . . . . 11 Figure 20 Higher Prices of Some Food and Non-Food Items Continued in 2019 and Jan. 2020 . . . . . . 11 Figure 21 Broad Money Increased in 2019 Driven by the Pick-Up in the Overall Economic Activity . . . . 11 Figure 22 But Credit to Private Sector Remains Constrained . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 23 Iraq Continues to Rank Unfavorably on All Doing Business Indicators Compared to MENA . 12 Figure 24 Logistics Quality Has Deteriorated with the Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 25 Penetration of Mobile and Mobile Broadband Services (per 100 Inhabitants) . . . . . . . . . . . . . 23 List of Boxes Box 1 COVID-19 Impact on the Humanitarian Response and Support to Vulnerable Displaced Populations in Iraq. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Box 2 Pensions and Social Insurance in Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Box 3 COVId-19 Impact on Poverty in Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Box 4 COVID-19 Impact on the Digital Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Box 5 Sri Lanka’s NCoV Surveillance System to Monitor COVID-19 Outbreaks . . . . . . . . . . . . . . . . . .27 Box 6 Case Study on Digital Skills Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Box 7 Startups on the Rise: Spotlight on Two High-Growth Iraqi Digital Startups . . . . . . . . . . . . . . . . 30 List of Tables Table 1: Iraq: Selected Economic and Financial Indicators, 2017–2022 . . . . . . . . . . . . . . . . . . . . . . . . . .16 iv IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) ACKNOWLEDGMENTS T he Iraq Economic Monitor provides an Le Borgne (Practice Manager, MTI), Ramzi Neman (Head update on key economic developments of Baghdad Office, MNCO2), Christos Kostopoulos and policies over the previous six months (Lead Economist, MTI). Several offered helpful inputs, and presents findings from recent World Bank work comments and advice. These included Syed Hassan on Iraq, placing them in a longer-term and global (Lead Financial Sector Specialist, EMNF2), Rene Leon context and assessing the implications of these Solano (Senior Social Protection Specialist, HMNSP), developments and other changes in policy regarding Sara Hariz (Social Protection Sector Specialist, the outlook for Iraq. Its coverage ranges from the HMNSP), Naila Ahmad (Senior Social Development macro-economy to business environment and private Specialist, SMNSO), Matt Wai-Poi (Senior Economist, sector development. It is intended for a wide audience, EMNPV), Lokendra Phadera (Poverty Economist, including policy makers, business leaders, financial EMNPV). Special thanks to Muna Salim (Senior market participants, and the community of analysts Program Assistant, MTI) for her administrative support. and professionals engaged in Iraq. The findings, interpretations, and conclusions The Iraq Economic Monitor is a product of expressed in this Monitor are those of World Bank the Middle East and North Africa (MENA) unit in the staff and do not necessarily reflect the views of the Macroeconomics, Trade & Investment (MTI) Global Executive Board of the World Bank or the governments Practice in the World Bank Group. The report was they represent. For information about the World Bank led by Wael Mansour (Senior Economist, MTI) and and its activities in Iraq, please visit www.worldbank. Ashwaq Maseeh (Economist, MTI), with contributions org/en/country/iraq (English) or www.worldbank. from Bledi Celiku (Economist, MTI). The Special Focus org/ar/country/iraq (Arabic). For questions and is authored by Alexandre Laure (Senior Private Sector comments on the content of this publication, please Specialist, EMNF2), Marolla Haddad (E T Consultant, contact Wael Mansour (wmansour@worldbank.org), IDD02), and Zoe Lu (Consultant, IDD02). Ashwaq Maseeh (amaseeh@worldbank.org), Bledi The report was prepared under the direction Celiku (bceliku@worldbank.org), or Eric Le Borgne of Saroj Kumar Jha (Country Director, MNC02), Eric (eleborgne@worldbank.org). v ACRONYMS BOC Basra Oil Company GEN Global Entrepreneurship Network Bpd Barrel per day GER Global Entrepreneurship Registration CAB Current Account Balance GoI Government of Iraq CBI Central Bank of Iraq GSM Global System for Mobile CACH Cheque enabled Automated Clearing Communications House GSRS Government Securities Registration CMC Communications and Media System Commission GW Giga Watt CNPC China National Petroleum Corporation HRP Humanitarian Response Plan CPA Coalition Provisional Authority ICA Investment Climate Assessment CPI Consumer Price Index HDI Human Development Index COSIT Central Organization for Statistics and HRMIS Human Resource Management Information Technology Information System COVID Coronavirus Disease ICT Information and Communications CSD Central Securities Depository Technology DB Doing Business IOM International Organization for Migration DE Digital Economy ISIS Islamic State of Iraq and Syria DFS Digital Financial Services ITPC Iraq Telecommunications and Post EMDEs Emerging Market Developing Economies Company EU European Union KRG Kurdistan Regional Government FDI Foreign Direct Investment KYC Know Your Customer GCC Gulf Council Countries LPI Logistics Performance Index FTTH Fiber to the Home MBPD Million Barrel Per Day IEM Iraq Economic Monitor MEES Middle East economic Survey GCC Gulf Cooperation Council MENA Middle East North Africa IDPs Internally Displaced Persons MoO Ministry of Oil GDP Gross Domestic Product MoF Ministry of Finance GEDI Global Entrepreneurship and MOED Ministry of Education Development Institute MSME Micro Small Medium Enterprises GEI Global Entrepreneurship Index MW Mega Watts vii NBP National Board of Pensions PPP Public-Private Partnership NEET Not in Employment, Education, or PSSD Pensions and Social Security Training Department NGO Non-Government Organization RPSI Retail Payments Systems Infrastructure NPLs Non-Performing Loans RTGS Real Time Gross Settlement NPS National Payment System SOEs State-Owned Enterprises NSDC National Skills Development Cooperation SSS Securities Settlement System UNOCHA United Nations Office for the TVET Technical and vocational education and Coordination of Humanitarian Affairs training OPEC Organization of Petroleum Exporting WBG World Bank Group Countries WDI World Development Indicators PDS Public Distribution System WGI Worldwide Governance Indicators PHCC Primary Health Care Corporation UNHCR United Nations High Commissioner for PP Percentage Point Refugees PPE Personal Protective Equipment viii IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) EXECUTIVE SUMMARY Recent Economic and Policy the country calling for better public service delivery Developments and jobs. As a result, all signs indicate that this multi- faceted crisis will have a protracted impact. Iraq, once again, is facing a combination of The outlook for Iraq, which was already acute shocks which the country is ill-prepared to negative prior to the COVID-19 shock, has manage. The collapse in oil prices has considerably markedly worsened since. Near-term economic reduced budgetary revenues and reversed the fiscal growth will be subdued by low oil prices, a new OPEC+ surpluses accumulated since 2018. COVID-19, and the agreement that has reduced oil production quotas, lockdown measures needed to contain the pandemic and unfavorable global and domestic conditions have dealt a severe blow to economic activities including disruptions from COVID-19 spread. As a especially the services sectors like transport, trade, result, the economy is projected to contract by 9.7 banking and religious tourism, which constitute around percent in 2020, down from a real GDP growth of half of the non-oil economy. The growing discontent 4.4 percent in 2019, with both oil and non-oil sectors over poor service delivery, rising corruption, and lack contracting by 13 and 4.4 percent respectively. of jobs persists and is coupled with political impasse The unsustainable stimulus package over the formation of a new government. introduced since October—including a rising Iraq’s pre-existing conditions going into public sector employment, lower retirement age, this crisis limit its ability to manage and mitigate and various transfers—coupled with weaker oil the socio-economic impact. A large dependency revenues are expected to have detrimental fiscal on oil revenues coupled with built-up budget rigidities effects. In case oil prices stabilize in the low-30s and limit Iraq’s fiscal space to respond to the COVID-19 no reform measures are taken, the budget deficit outbreak and offer a stimulus package to re-start would exceed 29 percent of GDP in 2020 and gross the economy. An undiversified economy, highly financing needs would reach of US$67 billion (over 39 dependent on oil outcomes, as well as large presence percent of GDP). Under this situation, Iraq may have of the state in economic and commercial activities, no choice but to resort to a mixture of domestic and make it hard to create the needed private sector jobs foreign sources to finance the deficit. Heavy reliance for a predominantly young population. Furthermore, on local banks will crowd-out the available liquidity rampant corruption and weak governance and for private sector credit, while access to international service delivery fueled large scale protests across markets may prove to be difficult given global market ix conditions and a weak macro-framework for Iraq. of its citizens’ concerns as well as accelerate the Closing the gap through local currency bonds will achievement of its development objectives. weaken CBI’s balance sheet and create pressures on The benefits of a robust DE are numerous, the exchange rate and inflation. The accompanying and often unexpected, such as stronger resilience in current account deficit, estimated at 18.8 percent of the face of pandemics, as illustrated with COVID-19. GDP in 2020, could also draw-down CBI’s foreign Innovative digital solutions are being deployed to sterilize currency reserves to below 3 months of imports by hospitals, identify and monitor affected populations, 2022, exacerbating further the vulnerability of the offer home-based educational and employment country to external shocks. opportunities among others to facilitate the necessary Amidst this situation, implementing reforms in social distancing. A critical element to benefitting from Iraq has become even more crucial for the sustain- these technologies is the underpinnings of a strong ability of growth and job creation. A comprehensive digital economy that also addresses the digital divide forward-looking economic reform agenda can signal will- between those who have access to digital devices (such ingness to create the enabling environment for private as computers, mobile phones, tablets) and the Internet, sector led growth, diversification and job creation, and and those who do not. center around two focus areas:1 The special focus covers the five foundational interconnected elements of a DE. The World Bank i. Tackling cross-cutting impediments for private- Group (WBG) defines the DE framework,2 as consisting sector led diversification through: of 1) Digital Infrastructure, 2) Digital Financial Services • Fiscal Sustainability and Economic (DFS), 3) Digital Platforms, 4) Digital Skills, and 5) Digital Governance. Entrepreneurship. Across all five pillars, the paper • Financial Sector Reforms. identifies challenges, opportunities, and proposes • Business Environment Reforms. short-to-medium term recommendations. • Improving Human Capital outcomes. The priority reform areas in Iraq are governance • Social Protection and Labor Systems and promoting private sector participation in Reforms. productive sectors (and diversification). This can ii. Reforming governance and promoting private subsequently boost Iraq’s participation in the DE. These sector participation in selected productive priority reform areas cut across all five elements of the sectors: DE framework and are meant to boost accountability, • Agriculture and Agri-Industries reforms. transparency, and trust. • Electricity Sector Reforms. Transitioning Iraq towards a resilient and • Gas Sector Reform, inclusive DE will require economic reforms and longer-term development priorities along the five pillars: ensuring affordable access to high-speed Laying the Foundation for a internet, achieving widespread adoption of cashless New Economy in Iraq: Digital payments, delivering digital government services Transformation and improving access to data, upskilling youth with technological know-how, and scaling up the digital This special focus on digital economy (DE) entrepreneurship ecosystem. The relevance and highlights the importance of digital transformation urgency of these reforms are all too visible during the for Iraq and the urgency behind it. Iraq’s economic ongoing COVID-19 global health crisis. condition was gradually improving following the deep economic strains of the last three years. However, the recent protests and unrest highlight the continued 1 World Bank “Strategic Note on Priority Reform Areas, fragility of the country and the high priority of Towards a more resilient and inclusive economy in Iraq”, improving economic opportunities, particularly for forthcoming. youth. Leveraging the DE will help Iraq address some 2 World Bank Digital Economy Diagnostic Framework. x IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) ‫الملخص التنفيذي‬ ‫أن حزمة املحفزات غري املستدامة التي تم طرحها منذ ترشين األول‬ ‫التطورات االقتصادية والسياساتية األخرية‬ ‫– مبا يف ذلك زيادة التوظيف يف القطاع العام ‪ ،‬وخفض سن التقاعد ‪،‬‬ ‫والتحويالت املالية املختلفة – إىل جانب تراجع إيرادات النفط الضعيفة‪،‬‬ ‫مرة أخرى يواجه العراق مزيجاً من الصدمات الحادة التي يبدو أن‬ ‫يُتوقع أن يكون له تأثريات مالية ضارة‪ .‬ففي حالة استقرار أسعار النفط‬ ‫البلد ليس عىل استعداد جيد ملواجهتها‪ .‬فقد أدى انهيار أسعار النفط إىل‬ ‫يف نطاق الثالثني دوالرا ً وعدم اتخاذ أي تدابري إصالحية ‪ ،‬سيتجاوز عجز‬ ‫انخفاض كبري يف إيرادات املوازنة وإستنزاف الفوائض املالية املرتاكمة منذ‬ ‫املوازنة ‪ % 28‬من الناتج املحيل اإلجاميل يف عام ‪ 2020‬وستصل احتياجات‬ ‫عام ‪ .2018‬وجاءت جائحة فايروس كوفيد – ‪( 19‬الكورونا) وإجراءات‬ ‫التمويل اإلجاملية إىل ‪ 67‬مليار دوالر أمرييك (أكرث من ‪ % 39‬من الناتج‬ ‫الحجر املنزيل املرتافقة بها الحتواء الوباء لتلحق رضبة قاسية باألنشطة‬ ‫املحيل اإلجاميل)‪ .‬ويف ظل هذا الوضع ‪ ،‬قد ال يكون أمام العراق أي خيار‬ ‫االقتصادية وبخاصة قطاعات الخدمات مثل النقل والتجارة واملصارف‬ ‫سوى اللجوء إىل مزيج من املصادر املحلية واألجنبية لتمويل العجز‪ .‬ولكن‬ ‫والسياحة الدينية ‪ ،‬والتي تشكل حوايل نصف االقتصاد غري النفطي‪ .‬واىل‬ ‫االعتامد الكبري عىل املصارف املحلية سوف يقلل من السيولة املتاحة‬ ‫جانب ذلك‪ ،‬يتواصل االستياء الشعبي املتزايد حيال سوء تقديم الخدمات‬ ‫إلئتامنات القطاع الخاص ‪ ،‬يف حني أن الوصول إىل األسواق الدولية قد‬ ‫‪ ،‬والفساد املتزايد ‪ ،‬ونقص الوظائف ‪ ،‬وقد أقرتن باملأزق السيايس حول‬ ‫يكون صعباً نظرا ً لظروف السوق العاملية وضعف إطار االقتصاد الكيل‬ ‫تشكيل حكومة جديدة‪.‬‬ ‫للعراق‪ .‬كام إن إغالق الفجوة من خالل سندات العملة املحلية سوف‬ ‫يضعف امليزانية العمومية للبنك املركزي العراقي مام يولد ضغوطاً عىل‬ ‫إن ظروف العراق القامئة أصالً والتي تغذي هذه األزمة تحد من‬ ‫سعر الرصف والتضخم‪ .‬وقد يؤدي العجز املصاحب يف الحساب الجاري‬ ‫قدرته عىل إدارة وتخفيف األثر االجتامعي واالقتصادي‪ .‬فهناك اعتامد‬ ‫در بنحو ‪ % 18.8‬من الناتج املحيل اإلجاميل يف عام ‪ ، 2020‬إىل‬ ‫كبري عىل عائدات النفط يصاحبه جمود مرتاكم يف املوازنة‪ ،‬وهذا يقلص‬ ‫‪ ،‬الذي يق ّ‬ ‫خفض احتياطي العمالت األجنبية يف البنك املركزي العراقي إىل أقل من‬ ‫من الحيز املايل للعراق الذي ميكّنه من خالله االستجابة لجائحة فايروس‬ ‫‪ 3‬أشهر من الواردات بحلول عام ‪ ، 2022‬مام يزيد من هشاشة البلد أمام‬ ‫كوفيد – ‪ ، 19‬كام يقلّل من إمكانية تقديم حزمة حوافز إلعادة تفعيل‬ ‫الصدمات الخارجية‪.‬‬ ‫االقتصاد‪ .‬إن االقتصاد الذي يفتقر إىل التنوع ويعتمد بشكل كبري عىل‬ ‫إيرادات النفط ‪ ،‬فضالً عن حضور كبري للدولة يف األنشطة االقتصادية‬ ‫يف خضم مثل هذه الحالة يصبح تنفيذ اإلصالحات يف العراق‬ ‫والتجارية ‪ ،‬يجعل من الصعب عليه خلق وظائف يف القطاع الخاص التي‬ ‫أكرث أهمية الستدامة النمو وخلق فرص العمل ‪ .‬وميكن ألجندة إصالح‬ ‫يتوجب إيجادها لسكان غالبيتهم من الشباب‪ .‬وعالوة عىل ذلك ‪ ،‬فإن‬ ‫اقتصادي شامل تتطلع نحو املستقبل أن تؤطر الهدف املتمثل يف خلق‬ ‫الفساد املتفيش وضعف الحوكمة وسوء تقديم الخدمات أسهم يف تغذية‬ ‫بيئة مواتية لنمو يقوده القطاع الخاص‪ ،‬والتنويع‪ ،‬وخلق فرص العمل‪،‬‬ ‫احتجاجات واسعة النطاق يف جميع أنحاء البالد تدعو إىل تحسني تقديم‬ ‫ويتمحور حول أثنني من مجاالت الرتكيز‪:1‬‬ ‫الخدمات العامة وتوفري فرص العمل‪ .