IRAQ ECONOMIC MONITOR The Slippery Road to Economic Recovery Fall 2021 Middle East and North Africa Region Iraq Economic Monitor The Slippery Road to Economic Recovery With a Special Focus on Overcoming Water Scarcity and Climate Change Impacts Fall 2021 Middle East and North Africa Region © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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TABLE OF CONTENTS Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix ‫الملخص التنفيذي‬ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv 1.  Recent Economic and Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Oil and Gas Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Monetary Policy and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.  Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Risks and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Special Focus: Overcoming Water Scarcity and Climate Change Impacts: Resilience and Institutional Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Setting the Context: Water Scarcity, Climate Change, and Much More… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Sector Architecture and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Sector Financing and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Confronting Iraq’s Water Situation—Demand Management, Institutional and Riparian Solutions . . . . . . . . . . 27 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Selected Recent World Bank Publications on Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 iii List of Figures Figure 1 The Economy Is Gradually Recovering in 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 2 Per Capita GDP Is also Growing but Remained behind that of its Regional and Income Peers . . . 2 Figure 3 Economic Growth Has Recovered in H1-21 Driven by Improved Performance of Non-Oil Activity… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 4 …and Despite Negative Contribution from Oil Which Offset the Overall Growth by More than 6 pp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 5 Consumption Is Expected to Pick Up in 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 6 As Pandemic Containment Measures Loosened, Mobility Improved Giving a Boost to Private Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure B1.1 Negative Coping Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Figure B1.2 Insufficient Food Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Figure 7 Oil Production and Exports Volume Are Inceasing as OPEC+ Relaxed Production Limits . . . . . .5 Figure 8 Prices for Iraq’s Oil Have Rebounded since Mid-2020 Driven Partially by the Pick-Up in Global Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Figure 9 Overall Fiscal Balance (Cash Basis) Is Improving Owing to Higher Oil Prices and Oil Exports . . 6 Figure 10 GoI Policies Led to Rising Non-Discretionary Spending with the Wage Bill Consuming the Largest Share of the Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Figure B2.1 Impact of COVID-19 on Labor Force Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure B2.2 Impact of COVID-19 on Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 11 Execution Rates, Particularly for Public Investment, Remained Low . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 12 CAB Returned to Surplus in H1-21 Easing the External Position of Iraq . . . . . . . . . . . . . . . . . . . . . 9 Figure 13 Higher Oil Prices and Lower Private Imports Contributed to the Positive Trade Balance Outcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Figure 14 The Usable Reserves Have Increased to 15 Months of Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 15 Recovery in Domestic Demand and the Currency Devaluation Have Spurred Inflationary Pressures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Figure 16 CBI has Scaled Back Some of the Credit to Private Sectors Schemes to Limit Inflationary Pressure, but Abundance of Cash in the Economy Is Offsetting It. . . . . . . . . . . . . . . . . . . . . . . . . .11 Figure 17 The Economy Remained Cash-Based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Figure 18 Supply-Demand Gap without the National Strategy (Business-as-Usual Scenario) . . . . . . . . . . . 20 Figure 19 Agricultural Water Productivity (US$/m3) and Per Capita Agricultural Water Withdrawals in Iraq and MENA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Figure 20 Source of Drinking Water by Governorate (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Figure 21 Increasing Reliance on Development Assistance for WSS Corresponds to Decreasing Oil Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Figure B5.1 Water Scarcity Leads to a Higher Food Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 List of Boxes Box 1 Impact of COVID-19 on Iraq’s Food Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Box 2 Iraq COVID-19 High Frequency Phone Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Box 3 Water Availability Essential to Maintain Oil Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Box 4 Water Scarcity: A Driver of Forced Displacement and Source of Vulnerability for the Forcibly Displaced and their Host Communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Box 5 Impact on Trade Balance of Food Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 List of Tables Table 1 Iraq: Selected Economic and Financial Indicators, 2018–2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 iv IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY ACRONYMS Bcf Billion cubic feet LFPR Labor force participation rate BOP Balance of payments LHS Left hand side BWA Baghdad Water Authority M2 Broad Money CAB Current account balance mbpd Million barrel per day CBI Central Bank of Iraq mbpm Million barrels per month COSIT Central Organization for Statistics and MENA Middle East and North Africa Information Technology MoE Ministry of Electricity COVID-19 Coronavirus Disease 2019 MoF Ministry of Finance (Iraq) CSSP Common Seawater Supply Project MoO Ministry of Oil (Iraq) DRM Domestic revenue mobilization MoWR Ministry of Water Resources Ekyc Electronic know your customer MPHMPW Ministry of Public Housing, ER Exchange rate Municipalities, and Public Works FAO Food and Agriculture Organization MT Metric Ton FDI Foreign Direct Investment MW Megawatt FINDEX Financial Incusion Database NPLs Non-Performing Loans GDP Gross Domestic Product O&M Operation and Maintenance GoI Government of Iraq OPEC+ Organization of Petroleum Exporting GW GigaWatts Countries (plus other non-OPEC partner HFPS High Frequnecy Phone Survey countries) H1 First Half of the Year PDS Public Distribution System IDP Internally Displaced Persons pp Percentage points IEA International Energy Agency RHS Right hand side IEM Iraq Economic Monitor SMEs Small and Medium-Sized Enterprises IFAD International Fund for Agriculture SOBs State-owned banks Development SWIFT Rapid Welfare Monitoring Survey IHFPS Iraq High Frequency Phone Survey SWLRI Strategy for Water and Land Resources IMF International Monetary Fund of Iraq or Strategy IOM International Organization for Migration Tcf Trillion cubic feet IQD Iraqi Dinar UNHCR United Nations High Commissioner for KRG Kurdistan Regional Government Refugees v UMIC Upper middle-income countries WDI World Development Indicators UNOCHA United Nations Office for the WSS Water Supply and Sanitation Coordination of Humanitarian Affairs WFP World Food Program US United States WRM Water Resource Management WB(G) World Bank (Group) y/y Year-on-year (growth) vi IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY ACKNOWLEDGMENTS T he Iraq Economic Monitor provides an prepared by a team consisting of Amal Talbi (Lead update on key economic developments Water Resources Management Specialist), Amjad and policies over the previous six months Muhammad Khan (Economist), Edoardo Borgomeo and presents findings from recent World Bank work (Water Resources Management Specialist), Anders on Iraq, placing them in a longer-term and global Jagerskog (Senior Water Resources Management context and assessing the implications of these Specialist), and contribution from Nafie Mofid (Senior developments and other changes in policy regarding Water Supply and Sanitation Specialist), Wilfried the outlook for Iraq. Its coverage ranges from the Hudertmark (Senior Irrigation Specialist), Esha Dilip macro-economy to business environment and private Zaveri (Water Economist), Nagaraja Rao Harshadeep sector development. It is intended for a wide audience, (Lead Environment Specialist), and Iyad Rammal including policy makers, business leaders, financial (Senior Infrastructure Specialist). Special thanks to market participants, and the community of analysts Muna Salim (Senior Program Assistant, MTI) for her and professionals engaged in Iraq. administrative support. The Iraq Economic Monitor is a product of The findings, interpretations, and conclu- the Middle East and North Africa (MENA) unit in the sions expressed in this Monitor are those of World Macroeconomics, Trade & Investment (MTI) Global Bank staff and do not necessarily reflect the views Practice of the World Bank Group. The report was of the Executive Board of the World Bank or the written by Wael Mansour (Senior Economist, MTI), governments they represent. For information about Majid Kazemi (Economist, MTI), and Ashwaq Maseeh the World Bank and its activities in Iraq, please visit (Economist, MTI). www.worldbank.org/en/country/iraq (English) or The report was prepared under the direction www.worldbank.org/ar/country/iraq (Arabic). For of Saroj Kumar Jha (Country Director, MNC02), Eric questions and comments on the content of this pub- Le Borgne (Practice Manager, MTI), Carmen Nonay lication, please contact Wael Mansour (wmansour@ (Practice Manager, SMNWA), Ramzi Neman (Head of worldbank.org), Majid Kazemi (mkazemi@worldbank. Baghdad Office, MNCO2), and Christos Kostopoulos org), Ashwaq Maseeh (amaseeh@worldbank.org), or (Lead Economist, MTI). The first chapter includes Eric Le Borgne (eleborgne@worldbank.org). inputs from Syed Mehdi Hassan (Senior Financial The data cut-off date for this report is October Sector Specialist). The Special Focus Chapter was 15, 2021. vii EXECUTIVE SUMMARY Recent Economic and Policy the same period a year earlier, oil revenues have Developments increased by 52 percent y/y while expenditures rose by 14 percent y/y. This led to a fiscal account surplus Iraq’s economy is slowly recovering from the of 2.2 percent of GDP and a decline in the public debt- double COVID-19 pandemic and oil shocks of to-GDP ratio. However, the budget remains large, beset 2020. Global demand has boosted oil prices, OPEC+ by rigid spending on wages and transfers, reducing eased oil production limits to the benefit of Iraq, and the ability of the Government of Iraq (GoI) to undertake COVID-19 restrictions were gradually lifted, leading fiscal adjustments or further stimulate the economy, to some recovery of economic activity especially and produces poor quality services. Large arrears— in the services sectors. The recovery was aided by especially those related to electricity, public wages, and government actions that continued to push forward pensions—intensify pressures on Iraq’s public finances. the White Paper reforms and managed to provide a Higher oil exports and global investment small stimulus through public transfers and schemes flows have improved Iraq’s external account and aimed at increasing credit to businesses. This led bolstered international reserves. Oil exports rev- real gross domestic product (GDP) to grow by 0.9 enues increase of 27 percent y/y in H1-21 together percent year-on-year (y/y) in the first half of 2021 (H1- with imports decline of 39 percent y/y, following the 21), after a 16 percent contraction in 2020. However, private sector adjustment to the currency deprecia- the recovery was held back by deteriorating public tion, pushed the current account balance to a surplus service delivery, including widespread electricity cuts, of 7 percent of GDP. This surplus combined with as well as intensifying climate change shocks such as improved external financing including a 27 percent historic low rainfalls (second driest year in 40 years) rise in FDI, namely, in energy sector, has boosted the which led to water shortages. These developments central bank’s useable reserves from US$48 billion in impacted agriculture and the industrial sectors. At the 2020 to almost US$55 billion in H1-21. These reserves same time, healthcare services deteriorated amidst cover 15 months of current year’s imports. growing cases of the COVID-19 Delta variant. Iraq’s economic prospects have improved More favorable oil market conditions with the recovery in global oil markets, but the have pushed Iraq’s fiscal balance into a surplus, spread of new COVID-19 variants and climate although structural challenges persist. With Iraq’s change challenges pose significant headwinds. oil prices in Jan-Jul 2021 trending at 81 percent above Oil GDP, the main driver of growth in the medium ix term, is expected to grow in line with the gradual water-related risks (droughts, and floods). In 2015, phase-out of OPEC+ production quotas. In the the Government of Iraq approved its national strategy absence of an accelerated process of reforms, to develop water and land resources for the next 20 average annual non-oil GDP growth is forecasted to years. The Strategy, known as SWLRI (Strategy for remain under 3 percent in 2021–23 due to the impact Water and Land Resources of Iraq or Strategy), alerted of the COVID-19 Delta variant on the economy and that in a business-as-usual scenario, by 2016, the water and electricity shortages that impact agriculture country would not have the necessary water quantity and industries. More favorable oil market conditions or quality and called for significant reforms to avert are projected to maintain the fiscal balance in surplus this alarming trajectory. By 2030, Iraq is projected in 2021–23. Higher oil exports are also expected to to face severe water scarcity, with less than 1,000 drive a current account surplus over the outlook years, cubic meters per person per year available. Iraq’s thereby reversing pressures on foreign exchange water sector faces many challenges, among which: reserves. The recent surge in poverty is expected to (i) increasing water demand and competition among gradually reverse following the economic recovery sectors, (ii) deteriorating water quality, (iii) aging and improved vaccination rollout. infrastructure operating at sub-optimal levels, and However, Iraq’s economic outlook is mired (iv) reduced water availability due to climate change. by significant risks that could materialize in the The SWLRI had envisioned spending US$180 billion medium-term. Downside risks include: a potential in the sector over this period, but the financing did not decline in oil prices, a worsening COVID-19 crisis due materialize as expected due to the oil price decline to the spread of new variants, a deterioration in secu- and the impacts of Islamic State insurgency. The rity conditions, the intensification of climate change current water sector resilience (storage level and shocks and additional macroeconomic volatility. conveyance infrastructure) is no longer sufficient to Positive oil price shocks would improve economic face the inevitable impacts of climate change. The indicators in the short term but, as with previous water sector needs to improve water productivity, years’ experience, could come at the risk of weak- efficiency, and financial sustainability in the medium ening an already tepid drive for reforms. The recent to long term and control the water demand to cope recovery is especially fraught by major fiscal risks. with water scarcity and the climate change impacts. These risks emerge from growing budget rigidities, Iraq’s water sector relies on a highly cen- slow clearance of arrears, a large exposure of state- tralized institutional architecture, which creates owned banks and the central bank to the sovereign, coordination challenges in water resource man- and public investment management constraints that agement and service delivery across the country. have impacted public service delivery. On the upside, A lack of consensus among governorates and across progress on regional economic integration together sectors has given rise to a “tragedy of the commons”, with an improved security environment could provide epitomized by the deterioration of downstream water new momentum for growth and diversification. The quality as upstream users pollute water resources breadth and depth of these challenges underscore needed downstream. Central control of water supply the need for an accelerated implementation of struc- and sanitation service provision also results in limited tural reforms by the new government. communication with local-level authorities and leaves little flexibility