Iraq Economic Monitor From War to Reconstruction and Economic Recovery With a Special Focus on Energy Subsidy Reform Spring 2018 Middle East and North Africa Region M croeconomics, Tr de & Investment Iraq Economic Monitor From War to Reconstruction and Economic Recovery With a Special Focus on Energy Subsidy Reform Spring 2018 Middle East and North Africa Region M croeconomics, Tr de & Investment Cover photo of the Shrine of Nabi Yunus in Mosul, Iraq courtesy of The World Bank. Publication design by The Word Express, Inc. TABLE OF CONTENTS Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii List of Key Abbreviations Used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix ‫ ملخص تنفيذي‬. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Chapter 1  Recent Economic and Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Political and Social Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Oil Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Access to Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Poverty, Equity and Vulnerabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Labor Markets and Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Business Environment and Private Sector Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Inflation, Money and Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 External Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Chapter 2  Economic Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Economic Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Chapter 3  Special Focus: Energy Subsidy Reform in Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Introduction: Economic Rationale of Energy Subsidy Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Rationale for Reform in Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Reform Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Government’s Reform Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Impact of Subsidy Reform on the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 Impact on Poverty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 iii References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Appendix: Selected Data on Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 Selected Recent World Bank Publications on Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 List of Figures Figure 1: Casualty Figures Have Been Decreasing after 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 2: Improved Security and Initial Reconstruction Effort is Estimated to Have Sustained Non-Oil Growth in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 3:  After a Marked Contraction, GDP Per Capita is Estimated to Have Improved in 2017 . . . . . . . .3 Figure 4: A Better Security and Initial Construction are Estimated to Have Improved the Economic Contribution of Non-Oil Sectors in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 5: Iraq’s Non-Oil GDP Growth Has Exceeded that in MENA Oil Exporters in 2017 . . . . . . . . . . . . 4 Figure 6: Non-Oil Investment Was Sharply Under-Executed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Figure 7: Foreign Direct Investment Plummets Due to Insecurity and Poor Business Environment . . . . .4 Figure 8: Oil Production is Estimated to Have Declined by 3.5 Percent in 2017, but to Remain the Primary Driver of the Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Figure 9: Oil Prices are Estimated to Have Increased in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 10: Oil Revenue is Estimated to Have Increased in 2017 Sustained by Higher Oil Prices . . . . . . . . 5 Figure 11: The Wage Bill Continues to Be the Largest and Fastest Growing Expense in the Government Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Figure 12: Iraq Is an Outlier in Terms of the Wage Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 Figure 13: Jobs by Sectors, Public and Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 14: Labor Force Participation for Men Highly Exceeds that for Women . . . . . . . . . . . . . . . . . . . . . .10 Figure 15: Women Participation in Labor Force Is Below the Already Low Rates for that in MENA . . . . . 10 Figure 16: Unfavorable Business Environment Remains a Significant Deterrent to Foreign Investment, but Reforms on the Way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Figure 17: The Quality of Iraqi Governance Remains Critical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 18: Following Large Deterioration, Higher Oil Prices and Continuation of Fiscal Adjustment, Fiscal Deficit Is Estimated to Have Improved in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 19: Improved Security in 2017 Is Estimated to Have Contained a Large Fall in the Share of Non-Oil Investment to GDP, while the Share of the Security Spending Declined . . . . . . . . . . . 13 Figure 20: Large Borrowing and Debt Guarantees Increased Iraq’s Public Debt-to-GDP Ratio . . . . . . . . 14 Figure 21: Large Borrowing Is Projected to Increase Total Debt Service . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 22: Inflation Remains Low Thanks to Pegged Exchange Rate and Subdued Demand . . . . . . . . . 15 Figure 23: The Disruption of Trade and Food Supply Boosted Food Inflation the 2nd Quarter 2015, but Remained Low since Then . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 24: Monetary Aggregates Are Estimated to Have Declined in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 25: Current Account Balance Is Estimated to Have Returned to a Surplus of 0.7 Percent of GDP in 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 26: International Reserves Have Been Falling to Finance the Current Account Deficit . . . . . . . . . 17 Figure B1: Non-Oil GDP Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Figure B2: Non-Oil GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 iv IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY Figure B3: Global Growth Has Picked Up to 3 Percent in 2017, Mainly Reflecting a Rebound in Investment, Manufacturing and Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Figure B4: Growth in MENA Region Is Estimated to Have Declined Markedly to 1.8 Percent in 2017, Reflecting the Deceleration among Oil Exporters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Figure 27: Electric Power Transmission and Distribution Losses, Latest Available Indicator . . . . . . . . . . .26 Figure 28: Electricity Generated, Billed, and Collected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Figure 29: Planned Energy Generation Mix-2017/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Figure 30: Intra Block Billing, Higher Consumers Benefiting from Lower Block Subsidy . . . . . . . . . . . . . .27 Figure 31: Iraq Electricity Tariffs – 2015/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 Figure 32: Contracts for Revenue Collection Average Cycle of Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Figure 33: Effects of Increase in Tariffs and Loss Reduction Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Figure 34: Change in GDP (Fixed Prices) by Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Figure 35: Change in National Accounts at Fixed Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 List of Tables Table 1: Current vs. Alternative Tariff Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Table 2: Dynamic Analysis: Average Growth of National Accounts in Real Terms (2017–2025) . . . . . .33 Table 3: Selected Macroeconomic Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 List of Boxes Box 1: Reconstruction: Only a Limited Boost, Especially if Delayed . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Box 2: Global and Regional Economic Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21  v PREFACE T he Iraq Economic Monitor provides an update (Practice Manager). The Special Focus is authored by on key economic developments and policies Bledi Celiku (Economist) under the general guidance over the previous six months and presents of Luca Bandiera. Muna Abeid Salim (Senior Program findings from recent World Bank work on Iraq, Assistant) provided outstanding administrative placing them in a longer-term and global context and support. assessing the implications of these developments The findings, interpretations, and conclusions and other changes in policy regarding the outlook for expressed in this Monitor are those of World Bank Iraq. Its coverage ranges from the macro-economy staff and do not necessarily reflect the views of the to financial markets to indicators of human welfare Executive Board of the World Bank or the governments and development. It is intended for a wide audience, they represent. For information about the World Bank including policy makers, business leaders, financial and its activities in Iraq, please visit www.worldbank. market participants, and the community of analysts org/en/country/iraq (English) or www.worldbank. and professionals engaged in Iraq. org/ar/country/iraq (Arabic). For questions and The Iraq Economic Monitor is a product of the comments on the content of this publication, please World Bank’s Macroeconomics, Trade & Investment contact Luca Bandiera (lbandiera@worldbank.org), Global Practice. It was prepared by Luca Bandiera Ashwaq Maseeh (amaseeh@worldbank.org), Bledi (Senior Economist) and Ashwaq Maseeh (Research Celiku (bceliku@worldbank.org), or Kevin Carey Analyst) under the general guidance of Kevin Carey (kcarey@worldbank.org). vii LIST OF KEY ABBREVIATIONS USED AML/CFT Anti-Money Laundering and Combating ID Iraqi Dinar of Terrorism Financing IEA International Energy Agency Bpd Barrel per day IDPs Internal Displaced Persons BOP Balance of Payments ILO International Labor Organization CBI Central Bank of Iraq IMF International Monetary Fund CGE Computable General Equilibrium IOCs International Oil Companies CPI Consumer Price Index IPP Independent Power Producers CSO Central Statistical Organization ISIS Islamic State of Iraq and Syria DB Doing Business JICA Japan International Cooperation Agency DNA Damage and Needs Assessment KRG Kurdistan Regional Government DPF Development Policy Financing MENA Middle East North Africa Region EMDEs Emerging Market Developing Economies OPEC Organization of Petroleum Exporting EODP Emergency Operation for Development Countries Project PDS Public Distribution System ESMAP Energy Sector Management Assistance PMT Proxy-Means Testing Program PPP Public Private Partnerships ESSRP Emergency Social Stabilization and RPP Revenue Protection Program Resilience Project SBA Stand-By Arrangement ESR Electricity Subsidy Reform SFD Social Fund for Development FATF Financial Action Task Force SOEs State Own Enterprises FDI Foreign Direct Investment SOMO Iraqi State Organization for Marketing Oil FFES Funding Facility for Extended Stabilization SPC Social Protection Commission FFIS Funding Facility for Immediate TBI Trade Bank of Iraq Stabilization TSP Transmission Service Provider GCC Gulf Council Countries UNDP United Nations Development Program GoI Government of Iraq UNOCHA United Nation Office for the Coordination GDP Gross Domestic Product of Humanitarian Affairs GW Giga Watt WB World Bank ICA Investment Climate Assessment WDI World Development Indicators ICPI International Corruption Perception Index WGI World Wide Governance Indicators EXECUTIVE SUMMARY I raq is slowly emerging from the deep economic promote stabilization, and initiate a recovery and strains of the last three years, but progress in reconstruction process. Kuwait hosted a donor addressing the legacy of the war against ISIS reconstruction and recovery conference in February and the accumulated development deficit from 2018 to identify short- and medium-term financing decades of conflict needs to be accelerated. needs for Iraq. The GoI’s reconstruction and The improvement in oil prices since mid-2017 and development framework presented at the conference expenditure restraint have been conducive to better addresses recovery needs and priorities according outcomes on fiscal and external balances. The to five key pillars: governance, national reconciliation reconstruction needs and economic consequences and peacebuilding, social and human development, of the war against ISIS need to be placed in the infrastructure, and economic development. overall fiscal and growth context of Iraq, both to The conflict with ISIS and widespread assess the implications of reconstruction for growth insecurity have created a major humanitarian and and the budget, and to highlight the importance of economic crisis. Since 2014, the war against ISIS the structural reform agenda in complementing and claimed the lives of over 67,000 Iraqi civilians. The war accelerating the recovery from conflict. has caused massive displacement, trauma, and rapid Following the complete liberation from increase in poverty with the internal displacement of ISIS of all Iraq territory in December 2017, the over three million people across Iraq. Recent estimates Government of Iraq (GoI) is putting in place a suggest that more than 8.7 million Iraqis (22.5 comprehensive reconstruction package linking percent of the population) are currently considered in immediate stabilization to a long-term vision. need of some form of humanitarian assistance. The On December 9, 2017, following more than three conflict with ISIS and widespread insecurity have also years of intense fighting, the Government of Iraq caused the destruction of infrastructure and assets (GoI) announced the complete liberation of all in ISIS-controlled areas, trade routes have been cut Iraqi territories from ISIS. By end-September 2017, off or severely curtailed, and investor and consumer the Government forces supported by the U.S.