‬ونتيجة لذلك ‪ ،‬تشري جميع الدالئل‬ ‫إىل أن هذه األزمة املتعددة الجوانب سيكون لها تأثري طويل األمد‪.‬‬ ‫‌أ‪ .‬معالجة املعوقات الشاملة للتنويع الذي يقوده القطاع الخاص من خالل‪:‬‬ ‫إن التوقعات الخاصة بالعراق ‪ ،‬التي كانت سلبية أصالً قبيل‬ ‫ •االستدامة املالية والحوكمة االقتصادية‪.‬‬ ‫ء وبشكل ملحوظ منذ‬ ‫صدمة فايروس كوفيد – ‪ ،19‬راحت تزداد سو ً‬ ‫ •إصالحات القطاع املايل‪.‬‬ ‫ذلك الحني‪ .‬فالتقديرات أن يرتاجع النمو االقتصادي عىل املدى القريب‬ ‫ •إصالحات بيئة األعامل‪.‬‬ ‫نتيجة النخفاض أسعار النفط ‪ ،‬واتفاقية (أوبك ‪ ) +‬الجديدة التي خفضت‬ ‫ •تحسني محصالت رأس املال البرشي‪.‬‬ ‫حصص إنتاج النفط ‪ ،‬والظروف املحلية والعاملية غري املواتية مبا يف ذلك‬ ‫ •إصالحات نظم الحامية االجتامعية والعمل‪.‬‬ ‫االضطرابات التي ظهرت جراء تفيش فايروس كوفيد – ‪ .19‬ولذلك ‪ ،‬من‬ ‫املتوقع أن ينكمش االقتصاد بنسبة ‪ % 9.7‬يف عام ‪ ، 2020‬بانخفاض عن‬ ‫‪ 1‬البنك الدويل‪ « ،‬مذكرة اسرتاتيجية حول نطاقات اإلصالح ذات األولوية – نحو‬ ‫منو الناتج املحيل اإلجاميل الحقيقي الذي بلغ ‪ % 4.4‬يف عام ‪ ، 2019‬وحيث‬ ‫اقتصاد مرن أكرث شمولية يف العراق»‪ ،‬ستصدر قريباً‪.‬‬ ‫سينكمش القطاعني النفطي وغري النفطي بنسبة ‪ 13‬و ‪ % 4.4‬عىل التوايل‪.‬‬ ‫‪xi‬‬ ‫الذين لديهم أجهزة رقمية (مثل الكمبيوتر والهواتف املحمولة واألجهزة‬ ‫‌ب‪ .‬إصالح الحوكمة وتعزيز مشاركة القطاع الخاص يف قطاعات إنتاجية‬ ‫اللوحية) واإلنرتنت ‪ ،‬وأولئك الذين ال تتوفر لديهم مثل هذه األجهزة‪.‬‬ ‫مختارة‪:‬‬ ‫يغطي العدد الخاص العنارص الخمسة األساسية املرتابطة لالقتصاد‬ ‫ •إصالحات الزراعة والصناعات الزراعية‪.‬‬ ‫الرقمي ‪ .‬وتعرف مجموعة البنك الدويل إطار العمل لالقتصاد الرقمي‪،2‬‬ ‫ •إصالحات قطاع الكهرباء‪.‬‬ ‫عىل أنه يتألف من (‪ )1‬البنية التحتية الرقمية ‪ )2( ،‬الخدمات املالية‬ ‫ •إصالح قطاع الغاز ‪.‬‬ ‫الرقمية‪ )3( ،‬املنصات الرقمية ‪ )4( ،‬املهارات الرقمية ‪ ،‬و (‪ )5‬ريادة األعامل‬ ‫الرقمية‪ .‬ويف جميع هذه الركائز الخمس‪ ،‬تحدد الورقة التحديات والفرص‬ ‫والتوصيات املقرتحة عىل املدى القصري إىل املتوسط‪.‬‬ ‫إرساء قاعدة القتصاد جديد يف العراق‪ :‬التحول الرقمي‬ ‫تتمثل مجاالت اإلصالح ذات األولوية يف العراق يف الحوكمة وتعزيز‬ ‫مشاركة القطاع الخاص يف القطاعات اإلنتاجية (والتنويع)‪ .‬وهذا ميكن أن‬ ‫هذا العدد الخاص حول االقتصاد الرقمي (‪ )digital economy‬يسلط‬ ‫يعزز الحقاً مشاركة العراق يف االقتصاد الرقمي‪ .‬وتغطي مجاالت اإلصالح‬ ‫الضوء عىل أهمية التحول الرقمي بالنسبة للعراق والرضورة امللحة‬ ‫ذات األولوية هذه جميع العنارص الخمس إلطار االقتصاد الرقمي‪ ،‬وهي‬ ‫التي تكمن وراءه ‪ .‬ذلك أن الوضع االقتصادي يف العراق راح يتحسن‬ ‫تهدف إىل تعزيز املساءلة والشفافية والثقة‪.‬‬ ‫تدريجياً بعد الضغوط االقتصادية العميقة التي عاىن منها يف السنوات‬ ‫الثالث املاضية‪ .‬ومع ذلك ‪ ،‬فإن االحتجاجات واالضطرابات األخرية تسلط‬ ‫يتطلب تحول العراق نحو تطوير اقتصاد رقمي يتسم باملرونة‬ ‫رس‬‫الضوء عىل استمرار هشاشة البلد واألولوية العالية التي يجب أن تك ّ‬ ‫والشمولية إجراء إصالحات اقتصادية واعتامد أولويات إمنائية طويلة‬ ‫لتحسني الفرص االقتصادية ‪ ،‬وبشكل خاص للشباب‪ .‬وتكمن االستفادة من‬ ‫املدى تغطي هذه الركائز الخمس‪ .‬سيشتمل ذلك عىل ضامن الوصول‬ ‫االقتصاد الرقمي عىل مساعدة العراق يف معالجة بعض مخاوف مواطنيه‬ ‫بأسعار معقولة إىل خدمات اإلنرتنت عايل الرسعة‪ ،‬تحقيق اعتامد واسع‬ ‫وكذلك ترسيع تحقيق أهدافه التنموية‪.‬‬ ‫النطاق للمدفوعات غري النقدية ‪ ،‬تقديم الخدمات الحكومية الرقمية‬ ‫وتحسني الوصول إىل البيانات ‪ ،‬رفع مستوى مهارات الشباب من ذوي‬ ‫إن فوائد وجود اقتصاد رقمي قوي متعددة‪ ،‬وغالباً ما تكون غري‬ ‫الخربة التكنولوجية ‪ ،‬وتوسيع نطاق النظام البيئي لريادة األعامل الرقمية‪.‬‬ ‫متوقعة ‪ ،‬مثل بلوغ مرونة أقوى يف مواجهة األوبئة ‪ ،‬كام تجىل ذلك فيام‬ ‫لقد بدت أهمية هذه اإلصالحات وطابعها العاجل جليني خالل األزمة‬ ‫يتعلق بفايروس كوفيد ‪ ،-19‬حيث يتم استخدام الحلول الرقمية املبتكرة‬ ‫الصحية العاملية املتواصلة والتي نتجت عن تفيش فايروس كوفيد – ‪.19‬‬ ‫يف تعقيم املستشفيات ‪ ،‬وتحديد ومراقبة السكان املترضرين ‪ ،‬وتقديم فرص‬ ‫التعليم والعمل عن بعد من بني أمور أخرى لتسهيل تحقيق رشوط التباعد‬ ‫االجتامعي ‪ .‬وهناك عنرص حاسم لالستفادة من هذه التقنيات يتمثل يف‬ ‫‪ 2‬البنك الدويل – اطار العمل التشخييص لالقتصاد الرقمي‪.‬‬ ‫متتني أسس االقتصاد الرقمي الذي يعالج أيضاً الفجوة الرقمية بني أولئك‬ ‫‪xii‬‬ ‫)‪IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX‬‬ 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS Introduction a result, this multi-facetted crisis is expected to have protracted impact going forward and reverse some of Iraq, once again, is facing a combination of acute the progress and reforms made through early 2019. shocks which the country is ill-prepared to man- Even prior to COVID-19, the social and hu- age. Following the twin shock of 2014-[17] where manitarian conditions were critical in many parts Iraq faced both the Islamic State (IS) and the sharp of the country. The pandemic has hit Iraq in a time collapse of the oil price, the country is once again where the country is still facing daunting challenges facing another major economic and social crisis com- to rebuild its infrastructure and provide needed pub- bining several large shocks: namely the collapse in lic services to its population. It also came when the international oil prices, the spread of COVID-19, as country was facing major development and humani- well as persistent social and political turmoil. Iraq’s tarian challenges. Indeed, Iraq ranks poorly at 120 of pre-existing structural conditions, along with long- 189 countries in the 2019 Human Development Index standing economic mismanagement, going into the (HDI). The poverty rate stood high at 20 percent in pandemic-related shock severely constrain the coun- 2018; while the unemployment rate, which was falling try’s current ability to manage and mitigate its impact. before the ISIS crisis, had risen beyond the 2012 level Large dependency on oil revenues coupled with to 9.9 percent in 2018. This also came on the back built-up budget rigidities—such as a budget dominat- of a very low labor force participation rate, especially ed by wages and pension payments—constrain fiscal for women (12 percent),3 and in times where more space for a resilience package, let alone a stimulus than a fifth of the economically active youth do not one; an undiversified economy and large presence of have a job and are neither in employment nor in the state in economic activity is making it harder to education or training. Furthermore, the humanitarian create jobs in the private sector for a predominantly situation is still precarious with 1.4 million internally young population; rampant corruption and weak gov- ernance structures prompted large scale protests 3 World Bank staff estimates, MNA, Poverty and Equity calling for better public service delivery and jobs. As Global Practice. 1 BOX 1  •  COVID-19 Impact on the Humanitarian Response and Support to Vulnerable Displaced Populations in Iraq. There are over 1.4 million people internally displaced people in Iraq, 25.4 percent (or 359,000) of which are residing in one of the 67 camps. In addition to this, as of end 2019, there were 286,949 refugees in Iraq. 245,810 are Syrians, and 41,139 from other nationalities (70% children), with most Syrian refugees living in Kurdistan Region of Iraq. 41% of who are living in the 10 refugee camps in KR-I and the rest living in urban areas. There is currently no strategy at the local, federal, or international level on what to do with these families, who prior to the COVID-19 pandemic, faced protection, (re)radicalization risks inside the camps and now face a startling health risk. With the support of UN agencies and NGOs, most camps have COVID-19 preparedness measures in place, training to Primary Health Care Corporation (PHCC) staff in camps, awareness raising and sensitisation messages are being disseminated, masks, soaps and hygiene material distributed and camp sterilisation has been carried out. There are currently no reported cases of COVID-19 infection within the camps, however this is expected to change as the situation evolves. In mid-March, to control the COVID-19 outbreak, the GoI and the KRG, imposed extensive measures including significant movement restrictions and nationwide curfews. The restriction on movements, the lack of clarity and enforcement, especially at the Governate level is now starting to limit the movement of the UN and NGO organizations who are providing essential lifesaving services to displaced communities in and outside of camps. Such services include health awareness campaigns, distribution of basic hygiene, Personal Protective Equipment (PPE), relief, medication to IDPs with chronic diseases; individual case management, counselling, and psychiatric services, support on gender-based violence—which will be at a heightened risk due to the “curfew” imposed across the country; establishment or reinforcement of health structures in IDPs in camps etc. UN agencies report that several IDP camp management teams have requested for support to increase preparedness to deal with a COVID-19 outbreak within the camp. IDPs, overall, are becoming anxious due to a lack of access to information, rumours, fears of exclusion or neglect, lack of clarity in certain cases about what to do should cases be suspected in camps, restrictions on movement in and out of camps. Based on a survey among 196 NGOs operating in Iraq, 93% of respondents said that their operations were affected by COVID-related restrictions on movement. 93% said they had suspended activities all together while 70% cited the inability to reach out-of-camp beneficiaries as an obstacle to implementing activities and 63% indicated that their activities have been impacted by a reduction in the ability of national staff to move. Lack of awareness and information on COVID-19, misdiagnosis, poor referral systems or PHCCs in camps not permitted to transfer suspected cases out of the camps and the limited capacity of the public health system to receive cases from refugee and/or IDP camps is a serious concern. The restrictions of movement that staff are facing will impact their ability to access persons of concern and there is a risk that instances of refoulement, deportation and/or rise in discriminatory practices can begin to affect the displaced. Finally, if the banking system is affected this can limit their ability to pay staff, implementing partners and suppliers. Sources: This information has been developed with inputs directly from the NGO coordination committee for Iraq, UNHCR and IOM as well as the WB. displaced persons (IDPs), 4.5 million returnees and Output and Demand over 286,000 refugees (UNHCR 2020). These popu- lations are susceptible to food insecurity,4 with poor Oil, agriculture and electricity generation have access to quality health care and education. been the drivers of growth in 2019. Real GDP grew This situation is currently aggravated with by 4.4 percent in 2019, reversing two consecutive years the ongoing COVID-19 pandemic. As of April 26th, of contraction (Figure 1). The lynchpin was the oil sector there has been 1,761 confirmed cases in Iraq with which grew by 4.2 percent year-on-year (y/y), while the 86 fatalities according to the UNOCHA. The virus non-oil economy grew by 4.9 percent (y/y). Agriculture spread puts additional strains on the under-invested was the largest contributor to growth of all non-oil sectors healthcare system and deepens economic downturn (Figure 3) after it expanded by a staggering 39 percent. as the strict containment measures forces closures of This performance reflects above-average rainfall and business. The pandemic is expected to have a larger impact on the most vulnerable segments of the popu- 4 United Nations, Food and Agricultural Organization lation especially the displaced (Box 1). (FAO), March 2020. 2 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) Non-oil GDP Has Grown by Nearly FIGURE 1 •  FIGURE 3 • Oil, Agriculture and Services 5 Percent in 2019, Outperforming Have Been the Pillars for Growth Previous Three Years in 2019 30 80 Year–on–year growth, percent, % 60 20 Growth, in percent, % 40 10 20 0 0 –20 –10 –40 –60 –20 –80 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e 2012 2013 2014 2015 2016 2017 2018 2019 Non–oil GDP Overall GDP growth Agriculture Oil Non–oil industry MENA GDP growth Services, other Public sector services Total GDP Sources: Iraq COSIT; WDI; and World Bank Staff Calculation. Sources: Iraq COSIT; WDI; and World Bank Staff Calculation. Nevertheless, Growth Was Not FIGURE 2 •  FIGURE 4 • … with Oil Recording the Largest Sufficient to Make a Change in Per Contribution Given Its Weight in the Capita Terms Economy 125 16 Contribution to growth, in percent, % GDP per capita (Index 2013=100) 120 12 115 8 4 110 0 105 –4 100 –8 95 –12 90 –16 2013 2014 2015 2016 2017 2018 2019e 2012 2013 2014 2015 2016 2017 2018 2019 Agriculture Oil Non–oil industry UMI MENA Iraq Services, other Public sector services Total GDP Sources: Iraq COSIT; WDI; and World Bank Staff Calculation. Sources: Iraq COSIT; WDI; and World Bank Staff Calculation. subsequent record wheat production that reached On the demand side, 2019 was character- 4.8 million metric tons for 2019–20,5 up by 60 percent ized by a consumption-led growth due to GoI’s fis- from 2018. This boosted farmer’s disposable income cal expansion. Private and public consumption picked and had positive gains for import substitution. There up in 2019 driven by a sizable expansion of public was also significant progress in expanding the electricity spending which included public sector wage bill and supply by increasing generation to an average of 16 GW pension. Such an expansionary fiscal policy coupled (up from 12 GW in 2018) and boosting peak generation with a low-inflation environment and a boost in income by nearly 20 percent, well above its 15 percent target. for agriculture sector workers, supported household Nevertheless, power generation remains well below total demand of 26 GW6 with frequent interruption in 5 USDA Foreign Agricultural Service, Dec 2019. services delivery given problems linked to transmission, 6 Source: Central Bank of Iraq; and Middle East Economic distribution, and bill collection. Survey (MEES). Recent Economic and Policy Developments 3 FIGURE 5 • Private Consumption Picked Up in FIGURE 6 • While FDI Halved to US$2.9 Billion in 2019 2019 60 12 50 40 10 Growth rate, % 30 8 US$ billion 20 10 6 0 4 –10 –20 2 2014 2015 2016 2017 2018 2019 0 Public Consumption Private consumption 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e Non–oil GDP growth–RHS Source: World Bank staff calculations. Source: CBI. purchasing power and therefore increased private con- the oil economy is not labor intensive). Only then would sumption only to be partially offset in the last quarter of Iraq be able to close the gap with peers and more im- the year following the protests. Hence, private consump- portantly maintain a constant level of economic activ- tion grew by 2 percent in 2019, from 0.3 percent in 2018 ity and welfare gains for its growing population. (Figure 5). This also increased imports of goods to about The protests that started in October 2019 43 percent of GDP in 2019, up from 38 percent in 2018. and subsequent events linked to the COVID-19 Investment remained subdued amidst per- pandemic in early 2020 have dampened economic sistent public investment management constraints activity especially in the services sectors. Protests and an unfavorable business environment. Despite had a considerable impact on the services sector which an allocation of IQD33 trillion (12 percent of GDP) in decelerated by 0.9 percent in Q4–19 (y/y). Sectors that the 2019 budget law, 74 percent of public investment were mostly impacted were transport, trade, banking was executed with most attributed to investments in the and tourism. Together they account for a sizeable 48 oil sector. Limited absorptive capacity, inefficiencies in percent of non-oil GDP.9 These benefitted earlier in public investment management, and weak capacity at 2019 from a stable security situation and a consump- the governates’ level have contributed to such a poor tion boost given fiscal loosening. The undesirable con- outcome.7 Moreover, an unfavorable business environ- ditions for services were exacerbated further in early ment, corruption, cumbersome bureaucracy, and an 2020 as the COVID-19 pandemic reached Iraq and opaque regulatory environment,8 nearly halved foreign strict containment measures were put in place includ- direct investment (FDI) to only US$2.9 billion in 2019 ing curfews, limitations on inter-governorate move- (1.2 percent of GDP) (Figure 6). ment and closure of borders. One example is religious Iraq’s (volatile) economy outperformed that of regional peers in 2019, but its population dy- namics requires much higher growth to sustain 7 Weak project preparation, procurement and contract the current level of welfare. Iraq’s growth has out- management, limited absorption capacity, as well as weak performed the Middle East and North Africa’s (MENA) coordination between federal and local governments are average growth of 0.1 percent (Figure 1). With a fertility all institutional constraints impeding the fast disbursement rate of 4.1 though, GDP has barely grown in per capita of public investment. terms over the past few years (Figure 2). For Iraq to 8 Iraq indeed ranks as 172 out of 190 countries in the reap its demographic dividend, it needs to consistently 2020 doing business ranking. grow its non-oil economy at a much faster pace (since 9 It also accounts for 17 percent of overall GDP. 4 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) The Collapse in Oil Prices FIGURE 7 •  FIGURE 8 • Oil Prices Stood at US$5 Above the Has Outpaced the Rise in 2019 Budgeted Price, Compared Production, Putting a Large Toll to a US$19.5 Spread in 2018, and on Revenues Continue to Plunge as COVID-19 Situation Develops in 2020 10,000 140 120 120 100 8,000 100 80 Million barrels US$ million US$/bbl 6,000 80 60 4,000 60 40 40 2,000 20 20 0 0 0 Mar–14 Jul–14 Nov–14 Mar–15 Jul–15 Nov–15 Mar–16 Jul–16 Nov–16 Mar–17 Jul–17 Nov–17 Mar–18 Jul–18 Nov–18 Mar–19 Jul–19 Nov–19 Mar–20 Mar–14 Jul–14 Nov–14 Mar–15 Jul–15 Nov–15 Mar–16 Jul–16 Nov–16 Mar–17 Jul–17 Nov–17 Mar–18 Jul–18 Nov–18 Mar–19 Jul–19 Nov–19 Mar–20 K,I65=5I7>)?