to respond to ever-changing local con- texts and situations. Although central water resource Overcoming Water Scarcity and planning is still needed due to the complex hydrology, Climate Change Impacts local-level involvement in management and allocation of water resources is necessary for incorporating Increasing water scarcity and climate change local knowledge and varying local priorities. impacts call for significant water sector reforms to Financing constraints are due to limited capture water-related opportunities and manage revenues from customers, and also arise from the x IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY institutional architecture of the water sector, and Going forward, this report identifies three present challenges to economic development in reform areas to improve resilience to water scarcity Iraq. Centrally determined budgets are volatile in the and climate change impacts: face of macroeconomic fluctuations and resource constraints arising from political instability. Iraq is • Reform Area 1: Water efficiency, productivity, especially vulnerable to such volatility due to the high and demand management policies exposure to oil price fluctuations and the strain from Increasing water efficiency and productivity are the expensive fight against and reconstruction needed essential, but only if paired with water demand after the Islamic State insurgency. Successful execu- management policies1 to cap the overall water tion of capital investment projects requires financial use. In addition, updating dams’ operation stability, especially in the water sector where many of will improve drought and flood management. these projects require multiple years to finish. Central Finally, water reallocation2 within and across budgets also place disproportionate emphasis on allo- governorates provides an additional tool for cations for capital expenditures and salaries but less policymakers to better cope with water scarcity on needed operations and maintenance expenditures, and climate change. leading to faster deterioration of existing infrastructure. • Reform Area 2: Institutional solutions Additionally, the misalignment of information and Iraq’s water sector has the opportunity to improve incentives also creates challenges for central planning water resources management through multiple and administration of sub-national of water supply and avenues of institutional reform. Stakeholder sanitation service delivery, leading to tariffs that may engagement could build consensus across water not reflect local water delivery costs. Current revenues users in multiple governorates and sectors to from customers are a fraction of the costs to operate harness the benefits of an inclusive decision- and maintain water supply and sanitation services. making process. Water service providers could Without action, these constraints in the also benefit from increased local-level fiscal water sector can lead to large losses across and managerial autonomy. Improving cost multiple sectors of the economy (GDP, labor, recovery at the local level generates revenue for and crop prices) and impact more the vulnerable sustaining service delivery and in the medium to people. A 20 percent reduction in water supply with long term ensure financial sustainability, which changes in crop yields that will accompany climate would improve the prospect for private sector change could reduce real GDP in Iraq by up to 4 per- participation in the water sector. cent, or US$6.6 billion, compared to 2016 levels; and • Reform Area 3: Regional solutions a drop by 11.8 percent of the demand for unskilled About 60 percent of Iraq’s freshwater resources labor in agricultural by 5.4 percent of the demand originates outside its borders, making dialogue for nonagricultural activities. Output reduction would with its neighbors important to ensure water cause consumer price index for crops to increase by security. While cooperation over transboundary 13.9 percent and would also increase net imports for waters is often thought of as a zero sum food items to over US$960 million. In the Middle East, where many households are net buyers of grains and food products, any increases in crop consumer prices 1 The expression “water demand management policies” could increase poverty. Low-income households are in this report refers to policies that affect the consumers particularly vulnerable because they tend to spend a use of water: water pricing, quotas, shifting of crops, high share of their incomes on staple foods (Martin water accounting and monitoring, use of transformative technology to support water governance monitoring and and Ivanic 2016 cited in World Bank, 2020). Similar enforcement, and strategic communication. inequalities arise when considering reductions in 2 Water reallocation is here defined as a change to the agricultural employment, which will disproportionately volume, timing, location, or quality of water delivered hurt the poor. under formal or informal water rights Executive Summary xi exercise, in practice there are many cooperative on quantity as well as on water quality; more solutions that Iraq and neighboring countries coordinated management and operation of water can undertake to their mutual advantage. These infrastructure to mitigate the impacts of droughts, regional solutions include, for example, increased floods, and climate change, and help improve the information sharing between the countries, both management of evaporative losses. xii IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY ‫المرصد االقتصادي للعراق‬ ‫الطريق الزلق لإلنتعاش اإلقتصادي‬ ‫مع عدد خاص حول التغلب على ندرة المياه وتأثيرات تغير المناخ‬ ‫الملخص التنفیذي‬ ‫فائض يف الحساب املايل بنسبة ‪ 2.2٪‬من إجاميل الناتج املحيل‬ ‫التط ّ‬ ‫ورات االقتصادية والسياسية األخرية‬ ‫وانخفاض نسبة الدين العام إىل إجاميل الناتج املحيل‪ .‬وبالرغم‬ ‫من هذا‪ ،‬يبقى حجم املوازنة كبريا بسبب اإلنفاق املرتكز عىل‬ ‫يتعاىف اقتصاد العراق تدريجياً من جائحة ‪ COVID-19‬ومن‬ ‫تسديد الرواتب والتحويالت‪ ،‬مام يقلل من قدرة الحكومة‬ ‫دى الطلب‬ ‫صدمات اختالل اسعار النفط لعام ‪ .2020‬فقد أ ّ‬ ‫العراقية عىل إجراء تعديالت مالية أو تحفيز االقتصاد بشكل‬ ‫العاملي إىل رفع أسعار النفط‪ ،‬وخفّفت منظمة أوبك ‪ +‬حدود‬ ‫أكرب‪ ،‬وينعكس سلبا عىل نوعية الخدمات العامة املقدمة‪ .‬إن‬ ‫إنتاج النفط املتاح للعراق‪ ،‬وتم رفع قيود ‪COVID-19‬الصحية‬ ‫املتأخرات الكبرية يف تسديد املستحقات‪ -‬خاصة تلك املتعلقة‬ ‫يا‪ ،‬مام أدى إىل بعضا‬ ‫واالجتامعية الخاصة بجائحة كورونا تدريج ً‬ ‫بالكهرباء واملصارفات العامة والرواتب ‪ -‬تزيد من الضغوط عىل‬ ‫من التعايف للنشاط االقتصادي وخاصة يف قطاعات الخدمات‪.‬‬ ‫املالية العامة للعراق‪.‬‬ ‫زز االنتعاش نتيجة بعض اإلجراءات الحكومية التي‬ ‫كامتع ّ‬ ‫أدى ارتفاع صادرات النفط وتدفقات االستثامر العاملية‬ ‫ن من توفري‬ ‫استمرت يف دفع إصالحات الورقة البيضاء مام مك ّ‬ ‫إىل تحسني الحساب الخارجي للعراق ودعم االحتياطيات‬ ‫محفز بسيط من خالل التحويالت العامة والربامج التي تهدف‬ ‫الدولية‪ .‬ارتفعت إيرادات صادرات النفط بنسبة ‪ 27‬يف املائة‬ ‫إىل زيادة القروض املمنوحة للرشكات‪ .‬أدى ذلك إىل منو الناتج‬ ‫عىل أساس سنوي يف النصف األول من العام الجاري وترافق‬ ‫املحيل اإلجاميل الحقيقي بنسبة ‪ 0.9‬يف املائة عىل أساس سنوي‬ ‫ذلك مع انخفاض الواردات بنسبة ‪ 39‬يف املائة‪ ،‬بعد تكيّف‬ ‫يف النصف األول من عام ‪ ،2021‬وذلك بعد انكامش وصل اىل‬ ‫القطاع الخاص مع خفض قيمة الدينار العراقي ‪ ،‬مام انتج‬ ‫‪ 16‬يف املائة يف عام ‪ .2020‬بالرغم من ذلك‪ ،‬فقد تباطأ االنتعاش‬ ‫فائضا يف ميزان الحساب الجاري بنسبة ‪ 7‬يف املائة من إجاميل‬ ‫مرة أخرى بفعل تدهور يف تقديم الخدمات العامة‪ ،‬مبا يف ذلك‬ ‫تحسن التمويل‬‫الناتج املحيل‪ .‬وقد أدى هذا الفائض اضافة اىل ّ‬ ‫انقطاع الكهرباء عىل نطاق واسع‪ ،‬فضال عن زيادة يف التأثريات‬ ‫الخارجي وزيادة االستثامر األجنبي املبارش بنسبة ‪ 27‬يف املائة‪،‬‬ ‫تجلت‪ ،‬عىل سبيل املثال‪ ،‬يف‬ ‫ّ‬ ‫املناخية التي ادت اىل صدمات‬ ‫وتحديدا ً يف قطاع الطاقة‪ ،‬إىل تعزيز االحتياطيات القابلة‬ ‫انخفاض تاريخي ملعدالت هطول األمطار (ثاين أكرب جفاف يف‬ ‫ٍ‬ ‫لالستخدام لدى البنك املركزي العراقي وذلك بزيادة من ‪48‬‬ ‫شح يف املياه‪ .‬وقد أث ّرت هذه التطورات‬ ‫ما) مام أدى إىل ّ‬ ‫‪ 40‬عا ً‬ ‫مليار دوالر أمرييك يف عام ‪ 2020‬إىل ما يقرب من ‪ 55‬مليار‬ ‫عىل الزراعة والقطاعات الصناعية‪ .‬يف الوقت نفسه‪ ،‬ادى‬ ‫دوالر أمرييك يف النصف األول من عام ‪ .2121‬وتغطّي هذه‬ ‫االرتفاع يف معدالت االصابة باملتغري دلتا لفريوس كورونا اىل‬ ‫را من واردات العام الحايل‪.‬‬ ‫االحتياطيات ‪ 15‬شه ً‬ ‫تدن يف مستوى تقديم خدمات الرعاية الصحية‪.‬‬ ‫تحسنت اآلفاق االقتصادية للعراق مع االنتعاش يف‬ ‫ّ‬ ‫دفعت الظروف األكرث ايجابية يف سوق النفط‬ ‫أسواق النفط العاملية‪ ،‬لكن انتشار متغريات كورونا الجديدة‬ ‫إىل فائض يف امليزان املايل العراقي‪ ،‬عىل الرغم من استمرار‬ ‫حا معاكسة‪ .‬من املتوقع أن‬ ‫وتحديات تغري املناخ تشكّل ريا ً‬ ‫التحديات الهيكلية‪ .‬ومع اتجاه أسعار النفط يف العراق خالل‬ ‫رك الرئييس للنمو‬ ‫ّ‬ ‫املح‬ ‫وهو‬ ‫النفطي‪،‬‬ ‫ينمو الناتج املحيل اإلجاميل‬ ‫الفرتة املمتدة من يناير إىل يوليو ‪ 2021‬إىل تسجيل ارتفا ٍ‬ ‫ع‬ ‫عىل املدى املتوسط ‪ ،‬مبا يتامىش مع اإللغاء التدريجي لحصص‬ ‫ة بالفرتة نفسها من العام السابق‪،‬‬ ‫نسبتُه ‪ 81‬يف املائة مقارن ً‬ ‫إنتاج أوبك ‪ .+‬غري انه ويف غياب عملية إصالحات متسارعة‪،‬‬ ‫كام زادت العائدات النفطية بنسبة ‪ 52‬يف املائة عىل أساس‬ ‫يبقى من املتوقع أن يظل متوسط منو إجاميل الناتج املحيل غري‬ ‫سنوي بينام زادت النفقات بنسبة ‪ 14‬يف املائة‪ .‬مام أدى إىل‬ ‫‪xiii‬‬ ‫للفرد يف السنة‪ .‬هذا ويواجه قطاع املياه يف العراق العديد من‬ ‫النفطي السنوي أقل من ‪ 3٪‬يف ‪ 2023-2021‬بسبب تأثري متغري‬ ‫التحديات‪ ،‬من بينها‪ )1( :‬زيادة الطلب عىل املياه والتنافس‬ ‫دلتا عىل االقتصاد ونقص املياه والكهرباء الذي يؤثر عىل قطاع‬ ‫عىل املوارد املائية بني القطاعات‪ )2( ،‬تدهور جودة املياه‪،‬‬ ‫الزراعة والصناعات‪ .‬ومن املتوقع أن تحافظ الظروف األكرث‬ ‫(‪ )3‬وضعية متهالكة للبنية التحتية التي تعمل مبستويات دون‬ ‫مالءمة يف سوق النفط عىل الفائض يف امليزان املايل يف ‪-2021‬‬ ‫املستوى األمثل‪ ،‬و(‪ )4‬انخفاض توافر املياه بسبب التأثريات‬ ‫‪ .2023‬كام يبدو من املتوقع أيضً ا أن يؤدي ارتفاع صادرات‬ ‫املناخية ‪ .‬وكانت االسرتاتيجية قد لحظت ان املوازنة املطلوبة‬ ‫النفط إىل تحقيق فائض يف الحساب الجاري عىل مدى سنوات‬ ‫لتنفيذها يف هذه املهلة الزمنية تقارب ‪ 180‬مليار دوالر أمرييك‬ ‫التوقعات‪ ،‬وبالتايل عكس الضغوط عىل احتياطيات النقد‬ ‫‪ ،‬غري ان التمويل مل يتوفر وفق املخطط املرسوم كام هو متوقع‬ ‫األجنبي‪ .‬كام من املتوقع أن تنعكس الزيادة األخرية يف خفض‬ ‫بسبب انخفاض أسعار النفط والتأثريات املالية الناجمة من‬ ‫معدالت الفقر تدريجياً بعد االنتعاش االقتصادي وتعميم‬ ‫الحرب التي شنها تنظيم الدولة اإلسالمية عىل العراق‪ .‬ويف‬ ‫حمالت التلقيح ضد فريوس كورونا‪.‬‬ ‫هذا الوقت‪ ،‬مل تعد مرونة قطاع املياه الحالية (ان عىل مستوى‬ ‫وبالرغم من ذلك‪ ،‬تبقى التوقعات االقتصادية للعراق‬ ‫التخزين اوالبنية التحتية للنقل) كافية ملواجهة اآلثار الحتمية‬ ‫محاطة مبخاطر كبرية ميكن أن تتحقق عىل املدى املتوسط‪.‬‬ ‫لتغري املناخ‪ .‬ويحتاج قطاع املياه إىل تحسني إنتاجية املياه‬ ‫ففي الجانب السلبي‪ ،‬تشمل هذه املخاطر انخفاض محتمل‬ ‫وكفاءتها واستدامتها املالية عىل املدى املتوسط إىل الطويل‬ ‫يف أسعار النفط‪ ،‬وتفاقم أزمة جائحة كورونا بسبب انتشار‬ ‫والتحكم يف الطلب عىل املوارد املائية ملواجهة ندرة املياه وآثار‬ ‫املتغريات الجديدة‪ ،‬وتدهور الظروف األمنية‪ ،‬وتكثيف صدمات‬ ‫تغري املناخ‪.‬‬ ‫تغري املناخ وتقلبات االقتصاد الكيل اإلضافية‪ .‬سينعكس إرتفاع‬ ‫يعتمد قطاع املياه يف العراق عىل بنية مؤسسية شديدة‬ ‫ن املؤرشات االقتصادية عىل املدى القصري‪،‬‬ ‫أسعار النفط اىل تحس ّ‬ ‫املركزية‪ ،‬مام يخلق تحديات تنسيق يف إدارة املوارد املائية‬ ‫غري ان الحال يبقى استنادا اىل تجارب السنوات السابقة‪ ،‬يف ان‬ ‫وتقديم الخدمات يف جميع أنحاء البالد‪ .‬ان غياب التوافق بني‬ ‫يؤدي هذا التحسن إىل إضعاف عملية تنفيذ اإلصالحات‪ .‬كام أن‬ ‫املحافظات وعرب القطاعات قد ادى إىل ظهور ما يسمى بظاهرة‬ ‫االنتعاش األخري محفوف بشكل خاص باملخاطر املالية الكربى‪.‬‬ ‫«مأساة املشاعات»‪ ،‬والتي برزت واضحة يف تدهور جودة‬ ‫وتأيت هذه املخاطر نتيجة تزايد الجمود يف امليزانية‪ ،‬والتباطؤ يف‬ ‫املياه عند املصب حيث يلوث مستخدمو املنبع موارد املياه‬ ‫تسوية املتأخرات‪ ،‬واالنكشاف الكبري للمصارف اململوكة للدولة‬ ‫الالزمة يف اتجاه مجرى النهر‪ .‬ويؤدي التحكم املركزي يف توفري‬ ‫والبنك املركزي العراقي عىل الديون السيادية‪ ،‬ومعوقات إدارة‬ ‫خدمات املياه والرصف الصحي أيضً ا إىل محدودية التواصل‬ ‫امليزانية العامة لالستثامر التي اثرت سلبا عىل تقديم الخدمات‬ ‫مع السلطات عىل املستوى املحيل وال يفسح مجاال واسعا من‬ ‫العامة‪ .‬أما يف الجانب اإليجايب‪ ،‬ميكن النظر اىل ان التقدم‬ ‫املرونة لالستجابة للسياقات واملواقف املحلية املتغرية باستمرار‪.‬‬ ‫الحاصل يف التكامل االقتصادي اإلقليمي فضال عن التحسن يف‬ ‫عىل الرغم من أن التخطيط املركزي ملوارد املياه يبقى رضوريًا‬ ‫وع‪.‬‬ ‫م جدي ً‬ ‫د للنمو والتن ّ‬ ‫السيطرة االمنية قد اديا اىل توفري زخ ً‬ ‫بسبب الهيدرولوجيا املعقدة‪ ،‬فإن املشاركة يف إدارة وتخصيص‬ ‫ويؤكد اتساع وعمق هذه التحديات الحاجة إىل رضورة االرساع‬ ‫موارد املياه عىل املستوى املحيل رضورية لدمج املعرفة املحلية‬ ‫يف تنفيذ اإلصالحات الهيكلية من قبل الحكومة الجديدة‪.‬‬ ‫واألولويات املحلية املتنوعة‪.‬‬ ‫إن نقص التمويل يف قطاع املياه ناتج عن محدودية‬ ‫اإليرادات املحصلة من املشرتكني يف خدمات املياه‪ ،‬كام أنها ناجمة‬ ‫التغلّب عىل ندرة املياه وتأثريات تغري املناخ‬ ‫عن الهيكلية املؤسسية للقطاع وتحديات العراق اإلقتصادية‬ ‫والتنموية‪ .‬يتقلب التحديد املركزي للموازنات وفق تقلبات‬ ‫ان النقص املتزايد للمياه وآثار تغري املناخ يتطلب إصالحات‬ ‫االقتصاد الكيل والقيود املفروضة عىل املوارد املالية الناجمة‬ ‫كبرية يف قطاع املياه لالستفادة القصوى من الفرص املتعلقة‬ ‫عن عدم االستقرار السيايس‪ .‬ويبقى العراق يف خطر متزايد جراء‬ ‫باملياه وإدارة املخاطر املتعلقة باملياه (الجفاف والفيضانات)‪.‬‬ ‫هذه التقلبات الناتجة عن عدم استقرار اسعار النفط واالكالف‬ ‫يف عام ‪ ،2015‬اعتمدت حكومة العراق اسرتاتيجيتها الوطنية‬ ‫املالية الكبرية نتيجة القتال ضد تنظيم الدولة اإلسالمية اإلرهايب‬ ‫لتنمية موارد املياه واألرايض للسنوات العرشين القادمة‪.‬‬ ‫واملتطلبات املالية إلعادة اإلعامر الالزم بعده‪ .‬ويبقى االستقرار‬ ‫وحذّرت االسرتاتيجية‪ ،‬املعروفة ب( اسرتاتيجية موارد املياه‬ ‫املايل رشطا اساسيا لتنفيذ ناجح ملشاريع االستثامر الرأساميل ‪،‬‬ ‫واألرايض يف العراق أو اسرتاتيجية ‪ ،)SWLRI‬من أنه يف حال‬ ‫خاصة يف قطاع املياه حيث يتطلب تنفيذ هذه املشاريع فرتة‬ ‫االستمرار يف اعتامد «سيناريو العمل املعتاد» ‪ ،‬فانه بحلول عام‬ ‫زمنية طويلة‪ .‬كام تركّز امليزانيات املركزية بشكل غري متناسق‬ ‫‪ ،2016‬لن يكون لدى العراق الكمية أو الجودة الالزمة من‬ ‫عىل مخصصات النفقات الرأساملية والرواتب ولكن بشكل أقل‬ ‫نب‬ ‫املياه‪ .‬وقد دعت االسرتاتيجية إىل إجراء إصالحات كبرية تج ّ‬ ‫عىل نفقات إدارة العمليات والصيانة‪ ،‬مام يؤدي إىل تدهور‬ ‫هذا املسار املقلق‪ .‬وبحلول عام ‪ ،2030‬من املتوقع أن يواجه‬ ‫أرسع يف وضعية البنية التحتية القامئة‪ .‬باإلضافة إىل ذلك‪ ،‬يؤدي‬ ‫العراق ندرة شديدة يف املياه‪ ،‬مع توفر أقل من ألف مرت مكعب‬ ‫‪xiv‬‬ ‫‪IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY‬‬ ‫داخل وعرب املحافظات أداة إضافية لصانعي السياسات‬ ‫االختالل بني توافر البيانات والحوافز إىل خلق تحديات تواجه‬ ‫للتعامل بشكل أفضل مع ندرة املياه وتغري املناخ‪.‬‬ ‫إدارات التخطيط املركزي و إدارات املحافظات لخدمات املياه‬ ‫ •مجال اإلصالح ‪ :2‬الحلول املؤسسية‬ ‫والرصف الصحي‪ ،‬مام يؤدي إىل اعتامد تعريفات قد ال تعكس‬ ‫يتمتع قطاع املياه يف العراق بفرصة تحسني إدارة‬ ‫بحق التكاليف املحلية لتوصيل املياه‪ .‬فيام تشكل اإليرادات‬ ‫املوارد املائية من خالل طرق متعددة لإلصالح‬ ‫الحالية من العمالء جزءا بسيطا من تكاليف تشغيل وصيانة‬ ‫املؤسيس‪ .‬وميكن إرشاك أصحاب املصلحة لبناء توافق‬ ‫خدمات إمدادات املياه والرصف الصحي‪.‬‬ ‫يف اآلراء بني مستخدمي املياه يف العديد من املحافظات‬ ‫يف غياب أي إجراءات‪ ،‬قد تؤدي هذه القيود يف قطاع‬ ‫والقطاعات لتسخري فوائد عملية صنع القرار الشاملة‪.‬‬ ‫املياه إىل خسائر كبرية عرب قطاعات متعددة من االقتصاد‬ ‫كام ميكن ملقدمي خدمات املياه االستفادة من زيادة‬ ‫(الناتج املحيل اإلجاميل‪ ،‬والعاملة‪ ،‬وأسعار املحاصيل) وتؤثر‬ ‫االستقالل املايل واإلداري عىل املستوى املحيل‪ .‬ويؤدي‬ ‫رضني‪ .‬ان خفضا بنسبة ‪ 20‬يف‬ ‫بشكل أكرب عىل األشخاص املع ّ‬ ‫تحسني اسرتداد التكاليف عىل املستوى املحيل إىل‬ ‫املائة من إمدادات املياه والذي يرتافق مع التغريات السلبية يف‬ ‫تحقيق إيرادات للحفاظ عىل تقديم الخدمات وضامن‬ ‫ايرادات املحاصيل الزراعية نتيجة تأثريات تغري املناخ قد يؤدي‬ ‫االستدامة املالية عىل املدى املتوسط إىل الطويل‪ ،‬مام‬ ‫إىل خفض الناتج املحيل اإلجاميل الحقيقي يف العراق بنسبة‬ ‫يحسن احتامالت مشاركة القطاع الخاص يف قطاع املياه‪.‬‬ ‫تصل إىل ‪ 4‬يف املائة‪ ،‬أو ما يعادل ‪ 6.6‬مليار دوالر أمرييك‪ ،‬مقارنة‬ ‫ •مجال اإلصالح ‪ :3‬الحلول اإلقليمية‬ ‫مبستويات عام ‪ ،2016‬وانخفاض الطلب عىل العاملة غري املاهرة‬ ‫يتمتع قطاع املياه يف العراق بفرصة تحسني إدارة‬ ‫يف الزراعة بنسبة ‪ 11.8‬يف املائة مقابل نسبة ‪ 5.4‬يف املائة من‬ ‫املوارد املائية من خالل طرق متعددة لإلصالح‬ ‫الطلب عىل األنشطة غري الزراعية‪ .‬سيؤدي خفض اإلنتاج إىل‬ ‫املؤسيس‪ .‬وميكن إرشاك أصحاب املصلحة لبناء توافق‬ ‫زيادة قياسية بنسبة ‪ 13.9‬يف املائة ألسعار املحاصيل بالنسبة‬ ‫يف اآلراء بني مستخدمي املياه يف العديد من املحافظات‬ ‫اىل املستهلك ‪ ،‬كام سيزيد صايف الواردات من املواد الغذائية إىل‬ ‫والقطاعات لتسخري فوائد عملية صنع القرار الشاملة‪.‬‬ ‫أكرث من ‪ 960‬مليون دوالر أمرييك‪ .‬وملا كانت العديد من األرس‬ ‫كام ميكن ملقدمي خدمات املياه االستفادة من زيادة‬ ‫يف منطقة الرشق األوسط تشرتي الحبوب واملنتجات الغذائية‪،‬‬ ‫االستقالل املايل واإلداري عىل املستوى املحيل‪ .‬ويؤدي‬ ‫فان أي زيادة يف أسعار املحاصيل ستؤدي إىل زيادة معدالت‬ ‫تحسني اسرتداد التكاليف عىل املستوى املحيل إىل‬ ‫الفقر‪ .