-led confidence has dwindled. Agricultural production has coalition and other regional allies liberated Mosul, declined by 40 percent, undermining the country’s the second largest city, followed by other cities food sufficiency, and hundreds of thousands of along the North-West border with Syria. The GoI, people have been forced to migrate to urban areas for with the support of the international community, jobs and support. Hundreds of thousands of people, deployed efforts to address humanitarian needs, especially women and youth, have been brutalized by ix violence, and subjected to exploitation, harassment, net for the poor. The GoI is implementing an ambitious and intimidation. reform to improve targeting of social spending, The recent Iraq Damage and Needs following the introduction of a proxy means testing Assessment (DNA) on the seven directly affected (PMT) system to identify the poor. The GoI committed governorates estimates the overall damages to adopt a unified database of eligible households to be US$45.7 billion and reconstruction and based on the PMT system across all different social recovery needs to total US$88.2 billion. Economic protection schemes. losses due to conflict have been enormous and failure While defeating ISIS marks a positive step, to address reconstruction needs would further reduce Iraq continues to face many political and people’s welfare. Iraq’s conflict, accompanied by an sectarian challenges. Political and social oil price shock, has caused a three-year recession tensions remain along ethnic and sectarian lines. of non-oil GDP. The impact of the oil price decline The federal government periodically faces large has considerably worsened the fiscal situation, popular protests, organized by political factions, the external sector, and the medium-term growth against corruption and poor service delivery. Over potential. By 2017, the cumulative real losses due to the last 24 months, the government has faced several the conflict to non-oil GDP stood at ID124 trillion (US$ demonstrations, the last one in early February 2018, 107 billion), equivalent to 72 percent of the 2013 GDP and some turned violent in Baghdad. Despite military and 142 percent of 2013 non-oil GDP, assuming the success, the Federal Government faces political non-oil economy would have continued to grow at the tensions. Since September 2016, the Prime Minister pre-conflict rate of 8 percent. is acting Minister of Finance after the minister was Poverty has risen sharply. Poverty, which removed from office due to a vote of no-confidence in had seen a decline from 22.4 percent in 2007 to 18.9 the Iraqi Parliament and no consensus has emerged percent in 2012, has risen sharply due to declining oil on a replacement. The next federal parliamentary revenues and the war against ISIS. The poverty rate election and the overdue provincial elections have in 2014 was estimated at 22.5 percent for the whole been set for May 12th, 2018. country, pushing an additional three million people Political trust between Baghdad and Erbil into poverty in 2015. The poverty rate doubled to 41.2 remains low. The Kurdistan Regional Government percent in ISIS-occupied areas, with a sharp increase (KRG) held a referendum on independence on in poverty levels in the Kurdistan Region of Iraq from September 25, 2017, which was considered illegitimate 3.5 percent to 12.5 percent, due to the inflow of 1.4 by the Federal Government. Since mid-October 2017, million internally displaced persons (IDPs) and over the Federal Government has quickly re-gained control 241,000 refugees from Syria. Women have been of all disputed areas between the Federal Government particularly affected by increased insecurity, which and KRG, including Kirkuk, an oil reach area. As a imposed restrictions on movement that affected result, KRG has lost half of its oil revenue. The federal access to education, health, and jobs. Already in budget proposes to reduce transfers to KRG from ID12 2012, one fifth of the Iraqi population was spending trillion in 2017 to ID6.7 trillion in 2018 and requires less than the amount required to meet their minimum KRG to transfer the entirety of its remaining oil export nutritional requirements and cover their basic non- receipts to the federal government. Disagreement on food needs. Jobs were not providing a pathway out of the budget has dominated political developments poverty as 70 percent of the poor are in households since early 2018. with employed heads. The country has one of the The ISIS war and the protracted reduction lowest employment-to-population ratios in the region, in oil prices have resulted in a 21.6 percent even among men, and the 2014 crisis has led to an contraction of the non-oil economy since 2014, estimated reduction in employment by 800,000 jobs. with non-oil growth estimated to have returned to The Public Distribution System (PDS) suffers from positive in 2017. Because of increased oil production severe inefficiencies but remains the primary safety and exports, overall GDP growth remained positive in x IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY the 2015–2016 period. But overall growth is estimated oil prices, total public debt is estimated to have to have contracted by 0.8 percent in 2017 due to a declined to 58 percent of GDP in 2017. In 2017, the 3.5 percent reduction in oil production, to comply with government was also successful in reducing the OPEC+ agreement to cut oil production until end-2018 stock of guarantees from US$36.5 billion to US$25.7 and further reduction of oil production in the area of billion, thanks to improved management practices, Kirkuk in the last quarter of 2017, following the transfer and limited their issuance within a ceiling established of its control from KRG to the federal government. Non- in the annual budget law. oil growth has been negative since 2014, but improved In 2017, the current account deficit is security situation and the initial reconstruction effort estimated to have returned to a surplus equal is estimated to have sustained non-oil growth at 4.4 to 0.7 percent of GDP. Low oil prices widened percent in 2017, driven by construction and services, the current account deficit to 8.6 percent of GDP in and pick-up in private consumption and investments. 2016. The strong reserve accumulation in 2010–2013 The pegged exchange rate and subdued demand smoothed the impact of the fiscal policy adjustment have kept inflation low around 0.1 percent in 2017. required to maintain external sustainability. Foreign The fiscal deficit is estimated to have reserves financed most of the balance of payment narrowed to 2.2 percent of GDP in 2017, due deficit, declining from US$77.8 billion at end-2013 (or to higher oil prices, and measures to control 10 months of imports) to US$48.1 billion at end-2017 expenditure on wages, pensions and transfers. (or 7 months of imports). Fiscal balances deteriorated in the 2014–2016 period The GoI’s reform program is supported by due to low oil prices, higher security spending, a large financing package from the international humanitarian outlays and weak controls. In 2017, the community, and, thanks to satisfactory fiscal balance improved mainly due to a 43 percent performance, the GoI has also tapped the increase of oil revenue despite production cuts, driven sovereign bond market in 2017. The financing by higher oil prices. The 2017 supplementary budget, provided has so far avoided a much deeper economic adopted on July 28, 2017, increased non-oil taxes with and social crisis that could have been triggered by the introduction of a flat 3.8 percent withholding tax on the large fiscal shock, that would excessively hurt wages and the adoption of a tax on internet services. the poor and further delay the economic recovery Nominal expenditure on salaries and pensions were and reconstruction of Iraq. The financing package kept close to their 2016 level, and current expenditure from the international community includes a US$5.34 and domestically financed investments were reduced. billion Stand-By Arrangement (SBA) with the IMF; a The 2017 budget included a larger envelope to pay US$1.44 billion budget support operation approved domestic and external arrears, a key measure to by the World Bank on December 2016, including increase private sector confidence. The GoI has also US$444 million guarantees provided to the Bank by committed to strengthen procedures to avoid further the United Kingdom (US$372 million) and Canada accumulation of arrears in 2018. The GoI is prioritizing (US$72 million); US$270 million in parallel financing investment expenditure for reconstruction in areas provided by JICA, US$450 million provided by liberated from ISIS and for increasing electricity France; and a US$1 billion bond issued in January production. 2017, guaranteed by the U.S. government. In August Thanks to better fiscal outturn, the GoI 2017, following the successful conclusion of the stopped the rapid increase of public debt. The second review of the IMF program, the government GoI also adopted sound management practices issued a US$1 billion bond maturing in 2023, its first to control the large stock of government-issued independent issuance since 2006. guarantees. From 2014 to 2016, short-term domestic Iraq’s growth outlook is expected to debt increased from 7 to 27 percent of GDP and improve thanks to a more favorable security external debt increased by 12 percentage points environment and gradual pick up of investment of GDP. Thanks to fiscal consolidation and higher for reconstruction, but absent structural reforms, Executive Summary xi higher growth would be short-lived. Overall GDP Kuwait’s government in February 2018, the capacity growth is projected to return positive in 2018 despite to attract interest from the private sector and the pace the extension of the OPEC+ agreement till end-2018. of implementation of the reconstruction plan. Oil production will grow by 2.2 percent in 2018 as Risks to the outlook arise from oil the oil production in Kirkuk resumes. Oil production prices volatility, failure to improve the security is expected to return to pre-2017 levels in 2019, after environment, and failure to implement the the expiration of the OPEC agreement. From 2020, expected large fiscal adjustment to contain oil production is projected to increase only marginally, current expenditure and prioritize investment for reducing overall growth, as GoI cannot afford to reconstruction and development. While oil prices significantly increase investments in the oil sector. are expected to remain higher than their lowest level Non-oil economic growth is expected to benefit reached in 2016, they would remain on average 50 from increased investment for reconstruction, but percent lower than in 2014 and their level over the absent structural reforms including to public finance projection period remains highly uncertain according management, service delivery, business environment, to volatility indices. The external debt remains highly and the financial sector, higher non-oil growth would vulnerable to a reduction in oil prices or a real be short-lived. Under a no-reconstruction scenario, exchange rate depreciation. Iraq could yet again face non-oil growth is projected to reach 3 percent in 2018 a fiscal crisis if conflict and violence re-ignite because and then is conservatively projected to recover to of setbacks in the recent successes against ISIS or about half its pre-2014 average growth to 4 percent, increased tensions with KRG. as recurrent violence and remaining insecurity could The outlook is also subject to significant delay investment and post-conflict recovery. In 2018, a social and political risks. Lingering political tensions, step up of government investment, with a large import weak administrative capacity and widespread component, is expected to stimulate growth over corruption continue to pose a downside risk and could the projection period in agriculture, manufacturing, further limit the government’s reform effort and its construction, transport and supporting services. capacity to implement investment for reconstruction. Private sector activity is subsequently projected to Escalating political tensions and the probability pick up, as public investments decreases. Under a of terrorist attacks ahead of the parliamentary reconstruction scenario, non-oil growth could spike to and provincial elections in mid-May 2018 add above 6 percent in 2018–19, but it is expected to taper further political risk in the short-term. Following the down once the scale effect of higher investments is parliamentary elections, difficult political negotiations factored in. could prevent the formation of a new government Projected fiscal surpluses should be seen and bring to a halt executive and legislative activities in the context of continued oil price volatility, needed to implement the expected fiscal adjustment the need to rebuild severely depleted buffers, while at the same time provide public services and finance investment for reconstruction. This and start reconstruction. Deteriorating relations fiscal outcome is the result of the resolve of the between the federal government and the KRG could GoI to create fiscal space to finance reconstruction weaken oil exports, slow the recovery of the non-oil and recovery, while at the same time reconstitute economy, and discourage donor support for post-ISIS international reserves and protect social expenditure. reconstruction. The large reform agenda, including The fiscal outcome in 2018 and over the medium term the unification of the public and private pension would depend on the financing that will be identified systems could give rise to social tensions and impact following the reconstruction conference hosted by the implementation of reforms. ‫ملخص تنفيذي‬ ‫من أشكال املساعدة اإلنسانية‪ .‬كام أحدث الرصاع مع التنظيم وغياب‬ ‫ذ بالخروج ببطئٍ من الضغوطات االقتصادية العميقة‬ ‫إنّ العراق آخ ً‬ ‫األمن عىل نطاقٍ واسعٍ تدمريا ً للبنية التحتية واملوجودات يف املناطق التي‬ ‫ن التقدّ م الحاصل يف التعامل‬‫التي الزمته يف السنوات الثالث األخرية‪ ،‬لك ّ‬ ‫سيطر عليها التنظيم‪ ،‬وأحدثت قطعاً أو نقصاً كبريا ً يف الطرق التجارية‪،‬‬ ‫مع تركة الحرب عىل تنظيم داعش والعجز التنموي املرتاكم الناتج‬ ‫وبالتايل تضاءلت ثقة املستثمر واملستهلك‪ .‬وتراجع اإلنتاج الزراعي بنسبة‬ ‫ة أرسع‪ .‬فقد عاد التحسن‬ ‫سنوات من الرصاع يجب أن مييض بوتري ٍ‬ ‫ٍ‬ ‫عن‬ ‫رض يف وفرة الغذاء يف البالد‪ ،‬كام أُجرب مئات اآلالف من‬ ‫‪ 40‬باملائة‪ ،‬وهو ما أ ّ‬ ‫الحاصل يف أسعار النفط منذ منتصف عام ‪ 2017‬وضغط النفقات بنتائج‬ ‫رض‬ ‫ّ‬ ‫وتع‬ ‫واملعونة‪.‬‬ ‫الوظائف‬ ‫عن‬ ‫ً‬ ‫ا‬ ‫بحث‬ ‫ً‬ ‫ة‬ ‫حرضي‬ ‫مناطق‬ ‫الناس عىل الهجرة اىل‬ ‫أفضل عىل امليزانيات املالية والخارجية‪ .‬ويجب أن توضع احتياجات‬ ‫ٍ‬ ‫ً‬ ‫مئات اآلالف من الناس‪ ،‬خصوصا من بني النساء والشباب‪ ،‬ألعامل عنف‬ ‫إعادة اإلعامر والتبعات االقتصادية للحرب ضد داعش ضمن السياق املايل‬ ‫ة أخضعتهم لالستغالل واملضايقات والرتويع‪.‬‬ ‫وحشي ٍ‬ ‫وسياق النمو العام يف العراق‪ ،‬وذلك من أجل تقييم تأثريات عملية إعادة‬ ‫اإلعامر عىل النمو واملوازنة‪ ،‬مع تسليط الضوء يف الوقت نفسه عىل أهمية‬ ‫وضع‬ ‫يُقدّ ر تقييم األرضار واالحتياجات (‪ )DNA‬يف العراق الذي ُ‬ ‫برنامج اإلصالح الهيكيل يف إمتام التعايف من الرصاع وتعجيله‪.‬‬ ‫مؤخراَ‪ ،‬والذي أجري عىل املحافظات السبعة التي تأثرت بشكلٍ مبارشٍ‪،‬‬ ‫قيمة األرضار الكلية مبا يصل اىل ‪ 45.7‬مليار دوالر أمرييك واحتياجات‬ ‫بعد التحرير الكامل لجميع األرايض العراقية من تنظيم داعش‬ ‫ة تصل اىل ‪ 88.2‬مليار دوالر‪ .‬فالخسائر االقتصادية‬ ‫إعادة اإلعامر بقيمة كلي ٍ‬ ‫ة من برامج‬ ‫يف كانون األول ‪ ،2017‬تضع الحكومة العراقية حزم ً‬ ‫التي نجمت عن الرصاع كانت هائلة وعدم التصدي الحتياجات إعادة‬ ‫إعادة اإلعامر التي تربط بني عملية تحقيق االستقرار املبارش والرؤية‬ ‫اإلعامر من شأنه أن يُنقص رفاهية الناس أكرث‪ .‬حيث تسبب الرصاع يف‬ ‫املستقبلية بعيدة املدى‪ .‬ففي ‪ 9‬كانون األول من عام ‪ ،2017‬وبعد أكرث‬ ‫ٍ‬ ‫سنوات يف‬ ‫ة يف أسعار النفط‪ ،‬بحدوث كسا ٍ‬ ‫د لثالث‬ ‫العراق‪ ،‬مصحوباً بصدم ٍ‬ ‫من ثالثة أعوام من القتال املحتدم‪ ،‬أعلنت الحكومة العراقية التحرير‬ ‫ن تأثري انخفاض أسعار النفط قد زاد‬ ‫الناتج اإلجاميل املحيل غري النفطي‪ .‬إ ّ‬ ‫الكامل لجميع األرايض العراقية من سيطرة تنظيم داعش‪ .‬فمع نهاية‬ ‫رض بالقطاع الخاص وبقابلية النمو عىل املدى‬ ‫من الحالة املالية سوءا ً وأ ّ‬ ‫ة بالتحالف‬ ‫شهر أيلول من نفس العام‪ ،‬حررت القوات الحكومية‪ ،‬مدعوم ً‬ ‫املتوسط‪ .‬وبحلول عام ‪ ،2017‬وصلت قيمة الخسائر اإلجاملية يف الناتج‬ ‫الذي تقوده الواليات املتحدة وحلفاء إقليميون آخرون‪ ،‬مدينة املوصل‪،‬‬ ‫اإلجاميل املحيل غري النفطي والناجمة عن الرصاع اىل ‪ 124‬ترليون دينار‬ ‫ن أخرى عىل طول الحدود الشاملية‬ ‫ثاين أكرب املدن العراقية‪ ،‬لتتبعها مد ٌ‬ ‫عراقي (‪ 107‬مليار دوالر أمرييك)‪ ،‬وهو ما يعادل ‪ 72‬باملائة من الناتج‬ ‫الغربية مع سوريا‪ .‬ثم قامت الحكومة العراقية‪ ،‬بدعمٍ من املجتمع‬ ‫اإلجاميل املحيل لعام ‪ 2013‬و‪ 142‬باملائة من الناتج اإلجاميل املحيل غري‬ ‫الدويل‪ ،‬بحشد الجهود للتصدي لالحتياجات اإلنسانية وتعزيز االستقرار‬ ‫ن االقتصاد غري النفطي كان سيستمر يف‬ ‫النفطي لعام ‪ ،2013‬عىل فرض أ ّ‬ ‫تعاف وإعادة إعامر‪ .‬فاستضافت الكويت مؤمترا ُ للامنحني‬ ‫والبدء بعملية ٍ‬ ‫النمو بنفس معدل ما قبل الرصاع وهو ‪ 8‬باملائة‪.‬‬ ‫إلعادة اإلعامر والتعايف يف شباط ‪ 2018‬لتحديد احتياجات العراق للتمويل‬ ‫عىل املدى القصري واملتوسط‪ .