estimated to have narrowed to 2.2 percent REPUBLIC OF of GDP due to higher oil prices and Recent developments measures to contain current expenditures. In 2015-16, low oil prices, higher security IRAQ Following the complete liberation from ISIS in December 2017, the Government of and humanitarian outlays and weak con- trols rapidly deteriorated the fiscal bal- Iraq (GoI) is designing a comprehensive ance, with the adjustment falling mainly reconstruction package linking immediate on non-oil investment expenditure. KRG Table 1 2017 stabilization to a long-term vision. The expenditure control measures decreased P o pulatio n, millio n 38.7 recent Iraq Damage and Needs Assess- its fiscal deficit by 80 percent from 2014 to GDP , current US$ billio n 197.7 ment estimates the reconstruction and 2016, while spending pressures remained GDP per capita, current US$ 5115 recovery needs at US$88 billion. In Febru- high to assist IDPs and refugees from Syr- a 17.9 ary 2018, Kuwait hosted a reconstruction ia. In October 2017, following a referen- Lo wer middle-inco me po verty rate ($ 3.2) a and recovery conference which identified dum on KRG independence, which was Upper middle-inco me po verty rate ($ 5.5) 57.3 b pledges amounting to US$30 billion. Sup- considered illegal by GoI, federal forces Natio nal po verty line 22.5 a ported by the World Bank, the GoI is con- regained control of disputed areas con- Gini co efficient 29.5 c sidering a financing facility to mobilize trolled by KRG, including oil-rich areas. Life expectancy at birth, years 69.6 significant resources from the private sec- As a result, KRG lost half of its oil reve- Source: WDI, M acro Poverty Outlook, and official data. tor. nue. Notes: (a) M ost recent value (2012), 2011 PPPs. Strong oil production has sustained eco- The GoI’s reform program is supported by (b) M ost recent WDI value (2014) nomic growth in 2015-16, but overall GDP a large financing package from bilaterals (c) M ost recent WDI value (2015) growth is estimated to have turned nega- and multilaterals which avoided a much tive at 0.8 percent in 2017, due to a 3.5 deeper economic and social crisis that percent reduction in oil production to could have been triggered by the large Reconstruction is slowly replacing oil fulfill OPEC+ agreement and further re- fiscal shock. GoI also tapped the sovereign duction from areas that returned under bond market in August 2017, first inde- production as a driver of growth in the the GoI’s control. Due to the ISIS war and pendent issuance since 2006, with a US$1 wake of the twin shocks of the ISIS war fiscal consolidation to adjust to lower oil billion bond. and oil revenue decline which caused a prices, non-oil growth has been negative A better fiscal outturn has stabilized pub- deep recession in the non-oil economy. in 2014-16. At the end of 2017, the cumula- lic debt in 2017 after large borrowing and tive real losses due to the conflict stood at issuance of debt guarantees increased the OPEC+ production restraint resulted in 72 percent of the 2013 GDP and 142 per- public debt-to-GDP ratio from 32 percent negative growth in 2017, despite a strong cent of the 2013 non-oil GDP. Improved in 2014 to 64.4 percent in 2016. In 2017, the recovery of the non-oil sector. Growth security situation and initial reconstruc- government has made progress to reduce will accelerate in 2018, thanks to a more tion effort have sustained non-oil growth a large stock of guarantees and improve at 4.4 percent in 2017. The pegged ex- their management. favorable security environment, but sus- change rate and subdued demand have In 2017, the current account is estimated taining growth during reconstruction kept inflation low at around 0.1 percent in to have returned to a surplus of 0.7 per- would depend on structural reforms. Pov- 2017. cent of GDP. The strong reserve accumu- erty reached 22.5 % in 2014 and 10 % of In 2017, the GoI’s overall fiscal deficit is lation in 2010–2013 smoothed the impact Iraqis remain displaced. FIGURE 1 Republic of Iraq / Fiscal Accounts (percent of FIGURE 2 Republic of Iraq / Poverty Head Count Rate GDP) (% change) Percent of GDP 10 60 33.6 South 5 31.5 55 15.8 Centre 18.6 0 50 14.9 -5 Rest of North 17.7 45 25.7 -10 IS-affected 41.2 40 12.0 35 -15 Baghdad 12.8 3.5 30 -20 Kurdistan 12.5 18.9 25 -25 Iraq 22.5 2010 2011 2012 2013 2014 2015 2016 2017e 2018f 2019f 2020f Overall Fiscal Balance, excl grants (right) 0 10 20 30 40 50 Revenues (left) Expenditures (left) 2012 2014 Crisis Sources: Ministry of Finance; and World Bank staff