‬وتكون األرس ذات الدخل املنخفض هي االكرث عرضة‬ ‫تحقيق إيرادات للحفاظ عىل تقديم الخدمات وضامن‬ ‫للخطر بشكل خاص ألنها متيل إىل إنفاق نسبة عالية من دخلها‬ ‫االستدامة املالية عىل املدى املتوسط إىل الطويل‪ ،‬مام‬ ‫عىل األغذية األساسية (‪ Martin and Ivanic 2016‬مذكور يف‬ ‫يحسن احتامالت مشاركة القطاع الخاص يف قطاع‬ ‫البنك الدويل‪ .)2020 ،‬وت َظهر أوجه عدم مساواة مامثلة عند‬ ‫املياه‪.‬‬ ‫النظر يف تخفيض العاملة الزراعية‪ ،‬والتي ستؤذي الفقراء بشكل‬ ‫غري متناسب‪ .‬أما بالنسبة اىل الخطوات املقبلة‪ ،‬يحدد هذا‬ ‫التقرير ثالثة مجاالت إصالح لتحسني القدرة عىل الصمود يف‬ ‫وجه ندرة املياه وتأثريات تغري املناخ‪:‬‬ ‫‪1‬يشري تعبري “سياسات إدارة الطلب عىل املياه” يف هذا التقرير إىل السياسات‬ ‫ ‬ ‫ •مجال اإلصالح ‪ :1‬كفاءة املياه‪ ،‬واإلنتاجية‪ ،‬وسياسات‬ ‫التي تؤثر عىل استخدام املستهلكني للمياه‪ :‬تسعري املياه‪ ،‬والحصص‪ ،‬وتحويل‬ ‫إدارة الطلب‬ ‫املحاصيل‪ ،‬ومحاسبة املياه ومراقبتها‪ ،‬واستخدام التكنولوجيا التحويلية لدعم‬ ‫د زيادة كفاءة املياه وإنتاجيتها أم ً‬ ‫را رضوريًا‪ ،‬غري‬ ‫ت ُع ّ‬ ‫مراقبة وتطبيق إدارة املياه‪ ،‬واالسرتاتيجية االتصاالت‪.‬‬ ‫‪1‬‬ ‫انه وجب ان تقرتن بسياسات إدارة الطلب عىل املياه‬ ‫‪2‬يتم تعريف إعادة تخصيص املياه هنا عىل أنها تغيري يف حجم أو توقيت‬ ‫ ‬ ‫للحد من االستخدام الكيل للمياه‪ .‬باإلضافة إىل ذلك‪،‬‬ ‫أو موقع أو جودة املياه التي يتم توفريها مبوجب حقوق املياه الرسمية أو‬ ‫سيؤدي تحديث تشغيل السدود إىل تحسني إدارة‬ ‫غري الرسمية‪.‬‬ ‫‪2‬‬ ‫الجفاف والفيضانات‪ .‬أخ ً‬ ‫ريا‪ ،‬توفّر إعادة تخصيص املياه‬ ‫امللخص التنفيذي‬ ‫‪xv‬‬ 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS Output and Demand following a decline in the infection positivity rate. This recovery outpaced the slowdown in the oil sector, After a sluggish start to 2021, the economy is which contracted by 10 percent, as Iraq adjusted its now slowly recovering from the double COVID-19 production levels to meet its OPEC+ quota early in the pandemic and oil shocks. Global demand has year (Figure 3). As a result, GDP per capita grew by boosted oil prices, OPEC+ loosened oil production 0.2 percent, following a contraction last year. GDP per quotas to the benefit of Iraq, and COVID-19 restrictions capita growth remains lagging behind Middle East were gradually lifted, leading to some recovery of and North Africa (MENA) and upper-middle income economic activity especially in the services sectors. countries (UMICs) averages (Figure 2). The recovery was also aided by government actions On the production side, electricity, water that continued to push forward the Government of and agriculture sectors shortfalls have hampered Iraq’s (GoI) White Paper reforms and managed to growth. Electricity and water sectors contracted by 0.5 provide a small stimulus through public transfers as percent (y/y) in H1-21. Years of expanding electricity well as schemes aimed at increasing credit to small supply has not met Iraq’s growing energy demand and and medium enterprises (SMEs). frequent power cuts persist owing primarily to problems Economic growth was driven by the non-oil in transmission and distribution.3 The collapse in oil sector as oil production was restricted under the prices in 2020 compounded these problems by limiting OPEC+ agreement. Iraq’s Gross Domestic Product Iraq’s ability to invest in rehabilitation of its energy (GDP) grew by 0.9 percent year-on-year (y/y) in the first half 2021 (H1-21), after a 16 percent contraction in 2020 (Figure 1), despite negative contribution from 3 Electricity supply in Iraq surpassed 18.4 Gigawatts (GW), up from 5.5 GW in 2010, but remains below the total oil (Figure 4). The modest rebound was driven by the demand of 28 GW. Source: Iraq Ministry of Electricity non-oil economy, which grew by 21 percent (y/y). (MoE) and Bloomberg https://www.bnnbloomberg. This strong rebound was due to a surge in services ca/iraq-plans-to-go-nuclear-to-resolve-crippling-power- as the pandemic containment measures were eased shortages-1.1614025). 1 FIGURE 1 • The Economy Is Gradually Recovering FIGURE 2 • Per Capita GDP Is also Growing but in 2021 Remained behind that of its Regional and Income Peers 20 15 10 Y/Y growth, percent GDP per capita growth 10 0 5 0 –10 –5 –10 –20 –15 –30 –20 2014 2015 2016 2017 2018 2020 H1-2021 2014 2015 2016 2017 2018 2020 2021e Non-oil GDP GDP MENA (2021 est.) UMIC MENA Iraq Sources: COSIT, WDI and World Bank staff calculations. Sources: COSIT, WDI and World Bank staff calculations. FIGURE 3 • Economic Growth Has Recovered FIGURE 4 • …and Despite Negative Contribution in H1–21 Driven by Improved from Oil Which Offset the Overall Performance of Non-Oil Activity… Growth by More than 6 pp 120 20 Y/Y contributiton to growth, percent/pp 15 80 10 Y/Y growth, percent 40 5 0 0 –5 –40 –10 –80 –15 –120 –20 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 H1-2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 H1-2021 Agriculture Oil Non-oil industry Agriculture Oil Non-oil industry Services, other Public sector services GDP Services, other Public sector services GDP Sources: COSIT, WDI and World Bank staff calculations. Sources: COSIT, WDI and World Bank staff calculations. sector and to import gas from Iran. The declining water poor people living in rural areas (Box1). Both electricity supply and governance problems in the sector are also and water shortages are exacerbated by overconsump- another source of drag on growth if left unaddressed. tion of these resources which are highly subsidized. Electricity and water shortages are causing widespread Appropriate pricing of these resources would help disruptions in the agriculture sector. Coupled with lower incentivize more efficient use of these resources and than usual rainfall, the second lowest in 40 years, agri- manage the growing demand. culture value-added contracted by 3.3 percent (y/y) in On the demand side, consumption picked up H1-21 (Figure 3). According to the Food and Agriculture in 2021 as lockdowns eased and higher oil prices Organization (FAO), drought impacted the production boosted government spending (Figure 5). With the of strategic crops, with wheat and barley production COVID-19 Stringency Index declining from 84 to 76, projected to drop by over 70 and 90 percent in 2021, respectively.4 These trends will have severe implications 4 FAO, Global Information and Early Warning System on food security, particularly for the large numbers of (GIESW), June 2021. 2 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY FIGURE 5 • Consumption Is Expected to Pick Up FIGURE 6 • As Pandemic Containment Measures in 2021 Loosened, Mobility Improved Giving a Boost to Private Consumption 30 220 200 20 160 150 100 100 Growth rate, percent 40 50 10 –20 –80 0 0 –140 –50 –200 –100 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 –10 –20 Workplaces percent change from baseline –30 Transit stations percent change from baseline 2014 2015 2016 2017 2018 2019 2021e Parks percent change from baseline Retail and recreation percent change from baseline Public consumption Private consumption Grocery and pharmacy percent change from baseline Non-oil GDP growth Covid-19 Stringency Index-LHS Source: COSIT and World Bank staff calculations. Source: Coronavirus Government Response Tracker, University of Oxford. Google’s mobility data has been reflecting the rising investment has remained low at 3 percent of GDP activity in Iraq as containment measures began to which is well below the growth and service delivery ease starting in Q2-21 (Figure 6). Despite such easing, needs for Iraq. The low investment level is a reflection the vaccination rollout has partially helped curb Iraq’s of broader governance and corruption challenges daily COVID-19 infections rate, which dropped by over that the country has experienced. Even at current 82 percent in September 2021 from its July peak. spending levels, public service provision—including Such improvements have gradually helped boosting roads, electricity, and water—could have been much private consumption. Moreover, public consumption higher were it not for the high level of corruption and has also been supporting growth. Fiscal data for the other inefficiencies. Structural problems impeding the first seven months of 2021 (7M-21) reveals an almost diversification agenda combined with public invest- 11 percent (y/y) rise in primary expenditures including ment management constraints are hampering the a 26 percent increase in social welfare expenditures. prospects for increased investment. Investment has also contributed positively to growth but remains below the development needs Oil and Gas Developments of the country. The global and domestic economic recovery have boosted private investment in Iraq most Iraq’s oil production is rising as OPEC+ cuts are notably in the energy sector. As a result, and after a gradually tapered. The July 2021 OPEC+ agreement sluggish start, net foreign direct investment (FDI) has to boost global oil production by a further 2 mbpd until recuperated and rose by 27 percent in H1-2021 (y/y) the end of the year, has been favorable to Iraq. As a reaching US$2.1 billion. Moreover, public investment result, Iraqi crude oil output rose by over 12 percent has also picked up rising by 79 percent over the same (y/y) and reached an average of 4 mbpd in August- period (y/y). The GoI has been pursuing investment September 2021, its highest since the quota agreement friendly policies to improve the business environment was put in place in April 2020 (Figure 7).5 Nevertheless, such as facilitating company registration and foreign such flexibility has yet to fully offset the earlier ownership, access to international arbitration for com- mercial conflict resolution, an investor friendly visas 5 The new OPEC+ agreement, which expires by end-2022, system, as well as increasing budgetary allocations is also allocating higher output quotas to five member for public capital spending. However, the impact countries starting May 2022, with Iraq’s output set to rise of those reforms is yet to materialize. The overall by 150,000 bpd. Recent Economic and Policy Developments 3 BOX 1  IMPACT OF COVID-19 ON IRAQ’S FOOD SECURITY* The World Food Program data shows that approximately 2.6 million Iraqis had insufficient food consumption as of February 2021 (6.3 percent of the population). Earlier data from October 2020 shows that 9.9 percent of the Iraqi population (3.8 million people) adopted negative food-based coping strategies, relying on “less expensive food,” “borrowing food” or “borrowing money to buy food” as the most common coping strategies. Negative coping strategies levels were even higher among internally displaced persons (IDPs) and returnees at 29 percent and 21 percent, respectively (Figure B1.2). To examine more broadly this issue, a multi-agency report* detailed the channels through which the pandemic impacted food security most notably at the peak of the COVID-19 spread in 2020. Those channels are summarized below: At the macroeconomic level: • Underinvestment in the agriculture sector as the twin shocks (oil and COVID-19) tightened the fiscal space and reduced private sector investments. • Border closures and strict controls coupled with import bans on certain consumer goods disrupted supply chains for food products. For example, Iraq’s trade flow from Jordan dropped to 3,000 metric tons (MT) of wheat in 2020 compared to 10,000 MT in 2018. • The drought in 2021 reduced agriculture output including wheat and barley, the two most important staples in Iraq. At the farmers’ and firms’ level: • Mobility restrictions undermining farmers’ preparations for the new agricultural season; a problem compounded by the limited availability of cold storage and packaging materials. • Rising costs of agriculture inputs, declining availability of financial support and marketing services, and delays payment by authorities of outstanding dues. • Between June and September 2020, seven out of 10 SMEs in the agriculture and food sectors reported production and sales declined by 50 percent on average. • Vendors reported difficulties in transporting goods, and consequently adjusted by changing their own suppliers, although at an increased cost which they then passed on to their customers. FIGURE B1.1 • Negative Coping Strategies FIGURE B1.2 • Insufficient Food Consumption 70 35 Insufficient Food Consumption 60 30 50 40 25 30 20 20 10 15 0 Borrowing Less meal Less total Lower quality Smaller 10 per adult number of of food meal size 5 meals 0 Refugees Returnee IDP Refugee Returnee Iraqies Source: Rapid Welfare Monitoring Survey (SWIFT) 2017/18 (B1.1,B1.3, B1.4); High Source: Rapid Welfare Monitoring Survey (SWIFT) 2017/18 (B1.1,B1.3, B1.4); High Frequency Phone Survey 2020 (B1.2). Frequency Phone Survey 2020 (B1.2). Note: 2017 estimates are from the SWIFT survey and the 2020 are projections from Note: 2017 estimates are from the SWIFT survey and the 2020 are projections from a Macro-Micro simulation. a Macro-Micro simulation. * Food security in Iraq, impact of COVID-19, World Food Program (WFP); The World Bank (WB); International Fund for Agriculture Development (IFAD); and Food and Agriculture Organization (FAO), April 2021. adjustment measures as Iraq’s oil production averaged expansion of oil production exist. This includes water less than 4mbpd in 7M-21, down from 4.2 mbpd in 7M- shortages affecting the operations in oil fields, and 20. In addition to quotas, major obstacles to further more transparency in the governance of the sector. 4 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY FIGURE 7 • Oil Production and Exports Volume Prices for Iraq’s Oil Have Rebounded FIGURE 8 •  Are Inceasing as OPEC+ Relaxed Since Mid-2020 Driven Partially by Production Limits the Pick-Up in Global Demand 6 110 90 5 70 US$/bbl Mbpd 4 50 30 3 10 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 2 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Average Iraq export price Crude oil, Brent Oil production (mbpd) Exports volume (mbpd) Budgeted Price Sources: Iraq’s Ministry of Oil (MoO), and World Bank Staff calculations. Sources: MoO, Iraq’s Ministry of Finance (MoF); and World Bank Staff calculations. The adjustments in oil production to meet Ratawi oilfield in the southern province of Basra to the OPEC+ quota have been compensated by raise production capacity from 85,000 to 210,000 the rapid recovery in international oil prices. bpd; (ii) develop a gas processing plant at Ratawi After 14 months, Iraqi crude oil exports rose to over with a capacity of 600 million cubic feet a day; (iii) a 3mbpd and traded at an average price of US$65.7 seawater supply facility project with a capacity of 7.7 per barrel in 9M-21, up from US$37 per barrel in mbpd to maintain production levels; and (iv) develop 9M-20 (Figure 8). While higher oil prices reduce a 1GW solar power plant. Moreover, the GoI signed short-term vulnerabilities, excessive dependency on two other agreements in June and August with UAE- oil exports exposes the country to macroeconomic based Masdar and PowerChina for the construction volatility. The impact of the recent twin shocks (oil and of solar energy with a capacity of 2GW respectively. COVID-19) underscores the urgent need to address Many of these investments are at an initial phase and the long-standing structural weaknesses to expedite yet to be executed. To reap the largest economic diversification efforts, embark on a low carbon returns and improve service delivery, these projects economy, and chart a path for inclusive and sustain- will have to be accompanied by governance reforms able development. in the energy sector. Iraq is making progress in investing in the energy sector. Iraq has stepped up major energy investments in 2021 to reduce reliance Public Finance on gas and electricity imports and raise potential crude output to 7 mbpd by 2027.6 Iraq’s Basra Gas As oil market conditions recovered, Iraq’s fiscal Company signed a five-year loan agreement with deficit turned into a surplus in the first half of the International Finance Corporation on June-2021, 2021. The latest fiscal data available for the 7M-21 worth US$360 million. The project aims to reduce gas flaring, improve energy access, curb green- 6 Iraq is heavily reliant on gas and electricity imports from house gas emissions, and support a more resilient Iran to meet domestic needs, however, the flows have been volatile recently due to Iraq’s arrears to Iran and energy sector in Iraq.7 GoI also signed a sizeable growing domestic demand in Iran. US$27 billion deal with TotalEnergies in September 7 Iraq joined the Global Gas Flaring Reduction initiative 2021 to develop its energy sector over 25 years. in 2011 and committed in 2013 to eliminate all routine The agreement includes four projects: (i) develop natural gas flaring by 2030. Recent Economic and Policy Developments 5 FIGURE 9 • Overall Fiscal Balance (Cash Basis) Is FIGURE 10 • GoI Policies Led to Rising Non- Improving Owing to Higher Oil Prices Discretionary Spending with the and Oil Exports Wage Bill Consuming the Largest Share of the Budget 80 15 60 10 40 35 40 Percent of GDP 5 30 Percent of GDP 20 25 0 0 20 –20 –5 15 10 –40 –10 5 –60 –15 0 2014 2015 2016 2017 2018 2019 2020 7M-21 2014 