‬ويتطرق إطار إعادة اإلعامر والتنمية الذي‬ ‫معدل الفقر ارتفع بشكلٍ حاد‪ .‬لقد ارتفع معدل الفقر‪ ،‬الذي شهد‬ ‫قدمته الحكومة العراقية يف املؤمتر اىل احتياجات التعايف وأولوياته وفق‬ ‫انخفاضاً من ‪ 22.4‬باملائة يف عام ‪ 2007‬اىل ‪ 18.9‬باملائة يف عام ‪،2012‬‬ ‫ة خمس‪ :‬الحوكمة واملصالحة الوطنية وإقامة السالم والتنمية‬ ‫أركانٍ رئيسي ٍ‬ ‫د بسبب تراجع عائدات النفط والحرب عىل تنظيم داعش‪ .‬حيث‬ ‫بشكلٍ حا ٍ‬ ‫االجتامعية والبرشية والبنية التحتية والتنمية االقتصادية‪.‬‬ ‫در معدل الفقر يف عام ‪ 2014‬بـ ‪ 22.5‬باملائة يف عموم البالد‪ ،‬وهو ما‬ ‫قُ ّ‬ ‫يف اىل دائرة الفقر يف عام ‪ .2015‬كام‬ ‫شخص إضا ٍ‬‫يعني الدفع بثالثة ماليني ٍ‬ ‫لقد أحدث الرصاع مع تنظيم داعش وغياب األمن عىل نطاقٍ واسعٍ‬ ‫ارتفع معدل الفقر مبقدار الضعف ووصل اىل ‪ 41.2‬باملائة يف املناطق التي‬ ‫ة كبرية‪ .‬فمنذ عام ‪ ،2014‬تسببت الحرب عىل‬ ‫ة واقتصادي ً‬ ‫أزم ً‬ ‫ة إنساني ً‬ ‫ة يف مستويات الفقر يف إقليم كردستان‬ ‫احتلها تنظيم داعش‪ ،‬مع زياد ٍ‬ ‫ة كبري ٍ‬ ‫ين عر ٍ‬ ‫اقي‪ .‬كام نتجت عنها‬ ‫داعش بفقدان حياة ما يزيد عىل ‪ 67,000‬مد ٍ‬ ‫العراق التي ارتفعت من ‪ 3.5‬باملائة اىل ‪ 12.5‬باملائة‪ ،‬بسبب تدفق ‪1.4‬‬ ‫ً‬ ‫وأذى نفسياً وارتفاعاً رسيعا يف معدل الفقر رافقه‬ ‫ة ً‬ ‫ح واسع ٍ‬‫حركة نزو ٍ‬ ‫مليون نازح داخيل (‪ )IDPs‬وما يزيد عىل ‪ 241,000‬الجئ من سوريا‪ .‬وقد‬ ‫د يف عموم العراق‪ .‬وتشري‬ ‫النزوح الداخيل ملا يربو عىل الثالثة ماليني فر ٍ‬ ‫ن قيودا ً‬ ‫خاص بغياب األمن املتزايد‪ ،‬والذي فرض عليه ّ‬ ‫تأثرت النساء بشكلٍ ٍ‬ ‫ن هناك ما يزيد عىل ‪ 8.7‬مليون عراقي (‪22.5‬‬ ‫التقديرات األخرية اىل أ ّ‬ ‫يف الحركة للوصول اىل التعليم والصحة والوظائف‪ .‬فخمس سكان العراق‪،‬‬ ‫باملائة من مجموع السكان) يُنظَر إليهم حالياً عىل أنهم بحاج ٍ‬ ‫ة لشكلٍ‬ ‫‪xiii‬‬ ‫تبعاً لهذا نشاط القطاع الخاص‪ ،‬مع تراجع االستثامرات يف القطاع العام‪.‬‬ ‫األجنبية عىل متويل معظم العجز يف ميزان املدفوعات‪ ،‬الذي انخفض من‬ ‫ويف ظل السيناريو الذي ينطوي عىل إعادة اإلعامر‪ ،‬من املمكن أن يقفز‬ ‫‪ 77.8‬مليار دوالر يف نهاية عام ‪( 2013‬أو ‪ 10‬أشهر من الواردات) اىل ‪48.1‬‬ ‫النمو غري النفطي اىل ما يربو عىل ‪ 6‬باملائة يف الفرتة ‪ ،2019–2018‬لكنه‬ ‫مليار دوالر يف نهاية عام ‪( 2017‬أو ‪ 7‬أشهر من الواردات)‪.‬‬ ‫يُتوقع له أن يتناقص حال دخول عامل األثر الذي يُحدثه تغري األسعار‬ ‫واملرتبط باالستثامرات األعىل‪.‬‬ ‫يأيت برنامج اإلصالح الحكومي العراقي مدعوماً بحزمة متويلٍ كبري ٍ‬ ‫ة‬ ‫من املجتمع الدويل‪ ،‬وبفضل األداء املُريض‪ ،‬فقد توجهت الحكومة العراقية‬ ‫يجب أن يُنظر اىل الفوائض املالية املتوقعة ضمن سياق التذبذب‬ ‫اىل االنتفاع من سوق السندات السيادية يف عام ‪ .2017‬لقد ساعد التمويل‬ ‫زف‬ ‫تن َ‬ ‫املتواصل يف أسعار النفط‪ ،‬والحاجة إلعادة بناء املخزون املايل املس َ‬ ‫الذي تم تقدميه للحكومة لحد اآلن يف تجنب احتاملية أن تُحدث الصدمة‬ ‫ن هذه الحصيلة‬ ‫د‪ ،‬ومتويل االستثامر الالزم إلعادة اإلعامر‪ .‬إ ّ‬ ‫بشكلٍ حا ٍ‬ ‫ة أعمق بكثري كان من شأنها‬ ‫ة واجتامعي ً‬ ‫املالية الكبرية أزم ً‬ ‫ة اقتصادي ً‬ ‫ء ما ٍ‬ ‫يل‬ ‫املالية هي نتاج عزم الحكومة العراقية عىل اإلدخار لخلق فضا ٍ‬ ‫أن تُلحق الرضر البالغ بالفقراء وتتسبب باملزيد من التأخري يف التعايف‬ ‫لتمويل عمليات إعادة اإلعامر والتعايف‪ ،‬ويف الوقت نفسه إعادة تشكيل‬ ‫االقتصادي وعملية إعادة اإلعامر يف العراق‪ .‬وتشمل حزمة التمويل امل ُقدمة‬ ‫ة وحامية اإلنفاق االجتامعي‪ .‬وستعتمد الحصيلة املالية‬ ‫احتياطيات دولي ٍ‬ ‫ٍ‬ ‫من املجتمع الدويل اتفاقية استعداد ائتامين بقيمة ‪ 5.34‬مليار دوالر أمرييك‬ ‫يف عام ‪ 2018‬وعىل طول املدى املتوسط عىل التمويل الذي سيتم تحديده‬ ‫مع صندوق النقد الدويل؛ وعملية دعم للموازنة بقيمة ‪ 1.44‬مليار دوالر‬ ‫بعد مؤمتر إعادة اإلعامر الذي استضافته حكومة الكويت يف شباط ‪،2018‬‬ ‫أمرييك وافق عليها البنك الدويل يف كانون األول ‪ ،2016‬مبا يف ذلك ضامنات‬ ‫وعىل القدرة عىل جذب اهتامم القطاع الخاص وعىل رسعة تنفيذ خطة‬ ‫بقيمة ‪ 444‬مليون دوالر للبنك قدمتها اململكة املتحدة (‪ 372‬مليون دوالر)‬ ‫إعادة اإلعامر‪.‬‬ ‫وكندا (‪ 72‬مليون دوالر)؛ ومبلغ ‪ 270‬مليون دوالر أمرييك بشكل متويل‬ ‫موازي قدمتها الوكالة اليابانية للتعاون الدويل (‪ ،)JICA‬ومبلغ ‪ 450‬ميلون‬ ‫تأيت املخاطر التي تكتنف النظرة املستقبلية من تذبذب أسعار‬ ‫دوالر أمرييك قدمتها فرنسا؛ وسندات بقيمة ‪ 1‬مليار دوالر أمرييك أصدرت‬ ‫النفط‪ ،‬وعدم القدرة عىل تحسني بيئة األمن‪ ،‬وعدم القدرة عىل تنفيذ‬ ‫ة من قبل الحكومة األمريكية‪ .‬ويف آب ‪،2017‬‬ ‫يف كانون الثاين ‪ ،2017‬مضمون ً‬ ‫التغيري املايل الكبري املتوقع الحتواء االنفاق الجاري وإيالء األولوية‬ ‫وبعد إنهاء املراجعة الثانية لربنامج صندوق النقد الدويل بنجاح‪ ،‬أصدرت‬ ‫لالستثامر من أجل إعادة اإلعامر والتنمية‪ .‬ففي الوقت الذي يُتوقع أن‬ ‫الحكومة سندات بقيمة ‪ 1‬مليار دوالر أمرييك باستحقاق يف عام ‪،2023‬‬ ‫تظل فيه أسعار النفط أعىل من املستوى األدىن الذي وصلت اليه يف عام‬ ‫وهو اإلصدار املستقل األول منذ عام ‪.2006‬‬ ‫‪ ،2016‬إال أنها ستبقى يف املعدل أقل بنسبة ‪ 50‬باملائة مام كانت عليه يف‬ ‫ن مستوى هذه األسعار خالل الفرتة املعنية يظل غري ٍ‬ ‫مؤكد‬ ‫عام ‪ 2014‬كام أ ّ‬ ‫تُشري التوقعات اىل أنّ النمو املستقبيل للعراق سيتحسن بفضل‬ ‫حد كبريٍ حسب مؤرشات تقلب األسعار‪ .‬كام يظل الدين الخارجي‬ ‫اىل ٍ‬ ‫ة وتزايداً تدريجياً يف االستثامر من أجل إعادة‬ ‫أمني أكرث مالءم ً‬ ‫ع ٍ‬ ‫وض ٍ‬ ‫حقيقي يف سعر‬ ‫ٍ‬ ‫ٍ‬ ‫تخفيض‬ ‫أو‬ ‫النفط‬ ‫أسعار‬ ‫يف‬ ‫ٍ‬ ‫انخفاض‬ ‫رهينة‬ ‫ٍ‬ ‫ري‬ ‫كب‬ ‫اىل ٍ‬ ‫حد‬ ‫عمر املعدل‬ ‫اإلعامر‪ ،‬ولكن يف ظل غياب اإلصالحات الهيكلية‪ ،‬لن يكون ُ‬ ‫ة إذا ما تأجج الرصاع‬ ‫ة أزم ً‬ ‫ة مالي ً‬ ‫ة ثاني ً‬ ‫الرصف‪ .‬وميكن أن يشهد العراق مر ً‬ ‫األعىل للنمو طويال‪ .‬من املتوقع أن يعود النمو العام يف الناتج اإلجاميل‬ ‫نكسات يف النجاحات التي تحققت مؤخرا ً ضد‬ ‫ٍ‬ ‫ة بسبب‬ ‫ة ثاني ً‬‫والعنف مر ً‬ ‫املحيل اىل األرقام اإليجابية يف عام ‪ 2018‬بالرغم من قيام منظمة أوبك‬ ‫ة مع حكومة إقليم كردستان‪.‬‬ ‫ات متصاعد ٍ‬ ‫تنظيم داعش أو توتر ٍ‬ ‫بتمديد اتفاقية خفض اإلنتاج حتى نهاية عام ‪ .2018‬فاإلنتاج النفطي‬ ‫سينمو مبعدل ‪ 2.2‬باملائة يف عام ‪ 2018‬مع استئناف عملية إنتاج النفط‬ ‫تظل النظرة املستقبلية أيضاً أسرية املخاطر االجتامعية والسياسية‬ ‫يف كركوك‪ .‬ويُتوقع أن يعود إنتاج النفط يف عام ‪ 2019‬اىل مستويات ما‬ ‫الكبرية‪ .‬ما تزال التوترات السياسية التي تأىب الزوال والقدرة اإلدارية‬ ‫قبل عام ‪ ،2017‬بعد انتهاء اتفاقية منظمة أوبك‪ .‬وبدءأ بعام ‪ ،2020‬تشري‬ ‫الضعيفة والفساد املسترشي متثل خطرا ً سلبياً ومن املمكن أن تزيد‬ ‫هاميش فقط‪ ،‬وهو ما يخفض من‬ ‫ٍ‬ ‫التوقعات اىل زيادة إنتاج النفط بشكلٍ‬ ‫من تحجيم جهود اإلصالح الحكومي وقدرتها عىل تنفيذ االستثامر من‬ ‫ن الحكومة العراقية ال تستطيع أن تتحمل تكاليف‬ ‫النمو العام‪ ،‬حيث أ ّ‬ ‫أجل إعادة اإلعامر‪ .‬كام تضيف التوترات السياسية املتصاعدة واحتاملية‬ ‫زيادة اإلنتاج بشكلٍ كبريٍ يف قطاع النفط‪ .‬كام يُتوقع أن يعود االستثامر‬ ‫ة تسبق االنتخابات الربملانية وانتخابات مجالس‬ ‫هجامت إرهابي ٍ‬ ‫ٍ‬ ‫حدوث‬ ‫املتزايد يف مجال إعادة اإلعامر بالفائدة عىل النمو االقتصادي غري النفطي‪،‬‬ ‫املحافظات التي سيتم تنظيمها أواسط شهر أيار ‪ 2018‬مزيدا ً من املخاطر‬ ‫لكن يف ظل غياب اإلصالحات الهيكلية مبا فيها تلك املتعلقة باإلدارة املالية‬ ‫السياسية عىل املدى القصري‪ .‬وبعد االنتخابات الربملانية‪ ،‬من املمكن أن‬ ‫يف القطاع العام‪ ،‬وتقديم الخدمات‪ ،‬وبيئة النشاط التجاري‪ ،‬والقطاع‬ ‫ة وهذا‬ ‫ة جديد ٍ‬‫تحول املفاوضات السياسية الصعبة دون تشكيل حكوم ٍ‬ ‫عمر املستوى األعىل من النمو غري النفطي طويال‪ .‬وتشري‬ ‫املايل‪ ،‬لن يكون ُ‬ ‫من شأنه أن يُحدث توقفاً يف النشاطات التنفيذية والترشيعية الرضورية‬ ‫ن النمو غري النفطي‪ ،‬يف ظل السيناريو الذي ال يشتمل عىل‬ ‫التوقعات اىل أ ّ‬ ‫لتنفيذ التصحيح املايل املتوقع مع العمل يف الوقت نفسه عىل توفري‬ ‫ة تنطوي عىل‬ ‫إعادة اإلعامر‪ ،‬سيصل اىل ‪ 3‬باملائة يف عام ‪ 2018‬ثم بنظر ٍ‬ ‫ن العالقات املتدهورة بني‬ ‫الخدمات العامة والبدء بإعادة اإلعامر‪ .‬كام أ ّ‬ ‫التحفظ يُتوقع أن يستعيد ما يقارب نصف معدل النمو الذي كان قبل‬ ‫عف صادرات‬ ‫الحكومة الفدرالية وحكومة إقليم كردستان من شأنها أن تَض ِ‬ ‫ن حوادث العنف املتكررة وما تبقى‬ ‫عام ‪ 2014‬ليصل اىل ‪ 4‬باملائة‪ ،‬حيث أ ّ‬ ‫النفط‪ ،‬وت ُبطئ تعايف االقتصاد غري النفطي‪ ،‬وت ُثبط دعم الدول املانحة‬ ‫من حاالت فقدان األمن من شأنها أن تؤخر االستثامر والتعايف بعد الرصاع‪.‬‬ ‫ن أجندة اإلصالحات‬ ‫الالزم لعملية إعادة اإلعامر ما بعد داعش‪ .‬كام أ ّ‬ ‫ويف عام ‪ ،2018‬يُتوقع أن تعمل زيادة االستثامر الحكومي‪ ،‬مع وجود‬ ‫الكبرية‪ ،‬مبا فيها توحيد نظامي التقاعد للقطاعني العام والخاص من شأنها‬ ‫مكونٍ كبريٍ لالسترياد‪ ،‬عىل تحفيز النمو خالل الفرتة املعنية يف قطاعات‬ ‫ة وتؤثر عىل تنفيذ اإلصالحات‪.‬‬ ‫ات اجتامعي ٍ‬ ‫أن ت ُحدث توتر ٍ‬ ‫الزراعة والتصنيع والبناء والنقل والخدمات الساندة‪ .‬كام يُتوقع أن يرتفع‬ ‫‪xiv‬‬ ‫‪IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY‬‬ ‫حكومة إقليم كردستان اىل الحكومة الفدرالية‪ .‬والنمو غري النفطي ظل‬ ‫سلفاً يف عام ‪ ،2012‬كان ينفق أقل من املبلغ املطلوب لإليفاء بالحد األدىن‬ ‫ن الوضع األمني املتحسن‬ ‫سلبياً منذ عام ‪ ،2014‬لك ّ‬ ‫ن التقديرات تشري اىل أ ّ‬ ‫من متطلبات التغذية الالزمة لهم واملطلوب لتغطية احتياجاتهم األساسية‬ ‫وجهود إعادة اإلعامر األولية قد أحدثت استدام ً‬ ‫ة يف النمو غري النفطي‬ ‫ن ‪ 70‬باملائة‬ ‫غري الغذائية‪ .‬فالوظائف مل تكن توفر مخرجاً من الفقر حيث أ ّ‬ ‫عند معدل ‪ 4.4‬باملائة يف عام ‪ ،2017‬مدفوعاً بقطاعي البناء والخدمات‪،‬‬ ‫رس أربابها موظفون‪ .‬والبالد متلك‬ ‫بيوت تسكنها أ ٌ‬‫من الفقراء موجودون يف ٍ‬ ‫واالرتفاع يف استهالك واستثامر القطاع الخاص‪ .‬وأبقى سعر الرصف املدعوم‬ ‫واحدا ً من املعدالت األدىن يف املنطقة لعدد املوظفني اىل عدد السكان‪،‬‬ ‫والطلب الفاتر عىل التضخم منخفضاً عند ‪ 0.1‬باملائة يف عام ‪.2017‬‬ ‫در‬ ‫ٍ‬ ‫إنخفاض يف التوظيف يُق ّ‬ ‫حتى بني الرجال‪ ،‬وأزمة عام ‪ 2014‬أدت اىل‬ ‫ٍ‬ ‫نقوصات‬ ‫بـ ‪ 800,000‬وظيفة‪ .‬ونظام الحصة التموينية (‪ )PDS‬يعاين من‬ ‫تحسن ليصل اىل ‪ 2.2‬باملائة‬‫تشري التقديرات اىل أنّ العجز املايل قد ّ‬ ‫نه يظل شبكة األمان األساسية للفقراء‪ .‬الحكومة العراقية تقوم‬ ‫حاد ٍ‬ ‫ة لك ّ‬ ‫من الناتج اإلجاميل املحيل يف عام ‪ ،2017‬بسبب أسعار النفط األعىل‪،‬‬ ‫ة لتحسني عملية االنفاق االجتامعي‬ ‫إصالحات طموح ٍ‬ ‫ٍ‬ ‫بتنفيذ حزمة‬ ‫اءات للسيطرة عىل اإلنفاق عىل رواتب املوظفني ومعاشات‬ ‫ووجود إجر ٍ‬ ‫امل ُستهدف‪ ،‬بعد إدخال نظام االختبار بالوسائل غري املبارشة (‪)PMT‬‬ ‫املتقاعدين والتحويالت‪ .‬لقد تدهورت املوازنات املالية يف الفرتة ‪–2014‬‬ ‫ة لألرس امل ُستحقة‬ ‫بيانات موحد ٍ‬ ‫ٍ‬ ‫ني قاعدة‬ ‫ملتزم ٌ‬ ‫ة بتب ّ‬ ‫لتحديد الفقراء‪ ،‬وهي ُ‬ ‫‪ 2016‬بسبب أسعار النفط املنخفضة وإنفاقٍ أعىل عىل األمن ومصاريف‬ ‫عىل أساس النظام هذا يف عموم برامج الحامية االجتامعية املختلفة‪.‬‬ ‫ة اىل وسائل السيطرة الضعيفة‪ .‬ويف عام‬ ‫تتعلق بالحاجات اإلنسانية إضاف ً‬ ‫ع بنسبة‬ ‫‪ ،2017‬تحسنت املوازنة املالية بالدرجة الرئيسية بسبب ارتفا ٍ‬ ‫ة‪،‬‬ ‫ة إيجابي ً‬ ‫يف الوقت الذي متثل فيه هزمية تنظيم داعش خطو ً‬ ‫‪ 43‬باملائة يف عائدات النفط عىل الرغم من عمليات الخفض يف اإلنتاج‪،‬‬ ‫يظل العراق يواجه العديد من التحديات السياسية والطائفية‪ .‬فالتوترات‬ ‫ة بأسعار النفط األعىل‪ .‬كام زادت املوازنة التكميلية لعام ‪،2017‬‬ ‫مدفوع ً‬ ‫ة عىل طول الحدود اإلثنية والطائفية‪.‬‬ ‫السياسية واالجتامعية ما تزال موجود ً‬ ‫والتي متت املوافقة عليها يف ‪ 28‬متوز‪ ،2017 ،‬من الرضائب غري النفطية‬ ‫ٍ‬ ‫ٍ‬ ‫ٍ‬ ‫والحكومة الفدرالية تواجه بني الحني واآلخر مظاهرات شعبية كبرية‪،‬‬ ‫ع ثابتة مبعدل ‪ 3.8‬باملائة من الرواتب واملوافقة‬ ‫بإدخال رضيبة استقطا ٍ‬ ‫اب سياسيةٌ‪ ،‬ضد الفساد وسوء الخدمات‪ .‬فخالل األشهر الـ ‪24‬‬ ‫تُنظّمها أحز ٌ‬ ‫ة عىل خدمات اإلنرتنت‪ .‬وبقيت املرصوفات اإلسمية عىل‬ ‫عىل فرض رضيب ٍ‬ ‫املنرصمة‪ ،‬واجهت الحكومة عددا ً من املظاهرات آخرها يف مطلع شباط‬ ‫ة من مستوياتها يف عام ‪،2016‬‬ ‫رواتب املوظفني ومعاشات املتقاعدين قريب ً‬ ‫‪ ،2018‬وبعضها تحول اىل العنف يف بغداد‪ .‬فالربغم من النجاح العسكري‪،‬‬ ‫كام تم تخفيض املرصوفات الجارية واالستثامرات املمولة محلياً‪ .‬حيث‬ ‫ة‪ .‬منذ أيلول ‪ ،2016‬يقوم رئيس‬ ‫ات سياسي ٍ‬ ‫تواجه الحكومة الفدرالية توتر ٍ‬ ‫تضمنت موازنة عام ‪ 2017‬باباً أكرب لدفع املتأخرات املحلية والخارجية‪،‬‬ ‫ٍ‬ ‫تصويت‬ ‫ة بعد أن أعفي الوزير من منصبه إثر‬‫الوزراء بدور وزير املالية وكال ً‬ ‫م لتعزيز ثقة القطاع الخاص‪ .‬كام التزمت الحكومة العراقية‬ ‫وهو إجرا ٌ‬ ‫ء مه ٌ‬ ‫ع عىل‬ ‫بسحب الثقة عنه أثار الجدل يف الربملان العراقي ومل يتشكل إجام ٌ‬ ‫نب البالد مزيدا ً من الرتاكم‬ ‫أيضاً بتعزيز اإلجراءات التي من شأنها أن ت ُج ّ‬ ‫حدد الثاين عرش من أيار‪ ،2018 ،‬موعدا ً لالنتخابات‬ ‫بديلٍ يحل محله‪ .‬وقد ُ‬ ‫للمتأخرات يف عام ‪ .2018‬وتويل الحكومة العراقية األولوية للمرصوفات‬ ‫الفدرالية القادمة ومعها انتخابات مجالس املحافظات التي فات موعدها‪.‬‬ ‫االستثامرية املتعلقة بإعادة اإلعامر يف املناطق امل ُحررة من تنظيم داعش‬ ‫وزيادة إنتاج الكهرباء‪.‬‬ ‫ة بشكلٍ ينذر‬ ‫متدني ً‬‫الثقة السياسية بني بغداد وأربيل ما تزال ُ‬ ‫بالخطر‪ .‬فحكومة إقليم كردستان (‪ )KRG‬نظّمت استفتاءا ً حول االستقالل‬ ‫بفضل العائد املايل األفضل‪ ،‬أوقفت الحكومة العراقية الزيادة‬ ‫يف ‪ 25‬أيلول‪ ،2017 ،‬والذي اعتربته الحكومة الفدرالية غري رشعي‪ .‬ومنذ‬ ‫نت الحكومة العراقية أيضاً مامرسات‬ ‫الرسيعة يف الدين العام‪ .‬كام تب ّ‬ ‫أواسط ترشين األول ‪ ،2017‬استعادت الحكومة الفدرالية رسيعاً السيطرة‬ ‫إدارة سليمة للسيطرة عىل العدد الكبري من الضامنات الصادرة عن‬ ‫عىل جميع املناطق املتنازع عليها بني الحكومة الفدرالية وحكومة اإلقليم‪،‬‬ ‫الحكومة‪ .‬فمنذ عام ‪ 2014‬وحتى عام ‪ ،2016‬ارتفع الدين الداخيل‬ ‫مبا فيها كركوك‪ ،‬الغنية بالنفط‪ .‬ونتيجة لهذا‪ ،‬فقدت حكومة اإلقليم نصف‬ ‫قصري األمد من ‪ 7‬اىل ‪ 27‬باملائة من الناتج اإلجاميل املحيل وارتفع الدين‬ ‫عائداتها من النفط‪ .‬واملوازنة الفدرالية املقرتحة تخفض املبالغ املحولة اىل‬ ‫الخارجي مبقدار ‪ 12‬نقطة مئوية من الناتج اإلجاميل املحيل‪ .‬وبفضل ضبط‬ ‫حكومة اإلقليم من ‪ 12‬ترليون دينار يف عام ‪ 2017‬اىل ‪ 6.7‬ترليون دينار يف‬ ‫أوضاع املالية العامة وأسعار النفط األعىل‪ ،‬تشري التقديرات اىل انخفاض‬ ‫عام ‪ 2018‬وتفرض عىل حكومة اإلقليم أن ينقل كل عائداته من صادرات‬ ‫الدين العام الكيل اىل ‪ 58‬باملائة من الناتج اإلجاميل املحيل يف عام ‪.2017‬‬ ‫النفط املتبقية اىل الحكومة الفدرالية‪ .‬وطغى الخالف الدائر حول املوازنة‬ ‫ونجحت الحكومة أيضاً يف عام ‪ 2017‬يف خفض مجموع الضامنات من‬ ‫عىل املشهد السيايس منذ مطلع عام ‪.2018‬‬ ‫‪ 36.5‬مليار دوالر أمرييك اىل ‪ 25.7‬مليار دوالر أمرييك‪ ،‬بفضل مامرسات‬ ‫ٍ‬ ‫سقف‬ ‫اإلدارة امل ُحسنة‪ ،‬وجعلت إصدار هذه الضامنات مقترصا ً عىل‬ ‫ول يف أسعار النفط ٌ‬ ‫تقلص‬ ‫نتج عن حرب داعش واالنخفاض املط ّ‬ ‫يحدده قانون املوازنة السنوية‪.‬‬ ‫مقداره ‪ 21.6‬باملائة يف االقتصاد غري النفطي منذ عام ‪ ،2014‬بينام تشري‬ ‫التقديرات اىل أنّ النمو غري النفطي قد عاد ليصبح إيجابياً يف عام ‪.2017‬‬ ‫يف عام ‪ ،2017‬أشارت التقديرات اىل تحول عجز الحساب الجاري‬ ‫بسبب اإلنتاج املتزايد للنفط وصادراته‪ ،‬ظل النمو الكيل للناتج اإلجاميل‬ ‫وسعت‬ ‫اىل فائض يساوي ‪ 0.7‬باملائة من الناتج اإلجاميل املحيل‪ .‬لقد ّ‬ ‫ن التقديرات تشري اىل أ ّ‬ ‫ن النمو‬ ‫املحيل إيجابياً يف الفرتة ‪ .2016–2015‬لك ّ‬ ‫أسعار النفط املتدنية عجز الحساب الجاري اىل ‪ 8.6‬باملائة من الناتج‬ ‫ٍ‬ ‫الكيل قد تقلص مبقدار ‪ 0.8‬باملائة يف عام ‪ 2017‬بسبب انخفاض مقداره‬ ‫اإلجاميل املحيل يف عام ‪ .2016‬وكان لالحتياطي املرتاكم القوي للفرتة‬ ‫‪ 3.5‬باملائة يف إنتاج النفط‪ ،‬التزاماً باتفاق منظمة أوبك بخفض إنتاج النفط‬ ‫ة يف التخفيف من أثر تعديل السياسة املالية املطلوب‬‫‪ 2013–2010‬فائد ً‬ ‫انخفاض آخر يف إنتاج النفط يف منطقة‬ ‫ٌ‬ ‫حتى نهاية عام ‪ 2018‬ليصاحبه‬ ‫لإلبقاء عىل الدميومة الخارجية‪ .‬كام ساعدت االحتياطيات من العملة‬ ‫كركوك يف الربع األخري من عام ‪ ،2017‬بعد انتقال السيطرة عليها من‬ ‫‪Executive Summary‬‬ ‫‪xv‬‬ 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS Political and Social Context than three-years of fighting, the GoI announced the complete liberation of all Iraqi territories from ISIS. Iraq declared complete victory in the war against By end-September 2017, the Government forces ISIS on December 9, 2017, more than three years supported by the U.S.