@57ABCDEFF-G Average Iraq Export Price (US$/bbl) Oil exports revenue, US$ million–RHS Crude oil, Brent (US$/bbl) Oil exports volume, million barrels–LHS Budgeted Price (US$/bbl) Sources: Iraq Ministry of Oil and World Bank Staff calculations. Sources: Iraq Ministry of Oil and World Bank Staff calculations. tourism which is concentrated in the southern governor- substitute for declining gas imports from Iran. It also ates and is often reported to be second largest source reflects growing domestic demand especially on of revenues after oil. According to Najaf’s head of the subsidized gasoline and kerosene material, a subsidy association for hotels and restaurants, the city hosted that is not typically pro-poor and does not contribute to more than 5,000 visitors per day. Because of protests job creation. The significant turn in global oil demand and now the corona virus, 300 of the city’s 350 hotels since the start of the COVID-19 is taking a toll though have closed with those who remained open seeing their on Iraq especially that China, one of the hardest occupancy rate drop to 10 percent.10 hit countries, is the largest importer of Iraqi crude (28 percent of oil exports at end-2019).11 As a result, Oil exports declined by over 4 percent in the Q1– Oil and Gas Developments 2020 (y/y), down to an average of 306 million barrel, compared to over 319 million barrels in 2018 (Figure 7). While Iraq’s oil industry was largely unaffected by Softer global prices since August 2019 the demonstrations, the turn in global conditions have also slashed oil revenues. Iraqi crude was following COVID-19 is taking a toll on production. sold at an average price of US$61.1 per barrel in On December 29th, the Ministry of Oil (MoO) confirmed 2019 compared to US$65.5 per barrel in 2018, that the Nasiriyah field in Dhi Qar province, which bringing exports value down by 6.2 percent (y/y) in produces 80,000–85,000 barrel/day had been shut 2019 (Figure 8). The Saudi-Russian price war over down after protesters blocked access to the site. The the extension of the OPEC+ agreement, as well as loss in production was compensated, however, by the outbreak of COVID-19 that weighed down on an Basra fields. Aligned with OPEC+ quotas, Iraq’s oil already soft global demand for oil has exacerbated production was up 5 percent (y/y) in 2019 reaching 4.8 million barrel per day (mbpd). Crude oil exports remained stable though and reached 3.5 mbpd (about 10 Agency France Press (AFP) and Daily Times https:// 74 percent of total production), up by only 1 percent dailytimes.com.pk/566257/virus-strikes-another-blow from 2018. This difference reflects primarily growing -at-religious-tourism-in-iraq. electricity generation and usage of domestic oil to 11 Bloomberg, March 2020. Recent Economic and Policy Developments 5 the situation further. As a result, Iraq’s crude oil export Fiscal loosening prioritized boosting con- prices crashed to US$28.4 per barrel in March 2020, sumption at the expense of public investment and its bringing the average price for Q1–20 to US$47 dollar ability to effectively respond to COVID-19 economic per barrel and slashing revenues by more than half. At downturn. Iraq continues to allocate a significant por- this price, Iraq will face extreme difficulties in financing tion of the budget toward non-discretionary spending basic expenditures planned for 2020. especially the wage bill and transfers. In 2019, recurrent Iraq continues to develop its oil and gas in- spending accounted for over 77 percent of total budget, dustry, despite challenges. With the spread of vio- largely due to transfers hike and additional public sec- lence in early 2020 and later COVID-19, a number of tor hiring (Figure 10). The public wage bill rose by over foreign workers had left the oilfields and some oil firms 13 percent (y/y) in 2019 and now stands above that of have been working in less than maximum capacity. the MENA region oil exporters and high income econ- This situation prompted once again the MoO to utilize omies’ average (Figure 11). Both goods and services, spare capacity in other fields to replace lost produc- and transfers—namely pensions and Public Distribution tion. Further developments in oil and gas are planned System (PDS)—increased by 127 and 18 percent (y/y), though across the country. This includes a US$203.5 respectively. This leaves a small fraction of funding for million contract awarded to China National Petroleum much-needed public investment in infrastructure and Corporation in March 2020 to build a 155 million cfd human capital programs. It also erodes the fiscal buffers sour gas treatment facility at Majnoon field,12 as well available to respond to the expected economic down- as the installment of an advanced system to detect turn in the aftermath of COVID-19 crisis. At this current leakages from pipelines carrying petroleum products rate, Iraq will require an oil price of US$76 per barrel to with the objective of limiting smuggling. However, finance its recurrent spending for 2020. boosting oil and gas production requires significantly Public investment remains below the need- higher investment than the GoI can support with the ed levels to close the infrastructure gap notably present oil prices. Under these global conditions and those for public service delivery in times of cri- given that Iraq exports 70 percent of its crude to Asia, sis like COVID-19. Investment spending increased the Basra Oil Company has proposed that all interna- by almost 77 percent (y/y) in 2019. While this is an tional oil companies cut the budget of developing oil improvement, it represents only 8.8 percent of GDP fields by 30 percent during the first half of 2020. and falls short of the infrastructure needs of the coun- try. Moreover, there is a persistent under-execution of the investment budget (Figure 12) with most of capi- Public Finance tal spending going towards the oil fields. For public in- vestment related to non-oil sectors, execution stood at Iraq’s fiscal position deteriorated substantially as 30 percent reaching only 2 percent of GDP. This raise the GoI authorized additional non-discretionary concerns over service delivery, rising infrastructure spending, building further budget rigidities. The gap, and stalled reconstruction program. Such results rapid expansion of the public wage bill, pensions and not only put a drag on long-term sustainable growth social assistance programs coupled with falling oil but also increases social vulnerabilities especially in revenues has shrunk the 11 percent of GDP budget times where boosting human capital systems is es- surplus in 2018 to 1.3 percent of GDP in 2019. MOF sential to manage the impact of COVID-19. data shows a substantial 26.4 percent (y/y) rise Deteriorating domestic revenue mobiliza- in recurrent spending following GoI’s decision to tion takes away one of the fiscal tools available for expand public employment, reduce the retirement’s Iraq to face this unpresented multifaceted crisis. age (see Box 2) and offer numerous cash transfers The Iraqi budget remains largely dependent on oil- following the demonstrations of October. As a result, related receipts as they constitute 92 percent of total the primary fiscal surplus shrunk from 12 percent of GDP (IQD32.6 trillion) in 2018 to 2.4 percent of GDP in 2019 (IQD6.6 trillion) (Figure 9). 12 MEES, March 2020. 6 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) Fiscal Loosening Has Markedly FIGURE 9 •  … and Is Among the Highest in the FIGURE 11 •  Reduced the Budget Surplus in 2019 World 60 15 16 40 10 14.7 Percent of GDP, % 20 5 12 Percent of GDP, % 0 0 11.0 –20 –5 8 8.6 9.0 –40 –10 –60 –15 2014 2015 2016 2017 2018 2019 4 Oil revenues Non–oil investment expenditure Primary expenditure Oil investment expenditure 0 Interest payments Non–oil revenues EMDEs Fragile MENA oil Iraq Overall fiscal balance–RHS (2016) states (2015) exporters (2016) (2019) Sources: Iraq Ministry of Finance and World Bank staff calculations. Sources: Iraq Ministry of Finance and World Bank staff calculations. FIGURE 10 • The Wage Bill Dominates Recurrent FIGURE 12 • Despite the Improvement in Public Spending Investment Execution Rates, It Remains Below Recurrent Spending 20 160% 18 16 123,9% Percent of GDP, % 14 120% 105,8% 12 79,4% In percent, % 10 75,6% 79,5% 73,9% 8 80% 70,6% 6 56,1% 4 2 40% 0 2014 2015 2016 2017 2018 2019 0% Compensations of employees Interest paymets Oil Non–oil Current Investment Goods and services revenues revenues expenditures expenditures Investment expenditures Transfers (including pensions) 2018 2019 Sources: Iraq Ministry of Finance and World Bank staff calculations. Sources: Iraq Ministry of Finance and World Bank staff calculations. budget revenues. The US$4 dollars drop in the aver- budgetary revenues base, and most importantly cre- age price of oil exports translated into a US$5 billion ate fiscal space for investments in human and physical loss in oil revenues in 2019. Furthermore, non-oil rev- capital to mitigate this protracted crisis. enues have been well below budgetary expectations The favorable debt dynamics in 2019 and have declined by 24 percent (y/y) over the year. could be short-lived. The fiscal surplus and high The decline reflects problems in domestic revenues nominal GDP growth lowered the public debt-to- mobilization attributed to poor tax compliance and col- GDP-ratio to 44.6 percent of GDP in 2019, a drop lection efforts, expansion of customs exemptions, and of 4.7 percentage points of GDP (ppt) compared to low growth affecting income tax. At 3 percent of GDP, 2018. External debt13 is the largest share of Iraq’s non-oil tax revenues in Iraq is one of the lowest in the world. Expanding domestic revenue mobilization will 13 External debt is defined as legacy external debt, external be key to reduce reliance on oil, create a more stable debt and guarantees external. Recent Economic and Policy Developments 7 BOX 2  •  Pensions and Social Insurance in Iraq The contributory system in Iraq comprises two pension schemes covering public and private sector employees, both designed as pay-as-you-go, defined-benefit schemes. The public scheme is managed by the Ministry of Finance’s National Board of Pensions (NBP) and includes civil servants, security forces, and survivors of martyrs. The private scheme is managed by the Ministry of Labor and Social Affairs Pensions and Social Security Department (PSSD) and covers a small proportion of private sector employees. In addition to the two schemes, there are currently almost 1M people still receiving pension benefits from the general budget. They are mostly those who retire before 2006 (when the current public pension scheme was created) or their beneficiaries. These payments are supposedly phasing-out. While total spending on pensions is high (approx. 4.2 percent of GDP in 2019), the current scheme covers less than 48 percent of the total labor force, most of whom are in the public sector (around 3 million contributors). The private sector scheme has a limited number of contributors (only 4 percent of private sectors employees, or around 200,000 people out of the 5 million working in the private sector), and there are not yet any social insurance schemes for self-employed, part time or flexible workers. In addition to low coverage, the system faces a number of financial/fiscal, economic, and social challenges: First, the schemes are financially unsustainable, given that revenues from contributions and investment returns will not be sufficient to cover pension spending. In fact, based on latest projections run by the World Bank, the public sector scheme is expected to reach deficit in 2025, therefore increasing reliance on the general budget and crowding-out resources for other relevant programs. Second, the current system produces considerable inequities, including those between private and public sector employees, the last ones being covered by a more generous scheme. The system also produces perverse incentives, including incentives for early retirement. Third, the current system does not provide adequate pensions. For instance, the pensions amount is not automatically indexed, which exposes beneficiaries to the risk of losing their purchase power due to inflation. The current system is governed by Law 9/2014, a law that does not respect the good principles of pensions design. With the support of the World Bank, the NBP and PSSD worked on a new draft social insurance law, which would have introduced considerable improvements to the previous 2014 law. The new draft law was approved by the Iraq Council of Ministers in November 2016. However, the complex political economy for such reform hindered the passage of the new draft law, which is still pending approval of the Council of Representatives. Instead, the Government of Iraq introduced in November 2019 an amendment to Law 9/14 that would further compromise the financial sustainability and fairness of the pension system, as it entails generous increases of some benefits and does not address some of the above-referenced key design challenges of the pensions system. The need to revamp the pension law in Iraq, which would now entail reversing some of the amendments introduced in 2019, is now more urgent than ever. Absence of reforms would entail a very large fiscal burden or a sharp cut in benefits in a few years. In addition to the existing challenges of the pension system, the current economic downturn sparked by the COVID-19 pandemic and the related expected worsening of labor market outcomes is likely to lead to a further deterioration of the pension system. Therefore, the introduction of short-term emergency measures to address the COVID-19 crisis, in combination of course with the adoption of appropriate long-term measures, will be critical to make the pension system sustainable as well as social and economic equitable. Source: WB staff. debt stock (Figure 13). Its structure makes solvency The current account balance (CAB) is expected to turn risks manageable despite the country’s limited debt from a 2.5 percent of GDP surplus in 2019 to 18 percent carrying capacity (Figure 14). Interest payments are deficit by end 2020 (Figure 15). This large swing is at- relatively small at 1.1 percent of GDP in 2019. The tributed to two factors. First, the less favorable terms of budget surplus of 2019 had helped contain financing trade where the collapse in international oil prices have needs at an estimated US$3.5 billion (1.5 percent of already reduced Iraq oil exports value by 26 percent in GDP). Nevertheless, this improvement could be short- Q1–20 (y/y) (Figure 16). Second, to