2015 2016 2017 2018 2019 2020 7M-21 Non–oil investment expenditure Primary expenditure Compensations of employees Transfers (including pensions) Non–oil revenues Oil revenues Goods and services Interest payments Interest payments Oil investment expenditure Investment expenditures Overall fiscal balance–RHS Source: Ministry of Finance and World Bank staff calculations. Source: Ministry of Finance and World Bank staff calculations. shows important gains in budgetary revenues as oil ratio of only 0.6 percent of GDP in 7M-21. This will prices rose above US$64 a barrel (up 81 percent y/y). not be enough to reduce the sensitivity of the budget These gains were also compounded by the fiscal to oil price volatility. The White Paper recognize this effects of the dinar devaluation and measures to boost structural fiscal constraint and devises tax policy and domestic revenue mobilization. These developments tax administration reforms aimed at raising domestic were enough to turn the overall fiscal deficit into a revenue mobilization. small surplus (on cash basis) of 2.2 percent of GDP The budget remains large, beset by rigid in the 7M-21 despite spending rigidities (Figure 9). spending on wages and transfers, reducing the The fiscal balance calculated on accrual basis is ability of the GoI to undertake fiscal adjustments considerably less favorable owing to the large size or further stimulate the economy, and produces of unaccounted arears. Moreover, in the absence poor quality services. Sizeable fiscal loosening over of significant reforms to the wage and pension bill, the years has resulted in rising budget rigidities and financing needs remained present at over US$1 eroded fiscal buffers. This was most visible after an billion in 7M-21. expansionary fiscal package following the October Iraq has made progress in mobilizing 2019 demonstrations, which raised the wage bill by non-oil domestic revenues. The 2021 budget law almost 15 percent of GDP in 2019. Despite attempts directives on customs and tax administration reforms at consolidation in the second half of 2020, Iraq con- have started paying off, with non-oil budgetary rev- tinues to allocate a significant portion of the budget enues surging by 47 percent in the 7M-21 (y/y). These towards non-discretionary spending, especially the included linking customs to the currency window at wage bill and transfers, at the expense of a stimulus the central bank limiting over-usage, border manage- to fight the drawbacks from the pandemic. Fiscal ment tightening, and improvement to tax collection data for the 7M-21 shows that while the wage bill measures among other actions. However, at only declined by 1.5 percent compared to 7M-20 (y/y), 1.6 percent of GDP (Figure 9), Iraq still has a long it now accounts for over 9 percent of GDP (55 per- way to catch up with UMIC and MENA oil exporters cent of total spending and 50 percent of budgetary whose non-oil revenues average 24 and 10 percent revenues) (Figure 10). Meanwhile, the pension of GDP respectively. Moreover, low tax compliance, and social security law approved by the cabinet in widespread exemptions and a weak legal framework November 2020 will expand benefits to the private governing taxation have resulted in a tax-to-GDP sector without ensuring adequate contributions 6 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY BOX 2  IRAQ COVID-19 HIGH FREQUENCY PHONE SURVEYa This box summarizes the main findings of the most recent round of phone interviews aimed to assess the Impact of COVID-19 pandemic on labor and welfare. Impact on labor. While estimated labor force participation for individuals between 18 and 64 years of age across Iraq remained above 61 percent throughout the last four rounds of the monthly survey (Oct 2020–Jan 2021), the estimated unemployment rate increased significantly during the pandemic. Compared to 12.7 percent unemployment prior to the pandemic, the figure climbed to 22 percent in October 2020 and increased slightly to 23.5 percent in January 2021. Despite lower labor force participation, unemployment rates for the non-displaced population were both more volatile and slightly higher (26.2 percent) than for IDPs or returnees (24.5 and 21.8 percent). While labor force participation among female respondents for IDPs, returnees and non-displaced households have been approximately half that of males (roughly 43.5 versus 87.5 percent), female respondents who do participate are three times as likely to be unemployed as males (roughly 54 versus 16 percent). IDPs living in camps are less likely to look for work than those living out of camps, and among those who are looking, camped IDPs are less likely to find employment. While a further investigation is required, camped-IDPs may find assimilation into the local labor market more difficult than the IDPs already living in the communities. Impact on welfare. Assistance programs helped stabilize welfare, but the ability to benefit from that help varied starkly between displaced groups. Returnees tended to be most able to benefit from this help; indeed, returnees were more likely to receive PDS transfers than nondisplaced households in every month observed (October 2020–January 2021). Camped IDPs were also able to avail themselves of cash and in-kind assistance. However, there is real cause for concern for IDP households who are not part of a camp. Only 38.2 percent of these households received PDS transfers (compared to two thirds of nondisplaced and camped IDP households). Even lower trends are seen for out of camp IDPs receipt of non-PDS in-kind transfers and cash transfers from any source. In combination with high shares of non- camped IDPs consuming inadequate diets, this group warrants further initiatives to monitor and improve welfare. Impact of COVID-19 on Labor FIGURE B2.1 •  Impact of COVID-19 on FIGURE B2.2 •  Force Participation Unemployment 100 60 90 80 50 70 40 In percent In percent 60 50 30 40 30 20 20 10 10 0 0 Pre-COVID (March) August September October November December January Pre-COVID (March) August September October November December January Labor force participation (Iraq) Unemployment (Iraq) Labor force participation (Male) Unemployment (Male) Labor force participation (Female) Unemployment (Female) a “Iraq High Frequency Phone Survey, to monitor socioeconomic trends during COVID-19. Results from October, November, December 2020, and January 2021 rounds”. World Bank, World Food Program, and Joint Data Center for Forced Displacement. rates to cover the costs. Pensions and the consumer and poorly targeted. Wage bill, pensions and sub- goods offered by the Public Distribution System sidies reforms are required to generate the needed accounted for 3.4 percent of GDP in the 7M-21. fiscal space to invest in human capital and reap the These are accompanied by various subsidies, returns on growth and welfare (Box 2). notably fuel and electricity, which are also costly Recent Economic and Policy Developments 7 In addition, accruing arrears especially FIGURE 11 • Execution Rates, Particularly for those related to electricity, public wages and pen- Public Investment, Remained Low sions intensify pressures on Iraq’s public finances. According to the 2021 budget law, arrears for elec- 140 128.8 tricity and gas imports, and for independent power 120 105.8 producers amounted to IQD2.3 trillion (1 percent of 100 GDP). This is added to the wage and pensions arrears 79.5 70.6 74.8 80 Percent estimated at IQD11.9 trillion (6 percent of GDP) in 61.0 2020. In addition to the liquidity risk, persistent arrears 60 51.5 44.4 accumulation could have a detrimental impact on 40 30.4 29.7 23.2 aggregate demand, interrupt public service delivery, 13.0 20 increase interest rate, and reduce the effectiveness of 2.0 1.1 3.9 0 fiscal policy. Oil Non–oil Operational Oil Non-oil revenues revenues expenditures investment investment With the GoI failing to address structural bottlenecks for project implementation, public 2019 2020 7M-2021 investment remains below the levels needed to Source: MoF and World Bank staff calculations. sustain higher levels of growth. Management con- straints, complex relations between the center and governorates, rising non-discretionary spending and documented corruption cases are all aggravating inef- growth and the overall fiscal surplus are improving ficiencies of public investment in Iraq. This is reflected the debt-to-GDP ratio which peaked at 71.6 percent in low levels of capital spending and weak execution in 2020. The external debt stock composition is rates. Data for the 7M-21 reveal that investment expen- relatively favorable as it encompasses legacy arrears ditures accounted for a mere 0.5 percent of GDP, of to non-Paris Club creditors and two-thirds of this which 0.4 percent of GDP was for non-oil investment debt stock is long term and relatively concessional. (Figure 9). Moreover, the execution rate for public Nevertheless, liquidity risks remain present. First, investment reached only 3.2 percent. This contrasts because potential oil shocks can reduce foreign with over 44 percent execution rate for operational currency reserves. Second, because of the excessive expenditures (Figure 11). The GoI policy has always reliance on domestic debt, estimated at US$47 billion been to allocate large sums to public investment (28 percent of GDP or 48 percent of total debt stock in the budget. However, it has failed to address the in 2020) and mostly short-term. The latter also implies structural bottlenecks surrounding implementation. higher rollover and refinancing risks as well as the More importantly, governance challenges, especially crowding out of much needed private sector credit. corruption, have diverted budget revenues away from A balanced debt management strategy is required much needed public investment and led to the current to reduce those risks. This includes addressing low level of public investment. Such outcomes not only structural policy issues to reduce the costs of Iraq put a drag on long-term growth, but also have affected accessing the international debt markets on the one service delivery and poverty reduction efforts. They hand and develop the domestic market to extend also increase social vulnerabilities, especially in times maturities of issuances and expand the investor base where boosting physical and human capital is key to on the other. manage the impact of shocks like the pandemic and Budget allocation disagreements between most importantly advance the economic diversifica- the Federal Government and the Kurdistan tion agenda. Regional Government (KRG) have eased in 2021. Iraq’s public debt ratio improved in line with An interim agreement was reached between the two better fiscal outcomes, but liquidity risks remain in June 2021 to temporarily resume transfers, based elevated. The base effect from rapid nominal GDP on which, the KRG received three payments for 8 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY FIGURE 12 • CAB Returned to Surplus in H1–21 FIGURE 13 • Higher Oil Prices and Lower Private Easing the External Position of Iraq Imports Contributed to the Positive Trade Balance Outcome 6 120 25 4 100 6 Percent of GDP 20 80 Percent of GDP 4 US$, billion 2 15 60 2 10 0 40 0 5 –2 20 –2 0 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Q2-21 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Q2-21 CAB (LHS) Oil price, US$ (RHS) Trade balance (LHS) Exports (RHS) Oil export volume, mbpm (RHS) Imports (RHS) Source: CBI, MoO and World Bank staff calculations. Source: CBI and World Bank staff calculations July-September of IQD200 billion (US$137 million). turn the trade balance into a surplus. A loosened The interim agreement has largely addressed the fiscal stance resulted in a notable rise in imports of region’s immediate needs, particularly salaries and goods and services acquired by government agen- pensions, and represents a quick fix until both sides cies. These imports, which are typically dominated finalize the details on how to implement the federal by non-capital goods such as refined oil products budget. Ultimately, under the premises of the 2021 and consumption imports, increased by 63 percent federal budget law, the KRG could receive monthly (y/y) in H1-21. However, private sector imports fell installments of IQD950 billion (US$650 million) in significantly by 37 percent (y/y) in H1-21 due to a slow return for handing over revenues from the sale of private sector recovery and the adjustments after the 250,000 barrels of crude oil per day and half of the devaluation of the dinar. Indeed, more import substitu- region’s non-oil revenues. tion was observed especially in agri-food items. As a result, overall total imports fell by 39 percent in H1-21 (y/y), almost US$10 billion less compared to H1-20. External Sector Exports, entirely dominated by oil, increased over 27 percent in H1-21 (y/y) turning the trade balance into The current account balance (CAB) returned to a surplus of 10 percent of GDP (US$17 billion) in the surplus in H1-21 as crude prices continued their same period (Figure 13). upward trend, easing the external position of Iraq. The recovery in global investment has A strong rebound in oil prices has pushed the current improved Iraq’s external financing conditions account balance into a surplus of nearly 7 percent of and bolstered CBI’s international reserves. GDP in H1-21 (US$12 billion), following a deficit of Available external financing has slightly recuper- almost 4 percent of GDP in H1-20 (Figure 12). The ated as the energy sector attracted additional FDIs. devaluation of the dinar in December 2020 has also Indeed, net FDI flows increased by 27 percent contributed to this outcome as imports became more (y/y) in H1-21, reversing the 10 percent decline in expensive. Imports from the private sector, consisting 2020. This was also accompanied by a recovery mainly of capital goods, contracted by almost 37 in net official investments, which reached US$2.8 percent in H1-21 or 4 pp of GDP (y/y) to reach 5.9 billion, largely through higher trade credits. While percent of GDP. absorption capacity remains a constraint to further A sluggish private sector recovery accom- expansion of external financing sources, rising oil panied by rising oil exports have managed to prices and export volume will continue to mitigate Recent Economic and Policy Developments 9 FIGURE 14 • The Usable Reserves Have Increased FIGURE 15 • Recovery in Domestic Demand and to 15 Months of Imports the Currency Devaluation Have Spurred Inflationary Pressures 80 20 7 10 6 8 16 5 60 Months of imports 4 6 Percent 3 US$ billion 12 2 4 40 1 2 8 0 0 –1 20 –2 –2 4 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 0 0 2013 2014 2015 2016 2017 2018 2019 2020 H1-21 Food Health Transportation Education Recreation, culture Communication Foreign reserves (exc. gold) (LHS) & restaurants Coverage ratio (RHS) Headline inflation-RHS Core inflation-RHS Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. any potential pressures on external accounts. CBI were partly dampened by the depreciation of the usable reserves (i.e., reserves excluding gold) have Turkish and Iranian currencies, the main import increased from US$48 billion in 2020 to almost partners for Iraq. US$55 billion in H1-21, covering 15 months of cur- Credit to the private sector continued rent year imports of goods and services (Figure 14). to grow but at a decelerated pace as the CBI scaled back some of its support programs. During 2020, the CBI retained policy interventions Monetary Policy and Prices introduced at the onset of the pandemic including reduced reserve requirements, and moratorium The recovery in domestic demand and the dinar’s on debt servicing by SMEs. At the time, temporary devaluation were the prominent drivers of inflation Electronic Know Your Customer (eKYC) require- in 2021. Cheaper imports and weak demand had ments facilitated opening of e-wallets to receive kept Iraq’s consumer price inflation low over the past cash transfer and promote digital financial channels. 8 years. However, the recovery in domestic demand As a result, credit growth to the private sector was coupled with a 23 percent devaluation of the Iraqi accelerated and reached a peak of 23 percent in Dinar in December 2020 are pushing prices higher. Q4-2020. However, during 2021, the CBI started Prices typically adjust gradually after a devaluation, phasing out some of these procedures to ward off providing a lag effect on inflation as prices adjust against inflation and contributed to decelerating to higher levels. As a result, headline and core credit growth to the private sector to less than 14 inflation in the 8M-21 edged up to an average of percent in 7M-21 (Figure 16). At only 11 percent of 5.6 and 6.4 percent (y/y), respectively (Figure 15). GDP, private sector credit in Iraq is by far the lowest This was largely driven by price increases of food in the MENA region (32 percent average), reflecting items, mostly imported, such as dairy (11.8 percent), the shallow financial depth and limited role of the pri- oils (8.5 percent) and meat (5.1 percent), as well as vate sector to drive the economy. On the other hand, transportation and health services prices, which broad money (M2) has grown by 20 percent (y/y) rose by 14.5 and 13 percent respectively. Frequent driven not only by the pickup of overall economic electricity cuts increased reliance on private electricity activity, but more importantly from the cash nature generation, and pushed electricity and water supply of the economy and households turning to cash sav- prices up by almost 12 percent. Inflationary pressures ings outside of the banking sector (home-savings). 