-led coalition and other regional after militants overrun and captured one-third of allies liberated Mosul, the second largest city, the country and imposed a violent and austere rule followed by other cities along the North-West border over millions of Iraqis. The insecurity since 2014 has with Syria. The GoI, with support of the international led to the death of thousands and created a major community, deployed efforts to address humanitarian humanitarian crisis with over 3 million Internally needs, promote stabilization, and initiate a recovery Displaced Persons (IDPs), and 8.7 million people in and reconstruction process.1 Kuwait hosted the need of humanitarian assistance. Poverty has risen International Conference for the Reconstruction of Iraq sharply, further intensifying the loss of human capital in February 2018 to identify short- and medium-term over the past three decades. Political trust between financing needs for Iraq. The GoI’s reconstruction and the GoI and KRG remains low, after the latter held development framework presented at the conference a referendum on independence in September 2017. addresses recovery needs and priorities according In anticipation of the reconstruction conference held to five key pillars: governance, national reconciliation in Kuwait in February 2018, the government of Iraq has put in place a comprehensive reconstruction and development framework linking immediate 1 For example, in May 2015, the GoI, in cooperation with stabilization and a long-term vision. the United Nations Development Program (UNDP), Following the complete liberation from ISIS launched the Funding Facility for Immediate Stabilization (FFIS), which was later extended as Funding Facility of all Iraq territory in December 2017, the GoI is for Extended Stabilization (FFES) in September 2016. putting in place a comprehensive reconstruction The FFES has undertaken more than 1,200 projects package linking immediate stabilization to a in 23 cities across five governorates aimed at reviving long-term vision. On December 9, 2017, after more infrastructure and public services. 1 FIGURE 1 • Casualty Figures Have Been the government has faced several demonstrations, Decreasing after 2014 of which some turned violent in Baghdad. The latest large demonstration took place in Baghdad in early 35,000 February 2018. Despite military success, the Federal 30,000 Government faces political tensions. Since September Number of death 25,000 2016, the Prime Minister is acting Minister of Finance 20,000 15,000 after the minister was removed from office due to a 10,000 vote of no-confidence in the Iraqi Parliament and 5,000 no consensus has emerged on a replacement. The 0 next federal parliamentary election and the overdue 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 provincial elections have been set for May 12th, 2018. Source: Iraq Body Count, 2017. Output and Demand and peacebuilding, social and human development, The ISIS war and low oil prices have severely impacted infrastructure, and economic development. Iraq’s non-oil economy since 2014, but it is estimated The conflict with ISIS and widespread to have returned to positive growth in 2017, driven by insecurity have created a major humanitarian and improved security, construction and services, and economic crisis. Since 2014, the war against ISIS pick-up in private consumption and investment. Overall claimed the lives of over 67,000 Iraqi civilians (Figure 1).2 GDP growth remains highly sensitive to performance The war has caused massive displacement, trauma, of the oil sector. Overall GDP expanded in 2015 and and rapid increase in poverty. The armed conflict with 2016, due to increased oil production and exports, but ISIS has led to the internal displacement of over three it is estimated to have turned negative at 0.8 percent million people across Iraq. Recent estimates suggest in 2017, due to a 3.5 reduction in oil production. that more than 8.7 million Iraqis (22.5 percent of the population) are currently considered in need of Economic Growth some form of humanitarian assistance.3 Hundreds of thousands of people, especially women and youth, The ISIS war and the protracted reduction in oil have been brutalized by violence, and subjected prices have resulted in a 21.6 percent contraction to exploitation, harassment, and intimidation. The of the non-oil economy since mid-2014, with non- conflict with ISIS and widespread insecurity have also oil growth estimated to have returned positive in caused the destruction of infrastructure and assets 2017. GDP growth is highly dependent on performance in ISIS-controlled areas, trade routes have been cut of oil production and revenues. Because of increased off or severely curtailed, and investor and consumer oil production and exports, overall GDP growth confidence has dwindled. Agricultural production has remained positive in the 2015–2016 period. But overall declined by 40 percent, undermining the country’s growth is estimated to have contracted by 0.8 percent food sufficiency, and hundreds of thousands of in 2017 due to a 3.5 percent reduction in oil production, people have been forced to migrate to urban areas for to comply with OPEC+ agreement to cut oil production jobs and support. until end-2018 and further reduction of oil production in While defeating ISIS marks a positive Kirkuk in the last quarter of 2017, following the transfer step, Iraq continues to face many political and of its control from KRG to the federal government. Non- sectarian challenges. Political and social tensions oil growth has been negative since 2014, but improved remain along ethnic and sectarian lines. The federal government periodically faces large popular protests, organized by political factions, against corruption 2 Also confirmed by the Iraq’s Ministry of Health in July 2017. and poor service delivery. Over the last 24 months, 3 OCHA Iraq Humanitarian Bulletin, February 2018. 2 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY FIGURE 2 • Improved Security and Initial FIGURE 3 • After a Marked Contraction, GDP Per Reconstruction Effort IIs Estimated to Capita Is Estimated to Have Improved Have Sustained Non-Oil Growth in 2017 in 2017 20 Year-on-year growth, percent 15 9,000 10 7,000 US$ 5 0 5,000 –5 3,000 –10 2012 2013 2014 2015 2016 2017e –15 2010 2011 2012 2013 2014 2015 2016 2017e Iraq MENA GDP Non-oil GDP Sources: IMF; and World Bank WDI. Sources: IMF; and World Bank estimates. and services. The impact of the conflict and limited security situation and the initial reconstruction effort government spending has had a profound impact have sustained non-oil growth at 4.4 percent in 2017, on the already weak and under-developed non-oil driven by construction and services, and pick-up in economy. Available data from Iraqi authorities shows private consumption and investments (Figure 2). The that the non-oil industry was the hardest-hit sector, economic disruption resulting from the two crises has especially the construction sector, which contracted caused a marked contraction in nominal GDP, with by over 40 percent in 2016, and contributed to –2.3 GDP per capita declined from US$6,517 in 2014 to percentage points to overall growth. Disruption of an estimated US$ 5,088 in 2017 albeit at higher level routes, trade routes, personal and social services compared to 2016 (Figure 3). have also led to about 6 percent contraction in the The recent Iraq Damage and Needs services sector, shrinking the overall growth to an Assessment (DNA) on the seven directly affected additional –2.3 percentage points (Figure 4). However, governorates estimate the overall damages to be US$45.7 billion and reconstruction and recovery needs to total US$88.2 billion. Economic losses FIGURE 4 • A Better Security and Initial due to conflict have been enormous and failure to Construction Are Estimated to Have Improved the Economic Contribution address reconstruction needs would further reduce of Non-Oil Sectors in 2017 people’s welfare. Iraq’s conflict, accompanied by an oil price shock, has caused a three-year recession 18 of non-oil GDP. The impact of the oil price decline Sectoral contribution to GDP, % 14 has considerably worsened the fiscal situation, the 10 external sector, and the medium-term growth potential. 6 By 2017, the cumulative real losses due to the conflict 2 to non-oil GDP stood at ID124 trillion (US$107 billion), –2 equivalent to 72 percent of the 2013 GDP and 142 –6 percent of 2013 non-oil GDP, assuming the non-oil –10 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e economy would have continued to grow at the pre- conflict rate of 8 percent. The contraction in non-oil economy has Agriculture Oil Services Non-oil industry Total GDP impacted various sectors, but better security would improve the performance of non-oil industry Sources: Iraqi authorities; and WB staff estimate. RECENT ECONOMIC AND POLICY DEVELOPMENTS 3 FIGURE 5 • Iraq’s Non-Oil GDP Growth Has FIGURE 6 • Non-Oil Investment Was Sharply Exceeded that in MENA Oil Exporters Under-Executed in 2017 80 15 Percentof total investment 60 expenditure, (%) 10 40 5 Percent 0 20 –5 0 2013 2014 2015 2016 2017e –10 Non-oil investment expenditures –15 Oil investment expenditures 2013 2014 2015 2016 2017e Sources: IMF; and World Bank estimates. Iraq MENA oil exporters Sources: Iraqi authorities; and IMF REO, Oct 2017. adjustment falling on non-oil investment expenditure, which negatively affected private sector consumption and investment. The GoI prioritized social and military a better security situation and the benefits of the initial expenditure, payments of wages and pensions to reconstruction effort are estimated to have increased protect social stability, debt service and oil-related the growth rate of non-oil industry and services to 1.0 investment, but sharply under-executed non-oil capital and 6 percent in 2017. Non-oil growth in 2017 has investment. Thus, expenditures on oil investment exceeded that in MENA oil exporters group for the increased from 48 percent in 2014 to about 66 first time since 2014 (Figure 5). percent of total investment expenditures in 2017, On the demand side, private consumption while non-oil investment expenditure declined from 52 and investment have picked-up in 2017 after percent to 34 percent of total investment expenditures a sharp reduction in 2014–16. A 63 percent in the same period (Figure 6). Because of insecurity fall in oil prices between 2014 and 2016 forced the and poor business environment, FDI declined from GoI to rapidly reduce expenditure, with most of the US$4.1 billion (2.4 percent of GDP) in 2014 to US$1.8 billion (1 percent of GDP) in 2017 (Figure 7). Private consumption and investment have slightly picked-up FIGURE 7 • Foreign Direct Investment Plummets in 2017 following the end of the conflict that affected Due to Insecurity and Poor Business supply of goods and household spending. Environment Oil Sector 6 5 Iraq’s hydrocarbon sector has continued to be the primary driver of growth, but further expansion 4 US$, billion will depend on higher oil investments. Iraq has 3 the fifth largest proven crude oil reserves in the world 2 with 141.4 billion barrels. With the rapid increase in 1 production in 2015 and 2016, the country is now 0 the world’s third largest and OPEC’s second largest 2010 2011 2012 2013 2014 2015 2016 2017e oil exporter. With 130 trillion cubic feet of proven Sources: IMF; and World Bank estimates. reserves, Iraq’s largely untapped natural gas reserves 4 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY FIGURE 8 • Oil Production Is Estimated to Have FIGURE 9 • Oil Prices Are Estimated to Have Declined by 3.5 Percent in 2017, but Increased in 2017 to Remain the Primary Driver of the Growth 120 5 100 Million barrel per day 5.0 4 US$ per barrel 4.5 80 3 4.0 Barrel per day, million 60 3.5 2 3.0 40 2.5 20 1 2.0 1.5 0 0 1.0 2013 2014 2015 2016 2017e 0.5 Iraq oil exports price-LHS Oil production-RHS 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e Source: Iraq Ministry of Oil. Sources: CSO; and IMF. Conflict had only a limited impact on oil are the twelfth largest in the world. Iraq is also the production, since the southern oil fields account world’s fourth-largest natural gas-flaring country in for over 90 percent of production. Iraq’s crude 2014, behind Russia, Iran, and Venezuela. More than oil production4 averaged 4.6 million bpd in 2016, half of its gross natural gas production was flared in 900,000 bpd more than the production level in 2015. 2017. The country is taking steps to reduce flaring and KRG accounted for 490,000 bpd or 11 percent of total instead use its natural gas resources more for power 2016 oil production. In 2017, oil production estimated generation and for reinjection into wells to enhance to have declined by 3.5 percent, to implement the oil recovery. The oil sector dominates the economy, OPEC+ agreement to cut oil production until end-2018 even by regional standards. Despite volatile security to increase international oil prices, and the reduction conditions, oil production has tripled since 2003. of oil production in Kirkuk in the last quarter of 2017, The sector accounts for over 65 percent of GDP, 90 following the transfer of its control from the KRG to percent of central government revenue, and nearly the federal government (Figure 8). Major obstacles 100 percent of the country’s exports. to further expansion of oil production plans include lack of insufficient water supply and gas injection, and cumbersome bureaucratic procedures. Despite the good performance in production FIGURE 10 • Oil Revenue Is Estimated to Have and exports volumes, the fall of oil prices drastically Increased in 2017 Sustained by reduced Iraq’s oil revenue. Iraq’s oil prices decreased Higher Oil Prices from an annual average of US$96.5 per barrel in 2014 to US$35.6 in 2016, before increasing to an average 100,000 1,600 of US$48.7 in 2017 (Figure 9). Oil revenues decreased 80,000 1,400 to US$40 billion in 2016 (a 53 percent reduction) Million, barrel US$, million 1,200 compared to 2014 and increased to almost US$59 60,000 1,000 billion in 2017, a 46 percent increase compared to 2016 40,000 800 (Figure 10). 