a loosening of the lived as deteriorating fiscal conditions in 2020 have fiscal stance resulting in a notable rise in imported goods worsened both debt dynamics and financing needs and services especially those conducted by the govern- (see outlook section for a detailed discussion). ment agencies. This weakens Iraq’s external position. Worsening global and domestic conditions reduce external financing options, putting pres- External Sector sure on Central Bank of Iraq’s (CBI) international Less favorable terms of trade coupled with fiscal reserves. The unfavorable business environment and loosening have weakened Iraq’s external position. weak execution of public investment through project 8 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) FIGURE 13 • Fifty Two Percent of Total Debt Sixty Six Percent of that Stock Is FIGURE 14 •  Stock Is External Long Term and 9 Percent Is Legacy Debt Prior to 1990 1,923 9,124 13,464 16,284 US$ million 33.6 US$ million 28,583 66.4 35,046 Legacy external debt External debt Domestic debt Guarentees external Guarentees domestic Debt–Long and medium term Domestic bonds for contractors Debt-Short-term Sources: Iraqi authorities; and World Bank staff calculations. Sources: Iraqi authorities; and World Bank staff calculations. finance are behind the poor performance of foreign remain largely muted due to cheaper consumption direct investment (FDI) and official investments, goods. This follows a continued depreciation of both the two main sources of external financing for Iraq. Turkish and Iranian currencies, the two main trading Combined, these inflows have dropped by 15 per- partners for Iraq. Items like food prices declined by cent in 2019 (y/y).14 While the CAB surplus in 2019 an average of 0.1 percent during the year, while con- had boosted CBI’s foreign currency (FX) reserves to sumer goods like “apparels” and “house supplies and US$68 billion (covering 10 months of imports and appliances” prices dropped by an average of respec- 1.9 times short-term external debt), the trend has re- tively 0.9 and 1 percent over the same period. These versed in early 2020 as domestic and global condi- three items alone constitute on average 41 percent of tions rapidly deteriorated (Figure 17). The weakened the household’s total consumption basket. While the global demand for oil, the spread of COVID-19 and easing in prices was favorable to Iraqi consumers, es- its implication on capital flows for emerging markets, pecially the poor, calls from the impacted domestic the persistence of domestic and political turmoil as a producers pushed the GoI to raise tariffs and impose push factor for investments, as well as worsening CAB import bans on selected food items. Furthermore, the already cut those reserves by US$9 billion in the first GoI seems to have succeeded in cracking down on 2-months of 2020 (lowering coverage for 5.9 months illegal price hikes keeping prices in 2020 subdued de- of imports) (Figure 18). spite border closures following COVID-19 containment measures. As a result, headline and core inflation reg- istered only 0.5 and 1.1 percent rise in January (y/y, Monetary Policy and Prices latest data) (Figure 19). Inflation remains muted despite disruptions Money supply increased, but private sec- caused by the spread of COVID-19. The fiscal tor credit remains tepid. Broad money (M2) ex- stimulus that boosted domestic demand combined perienced rapid growth of almost 8 percent (y/y) with increased usage of more expensive private in 2019 driven by the pickup in non-oil economic operators have put pressure on the prices of servic- es such as education (up 9.7 percent), recreation (up 5 percent) and health (up 2.9 percent) in 2019 14 Latest available data are for 2019. CBI data also reveals (y/y) (Figure 20). Nevertheless, inflationary pressures a contraction of 6 percent (y/y) for official investment. Recent Economic and Policy Developments 9 FIGURE 15 • CAB Is Expected to Turn from FIGURE 17 • The Decline in Oil Prices Due to a Small Surplus in 2019 Into a COVID-19 Caused the Official Reserves Markable Deficit in 2020 to Decline in the Start of 2020 8 120 90 10 80 8 4 100 70 US$ billion Percent of GDP, % US$ billion US$ per barrel 80 6 0 60 60 4 50 –4 2 40 40 –8 20 30 0 Feb–13 May–13 Aug–13 Nov–13 Feb–14 May–14 Aug–14 Nov–14 Feb–15 May–15 Aug–15 Nov–15 Feb–16 May–16 Aug–16 Nov–16 Feb–17 May–17 Aug–17 Nov–17 Feb–18 May–18 Aug–18 Nov–18 Feb–19 May–19 Aug–19 Nov–19 Feb–20 –12 0 2013 2014 2015 2016 2017 2018 2019e Official reserves, US$ billion–LHS CAB, % GDP–LHS Oil price, US$/barrel–RHS Exports value, US$ billion–RHS Sources: CBI, Ministry of Oil; and World Bank staff calculations. Sources: CBI, Ministry of Oil; and World Bank staff calculations. FIGURE 16 • Driven by Less Favorable Trade Reserve Coverage Is thus Expected FIGURE 18 •  Balance to Decline from 10 Months of Imports in 2019 to 6 Months in 2020 12 50 80 12 8 40 70 10 Months of imports Percent of GDP, % 4 8 US$ billion 30 60 0 6 20 50 –4 4 –8 10 40 2 –12 0 30 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020p 2019e 2013 2014 2015 2016 2017 2018 2019e Trade balance, % of GDP–LHS Exports, % of GDP–RHS Foreign Reserves, US$ billion–LHS Imports, % of GDP–RHS Coverage Ratio, months of imports–RHS Sources: CBI, Ministry of Oil; and World Bank staff calculations. Sources: CBI, Ministry of Oil; and World Bank staff calculations. activity (Figure 21). Credit to the private sector, reflects in part deficiencies in financial architecture on the other hand, remains constrained in part by including legal and institutional frameworks and weak banking sector that tend to cater primarily credit information. to large and inefficient State-Owned Enterprises The CBI has taken multiple measures to (SOEs), and in other part by increased borrowing mitigate the impact of the crisis on households by the public sector. Indeed, credit to public sec- and businesses, but a larger stimulus package is tor was up 6 percent (y/y) in 2019 compared to 3 still needed to re-start the economy. To participate percent for that of the private sector (Figure 22). in the fight against COVID-19, the CBI has hosted Credit to the private sector is at 8 percent of GDP, donation accounts dedicated for healthcare spend- well below that of MENA average (57 percent) and ing and donated itself IQD30 billion (roughly US$26 Upper Middle-Income countries (123 percent). This million). The CBI has also issued instructions on new 10 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) Inflation Remained Subdued in FIGURE 19 •  FIGURE 21 • Broad Money Increased in 2019 2019, but Slightly Edged Up in the Driven by the Pick-Up in the Overall Start 2020 Economic Activity 8% 10 6% 8 Percentage growth, y/y change, % 4% 6 In percent, % 2% 4 0% 2 –2% 0 –2 –4% Jan–12 Jul–12 Jan–13 Jul–13 Jan–14 Jul–14 Jan–15 Jul–15 Jan–16 Jul–16 Jan–17 Jul–17 Jan–18 Jul–18 Jan–19 Jul–19 Jan–20 –4 –6 –8 Headline inflation –10 Core inflation 2014 2015 2016 2017 2018 2019 Sources: COSIT and World Bank Staff Calculations. Source: Central Bank of Iraq. FIGURE 20 • Higher Prices of Some Food and FIGURE 22 • But Credit to Private Sector Non-Food Items Continued in 2019 Remains Constrained and Jan. 2020 50% 8 40% 7 Percentage growth, y/y change, % 30% In percent, % 6 20% 10% 5 0% 4 –10% 3 Jan–12 Jul–12 Jan–13 Jul–13 Jan–14 Jul–14 Jan–15 Jul–15 Jan–16 Jul–16 Jan–17 Jul–17 Jan–18 Jul–18 Jan–19 Jul–19 Jan–20 2 Food Cloths & footware Housing & utilities 1 Health Communications Education 0 Transport Recreation 2014 2015 2016 2017 2018 2019 Sources: COSIT and World Bank Staff Calculations. Source: Central Bank of Iraq. operational modalities for banks to serve clients un- both consumer and SMEs loans, suspended all fines der the CODID19-imposed curfew and resumed its imposed on commercial banks, and enhanced banks’ services for all payment systems and the investment cash liquidity by an amount of IQD1 trillion. It also sus- window on daily basis. The CBI has also decided to re- pended vendors commissions on electronic payment sume external transfers functions through the special- tools for a period of six months and reduced reserves ized window to meet the requests of both citizens and requirement of banks to 13 percent over the same GoI as well as appease the financial burden on Iraqis period. While these measures are a step in the right stranded abroad after the shut-down of airports. To direction to soften the impact of some aspects of the boost liquidity in the market and support households crisis, a larger stimulus package will be needed to re- and SMEs alike, the CBI has applied a three months start the economy and allow businesses to resume moratorium on interest and principal repayments for operations. Recent Economic and Policy Developments 11 Iraq continues to face structural challenges, Conflict and limited investment resulted in and suffers from limited financial intermediation, a deteriorating quality of logistics, which is a key which constrains lending to SMEs. Iraq ranks component to reduce the costs of doing business 186 out of 190 in terms of ease of getting credit on in Iraq. The World Bank Logistics Performance Index the World Bank’s 2020 Doing Business report. The (LPI) 2018 shows Iraq lagging the region and other banking system is dominated by under-capitalized UMIC in trade logistics efficiency. It stands at 147th and under-provisioned state-owned banks (SOBs) out of 160 countries. This situation implies high primarily used for quasi fiscal operations (NPLs stand operational cost, a colossal deficit in infrastructure, at an estimated 37+ percent). Most private banks are and rising pressure on service delivery. (Figure 24). small in size, lack credit risks analysis skills, and rely on currency arbitrage as their main revenue source FIGURE 23 • Iraq Continues to Rank Unfavorably as well as limited fee-based exchange services than on All Doing Business Indicators lending. As a result, credit intermediation is at a very Compared to MENA low level. The non-banking financial sector is also at an early stage of development. The number of Starting a Business functioning Micro-Financing Institutions (MFIs) has 200 Dealing with Resolving Insolvency 150 Construction Permits declined over the last 3 years, leaving only three MFIs 100 operating in the microfinance sector. Combined these Enforcing Contracts Getting Electricity 50 MFIs have outstanding portfolio of US$110 million and 0 63,530 active borrowers.15 With 7.36 million poor (22.5 Trading Across Registering percent of population), out of which 2.5 million are Borders Property economically active (8 percent of population), MFIs Paying Taxes Getting Credit likely fulfill only a small fraction of potential demand. Despite this situation, the CBI has put in place a US$5 Protecting Minority Investors billion line of credit extended to SOBs for on-lending Iraq–2020 Rank MENA–2020 Rank to SME’s, agriculture and or infrastructure projects. Sources: Iraq Doing Business 2019; and Logistics Performance Index 2019. Nevertheless, fewer than 5 percent of SMEs in the formal sector have received bank loans. FIGURE 24 • Logistics Quality Has Deteriorated with the Conflict Business Environment and Private Sector Development LPI Score 3.4 Iraq’s unfavorable business environment con- 3.2 3 strains private sector activity. In the World Bank Do- Timeliness 2.8 Customs 2.6 ing Business 2020, Iraq ranks 172 out of 190 countries, 2.4 2.2 one position down from the previous year. It is also one 2 of the lowest ranking amongst the MENA region and Tracking & tracing Infrastructure Upper Middle-Income Countries (UMIC) peers. While it ranks relatively favorably on some topics such as Logistics competence International shipments dealing with construction permits (103) and protecting minority investors (111) indicators, it fares particularly Upper middle income MENA Iraq poorly on getting credit (186), trading across borders Sources: Iraq Doing Business 2019; and Logistics Performance Index 2019. (181), and resolving insolvency (168) (Figure 23). No- table progress has been made on electricity access, with improved production, and in making starting a 15 Syed Mehdi Hassan, WB, Iraq Financial Sector Note, business easier by streamlining some procedures. March 2020. 12 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) Outlook and Risks that will weather the shock on the private sector. It will also force the government to scale back public Outlook investments on key basic services, making the situation worse. Overall, this is projected to lead to a The economic outlook for Iraq has markedly contraction of non-oil GDP by 4.4 percent in 2020. As worsened especially amidst a collapse in interna- conditions gradually ease over the near-term, and in tional oil prices. Since the last Iraq Economic Moni- the absence of structural reforms, non-oil economic tor published in October 2019, the country has suf- activity is expected to slightly rebound to an average fered from a protracted social and political turmoil, a of 4 percent over 2021–2022. collapse in international oil prices, and the outbreak Iraq’s fiscal loosening is unsustainable of COVID-19. All have tilted the economy’s outlook going forward and risks critical funding on public downward. As a result, GDP growth is now projected investments. Iraq’s build-up of non-discretionary to contract by 9.7 percent in 2020, making it the coun- spending throughout the past years and the absence try’s worst annual performance since the fall of the of measures to boost domestic revenue mobilization Saddam regime in 2003. Growth is projected to return has increased reliance on oil revenues windfalls, in subsequent years, partly due to a low-base effect, leading to an unsustainable fiscal position in 2020 to 1.9 and 7.3 percent in 2021 and 2022, respectively. and beyond. Indeed, the stimulus package that was Under the new OPEC+ agreement reached on April 9; introduced late 2019 coupled with weaker oil prices Iraq’s oil production is expected to be reduced from are projected to have detrimental fiscal effects. If oil 4.8 mbpd in 2019 to 4 mbpd in 2020. As a result, the prices remain in the low-US$30s per barrel and in oil sector’s is projected to contract by 13 percent in the absence of any measures that will curb the public 2020 amidst a markedly worsened outlook for in- wage bill and pensions, the budget deficit for 2020 is ternational oil markets. Both prices and exports are projected to exceed 29 percent of GDP. To showcase expected to be significantly lower given lower global the severity of the fiscal situation, Iraq would need demand and a projected recession worldwide as CO- at least a US$58/barrel oil price to meet its wage and pension obligations alone.17 Unless there is a VID-19 containment measures are extended. Since oil significant reorientation in fiscal policy in the delayed represents 67 percent of the overall economy,16 Iraq 2020 budget law to tackle spending rigidities and is highly susceptible to its variations. The report es- domestic revenue mobilization, there will be limited timates that every dollar increase in international oil fiscal space to finance COVID-19 response, invest prices could bring up to 0.14 ppt of additional growth in human capital and long-term development as in Iraq. As such, any development that increases oil well as financing post-war reconstruction. Moreover, prices will improve the growth outlook. investments in the development of oil and gas fields The non-oil economy is also expected to be could also be at risk as government will be forced to hit by the multitude of crises. The non-oil economy undertake public investment cuts. represents slightly more than a third of the Iraqi real Securing budget financing will be challeng- economy. The persistence of strict containment ing in the absence of a fiscal consolidation plan. measures to manage the COVID-19 spread, including Deteriorating fiscal conditions coupled with debt mandatory lockdown, curfew as well as closure of amortization, especially the rollover of domestic trea- airport and government facilities, will lead to closure sury bills, worsen debt dynamics (Table 1) and signal of businesses and reduced domestic demand as that Iraq’s gross financing needs may reach US$67 household suffer from labor income shock. As a billion (over 39 percent of GDP) in 