10 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY FIGURE 16 • CBI Has Scaled Back Some of the FIGURE 17 • The Economy Remained Cash-Based Credit to Private Sectors Schemes to Limit Inflationary Pressure, but 160,000 80% Abundance of Cash in the Economy 140,000 Is Offsetting it 120,000 IQD million 100,000 60% Percent 25 80,000 Y/Y change, percent 20 60,000 15 40% 40,000 10 20,000 5 0 20% 0 Dec-13 Jul-14 Feb-15 Sep-15 Apr-1 6 Nov-16 Jun-17 Jan-18 Aug-18 Mar-19 Oct-19 May-20 Dec-20 Jul-21 –5 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Broad money-LHS Credit to private sector Currency in circulation to M2 ratio Broad money-LHS Deposits to M2 ratio Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. Latest available data also shows the non-performing Iraq remains committed to strengthening loans (NPLs) at State-Owned Banks (SOBs)8 have its financial industry as an integral part of the increased to 18 percent in 2020, from 10 percent in reforms visualized in the White Paper. The CBI is 2019.9 Similarly, NPLs at private banks are reported implementing key reforms including a new corporate as high as 37 percent. governance bylaw for Rasheed and Rafidain banks, Iraq’s economy remains primarily cash establishing a SOBs’ unit at the central bank, and based. Cash, namely currency in circulation, con- a MoF’s agreement to conduct an Asset Quality tinues to play a dominant role in Iraq’s banking system. Review for the said banks. Moreover, to develop This is reflected in the high ratio of the currency in the domestic financial market and mobilize savings, circulation to broad money. Data available shows the CBI offered the first issuance of (Binaa) bonds that the ratio of deposits to broad money declined in two categories of IQD500 thousand and IQD1 overtime from 61 percent by end 2013 to less than million with annual interest of 6 and 7 percent, for 49 percent as of July 2021, while that for currency in two- and four-years maturity, respectively.11 It has also circulation increased from 39 percent to more than 51 completed the performance Scorecard Project for percent over the same period (Figure 17). This reflects Environmental, Social, and Governance Standards the increased use of cash in commercial transactions and lack of trust in the banking sector as more Iraqis prefer cash-at-home savings instead of deposits in the 8 Iraqi banking sector is dominated by under-capitalized banking sector. This could also signal more drawings and under-provisioned state-owned banks primarily used for quasi fiscal operations. on dollars savings following the dinar devaluation. The 9 The NPL figures are likely understated, as they do not use of digital technology to make payments remains reflect loans to public entities with uncalled government limited. Only 11 percent of adults use digital pay- guarantees. ments compared to 23 percent in MENA.10 Key steps 10 World Bank Global FINDEX Database 2017. are being taken to transform Iraq into a country less 11 The “Binaa (construction) bonds was issued by the CBI dependent on cash, which enables the state to fight in September 2021 in coordination with the Ministry of Finance. The issuance is open for public subscription corruption, evasion, and bureaucracy in financial deal- through licensed banks. While they are called ings within banks operating in Iraq. These reforms, led “construction”, the bonds are not earmarked to specific by the CBI and MoF and described below, are moving infrastructure projects or sectors. https://cbi.iq/news/ forward in a gradual but steady way. view/1832. Recent Economic and Policy Developments 11 to address supervisory issues in the banking sector momentum is maintained towards the expeditious based on international best practices. Meanwhile, reform of Iraq’s banking sector. Mastercard signed a partnership agreement with the CBI last April in a bid to digitize the payment 12 This service helps conducting financial operations in a ecosystem and boost financial inclusion. In parallel, modern digital form, with the aim of reducing reliance on the CBI announced in March the launch of the digital cash. Such service, if widely utilized, can be an effective enrollment service, which is the first of its kind in way of reducing access barriers in the Iraqi banking sector Iraq.12 It is critical that these reforms, which are part of and can help the fight against corruption and reduce the GoI white paper, are fully implemented to ensure bureaucratic red tape. https://cbi.iq/news/view/1651. 12 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY 2 OUTLOOK AND RISKS Outlook in 2021–23. Higher oil revenues, driven by both export price and quantity increases, are expected to The prospects for Iraq’s economy have improved push total revenues to more than 40 percent of GDP. with the recovery in global oil markets, but the Non-oil revenues are also projected to steadily grow, spread of new COVID-19 variants and climate albeit at a slower rate. However, in the absence of sig- change challenges pose significant headwinds. nificant expenditure consolidation, structural rigidities The economy is forecast to gradually recover on the including an oversized wage and pension bill14 are back of rising global oil prices in 2021–22 which projected to offset a significant part of the revenue are forecast to increase by 73 percent compared to increases. As with previous economic cycles, these 2020.13 Oil GDP will be the main driver of growth in the recurrent costs are likely to be also prioritized at the medium term, which is expected to grow in line with expense of public investment with negative impact on the agreed gradual increase in OPEC+ production growth. As a result, the fiscal surplus (on a cash basis) quotas. However, these quotas are planned to be is forecast to average around 3 percent of GDP in the phased out in September 2022 after which Iraq’s oil medium-term. In line with the trend in accumulating production is projected to increase at a moderate fiscal surpluses in the outlook, the debt-to-GDP ratio pace. Given the high capital intensity of the oil sector, is projected to steadily improve to under 50 percent this rebound is not expected to create many jobs. In the absence of an accelerated process of reforms, 13 Commodity price forecasts are subject to large average annual non-oil GDP growth is forecast to confidence intervals due to the evolving nature of the remain slightly under 3 percent in 2021–23 due to the pandemic and the resulting uncertainties surrounding impact of the COVID-19 Delta variant on the economy the pace and shape of the global economic recovery. 14 Iraq’s government wage bill and pension, measured as and the with water and electricity shortages that a share of GDP, is not only an outlier compared to the impact agriculture and industries (Table 1). world average but also compared to the higher ratio More favorable oil market conditions are witnessed in many MENA region countries. See, the forecast to maintain the fiscal balance in surplus recent World Bank Public Expenditure Review for Iraq. 13 by 2023. Nonetheless, government financing needs15 Downside risks include: a potential decline in oil are estimated to remain elevated (US$4.2 billion or 2.3 prices, a worsening COVID-19 crisis due to the spread percent of GDP on average) and above pre-COVID-19 of new variants, a deterioration in security conditions, pandemic levels (Table 1). the intensification of climate change shocks and Higher oil exports are expected to drive a additional macroeconomic volatility. Positive oil price current account surplus in 2021–23, thereby shocks would improve economic indicators in the reversing pressures on foreign exchange reserves. short term but, as with past years’ experience, could In line with price and quantity increases, oil exports come at the risk of weakening the drive for reforms. On are forecast to rebound to over 41 percent of GDP the upside, progress on regional economic integration and to account for 96 percent of goods exports over together with an improved security environment could the outlook. These gains are expected to be partially provide new momentum for growth and diversification. offset by rising imports as domestic consumption These sizable outlook risks are especially gradually recovers after the adjustment effect of the acute for government finances. Due to high oil currency devaluation. Imports are forecast to grow over dependence, Iraq’s fiscal account is highly sensitive 2021–23 in line with non-oil GDP growth. As a result, to oil market volatility which in the absence of sig- the current account balance is expected to remain at nificant stabilizing mechanisms such as fiscal rules a surplus of over 5 percent of GDP in 2021–23. The are directly transferred to the rest of the economy. accumulation of these surpluses is expected to lead to With an oil price assumption of US$66 per barrel on an increase in gross CBI foreign currency reserves to average in 2021, sensitivity analysis shows that an oil US$70 billion, equivalent to over 13 months of imports price decline of US$1 per barrel would directly reduce by 2023. revenues by 0.6 percent of GDP (or US$1.1 billion) per The surge in poverty is expected to gradu- year. Similarly, a 0.1 mbpd decline in oil production ally reverse following the economic recovery and would be equivalent to a 1.1 percent of GDP (or US$2.4 mass vaccination. Sustained economic growth and billion) fall in total annual revenues. On the expendi- job creation, especially in the non-oil sectors such as ture side, the main source of fiscal risk is related to services, would translate to gradually undo the loss of the accumulation of unaccounted arrears to domestic household incomes. This recovery would be contingent banks and public sector workers in addition to foreign on vaccine rollout especially in high contact sectors arrears for energy imports. These arears are currently such as transport, accommodation, and retail sectors. not captured by published government fiscal data as Plans to ramp up vaccination are well underway across they are reported on a cash basis rather than accrual the regions of Iraq. However, the disproportional impact basis. The realization of these additional expenditures of COVID-19 pandemic on the pre-pandemic poor and along with possible materialization of other contingent vulnerable groups especially in terms of job/income liabilities such as public guarantees to SOEs would loss and access to services, and the resulting inequality significantly change Iraq’s fiscal account outlook. will be felt for a long time to come.16 The diverging trends Iraq also faces a pressing climate change between groups and regions that overlap with Iraq’s challenge that will impact the country’s devel- existing ethnic and religious divisions make the situa- opment path. The adverse impact of climactic tion more precarious and call for appropriate planning challenges including desertification and water in the recovery phase, including in the implementation shortages (see this report’s Special Focus chapter of an equitable vaccination program. on water challenges in Iraq), which has already materialized across the country, are significant threats Risks and Opportunities 15 Government financing needs also includes debt servicing obligations. Iraq’s economic outlook is mired by significant 16 The poverty rate is estimated to have reached 29.8 risks that could materialize in the medium-term. percent in end-2020. 14 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY to future growth and the livelihood of all Iraqis.17 The reforms. Iraq’s recent parliamentary elections (held in global climate challenges will also have direct nega- October 2021) repeated the clear message from the tive spillovers for Iraq’s economy as the rest of the majority of the population who demand change and world moves away from fossil fuels. While approval of accountability. The new government is well placed to new nationally determined contributions is an impor- respond to this important request and follow through tant step in the right direction, Iraq can benefit from with long overdue structural reforms paving the way significant progress through curbing gas flaring and for economic diversification. To this end, the existing transitioning away from oil for electricity generation.18 GoI White Paper’s comprehensive list of economic Iraq is also endowed with a significant potential for reforms remains relevant more than anytime which, renewable solar energy which will be crucial in this if fully implemented and followed through, could put transition. Transition away from oil resources could the economy on a more sustainable path that is less have significant spillover effects through improving dependent on oil rents. Iraq’s governance and transparency conditions in the long term. Facing these challenges requires the government to embed the climate issues at the center of its economic development plan and policies.19 17 According to authorities, Iraq’s water supply-demand The breadth and depth of economic chal- balance could reach a deficit of 11 billion cubic meters lenges underscore the need for an accelerated by 2035. 18 Iraq’s Council of Minister Meeting recently approved implementation of structural reforms by the new new national commitments, as announced on official government. Averting or mitigating the impact of GoI social media pages on October 15, 2021. downside risks depends on the policies of the future 19 Iraq’s new 5-year National Development Plan for 2022– government and commitment to comprehensive 27 is currently being prepared by GoI. Outlook and Risks 15 TABLE 1 • Iraq: Selected Economic and Financial Indicators, 2018–2023 2018 2019 2020 2021e 2022p 2023p Economic growth and prices Real GDP (percentage change) 2.6 6.0 –15.7 2.6 7.3 6.3 Non-oil real GDP (percentage change) 9.4 9.0 –20.2 2.0 2.5 3.0 GDP per capita (US$) 5,720 5,866 4,017 4,038 4,175 4,465 GDP (in IQD trillion) 268.9 277.9 198.8 251.7 269.5 279.5 Non-oil GDP (in IQD trillion) 148.7 163.5 138.0 151.2 160.4 170.4 Oil production (mbpd) 4.61 4.84 4.00 4.12 4.54 4.91 Oil exports (mbpd) 3.50 3.54 2.99 2.91 3.24 3.58 Iraq oil export prices (US$ pb) 65.5 61.1 38.4 67.0 66.0 61.0 Consumer price inflation (percentage change; average) 0.2 0.4 –0.2 7.5 3.5 3.1 In percent of GDP Public Finance Government revenue and grants 39.6 38.7 31.8 44.4 45.3 44.6 Government oil revenue 35.6 35.7 28.7 41.0 42.0 41.3 Government non-oil revenue 4.1 3.0 3.0 3.4 3.3 3.2 Expenditures 28.6 37.4 38.2 42.8 41.3 41.4 Current expenditure 23.5 28.6 36.6 34.3 33.5 33.7 Wages and salaries 13.3 14.6 20.1 17.8 17.2 17.0 Goods and Service 1.5 3.2 3.2 4.4 4.3 4.3 Interest payment 1.1 1.1 1.1 1.4 1.9 2.4 Other 7.6 9.7 12.2 10.7 10.2 10.0 Investment Expenditure 5.1 8.8 1.6 8.5 7.8 7.7 Oil investment 3.9 6.8 0.2 5.1 4.8 4.7 Non-oil investment 1.2 2.0 1.5 3.4 3.0 3.0 Primary fiscal balance, cash basis 12.1 2.4 –5.3 2.9 5.9 5.6 Budget balance 11.0 1.3 –6.5 1.5 4.0 3.2 Gross budget financing needs 9.6 –1.5 –9.2 –4.1 –1.2 –1.7 In percent of GDP, unless otherwise indicated Public Debt Total government debt (percent of GDP) 48.6 44.4 71.6 55.0 47.4 42.5 Total government debt (US$ billion) 110.6 104.4 119.4 n.a n.a n.a External government debt (percent of GDP) 25.9 23.0 36.9 n.a n.a n.a External government debt (US$ billion) 59.0 54.0 50.7 n.a n.a n.a Monetary indicators Growth in broad money 3.9 4.1 22.9 n.a n.a n.a Policy interest rate (end of period) 4.0 4.0 4.0 4.0 4.0 4.0 (continued on next page) 16 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY TABLE 1 • Iraq: Selected Economic and Financial Indicators, 2018–2023 (continued) 2018 2019 2020 2021e 2022p 2023p In percent of GDP, unless otherwise indicated External sector Current account 9.8 5.6 –5.8 4.8 5.9 5.2 Trade balance 15.6 12.6 1.5 11.7 14.5 13.8 Exports of goods 38.0 34.7 28.1 42.5 43.6 42.9 Imports of goods 22.4 22.1 26.6 30.8 29.1 29.1 Gross reserves (US$ billion, excl. gold) 60.3 62.9 48.1 55.1 65.0 74.3 In months of imports of goods and services (excl. gold) 10.5 10.1 9.9 9.8 11.4 12.6 Exchange rate (IQD per US$; period average) 1183 1182 1192 1450 n.a n.a Sources: Iraqi authorities and World Bank staff estimates and projections. Outlook and Risks 17 SPECIAL FOCUS: OVERCOMING WATER SCARCITY AND CLIMATE CHANGE IMPACTS: RESILIENCE AND INSTITUTIONAL SOLUTIONS Iraq is quickly running out of water and is also run- water management institutions should create better ning down the quality if its water supply. Without conditions for private sector investment, which is policy action, the internal freshwater resources necessary to defray the US$180 billion investment of less 16 percent in 2035 and “scarcity level” price tag that is needed to address water scarcity threshold—1,000 cubic meters per person per and quality challenges. year—could have detrimental impacts on growth and job creation. This tragic situation can be avoided if Iraq immediately adopts demand management policies20 (such as quotas, tariffs), and strengthens domestic water management institutions (including 20 The expression “water demand management policies” in this report refers to policies that affect the consumers better management of dams and local governance use of water: water pricing, quotas, shifting of crops, initiatives) on the one hand and pursues regional water accounting and monitoring, use of transformative solutions on the other (including better information technology to support water governance monitoring and sharing among riparians). Strengthening domestic enforcement, and strategic communication. 