20,000 600 Following the GoI move to extend its authority 2013 2014 2015 2016 2017e in all disputed areas, KRG oil export volumes and Oil revenues-LHS Oil Exports Volumes-RHS Source: Iraq Ministry of Oil. 4 Including production in KRG, RECENT ECONOMIC AND POLICY DEVELOPMENTS 5 revenues are estimated to have dropped by 55 youth and women in those areas affected by ISIS. In percent in the last quarter of 2017. Since mid-2014, February 2018, the World Bank approved the Iraq’s KRG has controlled the oil production area of Kirkuk, Social Fund for Development (SFD) project financed which defended from an attempted ISIS take-over. with US$300 million, to improve the living conditions of Production from Kirkuk contributed 250,000 bpd to over 1.5 million poor households in Iraq by increasing KRG exports. Gross oil production from the territory of access to basic services and creating employment KRG amounts 310,00 bpd, of which 40,000 destined opportunities. This was followed in April 2018 by the to local refineries. The federal government take-over approval of the Emergency Social Stabilization and of Kirkuk dropped KRG oil exports from an average of Resilience Project (ESSRP), financed with US$200 520,000 pbd to 270,000 bpd. Furthermore, according million to increase livelihood opportunities, access to to the KRG, the gross revenue generated from these psychosocial services, and expand the provision of exports and refining activities would amount to US$420 social safety nets. million per month, but the oil revenue net of payments to Chronic shortages in the delivery of public international oil companies, debt service and payments services, especially electricity supply, have had a for the use of the pipeline would amount to only US$230 negative impact on households and private sector million per month to finance budget expenditure. development. Already before the conflict, 73 percent of Iraqi firms identified lack of sufficient electricity supply as a “very severe obstacle” to productivity, and the most Access to Services significant issue affecting private sector development and job creation.5 Technical losses, poor collection Iraq’s current security and fiscal constraints and tariffs below costs have made energy production have affected the Government’s ability a costly and increasing liability for the government. The to provide basic public services, but the deficit of the electricity sector is estimated to reach 5.2 government will implement a number of percent of GDP in 2017.6 The economic cost of Iraq’s projects supported by the World Bank to severe electricity shortages is estimated to have exceed improve service delivery. US$22 billion annually in the 2013 Iraq Integrated The fiscal, security, and humanitarian crises, National Energy Strategy (INES). Years of neglect hindered the government’s ability to deliver the have led to a dilapidated grid infrastructure with low services needed for poverty reduction, social operational efficiency and a broken business model inclusion and economic development. Despite unable to generate adequate revenue to sustain itself the large public expenditure in Iraq, access to even nor to offer value to its consumers. The 2014 World Bank basic services (health, education, electricity, and poverty assessment7 shows that Iraqi households and transport) has been deficient, and the ISIS war further consumers receive an average of 14.6 hours of electricity undermined service delivery. According to UNOCHA, per day, of which only 7.6 hours per day is provided by as of February 2018 there are 2.6 million IDPs and electricity grid. Furthermore, Iraq’s distribution system, 8.7 million people in need of targeted humanitarian outside KRG, has deteriorated owing to poor design, assistance. Basic infrastructure has either been lack of maintenance, and electricity theft, resulting in destroyed or is in a debilitated state, with cities like large distribution losses, low voltage level, and frequent Mosul and Tal Afar facing over 70 percent destruction. disconnections. The World’s Bank Doing Business Since July 2015, the World Bank is supporting the reconstruction efforts with the Emergency Operation for Development Project (EODP). In October 2017, the 5 Iraq Investment Climate Assessment (ICA) 2012 Survey World Bank approved a US$400 million additional (World Bank, 2012). financing to the project (US$350 million) approved 6 See IMF Staff Report, August 2017. back in July 2015, to focus not only on the basic 7 The Unfulfilled Promise of Oil and Growth: Poverty, infrastructure but also on health and education, with Inclusion and Welfare in Iraq, 2007–2012, The World a special attention to the needs of the marginalized Bank 2014. 6 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY 2018 report ranks Iraq poorly in terms of reliability of in households with employed heads. Poverty, which supply and transparency of tariff index. On a scale of had seen a decline between 2007 and 2012, has risen 0 to 8, where higher values indicate greater reliability sharply due to declining oil revenues and the war of electricity supply and greater transparency of tariffs, against ISIS. The poverty rate in 2014 was estimated Iraq scores the lowest (0), compared to the average of at 22.5 percent for the whole country, pushing an 4.2 for the MENA region. additional three million people into poverty. Poverty The GoI is committed to reform and rate doubled to 41.2 percent in ISIS-occupied areas, restructure the electricity sector, with the support with a sharp increase in the Kurdistan Region of Iraq, of the World Bank. As a result, the GoI increased from 3.5 percent to 12.5 percent, due to the inflow of tariffs fourfold effective January 2016 from an average 1.4 million internally displaced persons (IDPs) and over of US$1.7/KWh to US$8.0/KWh. In October 2016, 241,000 refugees.8 The security crisis is estimated to it adopted a strategy to reduce operational losses have created more than 3.4 million internally displaced and increase tariff collection. However, with protests persons, half a million of which are estimated to have from key commercial consumer groups, the cabinet fell into poverty since the beginning of the conflict. decided to lower the commercial and industrial tariffs In February 2018, the GoI launched a second effective January 2017, resulting in an overall average Poverty Reduction Strategy (PRS2) 2018–2022. tariff reduction of 25 percent to about US$6.0/KWh. In The new strategy,9 which aims to reduce Iraq’s poverty the medium-term, electricity sales revenue collections by a quarter by 2022—to no more than 17 percent—is are expected to increase from about US$780 million the result of a consultative and participatory process in 2015 to over US$1.14 billion by end-2018. The between all concerned ministries in Iraq and clearly new Electricity Law No. (53) of 2017 issued in March identifies priorities to improving access to basic 2017 provides for the first time the legal framework services to the poor, particularly to the most vulnerable for the sector’s reform and governance. The World including women and children, as well as providing Bank is providing technical assistance to support sustainable social protection mechanisms. The new the Government implement the MoE roadmap strategy also focuses on the needs of the returnees towards cost recovery, operational efficiency, and and IDPs in the recently liberated areas. Furthermore, implementing a strategy for subsidy reform. the new strategy promotes income generation from projects in agriculture, that will particularly focus on rural women. This Strategy complements and aligns Poverty, Equity and Vulnerabilities with the Iraq’s on-going strategies and plans, including the Sustainable Development Goals, the Iraq’s Vision Poverty remains prevalent, exacerbated by 2030, Social Protection Strategic Roadmap, and the the conflict, violence and the collapse in oil National Development Plan 2018–22. revenues, and the social safety net suffers Social protection is dominated by the from severe inefficiencies and gaps, but the inefficient and poorly-targeted Public Distribution GoI is embarking on a comprehensive reform System (PDS).10 The authorities, as agreed under the that is improve targeting of the poor and vulnerable. Poverty has risen sharply. Before the conflict, and despite Iraq experienced high economic growth driven 8 Losing the Gains of the Past: The Welfare and the Distributional Impacts of the Twin Crises of 2014 in Iraq. by rapidly increasing oil revenue, poverty remained high World Bank, June 2015. and welfare improvements were particularly slow for the 9 The first PRS-1 finalized in 2009 and adopted by the poor. Already in 2012, one fifth of the Iraqi population Parliament in 2010, has reached the end of its initially- was spending less than the amount required to meet envisaged implementation period in early 2016. their minimum nutritional requirements and cover 10 Under the PDS, the government procures local and their basic non-food needs. Jobs were not providing a imported food that is distributed to all families irrespective pathway out of poverty as 70 percent of the poor were of income. RECENT ECONOMIC AND POLICY DEVELOPMENTS 7 IMF SBA, will protect social spending which is expected make the pension portable, removing a disincentive for to remain at around 22 percent of non-oil expenditure, seeking employment in the private sector. in line with 2015–2017.11 The PDS provides a minimum With initial financing provided by the World amount of caloric consumption to the entire population. Bank, the GoI is improving service delivery at the It reached 99.4 percent of the poor and accounted for community level, through the implementation of 64 percent of total caloric consumption for the bottom the Iraq’s Social Fund for Development program 40 percent of households in 2012. This program is (SFD). With a US$300 million loan from the World large—the 2017 budget allocated ID 1.7 trillion, or 3 Bank approved in February 2018, the SFD program percent of the current primary budget expenditure— aims to provide technical assistance and capacity but it is untargeted, covering also 95 percent of the building for sustainable and inclusive development non-poor and suffers from significant inefficiencies in of local communities, support and empower them to procurement, distribution, and management. improve their livelihoods and access to basic services, With the assistance of the World Bank, the and increase short-term employment opportunity in Government is introducing a better targeted and communities affected by conflict. The program would cash-based social safety net program. To implement also include a specific allocation to support women the Social Protection Law (11/2014), the GoI has adopted entrepreneurship with special financing for women- a proxy means testing (PMT) formula to identify the poor. led projects. The SFD is expected to scale-up across The GoI committed to adopt in 2018 a unified database all of Iraq, including KRG, over a period of five years, of eligible households based on the PMT system across using a phased approach, with resource allocation all different social protection schemes. Other safety net based on population and poverty headcount figures programs are not yet poverty targeted and cover a small in the governorates. Resource allocation will also share of the poor. Through these reforms, the coverage include an allowance for IDPs, with 10 percent of total ratio of the poor is expected to increase from 11 percent resources divided between governorates proportional in 2015 to at least 50 percent by end-2018. to the number of IDPs they are hosting. The GoI is also embarking on a comprehensive reform of its social protection system. In 2016, the GoI has introduced to the Council of Representative Labor Markets and Employment (CoR) a new draft Social Insurance Law, which expands The public sector is predominant employer the coverage and fairness of the pension system and in Iraq, and unemployment remains high, improve its sustainability. Iraq’s pension system is especially between women and youth. fragmented, unequal, costly and unsustainable. Public The public sector is the predominant employer pension spending in Iraq, at around 4 percent of GDP, in Iraq and the role of the formal private sector is high by international standards.12 Despite such a high is marginal. Public sector expansion has created cost, the system suffers from large coverage gaps and wide distortions and limited job opportunities in other provides overly generous benefits. Pensions, reach less sectors. Although more than 750,000 new jobs were than 20 percent of the poor, while about 85 percent of created between 2007 and 2012, these were not enough pension recipients belong to non-poor households. to absorb all new participants in the labor market, and Only about 48 percent of the total labor force is currently contributing to and covered by the pension system. Most covered employees are in the public sector, while 11 Defined as budgetary allocations to health, education, less than 3 percent of the private sector employees and transfers in support of the PDS, the social safety net, are covered. Revising pension parameters would not the internally displaced and refugees. only reduce the fiscal cost of the public-sector pension 12 The OECD average of 23 countries is 1.8 percent of scheme but would also improve the system’s equity GDP; Iraq’s spending also exceeds the OECD’s most characteristics. In addition, the new pension system expensive pension system, namely, that of Greece at 3.7 would harmonize the public and private systems and percent of GDP. 8 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY FIGURE 11 • The Wage Bill Continues to Be FIGURE 13 • Jobs by Sectors, Public and Private the Largest and Fastest Growing Expense in the Government Budget 1,200,000 1,000,000 50 50% Percent of total govt expenditure 800,000 39% 39% 40 37% 40% 600,000 25%27% Trillions Iraqi Dinar 30%28%29% 30 26% 30% 400,000 22% 20 18% 19% 20% 200,000 14% 0 Mining & quarrying Utilities Public admin., health & education Other services Manufacturing Financial, insurance & professional Transport, storage & communication Agriculture & fishing Commerce and retail Construction 10 7% 10% 0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e Wages & salaries in ID Private Public Wages & salaries, % of total expenditure Source: Iraq Household Socio-Economic Survey 2012. Sources: IMF; and World Bank estimates. four-fifths of these new jobs were generated by the With support of the IMF and the World Bank, public sector. Increasing oil revenues have enabled the GoI is taking steps to control and reduce the the rapid expansion of public sector employment. wage bill. This sharp rise in the wage expenditures From 2004 to 2014, public sector employment more was driven largely by unchecked politically backed than tripled from 0.9 to 3 million employees. Over the recruitment and by fraudulent payroll practices, same period, the government wage bill ballooned from including the proliferation of “ghost” workers (not 7 to 27 percent of the budget. In 2017, the wage bill is legally employed), and “double dippers” (illegally estimated to increase to ID32.5 trillion or 40 percent drawing multiple salaries), collection of salaries of government budget (Figure 11). Iraq is an outlier in by chronic absentees and outright theft of payroll terms of the wage bill (as a share of GDP) in MENA cash. Under the IMF SBA, GoI committed to reduce among oil exporting countries (Figure 12). the number of employees through natural attrition.13 With support from the World Bank, the GoI has also introduced expenditure control measures, including Iraq Is an Outlier in Terms of the FIGURE 12 •  a transition to electronic payment of salaries and Wage Bill biometric verification of civil servants’ attendance. Potential for private sector jobs is in 20 construction, retail services, tourism, transport 16 and logistic and agri-business (Figure 13). Percent of GDP 12 Employment in small and medium enterprises (SMEs) 8 is concentrated in construction, commerce (retail and 4 0 Iraq Egypt Jordan UAE 13 The natural attrition strategy entails (1) freezing 2012 2013 2014 employment in all sectors except three priority sectors 2015 2016 2017e (education, health, and defense), and (2) hiring only one new employee for every five retiring employees in the Sources: IMF; and World Bank estimates. three priority sectors. RECENT ECONOMIC AND POLICY DEVELOPMENTS 9 FIGURE 14 • Labor Force Participation for Men FIGURE 15 • Women Participation in Labor Force Highly Exceeds that for Women Is Below the Already Low Rates for that in MENA 90 75 30 60 25 Percent 45 20 Percent 30 15 15 10 0 5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Female Male Iraq MENA Source: World Bank, WDI. Source: World Bank, WDI. wholesale trade), transport and communications. IDPs in 2016, and the national unemployment Construction is the single largest employment sector could have reached 15 percent in 2017. Youths are in the private sector and one of the largest sectors for underrepresented in government jobs, and limited jobs in the entire economy. Because of reconstruction growth of the private sector has not generated activities, the sector has also large potential to grow significant employment opportunities, especially Tourism, whose main driver is religious tourism, for young Iraqis. From 2005 to 2014, Iraq’s youth generated US$4 billion in export earnings in 2015 unemployment (ages 15–24) never dropped below 32 and is the largest non-oil exports. Transportation, percent, despite economic growth that averaged over freight, and logistics remain dominated by the state 6 percent during that period, with youth employment but growth of SMEs is increasing. Agriculture more estimated to have increased over 33 percent since broadly provides about 20 percent of employment then.14 In the period 2005–2017, only an average of and contributes 4 percent of GDP. Its potential has 17 percent of Iraqi women of working age participate been severely diminished by conflict and insecurity. in the labor force—below the already low rates of It represents a large employer for women. While female labor force participation in MENA region of 21 accounting for more than 65 percent of GDP and 90 percent (Figure 14)—and compared to 74 percent of percent of government revenue, the oil sector currently that for men (Figure 15). The unemployment rate for employs only 1 percent of the total labor force. young females is double than that of males. In 2017, Unemployment is high and labor force about 56 percent of young females were unemployed participation remains exceedingly low, especially compared to 29 percent for young males. The labor for women and youth and in the areas affected force lacks basic skills because of years of war by conflict. Unemployment was officially estimated at and sanctions and massive emigration since 2003. 