2020. External result, the services sectors, such as trade, transport, financial sector, religious tourism and others will continue to be the hardest hit. Furthermore, the 16 In real terms. precarious fiscal position of Iraq will limit the ability 17 This follows additional public sector hiring and changes of the GoI to introduce a fiscal stimulus package to the pension law introduced last October. Recent Economic and Policy Developments 13 BOX 3  •  COVId-19 Impact on Poverty in Iraq Besides the immediate and tragic impacts of the COVID-19 pandemic on health, the preventive behavioral responses by households and the government’s transmission control policies are likely to affect Iraqi households’ livelihoods and welfare through multiple channels. First, the need to attend sick family members or to recover from the illness and the sharp decline in economic activities will reduce households’ labor earnings from wages and self-employment. Second, the economic slowdown will reduce domestic and international remittances, impacting households’ non-labor income. In addition, fiscal pressures due to significantly lower oil prices could affect food (Public Distribution System – PDS) and public cash transfers. Third, disruption in domestic and international supply chains may increase prices, particularly for food, while reduced access to education, healthcare, transport and other services will also significantly impact the welfare of the Iraqis. These short and medium-term effects can have lasting impacts on economic growth, intergenerational mobility and the ability to escape poverty or remain above it. We assess impacts of the crises on poverty in Iraq using the 2017–18 Rapid Welfare Monitoring Survey (SWIFT) and micro- simulations. The analysis focuses losses in labor income and food price increases as the most likely channels. We assume no change in PDS transfers.a The analysis examines a 20 percent increase in food prices with the value of PDS held constant. We also use the employment status of the household head to classify households into five categories: self-employed in rural areas; self-employed in urban areas; public sector; private sector; and not working. Under a “moderate-low” scenario, employees in the public sector and self-employed in rural areas are assumed to maintain full incomes while employees in all the other sectors are assumed to lose 20 percent of pre-crisis income. The ”moderate-high” scenario is same except public sector employees also lose income by 20 percent due fiscal pressures from much lower oil prices. Results are presented in Figure a. Under the moderate-low scenario poverty in Iraq would increase by 14.4 percentage points, and by 18.7 points under the moderate-high scenario, a near doubling of national poverty. These impacts vary across regions. The impact is highest in northern and central Iraq where there are many households living just above the poverty line. In Kurdistan, low initial poverty rates mean fewer vulnerable households while in the south higher initial poverty rates mean many vulnerable households are already poor. This initial analysis assumes only moderate economic impacts. However, employment-related income losses could be significantly higher. At the same time, household resilience has been tested by years of conflict and displacement. High numbers of displaced, a lack of economic opportunities, political turmoil and fiscal pressures had already left many vulnerable before the start of the current pandemic. Many households are may lose all their incomes, especially those in the informal private sector. The longer the crisis continues, the more any savings or coping mechanisms will be exhausted. In the absence of a significant government response, it is possible that over half of the population could fall into poverty. FIGURE A • Impacts of Twin Crises on Poverty 25 22.1 20 18.7 Percentage points (%) 17.2 17.5 14.4 15 17.2 14.4 14.8 13 10 8.9 5 0 Iraq KRI North Center South Moderate–low Moderate–high Source: WB satff estimates. a The microsimulation employed is a partial equilibrium analysis and does not account for behavioral responses. A one-to-one income to consumption adjustment is assumed. Household expenditure is used as the measure of welfare, in line with national poverty estimates, and household welfare is nowcasted based on macroeconomic outcomes to create a current baseline for the simulation. 14 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) financing is very limited considering the capital flight mounts. These imbalances will further constrain fiscal from emerging markets. This means global market space critically needed for non-oil investment, limit the conditions are unfavorable for Eurobond issuances government’s ability to use discretionary fiscal policy, or other commercial debt, and project financing and if left unaddressed, will raise concerns about is expected to decline especially with cuts to pub- the sustainability of policies. Further deterioration of lic investment. As a result, financing is expected to the fiscal position arising from the revenue shortfalls be originated from domestic sources primarily. This and high fiscal deficit would further crowd out private comes with several risks. Over-reliance on local mar- sector credit, push public debt to unsustainable lev- kets for financing the budget increases the cost of els, and thus increases the risk of spending arrears debt service and repayment risks given that domestic re-emergence. debt is more expensive and mostly short-term. They Downside risks could worsen macro- also increase liquidity risks as they would crowd-out financial dynamics. If oil prices decline further which, private sector credit. The report projects a financing particularly if combined with further delays in fiscal gap that could reach up to US$54 billion in 2020 adjustment, Iraq could also be faced with a tradeoff of under the current oil price assumption (US$30 per issuing more domestic debt or drawing down external barrel). In the absence of any adjustment, monetizing buffers at the risk of affecting domestic liquidity and the deficit through CBI could be the only government reduce investor confidence. This situation could also recourse. Doing so weakens the CBI’s balance sheet entail pressures on the exchange rate peg, sovereign and creates pressures on the exchange rate and rating downgrades, higher financing costs, and inflation. Large financing needs are also projected thereby hindering growth prospects. to persist in 2021 and 2022,18 raising sustainability The outlook is also subject to significant questions over the current fiscal policy trend. political and social risks. Lower oil prices may Iraq is also expected to face a persistent force GoI to consider austerity measures, a move current account deficit driven mainly by lower oil that could spark more social unrest with already poor prices and rigid imports structure. Amidst a negative public services and high unemployment. This would global outlook for the oil market, the twin deficits in Iraq subside the non-oil growth prospects and further are projected to lead to a protracted current account limit long-awaited reforms and negatively affect deficit (Table 1.). This is expected to be financed confidence and economic prospects. The country’s partially from CBI foreign currency reserves, increasing weak healthcare system and close relations with Iran the country vulnerability to external shocks during the will make Iraq’s ability to respond to COVID-19 crisis forecast period as those reserves drop below 3 months more challenging. of imports by 2022. Iraq could increase oil production and not abide by the new OPEC+ agreement, to mitigate the widening of the deficit, albeit at the risk of further reducing oil prices. Risks Prolonging fiscal loosening policies pose signifi- cant risks. In the absence of consolidation, the fiscal and external positions will sharply deteriorate as oper- 18 The report projects budget financing needs to reach ational expenditures remain at an unsustainable pace, 55 and 51 billion respectively in 2021 and 2022. This is and uncertainty surrounding oil markets prospects equivalent to 26.7 percent of GDP in each year. Recent Economic and Policy Developments 15 TABLE 1 • Iraq: Selected Economic and Financial Indicators, 2017–2022 2017 2018 2019e 2020p 2021p 2022p Economic Growth and Prices Real GDP (percentage change) –2.5 –0.6 4.4 –9.7 1.9 7.3 Non-oil real GDP (percentage change) –0.6 1.2 4.9 –4.4 5.5 2.7 GDP per capita (US$) 5,058 5,641 5,841 4,282 4,858 5,273 GDP (in ID trillion) 231.0 265.0 276.7 202.4 229.7 249.3 Non-oil GDP (in ID trillion) 144.3 180.5 156.3 151.0 161.7 169.4 GDP (in US$ billion) 195.5 224.2 234.1 171.3 194.3 210.9 Oil production (mbpd) 4.46 4.61 4.84 4.03 4.02 4.44 Oil exports (mbpd) 3.33 3.50 3.54 2.84 2.78 3.03 Iraq oil export prices (US$ pb) 49.1 65.5 61.1 30.0 39.8 42.3 Consumer price inflation (percentage change; average) 0.2 0.4 –0.2 1.3 2.0 2.2 In percent of GDP Public Finance Government revenue and grants 33.5 40.2 38.9 22.1 24.5 25.7 Government oil revenue 28.2 36.1 35.9 18.2 20.8 22.2 Government non-oil revenue 5.3 4.1 3.0 3.9 3.7 3.5 Expenditures 32.2 29.0 37.6 51.8 45.1 42.7 Current expenditure 25.1 23.8 28.8 45.3 39.4 37.4 Wages and salaries 14.2 13.5 14.7 25.7 23.4 22.2 Goods and Service 1.6 1.5 3.2 2.9 1.8 1.7 Interest payment 1.0 1.1 1.1 2.0 1.7 1.7 Other 8.2 7.7 9.8 14.7 12.5 11.9 Investment Expenditure 7.1 5.2 8.8 6.5 5.7 5.3 Oil investment 5.4 4.0 6.9 5.3 4.6 4.3 Non-oil investment 1.7 1.3 2.0 1.2 1.1 1.0 Primary fiscal balance, cash basis 2.3 12.3 2.4 –27.7 –18.9 –15.3 Budget balance 1.3 11.2 1.3 –29.6 –20.6 –17.0 In percent of GDP, unless otherwise indicated Public Debt Total government debt (percent of GDP) 58.9 49.3 44.6 81.2 84.4 87.4 Total government debt (US$ billion) 115.2 110.4 104.4 139.0 163.9 184.3 External government debt (percent of GDP) 35.6 30.6 23.1 n/a n/a n/a External government debt (US$ billion) 69.5 59.0 54.0 n/a n/a n/a Monetary indicators Growth in broad money 2.6 2.7 8.4 –2.2 6.0 4.6 Policy interest rate (end of period) 4.0 4.0 4.0 4.0 4.0 4.0 (continues on next page) 16 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) TABLE 1 • Iraq: Selected Economic and Financial Indicators, 2017–2022 (continued) 2017 2018 2019e 2020p 2021p 2022p In percent of GDP, unless otherwise indicated External Sector Current account 1.8 6.9 2.5 –18.0 –10.7 –4.5 Trade balance 2.7 6.1 –6.3 –10.9 –3.6 –0.4 Exports of goods 38.1 44.0 37.1 19.1 21.8 23.4 Imports of goods 35.4 38.0 43.4 30.1 25.4 23.8 Gross reserves (US$ billion) 49.0 64.3 67.6 33.9 13.2 3.6 In months of imports of goods and services 10.3 11.1 10.1 6.0 2.3 0.7 Exchange rate (dinar per US$; period average) 1182.0 1182.0 1182.0 n/a n/a n/a Sources: Iraqi authorities; and World Bank staff estimates and projections. Recent Economic and Policy Developments 17 2 LAYING THE FOUNDATION FOR A NEW ECONOMY IN IRAQ: DIGITAL TRANSFORMATION Introduction to bringing more people and businesses online. 2) Digital Financial Services (DFS): The ability to This special focus of the digital economy (DE) pay, save, borrow, and invest through diverse digital highlights and explains the importance of digital financial tools is crucial for financial inclusion, for the transformation for Iraq and why this transformation growth of the e-commerce market, or for the transition needs to happen now. Iraq’s economic condition of Iraq to a cashless economy. 3) Digital Platforms: was gradually improving following the deep economic The presence and use of digital platforms that can strains of the last three years. However, the recent support greater digital exchange and transactions, unrest highlights the continued fragility of the country as well as boost online access to public services context and the high priority of improving economic will simplify civic functions and national ID systems. opportunities, particularly for youth. Leveraging the 4) Digital Skills: The development of a tech-savvy DE will help Iraq address its citizens’ concerns as well workforce that possesses the digital skills necessary as accelerate the achievement of its development for the jobs of the future as firms shift to increased objectives. technology adoption and innovation. 5) Digital The paper will cover five foundational, Entrepreneurship: Critical to the widening and interconnected elements of a DE as defined by the deepening of a digital economic transformation is the World Bank Group’s (WBG) DE framework,19 which are: 1) Digital Infrastructure: The wide availability of affordable and quality Internet will be instrumental 19 World Bank Digital Economy Diagnostic Framework. 19 presence of an ecosystem with high-quality support create additional job opportunities. Assessing where to entrepreneurs, startups and bigger companies to strategic investments and interventions need to be generate new products and services that leverage made is a critical first step to enabling DE growth. new technologies and business models. While digital technologies are spreading, The report provides an overview of each digital dividends and inclusion—the broader de- foundational element, highlighting strengths and velopment benefits from using these technolo- weaknesses and proposing illustrative policy gies, are not. Over 60 percent of the world’s popula- recommendations for the Government of Iraq tion remains offline and cannot participate in the DE. (GOI). It also examines where the country is today and Digital divides persist across gender, geography, age, sheds light on where it should be, given the imperative and income level. Many advanced economies are fac- to catch up with Iraq’s peer countries and the need ing polarizing labor markets and rising inequality be- to address structural challenges facing the economy. cause technology augments higher skills while replac- Digital transformation is reshaping the ing routine jobs, forcing many workers to compete for global economy, permeating every sector and low-paying jobs. aspect of daily life—changing the way we learn, The development of an enabling DE work, trade, socialize, and access information needs to be broader than the creation of an ICT and services. In 2016, the global DE was worth some strategy. Connectivity for all remains an important $11.5 trillion—equivalent to 15.5 percent of the world’s goal and a tremendous challenge, but attention must overall GDP. This is expected to reach 25 percent also be paid to regulations, skills, and governance. in less than a decade, outpacing global economic Digital investments need the support of regulations, growth. However, countries such as Iraq are capturing improved skills, and accountable institutions. Digital a mere fraction of this growth and need to invest technologies can, in turn, augment and strengthen strategically in the foundational elements of their DE these complements, and accelerate the pace of to keep pace. development.20 There are signs of a nascent DE in Iraq but In Iraq, building a vibrant DE is a critical taking these promising developments to the next step on the path to economic diversification and level will require important policy decisions and sustainable progress. As discussed previously, well-developed action and implementation plans. Iraq needs to lessen its oil reliance. Other countries The challenges and opportunities presented by the in the Gulf and North Africa are moving towards a DE should be accessible to the general public via digitally enabled economy, and Iraq runs the risk of clear and simple analyses that can be understood by being “left behind” if the necessary interventions are a variety of audiences. This special focus is an attempt not made, especially in light of the recent COVID-19 to make the Iraqi public aware of the importance of health crisis. Diversification of the economy such policies and the role of government in proposing can build on Iraq’s comparative strengths and and implementing this agenda. demographics to foster the development of digitally enabled sectors and industries, such as connectivity, trade-in services, and construction. It can also help The Importance of the Digital strengthen the Iraqi government, as an institution, Economy by digitizing critical civic functions in order to better serve the Iraqi population. Universal adoption and effective