projections. Sources: World Bank staff microsimulation estimates. MPO 1 Apr 18 of the fiscal policy adjustment required to thanks to higher oil prices. Thanks to fis- maintain external sustainability. Thanks to higher oil prices, international reserves Outlook cal consolidation, public debt is expected to remain sustainable in the medium term. started increasing in 2017, rebuilding buff- ers to external shocks. Iraq’s growth outlook is expected to im- The poverty rate increased from 18.9 per- cent in 2012 to an estimated 22.5 percent prove thanks to a more favorable security environment, and the gradual pick up of Risks and challenges in 2014. Recent labor market statistics sug- investment for reconstruction. Overall gest further deterioration of the poverty GDP growth is projected to return posi- Downside risks include oil price volatility, situation. Labor force participation rate of tive in 2018 despite the extension of failure to improve the security environ- the youth (ages 15-24) has dropped mark- OPEC+ agreement till end-2018 and fur- ment and failure to implement the ex- edly since the onset of the crisis, from 32.5 ther increase in 2019 as the agreement pected large fiscal adjustment to contain percent to 27.4 percent. Unemployment expires. From 2020, oil production is ex- current expenditure and prioritize invest- increased particularly for individuals pected to increase only marginally, reduc- ment for reconstruction. In the short-term, from the poorest households, youth, and ing overall growth, as GoI cannot afford to escalating political tensions and the prob- those in the prime working age (ages 25- significantly increase investments in the ability of terrorist attacks ahead of the 49). Unemployment rate is about twice as oil sector. Non-oil economic growth is elections in mid-May 2018 add further risk high in the governorates most affected by expected to benefit from increased invest- to the outlook. The external debt remains ISIS-related violence and displacement ment for reconstruction, but absent struc- highly vulnerable to a reduction in oil compared to the rest of the country (21.1 tural reforms, higher non-oil growth prices or a real exchange rate depreciation. percent versus 11.2 percent), especially would be short-lived. In 2018, a step up of Risks are also related to the capacity of the among the young and the uneducated. government investment, with a large im- GoI to provide public services and start Among the three million IDPs, unemploy- port component, is expected to stimulate reconstruction. Effective delivery of basic ment is 55 percent higher than that of host growth over the projection period in agri- services and creation of income- communities. The Public Distribution Sys- culture, manufacturing, construction, generating opportunities, particularly for tem (PDS) provides the only safety net for transport and supporting services. Private youths in recently-liberated areas, is also most poor, and is currently stretched to its sector activity is subsequently projected to crucial to ameliorate the underlying fragil- limits. Almost all IDPs and residents of pick up, as public investments decreases. ity and prevent another cycle of violence ISIS-affected governorates have experi- Projected fiscal surpluses should be seen and conflict in the country. enced some form of negative shock and in the context of continued oil price vola- many lost access to food rations through tility and creating fiscal space for financ- the PDS. ing for reconstruction. The current ac- count deficit is expected to remain limited TABLE 2 Republic of Iraq / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2015 2016 2017 e 2018 f 2019 f 2020 f Real GDP growth, at constant market prices 4.8 11.0 -0.8 2.5 4.1 1.9 Private Consumption 20.0 13.0 2.1 1.1 3.3 3.5 Government Consumption 29.1 6.3 -1.2 10.4 -3.6 -4.0 Gross Fixed Capital Investment -2.1 -30.2 -7.8 5.9 -1.7 -2.3 Exports, Goods and Services 28.3 13.1 -0.1 2.2 5.0 1.2 Imports, Goods and Services 11.2 -5.3 0.8 11.2 -1.7 -1.7 Real GDP growth, at constant factor prices 4.8 11.0 -0.8 2.5 4.1 1.9 Agriculture -49.3 59.6 -3.0 7.0 7.0 7.0 Industry 9.3 18.6 -3.3 2.1 4.2 0.9 Services 2.4 -7.2 5.9 3.0 3.5 3.7 Inflation (Consumer Price Index) 1.4 0.4 0.1 2.0 2.0 2.0 Current Account Balance (% of GDP) -6.5 -8.6 0.7 -0.2 -0.1 -1.3 Fiscal Balance (% of GDP) -12.3 -13.9 -2.2 0.9 1.7 1.4 Debt (% of GDP) 55.1 64.3 57.8 55.2 53.5 50.7 Primary Balance (% of GDP) -11.7 -13.2 -1.0 2.5 3.0 2.6 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 2 Apr 18