11 percent in 2011, although actual levels, particularly The sector of employment for households is also a among youth, were significantly higher. Jobs were not strong determinant of poverty, with 70 percent of poor providing a pathway out of poverty even before the household heads working in agriculture, construction, crisis. Iraq has one of the lowest employment-to-total utilities, transport or non-employed. population ratios in the region, even among men, and the 2014 crisis has led to an estimated reduction in employment by 800,000 jobs. The WB estimates that 14 World Bank, World Development Indicators (WDI) based there were 2.5 million unemployed Iraqis including on modeled ILO estimate. 10 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY FIGURE 16 • Unfavorable Business Environment FIGURE 17 • The Quality of Iraqi Governance Remains a Significant Deterrent to Remains Critical Foreign Investment, but Reforms on the Way Control of Corruption 60 U.A.E (rank 21) 78.7 Voice & 40 Government Oman (rank 71) 67.2 Accountability Effectiveness 20 Saudi Arabia (rank 92) 62.5 Jordan (rank 103) 60.6 0 Regional average (rank 115) 56.7 Iran (rank 124) 56.5 Stability & Absence of Regulatory Quality Egypt (rank 128) 56.2 Violence Iraq (rank 168) 44.9 0 20 40 60 80 100 Rule of Law Distance to frontier score Iraq MENA (100 = most favorable, 0 = least favorable) Source: World Bank Worldwide Governance Indicators. Source: World Bank, Doing Business 2018. Business Environment and Private Doing Business measures, including, trading across Sector Development borders (179), resolving insolvency (168), enforcing contracts (144), and getting electricity (133). Poor business environment and corruption Difficulties with corruption, customs regulations, keep Iraq at the bottom of global rankings for cumbersome visa procedures, unreliable dispute doing business, but recent reforms will pave resolution mechanisms, electricity shortages, and the way for more progress going forward. lack access to finance are common complaints from An unfavorable business environment remains businesses. The WB is providing support to GoI a significant deterrent to foreign investment. in improving performance in areas covered by the Overall, Iraq ranked at 168 out of 190 economies Doing Business report namely: resolving insolvency, in the 2018 Doing Business;15 significantly behind enforcing contracts, getting credit, protecting minority other countries in the region (Figure 16). The 2018 investors, and in reforming the business registration Doing Business finds that during 2016 and 2017, scheme at the national level in Baghdad and the Iraq has implemented substantive changes in the subnational level in KRG. local regulatory framework in two main areas: starting Corruption and poor governance remain a business and getting credit. In fact, starting a critical issues. The country is persistently ranked business in Iraq has become easier by combining around or below the tenth percentile globally based multiple registration procedures and reducing the on indicators of government effectiveness, rule of time to register a company. Entrepreneurs are no law, and control of corruption (Figure 17). Iraq’s longer required to register separately with the tax performance was particularly poor in the indicators authority. The time required to register a company has declined thanks to increased resources at the registry, an improved online registration system. As 15 In 2017 Doing Business report, Iraq ranked 165 out of 190 economies, however, these rankings are not a result, Iraq’s rank in the ease of doing business comparable because of the introduction of some improved by 11 points from 165 to 154, but still below methodology refinement and data revisions that impact that for MENA region (113). Iraq has also improved how countries rank. access to credit information by launching a new credit 16 As of January 1, 2017, the registry listed 234,967 consumers registry managed by the Central Bank of Iraq.16 Iraq and 4,877 commercial borrowers with information on their performed poorly on several of the other areas that borrowing history within the past five years. RECENT ECONOMIC AND POLICY DEVELOPMENTS 11 for stability and absence of violence, rule of law, and and continue to limit growth of private, non-oil sectors, control of corruption. It is also ranked 169 out of 180 including poor security and infrastructure, rampant countries in the latest Transparency International corruption, skilled labor shortages, and antiquated Corruption Perception Index 2017, with only Syria, commercial laws. Many private businesses are small Yemen, and Libya scoring worse within MENA region. and informal; mainly operating in retail and trade, Social unrest has continued periodically due to low construction and transportation services. quality and availability of basic public services and Firms identified access to electricity perception of widespread corruption. In 2016, Iraqi as the most severe obstacle to private sector parliament questioned and dismissed the Minister of development, but the track record to address Trade, Defense and Finance on corruption allegations. this constraint remains unconvincing. Before the In early January 2018, the Government successfully conflict, 73 percent of Iraqi firms identified the lack of pursued extraditions of high level officials accused sufficient electricity supply as a “very severe obstacle” of corruption from neighboring countries. Payroll to productivity, and the most significant issue affecting corruption, including collection of salaries by “ghost private sector development and job creation.18 To employees”, chronic absentees and skimming of promote a shift towards more diversified private sector- salaries, is rife, and hiring and disciplinary decisions led development, the GoI has prioritized improving the are affected by nepotism and bribery. Efficient public doing business and investment environment, and has procurement processes are often undermined by adopted a strategy to increase electricity supply and bribery and kickbacks. Difficulties with corruption reliability through corporatization of the sector and the and unreliable dispute resolution mechanisms remain adoption of a tariff setting policy to eliminate subsidies common complaints from companies operating in Iraq. in five years (see special chapter on electricity tariffs). Weak public administration, lack of experienced staff, However following protests against higher tariffs and high insecurity, and weak oversight of government a lack of an improvement in the supply of the service, spending provide incentives and opportunities for in January 2018, the CoM approved a new tariff corruption.17 Investors in KRG face many of the structure that reduced electricity tariffs by 16 percent. same challenges as investors elsewhere in Iraq, but a business-friendly investment law and more stable security situation are generally more attractive to Public Finance foreign businesses. However, the ISIS offensive, low Following the rapid deterioration in the period oil prices, and suspended budget transfers from the 2014–16, the fiscal deficit is estimated to have federal government have reduced foreign investment improved in 2017 due to higher oil prices and in KRG as well. The Iraqi government led by the Prime measures to increase non-oil revenues and fiscal Minister Al-Abadi has committed to a road map, adjustment. To finance past deficits, the Iraqi including reducing obstacles to business, tackling government has increased domestic and external corruption, and promoting foreign investments. The public debt, which doubled from 30 to 60 percent WB-DPF operation is aligned with the government of GDP from 2014 to 2016. Public debt is estimated objectives and the demand of citizens for improving to have declined in 2017 and to remain sustainable governance, transparency, and reducing corruption over the medium-term provided the GoI continues its through increased expenditure rationalization. fiscal adjustment. The GoI has also improved debt Fundamental constraints remain behind the very limited capacity and incentives of the private sector. Iraq’s private sector is not yet able to generate the investment and enterprise growth that is 17 Transparency International, Coralie Pring, U4 Expert needed to create employment and reduce Iraq’s high Answer, Anti-Corruption Resource Center 2015. level of dependence on oil revenue and public sector 18 Iraq Investment Climate Assessment (ICA) 2012 Survey employment. Multiple constraints stifle investment (World Bank, 2012). 12 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY management capacity, with the adoption of pre- FIGURE 18 • Following Large Deterioration, announced monthly domestic debt auctions and a Higher Oil Prices and Continuation of Fiscal Adjustment, Fiscal Deficit Is new framework to assess risks of government-issued Estimated to Have Improved in 2017 guarantees. Lower oil receipts have considerably 60 15 widened the budget deficit in 2015 and 2016. 40 10 With no other relevant source of revenue, GoI’s budget 5 Percent of GDP deficit increased from 5.4 percent of GDP in 2014 20 0 to 14 percent of GDP in 2016, despite a reduction 0 –5 of primary expenditure by almost 23 percent in real –20 –10 terms over the period 2015–16 (Figure 18). Rapid –40 –15 fiscal deterioration resulted from a sharp reduction in –60 –20 oil prices, which decreased from an annual average 2010 2011 2012 2013 2014 2015 2016 2017e of US$96.5 per barrel in 2014 to US$45.9 in 2015 and Non-oil revenues Oil revenues Current expenditures US$35.6 in 2016. The limited financing available forced Capital expenditures Overall fiscal balance-RHS the Government to make some adjustments to contain Sources: IMF; and World Bank estimates. the deficit in both 2015 and 2016. On the revenue side, these focused on ensuring increased volumes of oil exports (e.g., through oil infrastructure—pipelines, FIGURE 19 • Improved Security in 2017 Is storage facilities, maintenance—optimization). On Estimated to Have Contained a the expenditure side, the Government prioritized Large Fall in the Share of Non-Oil security spending, payments of wages, pensions, Investment to GDP, while the Share debt service and oil-related investments and sharply of the Security Spending Declined under-executed non-oil capital investment (Figure 19). Domestic and external arrears also accumulated to 12 US$11 billion at end-2016. 10 Twin shock In 2017, the fiscal deficit is estimated to Percent of GDP 8 have improved to 2.2 percent of GDP thanks to 6 higher oil prices, measures to increase non-oil 4 revenue, and cap expenditure on wages, pensions 2 and transfers. There was a 43 percent increase of 0 oil revenue despite production cuts, driven by higher 2013 2014 2015 2016 2017e oil prices. To keep the fiscal consolidation on track Non-oil investment expenditure and protect social spending, the 2017 supplementary Security-related expenditure budget, adopted on July 28, 2017, increased non- Sources: IMF, and World Bank estimates. oil taxes with the introduction of a flat 3.8 percent withholding tax on wages and the adoption of a tax on internet services. Nominal expenditure on salaries and pensions were kept at their 2016 level, and current reconstruction in areas liberated from ISIS, and expenditure and domestically financed investments increasing electricity production. were reduced. The 2017 budget included a larger The 2018 budget is expected to result in a envelope to pay domestic and external arrears, a key small surplus, but it represents a setback in GoI measure to increase private sector confidence. The attempts to reduce dependency on oil revenue. GoI has also committed to strengthen procedures Oil revenue in 2018 is prudently budgeted at an export to avoid further accumulation of arrears in 2018. price of US$46 per barrel. At this level, the overall fiscal The GoI is prioritizing investment expenditure for deficit would remain contained at 1.7 percent of GDP. RECENT ECONOMIC AND POLICY DEVELOPMENTS 13 FIGURE 20 • Large Borrowing and Debt the international community, and, thanks to Guarantees Increased Iraq’s Public satisfactory performance, the GoI has also tapped Debt-to-GDP Ratio the sovereign bond market in 2017. The financing provides has so far avoided that the large fiscal shock 150 150 could trigger a much deeper economic and social crisis 125 125 that would excessively hurt the poor and further delay Percent of GDP 100 100 the economic recovery and reconstruction of Iraq. The US$, billion 75 75 financing package from the international community 50 50 includes a US$5.34 billion Stand-By Arrangement 25 25 (SBA) with the IMF; a US$1.444 billion budget support operation approved by the World Bank on December 0 0 2016, including US$444 million guarantees provided 2010 2011 2012 2013 2014 2015 2016 2017e to the Bank by the United Kingdom (US$372 million) External debt (left) US$ Domestic debt (left) US$ and Canada (US$72 million); US$270 million in Debt-to-GDP ratio (right) parallel financing provided by JICA, US$450 million Sources: Ministry of Finance and World Bank estimates. provided by France; and a US$1 billion bond issued in January 2017, guaranteed by the U.S. government. In August 2017, following the successful conclusion of FIGURE 21 • Large Borrowing is Projected to the second review of the IMF program, the government Increase Total Debt Service issued a US$1 billion bond maturing in 2023, its first independent issuance since 2006. 