application of Poor governance has transformed Iraq’s digital technology is expected to characterize strengths—oil wealth and diversity—into twin liabil- economies of the future. It will shape their ability to ities of oil dependence and ethnic and sectarian succeed in the global marketplace and offer a better quality of life for their citizens. Well-functioning digital economies are expected to achieve faster economic 20 World Development Report 2016: Digital Dividends, growth, offer innovative products and services, and World Bank. 20 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) BOX 4  •  COVID-19 Impact on the Digital Economy The COVID-19 health crisis further highlights how technology plays an increasingly important role in adapting to the new reality of life during a pandemic. In fact, this health crisis proves that broadband is no longer a luxury but a necessity. Innovative technological solutions are being deployed in (1) telemedicine and health—including for prevention, diagnostics, and treatment, (2) accommodating an isolated work environment as the public and private sector shifts to home-based work, (3) managing global supply-chains and logistics—especially for hard to reach populations and regions, (4) increasing use of digital financial services and decreasing reliance on cash, (5) delivering educational content to primary, secondary, and tertiary students through virtual classrooms, to name a few. In the era of “social distancing”, individuals will increasingly rely on mobile apps, online platforms, and the Internet to receive basic supplies and perform other day-to-day transactions such as banking, paying taxes, or even to receive social welfare payments and/or receive stimulus payments from the government. fragmentation.21 Iraq’s institutions have been se- prevent service interruptions. Thus, critical DE reforms verely debilitated by decades of wars, sanctions, and are now a prerequisite for ensuring Iraq’s survival conflict. Poor governance has contributed to under- during this global health crisis. mining the state’s legitimacy, leading to political and sectarian divides resulting in further weakening of an already fragile governance system.22 Incorporating Current State of Iraq’s Digital digital technologies and platforms, coupled with oth- Economy er measures such as providing public officials with Digital Infrastructure incentives to effectively use technology,23 can help increase transparency and rebuild trust between the Digital infrastructure refers to the availability, GoI and its citizens. quality, and affordability of high-speed Internet. The development of an enabling DE needs It also serves as the backbone of the DE. Countries to be broader than the creation of an ICT strategy. are unable to realize the full potential of digital Connectivity for all remains an important goal and a transformation without reliable and affordable tremendous challenge, but attention must also be connectivity, so the latter is a highly critical prerequisite paid to regulations, skills, and governance. Digital in- for Iraq’s DE to thrive. Once it is deployed, the five vestments need the support of regulations, improved foundational elements can benefit from mutual skills, and accountable institutions. Digital technolo- synergies. Infrastructure that provides reliable and gies can, in turn, augment and strengthen these com- fast Internet access is needed for entrepreneurs to plements, the pace of development. create value, students to build their skills, and the The current COVID-19 pandemic is likely to government to improve service delivery platforms. further exacerbate some of the challenges faced High speed connectivity increases output by Iraq. Unemployment is likely to rise as businesses and productivity in other sectors and enables shut down either because of preventive measures a more competitive economy overall. Evidence enforced by the GoI (or because of a loss in demand from several global studies indicates that broadband for goods and services. Low-productivity and informal penetration enhances economic growth, with the workers will be at high risk of falling into deep poverty, further complicating Iraq’s reconstruction efforts. It is expected that corporations and public offices will 21 World Bank. 2017. Iraq – Systematic Country Diagnostic. shift to home-based work and the GoI will need to rely Washington, D.C. on digital technologies to ensure that public services, 22 Ibid. businesses, and individuals are able to withstand 23 World Bank. 2016. World Development Report 2016: “social distancing”, ensure business continuity, and Digital Dividends. Washington, DC. Laying the Foundation for a New Economy in Iraq: Digital Transformation 21 impact estimated to be, on average, around 0.85 to Digital infrastructure enables important services 1.16 percent increase in GDP for every 10 percent such as e-health, e-education, energy payments, increase in Internet penetration.24 The impact in and financial inclusion, among others.27 These the Iraqi context could be even greater, since there avenues also improve transparency and public are opportunities for Iraq to adopt “leapfrogging” engagement and can help rebuild public trust in technologies when broadband access is coupled the government. with interventions that promote digital skills and entrepreneurship. In Iraq, broadband demand has Comparison with Other Countries; Iraq’s long since outstripped its supply, indicating a need Potential to improve infrastructure to meet the demands of The difference between the adoption levels of fixed consumers and grow the other elements of the DE. and mobile broadband is flagrant in Iraq as much as As a result, interventions must focus on each of it is in other countries in the MENA region. Lebanon these elements, though a fundamental prerequisite is and Jordan are leaders in the use and adoption of infrastructure. fixed and mobile broadband services, and Iran has a comparatively high broadband penetration rate. Yet Challenges & Opportunities overall, a considerable gap remains in the adoption, Digital infrastructure can accelerate Iraq’s speed, usage and affordability of fixed broadband economic recovery through several channels: services between Iraq and the MENA region, as well as between Iraq and emerging economies such as • Investing in digital infrastructure deployment Turkey, Romania, and Bulgaria—countries that compare creates immediate opportunities to boost positively in terms of DE development. employment. Evidence further suggests that Several institutional and regulatory hurdles for every job created in broadband infrastructure have constrained broadband Internet adoption deployment, between 1.83 and 3.42 additional and the DE at large. The telecommunications sector jobs are indirectly added or induced in the falls under the purview of Ministry of Communications economy—higher than most other infrastructure and the Communications and Media Commission investments.25 Though employment generation (CMC), which have conflicting and insufficiently alone is generally not considered sufficient defined roles. This can be traced to the absence of rationale to undertake an infrastructure project, a comprehensive telecommunications law. The CMC such projects can improve quality of life for Iraqis itself was founded in 2004 by an order of the Coalition in a holistic manner. Provisional Authority (CPA) following the war, and • Access to digital infrastructure augments subsequent Iraqi governments have not been able to trade and economic diversification. Economic pass a thorough telecommunications law since then. diversification away from oil is a key priority for Due to these institutional shortcomings Iraq, and there is evidence that improving Internet and to the damage caused by extended conflict, penetration in developing countries will promote Iraq’s fixed broadband market has not reached its service industries and increase exports.26 • Increasing Internet penetration is associated 24 Mashreq 2.0. with higher private-sector productivity, which is of immense importance in the context of Iraq. 25 Katz, Raul, and Stephan Suter. “Estimating the economic impact of the broadband stimulus plan.” Columbia Research indicates that firms that adopt digital institute for tele-information working paper 7 (2009). technologies are 26 percent more profitable than 26 Clarke, George R. G. 2008. “Has the Internet increased their competitors who do not. The development of exports for firms from low- and middle-income digital infrastructure is thus a vital intervention for countries?”. Information Economics and Policy, Elsevier, Iraq to strengthen its economic competitiveness. Vol. 20, No. 1, pp16–37. https://ideas.repec.org/a/eee/ • Improving and facilitating service delivery, iepoli/v20y2008i1p16–37.html. including to refugees and host communities. 27 Mashreq 2.0. 22 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) potential. Fixed broadband penetration stands only FIGURE 25 • Penetration of Mobile and Mobile at 17.4 percent. As a step in the right direction, the GOI Broadband Services (per 100 Inhabitants) has since 2014 prioritized the deployment of fiber-to- the-home (FTTH) in certain urban centers such as 100% Baghdad. However, this initiative is being rolled out 80% 78% on a limited, ad hoc basis and has yet to create any 72% 63% 66% sweeping impact.28 Moreover, , telecom networks— 64% 60% 53% 57% 46% 45% 43% especially in the densely populated capital—have 38% 48% 40% 29% been under an unusual amount of stress due to violent 44% 27% conflict, including competition from illegal operators 20% 13% and prevailing signal jammers,29 severely impacting 0 Djibouti Palestine Iraq Syria Jordan Lebanon North Africa Gulf Countries the quality of broadband service for Baghdadis.30 Despite these adversities, Iraq’s mobile broadband sector is among the most competitive in the MENA region. There are three main licensed Market penetration; unique mobile subscribers, 2019 mobile operators in Iraq: Zain Iraq (42.4 percent Market penetration; unique mobile market share), Asiacell (37.4 percent market share), internet subscribers, 2019 and Korek Telecom (20.2 percent market share).31 Source: Global System for Mobile Communications Intelligence (GSMA), 2018a. Though mobile penetration is high (near 100 percent, a Cited in Mashreq 2.0, pg. 23. indicating that many SIM cards are sold and used), mobile broadband penetration is much more modest (19 percent of the population).32 Moreover, all three Penetration of mobile and mobile broadband services major operators offer only Global System for Mobile (per 100 inhabitants)). The stark gap between Communications (GSM) and 3G connectivity. The only basic mobile penetration and mobile broadband provider of 4G services is Fastlink, which operates penetration is a commonality in countries that have exclusively in the semi-autonomous region of Iraqi faced prolonged conflict, such as Djibouti and Syria. Kurdistan. Iraq’s mobile market has shown further However, the market in Iraq is competitive and would interest from the private sector, and Iraq’s cabinet leapfrog much faster than those comparator countries approved plans to relaunch attempts to auction a if the right policies and reforms were put in place to fourth mobile license, after its previous attempt in late allow mobile operators to invest in new technologies 2015 stalled due to political instability and conflict. in a regulated environment. Releasing and allocating 4G frequencies Iraq’s location at the crossroads of the is essential for digital services in Iraq to take highest-growth segment of global data connec- off and meet the aspirations of the citizens and tivity—the Europe-Asia Internet traffic route—of- effect economic development. Many countries fers an opportunity for Iraq to develop a regional worldwide—including Gulf Cooperation Council data hub. International connectivity will link Iraq to the (GCC) nations—are already testing 5G technologies worldwide Internet infrastructure. In most countries, in- that enable faster speeds, better quality, and a whole cluding in the MENA region, international connectivity new range of applications that connect devices and systems at a large scale. In an effort to “catchup” through the allocation of 4G frequencies, mobile 28 Telegeography. operators would be able to upgrade their networks 29 This refers to blocking transmission or reception of and provide faster, more reliable, and higher-quality signals resulting in loss of signal quality for the end user. mobile broadband services. 30 https://www.wired.com/2014/02/spectrum-warfare/. There is a gap between basic mobile adoption 31 Telegeography. and mobile broadband adoption in Iraq (Figure 25. 32 Unique broadband subscribers. Laying the Foundation for a New Economy in Iraq: Digital Transformation 23 is provided through submarine cables, with a smaller and specialist engineering or analytics vacancies percentage provided through terrestrial fiber, micro- remaining unfilled. This gap affects the GoI’s ability wave, or satellite. However, redundancy and alterna- to implement, manage, and oversee the regulation of tive routes are rising in importance and demand, since digital financial transactions. The economy is cash- any interruption in international connectivity inflicts based as a result of the most recent conflict, and the considerable costs on affected countries and the financial system and its institutions enjoy little trust. world economy at large. The strategic position of Iraq Despite the above, Iraq has in recent years stems from its connection to the submarine cables at made considerable progress toward developing its Al Faw at the Persian Sea and its borders with Turkey, payment systems, but gaps remain. With assistance Syria, Jordan, and Iran, allowing it to provide alterna- from USAID, as well as strong commitment from the tive terrestrial connectivity from the Persian Sea Ito CBI and the GoI, the Iraqi National Payment System Europe. International connectivity is owned and man- Strategy (NPS),33 discussed below, was developed to aged by the Ministry of Communications through the help Iraq transition toward a cashless system.34 Iraq Telecommunications and Post Company (ITPC), A clear regulatory framework is also criti- which has yet to expand international connectivity and cal to attracting private sector and telco partici- take full advantage of the competitive edge that Iraq’s pation. To that end, the CBI has enhanced the legal, geographic position entails. regulatory, and oversight framework, but several gaps remain, notably the lack of a statutory law that covers Digital Financial Services (DFS) all payment and settlement systems topics in a holistic manner, as well as the lack of an articulated oversight framework and the necessary oversight tools. The GoI A robust cashless payments ecosystem is a is at the final stages of passing its NPS Act that will critical pillar of any DE. DFS refers to transitioning establish firm legal foundations for payment and set- to a cashless economy. DFS is an important avenue tlement systems. Other secondary legislation, specifi- for the transactions and payments of goods and cally CBI regulations, must also be reviewed to ensure services between users, and between citizens compliance with the new law. and governments. While payments in Iraq are still mostly made in cash, the growth of digital payment Comparison with Other Countries: Iraq’s methods has been exceptional. The share of the adult Potential population that has made at least one digital payment Despite efforts by the GoI, Iraq trails its MENA peers a year nearly quadrupled between 2014 and 2017 and on most cashless economy indicators. Consequent- reached 19 percent in 2019. However, growth can only ly, the most important task of all NPS stakeholders is to be sustained if Iraq supports it with the necessary restore trust in the system. Iraqis must feel with certainty infrastructural investments and regulatory reforms. that money held in their bank accounts is as safe as The GOI has pledged its support for a cashless economy. It committed to establishing a conducive regulatory and policy framework for digital 33 The NPS Strategy is intended to guide the CBI in its payments, investing in an interoperable infrastructure, role as regulator, overseer, operator and catalyst of the and striving towards universal financial access. National Payments System. 