19 FIGURE 18 • Supply-Demand Gap without the National Strategy (Business-as-Usual Scenario) 80 Demand outstripped availability (2016) 75 Demand without national strategy Billion Cubic Meters /Year 3.8 70 6.7 9.7 Deficit without 65 71.0 national strategy 10.9 (BCM/Yr) 60 66.3 63.2 59.7 Available water 55 (BCM/Yr) 2015 2020 2025 2030 2035 YEAR Source: Hydro Nova (2020). FIGURE 19 • Agricultural Water Productivity son per year) by 2035 (Figure 18). In 2015, the (US$/m3) and Per Capita Government of Iraq approved the Iraq water strat- Agricultural Water Withdrawals in egy known as SWLRI (Strategy for Water and Land Iraq and MENA Resources of Iraq or Strategy). The SWLRI shows that the renewable internal freshwater resources per 2.5 Jordan capita would drop to 1,000 cubic meters per person per year water scarcity threshold in 2035. Renew- 2.0 able water resources within the country are under Malta Israel US$/cubic meters 1.5 Lebanon pressure from demographic growth, competing uses Kuwait (agriculture, municipal water, and industries) and cli- Oman 1.0 Qatar Saudi Arabia mate change. Withdrawals from riparian countries Yemen UAE Bahrain are increasing, to meet their needs and cope with 0.5 Algeria Morocco climate change, further constraining available water Iran Egypt Iraq Tunisia Libya Syria resources in Iraq. By 2050, a temperature increase of 0.0 0 200 400 600 800 1000 1200 1400 1600 1 degree Celsius, and a precipitation decrease of 10% Agricultural water withdrawals cubic meters per capita would cause a 20% reduction of available freshwater. Source: World Bank (forthcoming) “Economics of Water Scarcity in MENA: Institutional Under these circumstances, nearly one-third of the irri- Solutions” gated land in Iraq will have no water by the year 2050. At same time, Iraq has one of the lowest water produc- tivities in the region with the highest agricultural water Setting the Context: Water Scarcity, withdrawal per capita (Figure 19). The SWLRI states Climate Change, and Much More… that Iraq can avert this alarming trajectory only with significant water usage and allocation reforms within Back in 2015 the GoI water strategy assessed that Iraq and through cooperation with riparian countries. in a business-as-usual scenario, internal freshwa- ter resources would not meet water demand and In addition to water scarcity, Iraq faces the chal- reach scarcity levels (1,000 cubic meters per per- lenge of water quality degradation in its riv- 20 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY BOX 3  WATER AVAILABILITY ESSENTIAL TO MAINTAIN OIL PRODUCTION Oil production remains a dominant element of Iraq’s economy; however, the sector faces four major challenges moving forward, with water availability being as important as international oil market conditions, foreign investments, political stability in determining the sector’s outlook (IEA 2019). Injecting water into oil formations can increase recovery factors (ratio of oil extracted to oil originally in place) and help achieve increases in production rates. Hence, water availability will be a key determinant of oil production stability and growth in Iraq in the coming decade. However, the country’s binding water scarcity constraints, declining water quality and increasing competition over water mean that the oil industry can no longer uniquely rely on surface freshwater resources to meet its needs. The sector is already facing the implications of the country’s water crisis. In 2018, for example, operations were curtailed at power plants and its largest oil refinery when salt levels in water were four-times higher than operable limits (IEA 2019). Looking ahead, the International Energy Agency estimates that about 0.5 km3/year (or 8 million barrels per day, equivalent to more than 1% of the country’s current total water withdrawals) of water will be required by 2030 for Iraq’s oil production, up from 0.3 km3/year (5 million barrels per day of water) used today (IEA 2019). To meet the sector’s water needs, plans were drafted in 2011 to build the Common Seawater Supply Project (CSSP) that would process seawater from the Gulf and transport it to the largest oil fields in the South to be used for injection. However, conflicts and changes in ownership have delayed this project, which is now expected to partly come online towards mid-2020s. In the meantime, oil companies are still looking for alternative water sources, such as the creation of water treatment facilities and increased recycling. Unless the oil industry pursues decisively these alternative water supply models centered around recycling of produced water (i.e., reutilization of the water injected in the fields), it will face significant challenges maintain its production targets. Moving forward, the oil industry will also have to pay increasing attention to water quality and pollution. The oil industry is not only a major water user, but also a source of water pollution. Oil spills and seepage from pipelines cause declines in water quality, which affect drinking water quality and public health, as recently observed along the Tigris river and in Basrah (Human Rights Watch, 2019; Mawlood et al., 2018). ers and its ground water. Contaminants entering cause salts to accumulate in irrigated agricultural freshwater from agricultural, industrial, and munici- land. Salinity along the Euphrates is more elevated pal sources include total dissolved solids (represen- than along the Tigris and its tributaries because of tative of the water’s salinity), organic and inorganic land management and irrigation and drainage prac- substances, and pathogens. Iraq is dealing with two tices within the Euphrates watershed. In a business- types of water quality issues within its surface water. as-usual scenario, the SWLRI projects that poor water First is the water’s salinity, and the second is pollu- quality will worsen further and cause damage across tion related to municipal, industrial (for example the several sectors, including public health, agriculture, oil sector see Box 3), and agricultural activities. Agri- and economic development. cultural Development throughout the Euphrates and Tigris watershed, both outside and inside Iraq, is Reduction in water availability could lead to large causing a progressive increase in the water salinity losses across multiple sectors of the economy of the Euphrates, Tigris, and their major tributaries. (GDP, labor, and crop prices) (World Bank 2020). Groundwater quality also varies across the country. For example, the Water in the Balance Report (World The highest quality aquifers are in the northeast and Bank 2020) uses a computable general equilibrium groundwater salinity increases in the central, topo- model to quantify the economy-wide impacts of a graphically lower, Mesopotamian Plain and Jazira 20% reduction in water availability, which would likely area. Groundwater in the Mesopotamian Plain is, in materialize by mid-century under a business-as-usual general, extremely saline. scenario represented in Figure 18 Supply-Demand Gap without the National Strategy (business-as- Economic development and population growth usual scenario). The economic modelling shows that contribute to increasing loads of various con- real GDP in Iraq could drop by up to 4 percent, or taminants in freshwater. Most of the soil saliniza- US$6.6 billion compared to 2016 levels; and demand tion observed in central and southern Iraq stems from for unskilled labor in agricultural activities could drop the use of irrigation water with high salt content. Lim- by 11.8% and in non-agricultural activities by 5.4%, ited drainage mechanisms and high evaporation rates under a scenario of 20% reduction in water availability Special Focus: Overcoming Water Scarcity and Climate Change Impacts: Resilience and Institutional Solutions 21 FIGURE 20 • Source of Drinking Water by Governorate (2018) Source of Drinking Water by Governorate 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Duhok Sulaimaniya Erbil Nainawa Kirkuk Diala Anbar Baghdad Babil Karbalah Wasit Salahaddin Najaf Qadisyah Muthana Thiqar Misan Basrah Total Piped in hh/yard Piped to neighbour Piped to public tap Tubewell/borehole Protected dug well Protected spring Water kiosk Tanker truck Cart with small tank Packaged water: bottled Packaged water: desal Other Unprotected dug well Unprotected spring Surface water Rainwater Source: Learning Review: World Bank Water Sector Technical Assistance to Iraq FY19–21 using 2018 MICS survey. and climate change-induced declines in crop yields. affecting approximately 60% of the cultivated land Output reduction would cause consumer price index and a 30–60% reduction in yield. The use of surface for crops to increase by 13.9% percent and would also flooding irrigation methods without drainage systems increase net imports for food items to over 960 Million results in waterlogging and raises salt accumulation USD. in topsoil. Food production faces challenges with this Iraq’s cropland salinization. Currently, evaporation Aging water infrastructure is under strain to losses are also significant in Iraq due to high deliver water services following three decades temperature, with an estimated 9 BCM water loss by of war, more than a decade of sanctions, and evaporation from Iraq’s reservoirs. Climate change security challenges with the Islamic state. The will put more pressure on infrastructure, with reduced condition of existing infrastructure is a challenge for water availability and higher temperature leading to both the water sector and other sectors depending increased evaporation and demand. on water. Estimates suggest that dams, barrages, regulators, and main pumping stations rehabilitation Availability of adequate water resources is would require over US$11 billion (Hydronova 2020). increasingly a binding constraint to water sup- These dams and reservoirs need to be well maintained ply services for cities and towns in Iraq, with the and operated, as they are essential to retaining fresh quality of water supply services getting mark- water during high flow periods that enter Iraq along edly worse the further south governorates are the Euphrates and Tiger rivers to support year-round along the Tigris and Euphrates (Figure 20). While water needs. Irrigation and drainage infrastructure this binding constraint relates to both reduced quan- also need rehabilitation and better operation. The tity and quality of water resources, water quality is current state of infrastructure has led to salinity a bigger concern particularly the increasing salin- 22 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY ity in the south of Iraq (Hydronova 2020). In south- ates, 90% of households used the public piped source ern Iraq, critical water quality thresholds are already for drinking compared to just 1% in Basra in the south. being exceeded, suggesting that a water quality crisis The remaining 99% households resorted to purchas- is already under way and is a major symptom of the ing water from more expensive alternatives: tanker impending water availability crisis in Figure 18 Supply- trucks or carts (83%) or buying bottled water (16%). Demand Gap without the National Strategy (business- In 2018, in Basra, riots erupted over poor access to as-usual scenario). The lack of water quality is evident service when thousands of people were hospitalized in the proportion of households that are opting to use because of contaminated water (HRW 2019). This non-piped water sources (i.e., those not provided by deterioration in water quality has forced an increasing water service providers) as their main source of drink- number of households to switch to more expensive ing water. In 2018, although close to 90% of house- alternative drinking water sources. Reliance on private holds had a piped connection to a public water ser- water vendors, such as tanker trucks, carts, bottled vice provider, the proportion of households using it and packaged water, is becoming increasingly preva- as the main source of drinking water had dropped to lent across Iraq, increasing the cost of water to its peo- 60 percent. The piped connection use varied from the ple. The situation is particularly dire for the country’s north to the south. In KRG and the northern governor- forcibly displaced population (Box 4). WATER SCARCITY: A DRIVER OF FORCED DISPLACEMENT AND SOURCE OF VULNERABILITY FOR BOX 4  THE FORCIBLY DISPLACED AND THEIR HOST COMMUNITIES At the end of 2020, Iraq hosted more than 2 million forcibly displaced people, of which at least 618 thousand are refugees and asylum seekers and about 1.5 million are internally displaced people (UNHCR 2020). Given these high levels of displacement, it is paramount to understand the role of water in influencing human mobility and also the vulnerabilities of those that are displaced and their host communities. Here two mechanisms are examined. First, the contribution of water to forced displacement. Second, the water challenges faced by the forcibly displaced and their host communities. Water scarcity is linked to small-scale forced displacement in Iraq. Multiple surveys of internally displaced persons (IDPs) from different years identify water scarcity as one of the key drivers of forced displacement and reasons for returning (or not) to places of origin (IOM 2012, 2019; Guiu 2020). In these surveys, water scarcity refers to both lack of water to support agriculture and livestock and lack of drinking water services. In some governorates, especially in southern Iraq, more than 25 percent of IDPs cited water scarcity as the main reason for displacement and also the main reason preventing them from returning to their place of origin (2010 survey). In a follow-up survey in 2019, the International Organization for Migration in Iraq identified 21,314 IDPs from the southern and central governorates who were displaced due to drinking water issues caused by high salinity content or waterborne diseases (IOM and Deltares 2020). Most of these individuals came from the four governorates in the south (Missan, Muthanna, Thi-Qar, and Basra). Beyond acting as a driver of forced displacement, water plays a much bigger role as a determinant of the vulnerability of the forcibly displaced and their host communities. Across Iraq, the number of people in need of WASH assistance includes approximately 600,000 IDPs (of whom about half reside in out-of-camp locations) and 1.06 million returnees; 14,724 people in highly vulnerable host communities; and more than 100,000 refugees in nine refugee camps and out-of-camp locations (UNOCHA 2019). Of these, 317,663 people lack access to an improved water source, while 679,751 people lack access to sufficient quantities of watera (UNOCHA 2019). Host communities in Iraq have also faced water challenges in relation to the influx of Syrian refugees and IDPs. A large share of the forcibly displaced population is hosted in the Kurdistan region of Iraq, where there are at least 237,000 registered Syrian refugees and more than 1 million IDPs.b Together, this means that the population of the Kurdistan region of Iraq (Dohuk, Erbil, Halabja, and Sulaymaniyah governorates) has increased by about 20 to 30 percent. Most refugees and IDPs live in host communities. By 2016, only a third of Syrian refugees and 20 percent of IDPs were still living in the 42 camps set up throughout the region (Saaid 2016). This influx of forcibly displaced persons led to increasing demand for services, affecting the provision of health, education, and social protection programs for