6 Since the onset of the crisis, public debt 5 doubled from 32 percent of GDP in 2014 to 64 Percent of GDP 4 percent of GDP in 2016, but this pace has since 3 been halted. Over the same period, domestic debt 2 increased from 7 to 27 percent of GDP and external 1 debt increased by 12 percentage points of GDP. 0 Thanks to fiscal consolidation and higher oil prices, 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 total public debt is estimated to decline to 58 percent of GDP in 2017 (Figure 20). Large borrowing at Domestic interest payments External interest payments Amortization on external debt Total debt service commercial terms, including through the issuance of Eurobonds is projected to rapidly increase total Sources: Ministry of Finance and World Bank estimates. debt service, which would reach 5 percent of GDP by 2023 (Figure 21). In 2017, the government was able to reduce the stock of guarantees from US$36.5 billion However, with export oil prices expected to average to US$25.7 billion, thanks to improved management above US$56 per barrel in 2018, the fiscal balance practices, and limited their issuance within a ceiling is expected to reach a surplus of 2.7 percent of GDP. established in the annual budget law. The approve budget does not include investment The KRG is implementing measures of fiscal financing for reconstruction. Therefore, the budget austerity to contain expenditure and improve non- surplus in 2018 should be considered as government oil revenue. Since mid-2014, the inflow of 1.4 million savings to continue to re-build buffers and provide IDPs and 241,000 Syrian refugees to KRG have financing for reconstruction after the amount of increased needs to deliver services. Oil revenue, which foreign financing has been clearly identified. represents 90 percent of total KRG fiscal revenue, The GoI’s reform program has been decreased from US$8.3 billion in 2014 to US$5.5 billion supported by a large financing package from in 2016, because of lower oil prices. In 2016 the KRG 14 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY announced new measures to withhold a significant Inflation Remains Low Thanks to FIGURE 22 •  percentage of government salaries, pensions and Pegged Exchange Rate and Subdued Demand stipends—excluding Peshmerga and other security forces. In 2016, these delayed payments provided 7 a temporary fiscal saving of ID 531 billion (US$455 6 million). In addition, the KRG took an action to reduce Headline inflation, y-o-y change % 5 operating costs. The Government has also moved to 4 increase non-oil revenues by raising fees, penalties, 3 water charges and electricity tariffs for industrial 2 consumers; as well as by slashing petroleum product 1 subsidies. As a result, fiscal deficit decreased by 80 0 2011 2012 2013 2014 2015 2016 2017e percent from 2014 to 2016—from ID 7.7 trillion in 2014 to an estimated ID 1.6 trillion in 2016, but spending Source: Iraq CSO. pressures remain high to accommodate the need of IDPs and refugees. Debt and arrears on payments of the Government payroll have mounted since 2014. Inflation, Money and Banking Public debt increased from less than US$1 billion in 2012 to US$18 billion in 2015. Arrears amounting to The pegged exchange rate and subdued demand US$8 billion at end-2015 have accumulated on wage contributed to maintain inflation very low. Banking payments to public employees and payments to oil- system is underdeveloped, dominated by inefficient producing companies. State-Owned Banks, with little credit to the private Failure to reach an agreement on budget sector. The Central Bank of Iraq is continuing reforms transfers could increase vulnerability in KRG. to improve supervision of banks, and simplify access Previous agreements were only implemented two to the foreign exchange auctions. months in 2014 and five months in 2015 and halted Inflation remains very low. The pegged entirely in 2016 and 2017.19 Since mid-October exchange rate and subdued demand have kept 2017, the Federal Government has quickly re- inflation low at around 0.1 percent in 2017 (Figure 22). gained control of all areas disputed between the The disruption in trade and food supply moderately Federal Government and KRG, including Kirkuk, an boosted food inflation in the third quarter of 2015, to oil reach area. As a result, KRG has lost half of its an average rate of 3 percent, but food prices have oil revenue. The 2018 federal budget proposes to decreased since, reaching –2 percent in the fourth reduce transfers to KRG from ID12 trillion in 2017 to quarter of 2017 (Figure 23). Official statistics don’t ID6.7 trillion in 2018 and requires KRG to transfer the include the conflict-affected provinces, where inflation entirety of its remaining oil export receipts, assumed could be higher due to shortages in fuel and goods. to amount to 250,000 barrels per day, to the federal Prices have also increased in the KRG governorates government. This lower level of transfers could result that host many IDPs and Syrian refugees, and where insufficient to pay salaries in KRG to the civil servants food and basic commodities cost more than in other and the military. Since early 2018, demonstration governorates. demanding payment of salaries have become frequent in the area. The Federal Government and KRG are4 continuing to work to reach an agreement to ensure payment of salaries. In January and March 19 The budget sharing agreement reached in 2014 required that KRG transfers revenue from exports of 500,000 2018, the Federal Government has made transfer to barrel per day of oil extracted in KRG territory and in pay salaries of the Ministry of Health and Education, areas controlled by KRG and the federal government following audits to verify of the number of employees makes transfers to the KRG equivalent to 17 percent of and the amount of salaries. non-sovereign spending in the federal budget. RECENT ECONOMIC AND POLICY DEVELOPMENTS 15 FIGURE 23 • The Disruption of Trade and Food extends little credit to the private sector. As of Supply Boosted Food Inflation the September 2017, there were 70 banks operating in 2nd Quarter 2015, but Remained Iraq, including 7 state-owned banks (SOBs), 44 Iraqi Low since Then private banks, and 19 foreign banks. The SOBs account for the bulk of assets and credits, particularly three of 14 12 them, Rafidain Bank, Rasheed Bank and Trade Bank of 10 8 Iraq (TBI). Both Rasheed Bank and Rafidain Bank are Percent 6 4 believed to be capital deficient. Since the crisis, SOBs 2 0 have provided soft loans, amounting to about ID9.8 –2 –4 trillion (or US$8.3 billion), to insolvent SOEs to allow Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 them to pay salaries. The government is committed 2011 2012 2013 2014 2015 2016 2017 to restructure Rasheed Bank and Rafidain Bank. The Headline inflation Food and Non-Alcoholic Beverages first audits on their latest financial statements per Housing, Water, Electricity & LPG Health international standards since 2006 have been finalized Sources: Iraq CSO. and submitted to the CBI and Ministry of Finance in end-September 2017. Results of the audits are heavily qualified and inconclusive, as the auditor was not able FIGURE 24 • Monetary Aggregates Are Estimated to obtain sufficient appropriate evidence to form an to Have Declined in 2017 audit opinion. Private banks are small and they are mostly active in currency exchanges and wire transfers. 20 In 2017, total credit to the economy was 12 percent 15 of GDP, the lowest level in the Middle East and North Percentage growth 10 Africa (MENA). Access to finance is very low in Iraq 5 0 with only 11 percent of adults having a bank account, –5 suggesting that there is a substantial unmet demand for –10 financial services. In addition, men are more than twice –15 as likely to have a bank account than women. The share –20 2013 2014 2015 2016 2017e of non-performing loans to total loans is high for both Broad money Reserve money public and private commercial banks at 10 percent and 24 percent respectively at end- 2016 and expected to have increased in 2017, reflecting the low business Sources: IMF, and World Bank estimates. confidence, and reduced private sector activity. The CBI is working toward eliminating exchange rate distortions. The fixed exchange rate Broad money and reserve money declined regime has worked well in a highly volatile situation in 2017. Because of fiscal consolidation, increase helping maintaining prices stable in the areas non- in availability of foreign financing, and continued occupied by ISIS. The real and nominal effective government borrowing from banks, reserve and broad exchange rates for Iraq appreciated by about 8 percent money have increased in 2016. In 2017, the broad in 2016. This is a continuation of the real appreciation money has remained almost unchanged compared trend that the Iraqi Dinar has experienced since 2013 to 2016. Reserve money have contracted 7.1 percent and mirrors the appreciation of the U.S. dollar to which y-on-y (Figure 24), as CBI reduced the reserve the Iraqi dinar is pegged. To protect reserves, the CBI requirement ratio on time and saving deposits from 15 has enforced limits on transfer of investment proceeds to 10 percent in March 2017 to support banks’ liquidity. and in 2016 reduced its foreign exchange sales on the The banking system in Iraq is underdeveloped, official market. As a result, the spread between official dominated by inefficient State-Owned Banks and and parallel market exchange rate has widened from 16 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY 3 percent at end-2015 to 9 percent in January 2016. law for banks, foreign exchange bureaus, insurance Under the IMF SBA program, and to boost investors’ companies and other actors.  In February 2018, the confidence, the CBI has committed to remove FATF has issues a very supportive statement of the restrictions to the repatriation of investment proceeds reforms implemented and has planned a verification as well as remove weekly limits to purchases on foreign mission in May 2018, following which Iraq is expected exchange by commercial banks and citizens. Thus, to be removed from the FATF watch list. Without streamlined procedures for access to the CBI foreign undermining anti-money laundering regulations, exchange window have contributed to a reduction of the CBI has also implemented several measures to the spread between the official and parallel exchange simplify access to its foreign exchange window. rates from 10 percent in December 2016 to 6 percent in December 2017 as the Central Bank of Iraq (CBI) streamlined the documentation requirements for External Position access to its foreign exchange window. The Central Bank of Iraq (CBI) is continuing Higher oil prices have helped the current account its reforms and tightening supervision of the to return to a surplus in 2017, but foreign reserves banking sector while at the same time simplifying continued to decline. access to its foreign exchange window. The In 2017, the current account deficit is CBI is placing special emphasis to its mandate on estimated to have returned to a surplus of 0.7 Combating Financing of Terrorism (CFT) and Anti- percent of GDP. Low oil prices widened the current Money Laundering (AML) regulations. The risk account deficit to 8.6 percent of GDP in 2016 of money laundering and terrorist financing has (Figure 25). The strong reserve accumulation in increased during the ISIS war. Physical assets of some 2010–2013 smoothed the impact of the fiscal policy banks and their clients have been destroyed. The adjustment required to maintain external sustainability. government issued a new AML/CFT Law in October Foreign reserves financed most of the balance of 2015, which kept Iraq off the Financial Action Task payment deficit, declining from US$77.8 billion at end- Force’s (FATF) black list. In 2016 and 2017, the CBI 2013 (or 10 months of imports) to US$48.1 billion at has issued regulations to comply with the AML/CFT end-2017 (or 7 months of imports) (Figure 26). FIGURE 25 • Current Account Balance Is Estimated FIGURE 26 • International Reserves Have Been to Have Returned to a Surplus of 0.7 Falling to Finance the Current Percent of GDP in 2017 Account Deficit 50 80 12 40 30 10 Percent of GDP 60 Months of imports 20 10 8 US$, billion 0 40 6 –10 –20 4 –30 20 –40 2 2010 2011 2012 2013 2014 2015 2016 2017e 0 0 2010 2011 2012 2013 2014 2015 2016 2017e Imports Exports Current account balance Sources: Iraqi authorities; IMF; and world Bank estimates. Foreign Reserves (left) Coverage Ratio (right) Sources: Iraqi authorities; IMF; and world Bank estimates. RECENT ECONOMIC AND POLICY DEVELOPMENTS 17 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY 2 ECONOMIC OUTLOOK AND RISKS Economic Outlook the medium-term, which would be consistent with the financing received and domestically-financed Iraq’s overall growth outlook is expected to investment. improve due to increasing oil production, a more The macroeconomic outlook is based favorable security environment, gradual pick up on conservative assumptions regarding oil of investments for reconstruction and economic production. Oil production is expected to remain recovery and a more benign global and regional strong at around 4.8–4.9 mbpd for 2019–21, if outlook. Overall growth expected to return positive GoI and KRG reach an agreement to continue to at 2.5 percent in 2018 and to further accelerate to share the KRG-controlled pipeline. Oil production 4.1 percent in 2019 and to average around 2 percent is expected to grow by 2.2 percent in 2018 despite in the medium-term. Oil demand is expected to be the extension of the OPEC+ agreement until end- sustained by strong global growth in 2018 (Box 2). 2018.20 Oil production will be sustained thanks to Non-oil growth is projected to reach 3 percent in 2018 the resumption of production in Kirkuk’s province, and then is conservatively projected to recover to where it was halted following the re-occupation of the about half its pre-2014 average growth to 4 percent province by the Federal forces in mid-October 2017. as recurrent violence and remaining insecurity Oil production is expected to return to pre-2017 levels would delay investment and post-conflict recovery. in 2019, after the expiration of terms of the current Average inflation is expected to remain at 2 percent OPEC+ agreement. It is then projected to continue to over the projection period, assuming maintenance of the exchange rate peg. Projections do not factor in possible higher investment for reconstruction. At a reconstruction conference hosted by Kuwait in 20 This outlook does not yet factor in that OPEC countries February 2018, the GoI obtained pledges amounting and other non-OPEC oil-exporting countries could agree to US$30 billion to finance reconstruction activities, to further extend the production cap to end-2019, as but it still has to formulate an investment plan for proposed in March 2018 by Saudi Arabia and Russia. 