34 In technical terms, this includes: a real time gross settlement Challenges & Opportunities (RTGS) system; Cheque enabled Automated Clearing The Iraqi National Payment System faces multiple House (CACH) for clearing and settlement of cheques in challenges. Infrastructure—including electricity truncation mode; the Government Securities Registration System (GSRS)—a Central Securities Depository (CSD) provision and network connectivity—is not always and Securities Settlement System (SSS) for Central Bank reliable, hampering access to digital payments. This and Government securities; and Retail Payments Systems problem is compounded by a human resources crisis, Infrastructure (RPSI), an integrated card, mobile payments, with many qualified Iraqis having immigrated abroad and electronic funds transfer system. 24 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) that stored in banknotes, and that electronic payment social services. Private-sector digital platforms in- instruments are as reliable as cash payments. Some of cludes DFS and e-commerce. the required actions, such as setting up an effective de- Digital services also have the potential to posit insurance scheme, lie beyond the scope of NPS increase inclusiveness and transparency. The regulations and oversight, and should be taken up by automation of business processes and improved other parts of the CBI. Nonetheless, there are many monitoring can reduce bureaucratic discretion and other improvements that can be affected with relatively opportunities for petty corruption. Frontier technologies little cost, such as the establishment of a consumer such as blockchain for e-governance can also be protection framework and improved monitoring of the deployed to improve accessibility to critical services operational reliability of payment systems’ participants. such as digitally enabled healthcare and education to Iraq has set ambitious targets in its NPS improve social welfare outcomes. Strategy to catch up in the next five years on deb- The use of technology in governments it card ownership, cashless transactions, mobile tends to be successful when it addresses straight- money and electronic payments. The NPS Strategy forward information and monitoring problems. for Iraq aims to guide a range of diverse stakeholders For more demanding challenges, such as better man- in their actions and goals to develop payment systems, agement of providers or giving citizens greater voice, instruments, and regulations. The stakeholders range technology helps only when governments are already from the CBI to commercial banks, government agen- responsive. Closing the gap between evolving tech- cies, non-bank e-money issuers, telecommunications nology and bureaucratic institutions requires initia- and technology companies, as well as the end users tives that strengthen the transparency and account- of payment products: Iraqi citizens and businesses. ability of governments.36 A recent positive development is the In the context of Iraq, critical digital issuance of e-Wallets: the GoI through the CBI has platforms include: licensed two Payment System Providers (PSPs) to deliver this service. In addition, as part of its COVID-19 • An e-Government platform that simplifies initiatives, CBI facilitated the process for Iraqi citizens administrative processes while eliminating to open e-wallets from their homes through a simplified administrative corruption and red tape. This includes online business registration with an e-KYC35 process using only their IDs. The GoI is online payments function. Iraq currently ranks currently running a campaign to promote the usage 172 out of 190 overall on the 2020 Doing Business of cashless and contactless payments solutions (i.e. Ranking and 154 for starting a business. e-wallets/ POS/ POC and ATM’s) through the launch • Digital ID systems to enable Iraqis to exercise of the e-wallet scheme, the issuance of a promotional their rights and access services. It also helps public information campaign including video etc. the country realize the transformational potential of inclusive, robust, and responsible digital Digital Platforms identification systems. Including tangible benefits across a range of areas, such as financial Digital Platforms is a broad category that ex- inclusion, health services, social protection for the plores two main types of platforms: public-sector poorest and most vulnerable, and empowerment platforms and private-sector platforms. Digital plat- of women and girls. forms help governments streamline civic functions such as filing taxes online and starting a business. For 35 This stands for Know Your Customer/Client guidelines. domestic firms, platforms provide stronger productiv- Financial services require that professionals make an ity and innovation through competition in the global effort to verify the identity, suitability, and risks involved digital market. Public-sector digital platforms include with maintaining a business relationship. e-government services such as e-procurement and 36 Cited in the World Development Report 2016: Digital national ID systems that enable citizens to access Dividends., p. 24. Laying the Foundation for a New Economy in Iraq: Digital Transformation 25 • Public Digital Transactions refers to digital in- A critical, forthcoming public platform is frastructure and processes critical to public ad- the digitization of the Public Distribution System ministration such as revenue collection, budget (PDS). The PDS is Iraq’s biggest social safety net, management, treasury, civil service payroll, and providing food entitlements to almost the entire Human Resource Management Information Sys- population, supported by the UN’s World Food tem (HRMIS) at all governmental levels (central, Program. This digitized system will ensure citizens’ local, and municipal). data is safely encrypted and stored, and the security • Cybersecurity: as economies become more is enhanced using fingerprints or iris scans. These dependent on digital technologies, they also safeguards will allow the GoI to identify and remove become more vulnerable to network attacks. The duplicate records as well as to conduct biometric most serious cybersecurity risks are those that verification at the time of food collection. The new threaten the functioning of critical information system will replace the current paper-based system. A infrastructures, such as those dedicated to complementary mobile application, myPDS, will also financial services, control systems for power, be developed to help Iraqis collect their benefits and gas, drinking water, and other utilities; airport update their family information about births, deaths and air traffic control systems; logistics systems; and marriages—using personal smartphones. and government services. A robust cybersecurity To increase the formal participation of firms framework as per international best practices in the Iraqi economy, the Global Entrepreneurship must be co-developed and implemented Registration (GER) project,39 will soon be alongside any digital platform. launching an eRegistration software system. This • Data Protection or the process of safeguarding will allow the GoI to build online databases of formally important information from corruption, registered firms and digitize the firm registration compromise, or loss. The importance of data process in Iraq by creating an online single window protection increases as the amount of data created for business registration. This system allows and stored continues to grow at unprecedented entrepreneurs to see their current registrations, apply rates. The implementation of a successful Digital for licenses, update their data, and make declarations ID system also hinges on a robust data protection and payments—either to link a bank account or framework. mobile money system. The eRegistration system will • E-commerce can unlock significant downstream also deploy an innovative donor funding model for employment in novel areas, such as digital private sector development by funding entrepreneurs advertising, as well as in traditional areas such directly, versus through the government: the user’s as logistics, warehousing, and shipping. Chinese administrative account can receive money from the e-commerce giant Alibaba, while directly employing government (in the form of subsidies, tax credits or just over 85,000 employees, created 14 million refunds, etc.) or a national development institution jobs for sellers on its platforms in 2017, and a (e.g. a foundation), or an international aid agency. The further 22 million downstream jobs in areas such system is anticipated to launch in Spring 2020.40 as R&D, design, manufacturing and logistics.37 These benefits are particularly important in Iraq’s context, where labor force participation is amongst 37 Alibaba Group. 2018. Foundations for Sustainable Growth: the lowest in the world, at 48.7 percent.38 ESG Report 2018. https://esg.alibabagroup.com/. 38 https://www.worldbank.org/en/country/iraq/overview. Challenges & Opportunities 39 A joint initiative of the Global Entrepreneurship Network Iraq is still in the early phases of building various (GEN), the United Nations Conference on Trade and digital platforms. Public-sector platforms such as Development (UNCTAD), and the U.S. Department of e-government services, including online business State. This software system is already operational in registration, are still in early phases, and private-sector several countries. platforms such as e-commerce are still nascent in Iraq. 40 Source: Global Entrepreneurship Network Global Team. 26 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) BOX 5  •  Sri Lanka’s nCoV Surveillance System to Monitor COVID-19 Outbreaks Example of government implementing a digital platform to monitor COVID-19 outbreaks among its population The Ministry of Health of Sri Lanka developed a web-based District Health Information Software (DHIS2) solution to capture information on high risk passengers entering the country from at-risk countries for active COVID-19 surveillance. The nCoV Surveillance System captures demographics, immigration, symptoms of COVID-19 disease, and possible contacts at all ports of entry, for local public health officers, based on their geographic area. From 0–14 days, it captures potential symptoms of COVID-19 disease and any action taken. After 14 days, it captures symptoms of COVID-19 disease and any action taken at the end of the surveillance period. The Government of Korea has also implemented a similar surveillance system as part of “Special Entry Procedures” for travelers arriving from China that went into effect on February 4, 2020. Other governments, such as Nigeria, have also implemented similar monitoring systems. Currently, the uptake of private-sector the basic enabler of digital platforms, low broadband platforms is low. E-commerce could improve the access will hinder the implementation and adoption standard of living in Iraq, enabling Iraqi citizens to of digital platforms in Iraq. Across all government compare goods in order to find the best prices, platforms indicators, Iraq is 34 percent below the stirring an influx of foreign goods and commodities, MENA average and 97 percent below the MENA and creating a more transparent market. Although average for private-sector platforms.42 e-commerce is the easiest digital opportunity that startups can seize in nascent ecosystems. it has Digital Skills been slow growing in Iraq for several reasons, mainly low Internet and banking penetration, and Digital skills are essential to prepare for the jobs preference of consumers for cash. Another major of the future, which will be anchored in the DE. problem contributing to slow adoption of e-commerce This in turn promotes economic growth, job creation, is the low level of literacy among Iraqis, especially and poverty reduction. Investments in digital skills the inability to read and write English—the primary create new opportunities through the creation of new language of trade and e-commerce globally. In this markets and innovative solutions. Digital skills also context, the most popular platforms are emerging Iraqi constitute a key element for social inclusion. As the and MENA-focused e-commerce websites, such as world moves towards heightened use of technologies, Miswag,Dakakkena, ShopYoBrand, and Opensooq. for work or social life, those who do not have the skills Magnitt, a digital platform that has gained to adapt are likely to feel an even bigger sense of traction in the MENA region, was launched by isolation. Iraqi expats based in Dubai (UAE). Magnitt has Digital skills are increasingly important for developed a data platform for investors, and currently promoting digital employment opportunities for hosts 5,500 startups and over 12,000 users including young Iraqis, especially when job opportunities for over 300 individual investors and over 150 funding youth are very limited. Skills upgrading is critical to institutions.41 Unfortunately, Magnitt cannot monitor prepare young Iraqis for possible digital employment and produce data related to entrepreneurial activity jobs such as online freelancing, microwork, outsourcing, in Iraq yet. etc. Beyond digital employment, given that the future of work depends on a certain level of digital literacy Comparison with Other Countries: Iraq’s and an aptitude to advance digital skills for higher Potential Iraq has made considerable progress in the mobile market, but, as discussed above, its broadband access 41 Mashreq 2.0. indicators remain weak. Since digital infrastructure is 42 WBG. Laying the Foundation for a New Economy in Iraq: Digital Transformation 27 value-added work, the fact that many Iraqi youth work in in particular. In fact, public sector training providers, basic occupations further emphasizes the importance including universities, are not well prepared to of upgrading their skills for the future of their work. support the development of digital skills in Iraq. They are constrained by traditional academic curricula that Challenges & Opportunities were tailored for public sector jobs and do not meet The ICT sector in Iraq is small and the little the requirements of the DE. For example, the Ministry employment it creates (3–5 percent) does not of Communications has its own training institution, the cater to youth. In fact, only 20 percent of the jobs Higher Institute for Communications and Post,45 and in the ICT sector are occupied by youth. This is employs many of its own graduates in its workforce of surprising given that the younger age group is familiar approximately 13,000.46 with the use of Internet and technologies (25 percent The annual skills supply to the ICT sector of the population aged 15–24 years) much more than from formal Technical and Vocational Education the older generation (less than 15 percent among the Training (TVET) institutions at all levels amounts to more than 11,000 graduates. The largest population aged more than 40 years). proportion (over 3,000) is low-level computer repair A key challenge is the poor labor market graduates from the Ministry of Education (MOED) outcomes, especially among youth. Out of the ap- schools and the Ministry of Labor and Social Affairs’ proximately seven million youth aged 15–24, around 48 vocational training centers. Electronics programs percent are Not in Employment, Education, or Training produce the second largest cohort of graduates (NEET). Compared to the national unemployment rate of (over 2,000) for the sector. Computer systems and 16 percent, youth unemployment is about 36 percent.43 information technology programs produce more than Among youth, the unemployment rate is higher for wom- 1,000 graduates each. Less than 1,000 students en (65 percent). There are also high levels of under- graduate each year for networks, databases, software, employment, affecting 32.4 percent of youth between and media occupations though there is evidence of the ages of 15 and 24. Most youth who have jobs are sector demand for these specific services. employed in low quality jobs either as low-productivity However, formal qualifications do not seem self-employment or as informal sector wage employees. to be highly valued by employers, and qualifications Conflict and instability have further are not a high-ranking selection criterion for exacerbated the situation and resulted in high employment, suggesting a disconnect between youth unemployment. Iraq’s fast-growing youth TVET institutions and employers. Additionally, 77 population,44 means high labor force growth and percent of ICT employers offered training to their accelerated demand for youth employment. The employees, presumably in areas where graduates dominance of public sector employment (represents lack skills, suggesting that formal training institutions 42 percent of jobs) and youth’s preference for public should bridge the gap with employers to (1) improve sector jobs causes significant labor market distortions. the curricula and ensure they meet market needs, and The private sector is undiversified, under-developed (2) facilitate job placement for graduates. and uncompetitive and, therefore, does not create sufficient quality jobs. In the absence of relevant education and training systems, skills mismatches 43 Dhiraj S., Wai-Poi M. G. (2019). Arrested Development: Conflict, Displacement, and Welfare in Iraq. remain a significant challenge, with individuals not 44 Nearly 50 percent of Iraqis are younger than 19 years, having the right skills to match the requirements of and 60 percent are below 25 years of age. available job openings, or of limited opportunities 45 It offers three-year diploma courses for preparatory to access high quality pre-employment or skills education graduates. While most technicians employed upgrading training programs. by the Ministry are graduates of the institute, some The skills mismatch gap remains largely in graduates do enter private sector. the education system’s failure to equip youth with 46 UNESCO “Assessment of the Labor Market & Skills jobs-relevant skills in general, and digital skills, Analysis Iraq and Kurdistan Region-Iraq”. 