the population in general (WHO 2019). Perhaps surprisingly, water supply and sanitation coverage in the Kurdistan region of Iraq has slightly increased following the forcibly displaced crisis. This suggests that the region’s government and its development partners adapted quickly to improve water supply, with indicators for coverage improving since the start of the Syrian crisis. Based on Ebb and Flow, Volume: Water in the Shadow of Conflict in the Middle East and North Africa. Washington, DC: World Bank. a A sufficient and adequate quantity of water means at least 15 liters of safe water (from improved water sources) per day. b Data from UNHCR’s data portal: http://data2.unhcr.org/en/situations/syria/location/ Special Focus: Overcoming Water Scarcity and Climate Change Impacts: Resilience and Institutional Solutions 23 Economic theory dictates that where water is scarce in general and difficulties in implementing the 2015 it ought to be allocated efficiently to maximize its Strategy specifically exacerbate this “tragedy of the contribution to growth, jobs, and well-being (World commons”. For instance, the existing central com- Bank 2017). Nevertheless, in water scarce countries mand and control systems fail to win the compliance like Iraq, water is often used less efficiently, and more of irrigators and make monitoring and enforcement of intensively than in countries where it is more abundant. In wastewater treatment standards at the local level dif- doing so, less economic value-added is squeezed out of ficult. The burden of this inability to coordinate effec- each drop of water such that high-water stress does not tively across regional and sectoral users is borne by necessarily lead to economization on water use. One of populations and users in downstream regions, who the underlying reasons for this paradox is that very often are forced to rely on costly alternatives in the face of water is not valued at adequate level for cost recovery or deteriorating water quality. to reflect the scarcity of water. Although central water resource planning is still needed due to the complex hydrology, increas- Sector Architecture and Issues ing local-level involvement in management of water resources could harness the benefits of Presently, the water sector in Iraq relies on a local knowledge and incorporate varying local highly centralized institutional architecture, but priorities. Central water resources planning for Crit- there is fragmentation of responsibilities for ical maintenance, repairs and upgrades allows man- water resources management and water services aging various major dams and canals to provide min- across federal ministries. All decisions regarding imum water flows along the Tigris and Euphrates to governance and administration of water resources preserve nature, prevent further salinization, and pro- and water supply and sanitation (WSS) services lie at vide downstream populations with water services. the center. Complications arise as these inter-linked At the same time, broader stakeholder participation responsibilities are fragmented between two federal in water resource management, especially by gover- ministries—the Ministry of Water Resources (MoWR) norate-level actors, could better inform resource man- manages the “resource”, while the Ministry of Public agement plans and identify water reallocations nec- Housing, Municipalities, and Public Works (MPHMPW) essary to secure water needs across consumptive manages the WSS service. There is limited dialogue uses—including basic WSS services. Failure to appro- between MoWR and MPHMPW at the federal level, priately account for local-level information may endan- and though they have some deconcentrated repre- ger downstream water needs for people, economic sentation at the governorate level, there is not enough development, and the environment. decision-making power or funding to better align water resources with WSS services at the local level. The top- The high reliance on centralized administration down master-planning approach leaves little space to poses specific challenges to the efficient and sus- capitalize on the benefits of local-level decision mak- tainable provision of WSS services at local level. ing and increases the risks of backlash from, as well as conflict between, stakeholders engaged in compet- 21 A “tragedy of the common” is a situation when the ing uses. collective use of a common pool resources, shared by multiple individuals results in its depletion. Such Consensus among governorates and across sec- depletion arises when individual actors utilize a shared tors is needed for managing Iraq’s uneven hydrol- resource (e.g., ground water) only on the basis of their own individual costs and incentives but without ogy, without which a “tragedy of the commons”21 considering how the aggregate impact of collective arises where upstream users pollute the water usage could negatively impact the availability of that resources needed downstream. The highly cen- resource for all (e.g., overuse leads to groundwater tralized approach to water resources management depletion) (Ostrom 2008). 24 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY The GoI earlier had plans to devolve WSS services volatile in the face of macroeconomic fluctuations and alongside other functions such as health and educa- resource constraints arising from political instability. They tion, but in 2019 the parliament halted the devolution also place disproportionate emphasis on allocations for process and a decision on the legality of the rollback capital expenditures and salaries, but omit important of decentralization currently rests with the Supreme allocations required for operations and maintenance of Court. All WSS services in Iraq are managed centrally infrastructure. In addition to lack of autonomy, the lack by the MPHMPW through a network of 265 deconcen- of fiscal decentralization to WSS service providers at the trated municipal directorates, also responsible for other local level also constrains their ability to effectively serve services such as solid waste management and roads. the end-users who are their clientele. In addition, current However, these Municipal directorates report directly to revenues from customers are a fraction of the costs to MPHMPW with no formal oversight or reporting link to operate and maintain WSS services. sub-districts, districts or to governorate administrations. This centralization of WSS provision and limited com- Implementation of SWLRI had envisioned spend- munication with local-level authorities presents barriers ing US$180 billion in the sector over a 20-year to effective engagement with the demands and needs period, but the financing did not materialize as of end-users and on-the-ground conditions. In partic- expected. The planned expenditures included: ular, resource allocation decisions taken at the center approximately US$12billion for rehabilitating and leave little flexibility to respond to ever-changing local building new water infrastructures such as dams, bar- contexts and situations. As discussed below, centrally rages, regulators and main drains; US$13 billion for determined budgets tend to omit important allocations rehabilitating existing irrigation projects; US$33 bil- required for operations and maintenance and also tend lion for developing new irrigation projects; and an to be highly discretionary and volatile in the face of additional US$80 billion for investment across the macroeconomic fluctuations. municipal water sector. Based on regional experi- ence, the latter could potentially see the involvement of private sector actors, including oil and gas compa- Sector financing and issues nies. But these capital resources never materialized: in 2018, for example, the budget for MoWR was about Much of the financing constraints faced in the US$0.015 billion—less than 0.2 percent of the planned water sector stem from its institutional architecture budget. A significant decrease in the price of oil in and limited revenues from customers. Centrally 2015, coupled with the expensive fight against and determined budgets tend to be highly discretionary and reconstruction needed after the Islamic State insur- FIGURE 21 • Increasing Reliance on Development Assistance for WSS Corresponds to Decreasing Oil Prices OECD Development Assistance for WSS Oil prices 22 120 21 110 110 US Dollars Committed 20 US Dollar per barrel 19 90 (Natural Log) 18 80 17 70 16 60 15 50 14 40 13 30 12 20 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YEAR YEAR Source: World Bank staff calculations based on OECD data. Special Focus: Overcoming Water Scarcity and Climate Change Impacts: Resilience and Institutional Solutions 25 gency, decimated the Iraqi budget (see Figure 21). water authority (under the Mayorality of Baghdad), The financial shortfall left little money for implement- NRW is estimated at 53 percent—20 percent due to ing the Strategy. The COVID-19 pandemic has only physical losses, and 33 percent from unauthorized made the situation worse with further oil price fluctu- consumption, metering inaccuracies, unbilled ations and a halt in water tariff collection. consumption. Cost-recovery for water services could be achieved through reduction in the costs (or Sustainable delivery of WSS services is con- efficiency improvements) and increasing the revenues strained by the O&M deficit, against a backdrop (tariffs). Higher revenues, however, would need to be of the central government’s declining ability to attained through tariff structures that cover operation provide subsidies due to oil price fluctuations, and maintenance costs whilst ensuring vulnerable fragility, and now covid. The center subsidizes sala- households can afford the services. ries of WSS employees and capital expenditures, but O&M costs of frontline service delivery departments Without action, climate change and reduced water are not accounted for. This budgeting encourages availability will reduce GDP through a cascade the local level to opt for new infrastructure funded of negative impacts across multiple sectors of by central level instead on efficiency, optimizing, and the economy and impact more the vulnerable maintaining existing assets. Even in the case of capi- people. Reduced water supply alongside changes in tal expenditure allocations for new infrastructure, cen- crop yields that will accompany climate change could tral control presents challenges. Public investment reduce real GDP in Iraq by up to 4 percent, or US$6.6 projects are executed at very low rates, are highly dis- billion (World Bank 2020). Output would be reduced cretionary and are the first to be cut when oil prices across the economy, with the worst-hit sectors being decline. Hence, such capital expenditure allocations the crops, food and industrial sector which would related to water require financial stability, especially experience a 16, 6 and 5.5 percent loss of output. The given that many of these projects require multiple output reduction would, in turn, cause consumer price years to finish. index for crops in Iraq to increase by 13 percent and would also increase net imports for food items (see Misalignment of information and incentives Box 5 Impact on trade balance of food products). In the creates challenges for central ministries to plan Middle East, where many households are net buyers and administer sub-national delivery of WSS of grains and food products, any increases in crop services, leading to tariffs that may not reflect consumer prices could increase poverty. Low-income local water delivery costs. Tariffs are set centrally households are particularly vulnerable because they by MPHMPW, while the staff across the 265 municipal tend to spend a high share of their incomes on staple directorates are appointed and paid directly by foods (Martin and Ivanic 2016 cited in World Bank, MPHMPW with estimates varying from 13,000 to 2020). Similar inequalities arise when considering 40,000 staff. Since 2014, municipal directorates have reductions in agricultural employment, which will been allowed to retain revenue from customers, but disproportionately hurt the poor. these revenues are a fraction of what it actually costs to operate and maintain WSS services. The average Vulnerable people are likely to suffer some tariff in 2019 was US$0.01/m3. Additionally, billing of of the most severe impacts of water scarcity. customers was suspended by central government Direct impacts include reduced job opportunities in decree in March 2020 in response to the COVID-19 agriculture, healthcare costs to addressing the health health crisis. impacts of inadequate quantity and quality. Impacts can also be indirect and can be felt through food WSS provision in Iraq also suffers from high levels prices and human development. Higher food prices of non-revenue water, both in terms of physical could raise poverty levels and reduce food security, losses and commercial losses. For the Baghdad because many households are net buyers of grains 26 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY and food products, and thus any increases in crop Reform Area 1: Water efficiency, productivity, prices could increase poverty. Higher reliance on food and demand management policies exports without social protection can expose poor households to international food price shocks. Large Increasing water efficiency and productivity is impacts on agricultural production would also trigger essential, but will only pay off with water demand a reduction in the demand for (low-skilled) labor in management policies to cap the water use.  As the agriculture sector, raising important distributional water needs exceed the available water, Iraq must concerns as agricultural employment constitutes improve water use, including improving reservoir an important 18 percent of total employment in Iraq operations and increasing water efficiency and pro- (World Bank 2020). Long-term exposure to water ductivity. The water in the balance report (World Bank scarcity also accumulates into further economic 2020) shows that with climate change, improvements losses through their impacts on the human capital in water use efficiency needs additional mitigation formation of children and labor productivity of adults policies to deal with the adverse impacts of climate (World Bank 2017). change on rainfed crop yields. However, with no effec- tive water demand management policies in place, improvements in water use efficiency may gener- Confronting Iraq’s Water Situation— ate rebound effects26 in water consumption, increas- Demand Management, Institutional and Riparian Solutions 22 In this note, “Water supply-side policies” refer to water resource augmentation interventions including increasing Iraq water sector faces old and new water storage capacity, desalination, agriculture drainage water challenges requiring to complement the dialogue reuse, and wastewater reuse and increasing efficiency with riparian countries and current water supply- and water productivity; reduction of non-revenue water, side policies22 with water demand management reduction in water leakages (distribution network, and transfers), and modernizing irrigation. policies, to cap or reduce water demand in the 23 The supply-demand cycles hypothesize that supply face of dwindling of water availability. Since the side policies can lead to counterintuitive effects. An 2015 SWLRI, many events have taken place (fall increasing water supply can generate a higher demand, in oil price, Islamic state, and COVID 19 pandemic) which can even aggravate water scarcity. hampering the implementation of the SWLRI. As such, 24 The reservoir effect results on overreliance on water the water situation of demand exceeding the supply infrastructure (dams, desalination, wastewater treat- ment), which is associated with the expansion of water and the water quality degradation has worsened. With supply and a belief that the volume of water will always the impact of climate change in Iraq and the riparian be available leading to reduced incentives for adaptive countries, added to the economic development and actions at individuals or community level to period of demographic, demand management policies must water shortages or droughts. accompany supply-side policies. Water demand 25 Claims of water-saving potential, have focused solely on policies break the water demand cycle23, the reservoir changes in the volume of water withdrawn or applied to farm fields, neglecting the volume and fate of return flow effect24, and the paradox of water efficiency25. This back into the original water source, creating misleading transition to using demand management policies impressions of water benefits within the overall irrigation will contribute to securing water for uses within a network within which water practices have been mod- financially sustainable path for the sector. ified. This insufficient accounting leads to a