28 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) BOX 6  •  Case Study on Digital Skills Providers Examples of private-sector and public-sector initiatives to facilitate digital skills acquisition (1) 1337 via École 42 in Morocco: Example of a private-sector initiative facilitating digital skills acquisition 1337 is a coding school established in 2018 by Paris-based École 42 in Khouribga, Morocco. The training covers programming languages such as JavaScript, HTML, or CSS, is completely free of charge. 1337 offers 300 workstations (including the best bandwidth in the market) and staff is available 24 hours a day, 7 days a week. Impact: With no attendance fees, widespread accessibility, and top-ranked training, 1337 allows social as well as economic mobility. 1337 School is part of the larger 42 Network, which was established in Paris in 2013 by the famous serial entrepreneur Xavier Neil. With 20 partner campuses worldwide, the 42 network represents an international community for digital learning. In 2017, the 42 Network was ranked as the best computer science training program by the CodeinGame computer programming platform. (2) India’s National Skills Development Cooperation: Example of government-driven initiative facilitating digital skills acquisition The National Skills Development Cooperation (NSDC) was established as a PPP company with the mandate of catalyzing the skills landscape in India. Its objectives are to upgrade the skills of 150 million people to international standards and to develop frameworks for curriculum and quality assurance. NSDC focuses on industry involvement (operational and financial), supports private sector initiatives, and plays the role of a “market-maker”. Impact: To date, NSDC has trained over 5.2 million students, built 235 private sector partnerships, and introduced vocational training in 10 states, covering over 2,400 schools and benefitting over 2.5 million students. To ensure alignment of education standards, NSDC is working with 21 universities and community colleges and assures National Occupational Standards and certifications. Relatedly, NSDC approved 38 Sector Skill Councils to issue certificates to entities complying with standards and frameworks. Furthermore, it developed and maintains a Skill Development Management System with 1,400 training partners, over 28,000 training centers, 16.000 training, 20 job portals, and 77 assessment agencies. To address gaps in existing curricula, Revolution. Top ranked economies for the MENA digital training activities have emerged in the Iraqi region are the United Arab Emirates (27) and Qatar ecosystem. Donors and international organizations (30). Moving forward, Iraq should address the exist- have launched tech-related events and digital skilling ing skills gaps to allow youth to reach their potential, activities that target the youth, students, refugees, and and leverage partnerships with the private sector to women, with the aim of equipping them with technical both grow the digital sector and absorb more digi- skills such as coding, and maker skills, and soft skills, tally skilled labor. including leadership and entrepreneurship. These activities are emerging across the country, including Digital Entrepreneurship in Baghdad, Erbil, Mosul, and Sulaymaniyah. However, corporate and public involvement Innovative technology entrepreneurs and start- in digital skills development initiatives remains ups also provide employment and instill an en- weak. The potential of corporate involvement remains terprising mindset. This is especially crucial in the important and should be mobilized through digital context of Iraq where labor force participation is one transformation seminars that involve government and of the lowest in the world (48.7 percent), especially banking, oil and gas, and agriculture sectors. 47 Ibid. Comparison with Other Countries; Iraq’s Potential47 48 The Global Competitiveness Index assesses the competitiveness of 140 economies in the context of the Iraq is not currently ranked on the World Eco- Fourth Industrial Revolution. It measures the enabling nomic Forum’s Global Competitiveness Index,48 environment, including ICT adoption, markets, human which, among many things, measures digital and capital, and the innovation ecosystem. http://reports. other skills needed to thrive in the Fourth Industrial weforum.org/global-competitiveness-report-2018/. Laying the Foundation for a New Economy in Iraq: Digital Transformation 29 BOX 7  •  Startups on the Rise: Spotlight on Two High-Growth Iraqi Digital Startups Miswag: An E-Commerce startup founded in 2014 (https://miswag.net/): • The first e-commerce service in Iraq, “Amazon of Iraq”, with delivery service to all major Iraqi cities. • Miswag’s online shopping platform sells more than 15,000 products from over 250 companies and agencies across 150 departments. • Miswag is known for displaying and marketing high quality original products that meets the company’s quality control standards. • Company traction: Miswag has a turnover of more than USD $2 million. Sandoog: A Logistics & Last Mile Delivery startup founded in 2017 (www.sandoog.net): • Sandoog is a last-mile delivery and order fulfilment startup tackling daily challenges faced in Iraq’s logistics using advanced technological and operational solutions. • It enables businesses and organizations of all sizes to deliver their goods and mail efficiently inside cities and to all corners of the country through its digital platform. • Sandoog crowdsources its delivery drivers with 10 in Baghdad and 15 throughout the rest of the country. • Its business model is pay-per-use, with cash on delivery (approximately USD $7 fee). • Company traction: Sandoog has over 750 clients and completed deliveries to over 50,000 people since April 2018. Sources: WBG Interviews; Magnitt. for youth (26 percent) and women (12 percent).49 untapped. Digital entrepreneurship is beginning Through competitive wages, flexible work hours, and to thrive, and there is an opportunity for a comple- a focus on technical skills, many digital industries in mentary venture capital ecosystem to fund Iraqi other contexts have improved female participation in entrepreneurs. the work force. In Egypt for example, a smartphone While Iraq’s start-up ecosystem is still na- factory created by SICO in Assiut, Upper Egypt, em- scent, it has shown promising signs and has at ploys over 200 women, who are paid above average its disposal, an important domestic market of wages higher than average for the area.50 Innovations 40 million consumers. In April 2019, startup hubs such as mobile ride-hailing services are also pro- in Baghdad, Basra, Mosul, Erbil, and Sulaymaniyah viding flexible work for women,51 and a female-only hosted the Iraq Innovation Hackathon, where over ride-hailing startup has been launched as well was 700 young tech entrepreneurs competed for prizes recently launched.52 In August 2019, the acceptance of the first Iraqi startup, Lezzoo, into the Silicon-Valley- 49 https://www.worldbank.org/en/country/iraq/overview. based, Y Combinator (YC) accelerator program 50 Abou el Atta, Nadine. 2019. “Technology, Talent, and signaled Iraq’s developing entrepreneurial eco- Upper Egyptian Women.” Business Monthly, March. system. YC is considered the world’s most presti- 51 World Bank. 2018. Driving toward equality: women, ride- gious acceleration program, with an acceptance rate hailing, and the sharing economy. http://documents. of 1.5 percent. Lezzoo was selected based on its scal- worldbank.org/curated/en/856531520948298389/ Driving-toward-equality-women-ride-hailing-and-the- ability, market traction, and potential for international sharing-economy. expansion. 52 Samir, Salwa. 2018. “Female-only ride-hailing app to compete with Uber, Careem in Cairo.” Al-Monitor, Challenges & Opportunities December 27, 2018. https://www.al-monitor.com/pulse/ Due to an unfavorable investment climate, Iraq’s originals/2018/12/egypt-fyonka-all-female-ride-hailing- high entrepreneurship potential remains largely service-uber.html. 30 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) that included financing, coworking spaces, and men- linkages, but similar efforts could be further ampli- torship.53 Though there is still a long way to go—in fied by the GoI. 2018, Iraq created only 1 tech startup per million Iraqis, which is 12 times less than in Egypt—the hack- athon networks indicate that Iraq has the potential to Conclusion engage young entrepreneurs. This is especially im- The WBG and the GoI have jointly identified priority portant in the context of Iraq, where 42% of all jobs reform areas that have the strongest potential for are in the public sector. The DE can help shift this sta- achieving the objectives of 1) private-sector-led tus quo of seeking public sector employment toward diversification and 2) reforming governance and increased employment in start-ups. promoting private-sector participation in selected Despite the growing number of entrepre- productive sectors that can subsequently boost neurship initiatives, the ecosystem still lacks ma- Iraq’s participation in the DE. These priority reform turity and depth. These manifests itself in the quality areas cut across all five elements of the DE framework and number of services provided by business devel- and are meant to boost accountability, transparency, opment support (BDS) organizations such as incuba- and trust. tors and accelerators, and in the dearth of early-stage Transitioning Iraq towards a resilient and investors that provide much needed startup capital to inclusive DE will require economic reforms and emerging entrepreneurs. longer-term development priorities along the five Comparison with Other Countries: Iraq’s DE pillars: ensuring affordable access to high-speed Potential Internet, achieving widespread adoption of cashless Due to political instability and fragility, Iraq is not payments, delivering digital government services and currently ranked on leading global entrepreneur- improving access to data, upskilling young Iraqis with ship indexes, including the Global Entrepreneurship technological know-how, and scaling up the digital Index (GEI) developed by the Global Entrepreneurship entrepreneurship ecosystem. and Development Institute (GEDI), Startup Genome’s The proposed short- and medium-term Global Startup Ecosystem Report, and the Seedstars improvements below are prioritized by promoting Index. However, Iraq’s emerging ecosystem could actions with the highest potential to keep Iraq soon be benchmarked against comparable countries. on track with its commitment to boosting its DE A strong signal is Seedstar’s recent Investor Master- across the five pillars. These eighteen (18) critical class54 conducted in Baghdad in August 2019, spon- recommendations are also included in the Strategic sored by the CBI. Note on Priority Reform Areas (aka “Iraq White Paper”): In the MENA region, the United Arab Emirates (UAE) is considered the most advanced entrepreneurship ecosystem due to its enabling 53 ArabNet Team. 2019. “Hubs at Iraq Coordinate to business environment, regional prowess as a lead- Launch the 1st Nationwide Hackathon”. March 27, 2019. ing financial center, and the proliferation of entre- https://www.arabnet.me/english/editorials/events/ preneurship support organizations BDS providers hubs-iraq-hackathon. that cover the entire value chain of entrepreneurship 54 Investor Masterclasses are workshops that build support ranging from pre-incubation to accelera- knowledge and capacity of local investors. These tion programming. As demonstrated in other WBG- investors are critical sources of early-stage financing for digital startups who do not qualify for loans from supported regional entrepreneurship activities,55 Iraq commercial banks. should increase linkages with mature ecosystems to 55 Such as the XL Africa and l’Afrique Excelle acceleration 1) showcase local startups to leading investors, cor- programs for African digital startups seeking financing of porates, and the media; and 2) attract private-sector $250,000 up to $5MN. These programs were anchored actors into its national market. Programs such as in Cape Town, South Africa and Paris, France to leverage Iraqpreneurs are already establishing these types of an international audience. Laying the Foundation for a New Economy in Iraq: Digital Transformation 31 • Immediate- to short-term measures: 1) remov- • Short- to medium-term measures: 9) allocating ing restrictions on private operators to build, own, 4G spectrum; 10) developing and implementing and operate domestic and international fiber in- PPPs in the rebuilding of critical fiber infrastructure frastructure; 2) promulgating the Payment Sys- to achieve 10 percent fiber connectivity by 2023; tems Law to facilitate digital payments; 3) pro- 11) rolling out National ID cards, 12) strengthen- viding a timetable to update the 2012–15 e-Gov ing the existing cash payment systems through up- Strategy and Action Plan for a paperless govern- grading technologies for improved governance ment; 4) building confidence with online disclo- and efficiency; 13) developing regulations to sure of information on public tenders and con- implement the Payment Systems Law; 14) re- tract awards, starting with major transactions, and forming the curriculum for digital skills across allowing for public feedback; 5) mandating start- the education spectrum, ranging from primary to ups and tech companies registration to select tertiary institutions, including TVETs; 15) introduc- eligible support structures; 6) adopting a national ing programs that provide demand-driven digital law on private equity and venture capital funds; training opportunities for youths; 16) establishing 7) establishing a Seed Capital Fund; and 8) in an electronic system for e-visa issuance to attract partnership with the private sector, piloting digi- foreign investors, 17) streamlining current legal re- tal training programs for youth to increase their quirements to start a business; 18) addressing access to digital wage employment opportunities government accountability in delivering services such as online freelancing, microwork, telework, such as simple e-government tools (example: a outsourcing, etc. mobile-based citizen feedback platform). 32 IRAQ ECONOMIC MONITOR: NAVIGATING THE PERFECT STORM (REDUX) REFERENCES Bloomberg, March 2020. 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