water effi- ciency paradox, in which more efficient irrigation applica- This section identifies three areas of reforms for tion can result in greater net consumptive use, ultimately lessening the volume available for subsequent use. improved water security and adapting to impact of 26 “Rebound effects” encompasses several economic and climate change: (i) efficiency and water demand behavior adaptation mechanisms which occur when management; (ii) Institutional reform; and (iii) regional an increase in resource-use efficiency affects the total solution. consumption of that resource. Special Focus: Overcoming Water Scarcity and Climate Change Impacts: Resilience and Institutional Solutions 27 ing water withdrawals. Improved water accounting agreements are a potential tool to offer flexibility and monitoring are essential to detect unexpected in implementing national plans at the local level. responses to enhanced efficiency and productivity. The SWLRI does not direct local water managers in In addition, while supply-side improvements tend to determining how to use the water allocating them, require costly capital expenditure and take time to which can lead to suboptimal outcomes. International materialize, demand management has the potential to experience shows that involving and empowering reduce inefficiencies. local water managers on water use can contribute to more efficient and effective water management. The Increasing efficiency and demand management SWLRI offers flexibility to allow for a greater role for require better valuation of water alongside reg- local water managers as long as local decisions and ulation of water-use. Strategic communication is reallocation agreements between users are made needed to encourage behavior change among users within the confines of SWLRI and allow meeting local to reduce consumption. In addition, tariffs for munic- and national priorities. While water reallocations ipal and industrial uses and quotas for agriculture agreements are not a stand-alone solution for Iraq’s provide incentives for users to lower their water con- water management problems, they can provide an sumption. Finally, transformative technology (e.g., additional tool for policymakers to draw on within the remote sensing and smart meters) allows for cheaper SWLRI water balance. and faster collection and processing of information, which can help monitor users’ compliance with water Reform Area 2: Institutional solutions demand management policies and can also fill infor- mation gaps regarding water demand and supply to Despite the importance of central oversight, capture more accurately its value. increased stakeholder engagement and partic- ipatory decision-making would optimize water Updating dam’s operation will improve drought allocations across competing uses. The inclu- and flood management, which are expected to sion of important local-level actors from across mul- increase with climate change. In collaboration with tiple sectors is necessary for effective coordination the riparian neighbors, Iraq should develop a real-time between competing uses and integrated manage- meteorological gage network to help forecast flood ment of water resources. For WRM, stakeholder events and improve drought early warning systems. engagement can take advantage of local level knowl- Iraq needs to update the dams’ operation to accom- edge to better inform policy-decisions in identifying modate floods volumes and determine the water allo- sectoral requirements and priority areas for any water cations during drought events. More agile water allo- reallocations, while ensuring a just and equitable dis- cation and flood and drought response mechanisms tribution of water resources. In the case of WSS ser- will support Iraq’s investments, preserve economic vice delivery this process could improve customer sat- development, and prevent seasonal or annual losses isfaction with services provided, which in turn could in the agriculture sector. trigger a virtuous cycle of increasing locally generated revenue from customers. In general, increased stake- Water reallocation27 within and across holder engagement would build trust in water sector governorates provides an additional tool for institutions and generate users’ support for and com- policymakers to better cope with water scarcity pliance to the decisions taken regarding shared water and climate change. At the same time, with the resources, arguably also setting the stage for broader- water scarcity and climate change impacts, Iraq scale cooperation (World Bank (forthcoming)). Build- shall explore water reallocation within and among different governorates. Water resource management 27 Water reallocation is here defined as a change to the in Iraq will always require federal oversight because volume, timing, location, or quality of water delivered of the complex hydrology system. Water reallocation under formal or informal water rights. 28 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY ing consensus in the water sector has the potential to restructure WSS services into semi-commercial cor- to catalyze cooperation and can lay the foundations poratized entities able to recover the actual costs of for cementing a broader settlement though integrated operation and maintenance from users—in line with agreements with other sectors. good international practice. Service providers need to have a minimum A key benefit from moving towards corporatization degree of local-level fiscal and managerial auton- of WSS services would be increased accountability omy for improving WSS service delivery. Improving of corporate entities to customers and to the ser- cost recovery for water supply and sanitation services vice authority (government). Improved customer rela- at the local level will generate cash for service provid- tionship management (CRM) could build trust in service ers to sustain service delivery, and, in the medium to providers, establish a reputation for service delivery and long-term, increased water sector revenue will ensure positively impact revenue through increased collection financial sustainability of the sector and attract the rate. In the case of BWA, the only autonomous WSS private sector. While other forms of funding from the provider, strengthening customer relationship manage- center are non-discretionary, such as subsidies ear- ment systems for billing and collecting the revenue was marked for staff salaries, the revenue from custom- a key constraint to sustaining critical aspects of oper- ers can be used to fix immediate problems; be they ation and maintenance. e satisfied with the quality of leaks, replacing pumps and generators or even tak- education and water in their area. ing commercial customers to court for non-payment. Local-level managerial autonomy is a necessary pre- Strategic communications and ensuring availabil- condition for effectively mobilization of local reve- ity of reliable data and information is fundamental nues. Today the only partially autonomous WSS pro- for effective stakeholder engagement, customer vider is the Baghdad Water Authority (BWA)—which relationship management and improved service itself stands to benefit from improved cost-recovery delivery. Transparent information sharing and commu- and customer-relationship management. nications campaigns underpin the social contract that exists between the governed and the governors. Such Moving towards the corporatization of water sup- transparency can win compliance from multiple actors ply and sanitation services could help tackle the in the water sector by building trust and legitimacy for lack of locally generated revenue from custom- decisions taken regarding water sector allocations ers, which restricts the ability to operate and main- and cost-recovery efforts in service provision (munici- tain WSS services. Restructuring WSS services into pal water, and irrigation). One of the most powerful out- semi-commercial corporatized entities able to recover comes of information disclosure is its ability to catalyze O&M costs from users would also lay the necessary pro-social behaviors and create the support needed for foundation for public-private partnerships and to attract policy improvements, such as the need to charge tar- private sector in both the financing and management iffs to meet costs of service delivery or quotas. Well- of WSS services. A first step of corporatization would functioning data collection and information systems are involve unbundling WSS from other municipality func- also essential to monitoring water use and the condi- tions ringfencing the operations of WSS service provid- tion of existing infrastructure, and would ensure timely ers. While in most countries, including within MENA, the responses, effective management and reduction in operations of WSS service providers have been unbun- losses in the water sector. dled from line ministries or municipalities this is not the case in central and southern Iraq, where ringfencing the Reform Area 3: Regional solutions operations of WSS service providers has not yet been taken, as discussed above. The White Paper adopted A large share of Iraq’s freshwater resources orig- by the GoI acknowledges the need to establish an inde- inates from outside its borders, making dialogue pendent body to regulate WSS services and proposes with its neighbors important. The high level of water Special Focus: Overcoming Water Scarcity and Climate Change Impacts: Resilience and Institutional Solutions 29 dependency (more than 60% of Iraq’s freshwater comes from its broader ramifications on opportunities and from neighboring Turkey, Syria and Iran) underscores risks for regional economic development and integra- the need for a regional approach, especially in light of tion. For example, efficient water management can con- increasing water demands and climate change. The tribute to a more productive, export-oriented agricultural World Bank’s Water in the Balance Report (2020) high- sector while mitigating the impacts of water scarcity. For lights the significant benefits of a more cooperative an upstream country, this means growing more food approach towards water infrastructure development and while using less water, making the water available for freshwater resources management. In Iraq, a 20% reduc- downstream countries. Moving forward, there is a need tion in water supply with changes in crop yields that will to build on ongoing efforts to further the debate on how accompany climate change could reduce real GDP in the regional water scarcity challenge can be turned Iraq by up to 4 percent, or US$6.6 billion compared into an opportunity for greater cooperation over trans- to 2016 levels; and a drop by 11.8% of the demand for boundary water resources and beyond. unskilled labor in agricultural by 5.4% of the demand for nonagricultural activities. Output reduction would cause Regional solutions include increased information consumer price index for crops to increase by 13.9% per- sharing between the countries, both on quantity as cent and would also increase net imports for food items well as on water quality. More coordinated manage- to over US$960 Million. A regional dialogue focusing on ment and operation of water infrastructure on shared the broader basked of benefits that can be derived from river systems can mitigate the impacts of droughts and cooperative management of water, as well as increased floods on downstream countries and help improve the trade would benefit Iraq and the region. management of evaporative losses. Information sharing and the development of monitoring and early warning The impacts of water scarcity can ripple through systems all promote the cooperative operation of water national economies to affect topics of regional infrastructure, allowing for better decisions to be made importance such as trade and labor markets. to protect and benefit the environment, economies, and For example, economic modelling suggests that an communities within the basin. In addition, as water qual- increase in water scarcity would lead to increased food ity generally deteriorates downstream, as more pollu- import in Iraq, and also neighboring countries (Box 5 tion sources contaminate the river, improved coordina- Impact on trade balance of food products). Therefore, tion and sharing of information can also be a powerful water scarcity should not be considered in isolation to help address this challenge. BOX 5  IMPACT ON TRADE BALANCE OF FOOD PRODUCTS In general, a reduction in water supply increases the net FIGURE B5.1 • Water Scarcity Leads to a imports of food items across the region. The larger the Higher Food Bill reduction in water supply, the higher the increase in net imports. As water scarcity hits Iraq, the country will face a higher food bill. Other neighboring countries, including Change in Net Imports of Food Items (US$ million) Iran, Syria and Turkey, are also expected to import more Jordan –$203 food in an increasingly water scarce world. The exception Lebanon is Jordan, which experiences fewer net imports (or more $31 Syria $125 net exports) as the level of water scarcity increases. This is because Jordan might export more valuable food products Iran $589 to neighboring countries as the severity of water scarcity Iraq $963 grows in the entire region and imports less valuable Turkey $1,228 products from the world market. Improvements in water- use efficiency can partially eliminate a small portion of the Source: World Bank 2020. increases in net imports of food items. 30 REFERENCES Borgomeo, Edoardo; Jägerskog, Anders; Zaveri, water-quantity-and-water-quality-central-and- Esha; Russ, Jason; Khan, Amjad; Damania, Rich- south-iraq-preliminary-assessment-context. ard. 2021. 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Geneva: UNHCR. https://www. viding Health Care to Syrian Refugees in and out- unhcr.org/5ee200e37.pdf. side the Camps.” WHO Regional Office for the Eastern Mediterranean. 32 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY SELECTED RECENT WORLD BANK PUBLICATIONS ON IRAQ (for an exhaustive list, visit: https://www.worldbank.org/en/country/iraq) Title Publication Date Document Type Iraq country climate and development report Upcoming Report Iraq economic monitor: Seizing the opportunity for reforms and managing volatility, Spring 2021 May 2021 Economic Update Iraq Public Expenditure Review for Human Development Sectors May 31, 2021 Public Expenditure Review Iraq-Navigating through COVID-19: A snapshot on how the pandemic affected MSMEs in Iraq February 15, 2021 Report Breaking Out of Fragility: A Country Economic Memorandum for Diversification and Growth in Iraq September 30, 2020 Country Economic Memorandum The Seasonality of Conflict August 31, 2020 Policy Research Working Paper Iraq Economic Monitor: Navigating the Perfect Storm (Redux) May 4, 2020 Economic Update Multidimensional Poverty Assessment of Internally Displaced Persons in Iraq April 6, 2020 Policy Research Working Paper Iraq’s Universal Public Distribution System: Utilization and Impacts During Displacement February 19, 2020 Policy Research Working Paper EITI as an Instrument of Fiscal Transparency and Accountability: A Case Study of Two FCV Countries November 1, 2019 Brief Doing Business 2020: Comparing Business Regulation in 190 Economies–Economy Profile of Iraq October 24, 2019 Working Paper (continued on next page) 33 (continued) Title Publication Date Document Type Iraq Economic Monitor, Fall 2019: Turning the Corner–Sustaining Growth and Creating Opportunities October 20, 2019 Economic Update for Iraq’s Youth EITI as an Instrument of Fiscal Transparency and Accountability in Contexts of Fragility and Violence: August 1, 2019 Brief A Comparative Case Study of Afghanistan and Iraq (Part One) EITI as an Instrument of Fiscal Transparency and Accountability in Contexts of Fragility and Violence: August 1, 2019 Brief A Comparative Case Study of Afghanistan and Iraq (Part Two) Mashreq 2.0: Digital Transformation for Inclusive Growth and Jobs: Executive Summary June 25, 2019 Report Jobs in Iraq: A Primer on Job Creation in the Short-Term February 19, 2019 Working Paper Arrested Development: Conflict, Displacement, and Welfare in Iraq January 1, 2019 Report Bringing Back Business in Iraq: Analytical Note January 1, 2019 Report The Reconstruction of Iraq after 2003: Learning from Its Successes and Failures January 1, 2019 Publication Iraq–Interventions to Urgently Improve the Quantity and Quality of Drinking Water January 1, 2019 Brief Doing Business 2019: Training for Reform – Iraq October 31, 2018 Working paper Iraq Economic Monitor: Toward Reconstruction, Economic Recovery and Fostering Social Cohesion October 1, 2018 Working Paper Advancing the Public Procurement – Governance Nexus – The Case of Iraq (English) October 1, 2018 Brief 34 IRAQ ECONOMIC MONITOR: THE SLIPPERY ROAD TO ECONOMIC RECOVERY 1818 H Street, NW Washington, DC 20433