19 increase by 1 percent per year as GoI cannot afford (Box 1). Under this scenario, a step up of government to significantly increase investments in the oil sector. investment, with a large import component, is Under a reconstruction scenario, non- expected to stimulate growth over the projection oil growth could spike to above 6 percent in period in agriculture, manufacturing, construction, 2018-19, but it is expected to taper off once the transport and supporting services. Elevated levels of scale effect of higher investments is factored in forced displacement and remaining insecurity could BOX 1  •  Reconstruction: Only a Limited Boost, Especially if Delayed Iraq’s conflict has caused a three-year recession of non-oil GDP. By 2017 the cumulative real losses to non-oil GDP stood at 72 percent of 2013 GDP (Figure B1) and 142 percent of 2013 non-oil GDP, assuming the non-oil economy would have continued to grow at the pre-conflict rate of 8 percent. The conflict has only marginally affected oil production, which has continued to grow. The reconstruction would only partly offset the economic and social losses suffered by Iraq. Estimates of the growth effects of a credible path of public and private investments indicates how fast the reconstruction would bring non-oil GDP to its pre-conflict 2013 level. A reconstruction path to pre-conflict level of non-oil GDP would include higher public and private investment. Post-conflict total gross capital formation grows gradually as a share of GDP and in a back loaded fashion, which is consistent with the absence of a prolonged post-conflict boom, following a short-lived immediate recovery.a Investments in infrastructure tend to ramp up and peak 6 years after the end of a conflict.b Past levels of FDI inflows indicate that Iraq can attract large amounts of foreign capital that can provide the country with access to capital, skills, technology, and international business networks not available domestically. Since 2004, Iraq had experienced a tenfold increase in FDI inflows, which stood at over $5 billion in 2013.c Most FDIs were directed to the oil sector, and provided financing also for construction and agriculture. Thanks to higher growth, the non-oil economy will reach 2013 levels by 2019 if both higher public and private investments are realized. It will take one year longer if there is no scale up of private investment (Figure B2). Compared to the baseline macroeconomic outlook, the reconstruction scenario assumes that from 2019 GoI will be able to gradually increase non-oil public investment by US$10 billion.d This is a conservative estimate that would result into a reconstruction phase longer than 10 years. It is assumed that public investment for reconstruction is entirely externally financed, at terms comparable to those of the current Iraq’s external public debt portfolio and with a magnitude adequate to an initially limited absorption capacity and consistent with debt sustainability.e Increased security and public investment would also contribute to the return of private investment to the pre-conflict level of US$5 billion a year by 2019. Further delays in the reconstruction would continue to increase the cost of the conflict for the people of Iraq. However, investment alone would not be sufficient for Iraq to achieve higher non-oil growth if structural reforms would not result in higher productivity of the Iraq economy. The recovery would also take longer if the reconstruction fails to crowd in the private sector. FIGURE B1 • Non-Oil GDP Losses FIGURE B2 • Non-Oil GDP 160 18 140 13 120 100 8 In percent ID trillion 80 3 60 –2 40 20 –7 0 –12 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Non-Oil Public Non-Oil Public & Private Non-oil GDP Loss Non-oil GDP Non-Oil Actual Counterfactual Non-oil GDP Source: World Bank staff estimates. Source: World Bank staff estimates. a United Nations and World Bank (2017); Schwartz, Hahn, and Bannon (2004). b Schwartz, Hahn, and Bannon (2004). c An amount similar to that of significantly larger economies such as Egypt and Nigeria and the second largest as a share of GDP among OPEC countries. d A level consistent with the investment needs indicated by the GoI. In 2018 a US$5 billion increase in non-oil public investment is assumed compared to the baseline. e Under this scenario public debt would continue to increase and peak in 2020 at 61.8 percent of GDP, compared to the baseline. 20 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY BOX 2  •  Global and Regional Economic Outlook Global Economy. The global economy is experiencing a cyclical recovery, reflecting a rebound in investment, manufacturing activity, and trade. In January 2018, the World Bank estimated the global growth to have picked up from 2.4 percent in 2016 to 3 percent in 2017, above the June forecast of 2.7 percent (Figure B3). Growth in Advanced Economies strengthened in 2017, reaching an estimated 2.3 percent and helped by a recovery in capital spending and exports. In the United States, growth picked up in 2017 to an estimated 2.3 percent, supported by strengthening private investment. The recovery reflected a diminished drag from capacity adjustment in the energy sector, rising profits, a weakening dollar, and robust external demand. In the Euro Area, growth gained substantial momentum in 2017, reaching an estimated 2.4 percent with broad-based improvements across member countries spurred by policy stimulus and strengthening global demand. In Japan, growth picked up in 2017 to an estimated 1.7 percent. Domestic demand firmed, supported by a gradual recovery in consumer spending and investments, as well as the implementation of a fiscal stimulus package. In China, growth is estimated to have reached 6.8 percent in 2017 reflecting continued fiscal support and the effects of reforms, as well as a stronger-than-expected recovery of exports and a slight positive contribution from net trade. EMDEs growth accelerated in 2017 to 4.3 percent, reflecting a recovery in commodity exporters amid continued robust activity in commodity importers. Growth in commodity exporters EMDEs is estimated to have accelerated in 2017 to a still subdued rate of 1.8 percent as various large economies (e.g., Argentina, Brazil, Nigeria, Russia) emerged from recession. Meanwhile, growth in commodity importers EMDEs remained robust at an estimated 6 percent in 2017, in part reflecting a continued strong contribution from India, firming global and domestic demand. following a stronger-than-expected cyclical upturn in 2017. A further pickup investment growth in major economies could strengthen the recovery, with positive spillover effects for trading partners. While global growth is forecast to edge up to 3.1 percent in 2018, risks remain predominantly on the downside, especially over the medium term. With interest rates and financial market volatility at exceptionally low levels, the outlook is vulnerable to sudden changes in market sentiment or unexpected policy shifts that could lead to financial instability. Also, increased trade protectionism and rising geopolitical tensions could weigh on sentiment and disrupt the recovery. Regional Economy Growth in the Middle East and North Africa (MENA) region is estimated to have declined markedly to 1.8 percent in 2017 from 5.0 percent in the previous year (Figure B4), contributed by hydrocarbon-sector-led growth decelerations among regional oil exporters. In contrast, growth in oil importers in 2017 has strengthened to 3.7 percent from the previous year, supported by reforms and improved competitiveness. Growth in both groups of economies continue to face headwinds from fiscal consolidation plans and geopolitical tensions. Growth among the oil exporters was affected by OPEC oil production cuts and fiscal consolidation. Besides the effect of a slowdown in its oil sector following an exceptionally high 2016 surge, activity in the Islamic Republic of Iran was dampened by weak foreign investor confidence associated with geopolitical tensions (including new sanctions and hardened nuclear-deal stance by the United States). Algeria and Iraq’s growth are also estimated to have decelerated in response to fiscal consolidation, moderating hydrocarbon sector growth, and weak non-oil activity. Lower growth among the Gulf Cooperation Council (GCC) members mainly reflects lower oil output from production cuts. Among the region’s oil importers, growth improved in 2017, as a result of reforms and improved competitiveness. Egypt experienced strong industrial production, investment, and exports, supported by the effects of the exchange rate devaluation on competitiveness. In Morocco, a strong rebound in agricultural production in the first three quarters of 2017 from severe droughts in the previous year further supported the economy’s recovery. Tunisia has experienced gradual recoveries in agricultural and manufacturing sectors. Regional growth is projected to increase steadily after 2017, to 3.0 percent in 2018 and 3.2 percent by 2020, reflecting accelerations among both oil exporters and importers. The risks to the outlook, while varying between oil exporters and importers, are generally to the downside. The regional outlook faces four main risks: amplification of geopolitical tensions, weak momentum in oil prices, obstacles to reform progress. FIGURE B3 • Global Growth Has Picked Up to Growth in MENA Region Is Estimated FIGURE B4 •  3 Percent in 2017, Mainly Reflecting to Have Declined Markedly to 1.8 a Rebound in Investment, Percent in 2017, Reflecting the Manufacturing and Trade Deceleration among Oil Exporters 6 6 4 4 2 2 Percent Percent 0 0 –2 –2 –4 –4 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 World Advanced economies MENA Developing oil importers Emerging and developing economies Developing oil exporters excl. Iran Source: World Bank, Global Economic Prospects, January 2018. Source: World Bank, Global Economic Prospects, January 2018. Note: The World Bank’s MENA aggregate includes 16 economies, and is grouped into three sub regions: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE comprise the Gulf Cooperation Council (GCC); all are oil exporters. Other oil exporters in the region are Algeria, the Iran, and Iraq. Oil importers in the region are Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank and Gaza. Syria Yemen, and, as of this publication of Global Economic Prospects, Libya, are excluded from regional growth aggregates due to data limitations. ECONOMIC OUTLOOK AND RISKS 21 limit private consumption and investment initially, international oil companies (IOCs), and reconstitute but are expected to then increase also thanks to a international reserves to a level considered appropriate projected increase of credit to the private sector albeit to reinforce the exchange rate peg.23 from a very low level.21 Projected budget surpluses in 2018–21 should be seen in the context of savings to Risks finance identified reconstruction needs and Downward risks to the outlook remain many. rebuild severely depleted buffers. The economic These include oil prices volatility, failure to improve and social losses suffered by Iraq in the last three the security environment, and failure to implement years add already to ¾ of GDP in terms of missed the expected large fiscal adjustment to contain development opportunities. The overall reconstruction current expenditure and prioritize investment for and recovery needs are estimated at ID 104.2 trillion reconstruction and development. While oil prices (US$88.2 billion), with ID 27 trillion (US$22.9 billion) over the projection period are expected to remain needed in 2018–19 short term, and ID 77.2 trillion 40 percent higher than their lowest level reached in (US$65.3 billion) needed for the medium term.22 The 2016, they are expected to remain on average 50 2018 budget expenditure and balance do not reflect percent lower than in 2014. In addition, their level the level of investment that the government could over the projection period remains highly uncertain finance (either thanks to identified external financing according to volatility indices. Fiscal and external debt or use of saved reserves) to reconstruct the areas sustainability remain highly vulnerable to a reduction liberated from ISIS including Mosul. The government in oil prices or a real exchange rate depreciation. could adopt a 2018 supplementary budget, following Iraq could yet again face a fiscal crisis if conflict and the reconstruction conference in Kuwait and the violence re-ignite because of setbacks in the recent parliamentary elections to fully reflect the investment successes against ISIS or increased tensions with and other activities to finance the reconstruction. KRG. As in the recent past, any setbacks in the recent Domestic financing is transitioning to success against ISIS could renew pressures on Iraq’s market-based instruments. In 2018, the domestic twin deficits and require a combination of further gross borrowing needs are projected to be covered fiscal adjustment, additional external financing, mainly through the issuance of Treasury bills, most depletion of international reserves and accumulation of which will be refinanced by commercial banks of mainly short-term domestic debt, inconsistent at the discount window of the CBI. As the capacity with the exchange rate peg and macroeconomic of the public debt management office improves stability. Failure to achieve fiscal consolidation could and the domestic market is developed, the GoI will resort to an increasing share of market-based short- term instruments, gradually discontinuing automatic refinancing of T-bills falling due, and longer-term 21 Credit to the economy grew by 4 percent year-over-year bonds, including Islamic financing bonds. The during the first five months of 2017 and is projected to borrowing plan for 2018 increases the share of market- increase to average 14 percent in 2018–20. See IMF — based domestic debt instruments from 8.6 percent in Article IV Consultations and Second Review under the Three-Year SBA, August 2017. 2017 to above 10 percent in 2018. The current account deficit is projected 22 See: Iraq Damage and Needs Assessment of Seven Directly Affected Governorates (2018). to remain moderate thanks to higher oil prices, 23 Under the current outlook for oil prices, production and increase in oil exports and fiscal consolidation. exports, International reserves are projected to increase The government commitment to contain expenditures from 7.0 months of imports in end-2017 to 8.9 months but continue oil-related investments is key to reduce of imports in 2021. While high compared to traditional the current account balance over the projection metrics, Iraq’s reserve adequacy needs to factor in the period, ensure direct financing will flow to Iraq from inherent volatility of oil exports. 22 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY delay investment for the reconstruction and continue timely formation of a new government and bring to to increase the cost of the conflict for the people a halt executive and legislative activities needed of Iraq. The recovery would also take longer if the to implement the expected fiscal adjustment while reconstruction fails to crowd in the private sector. On at the same time provide public services and start the upside, any further increase in the export price reconstruction. Deteriorating relations between the of Iraq’s oil would generated additional resources for federal government and the KRG could weaken oil reconstruction.24 exports, slow the recovery of the non-oil economy, and The outlook is also subject to significant discourage donor support for post-ISIS reconstruction. social and political risks. Escalating political tensions The large reform agenda, including the unification of and the probability of terrorist attacks ahead of the the public and private pension systems could give parliamentary elections to be held in mid-May 2018 rise to social tensions and impact implementation of add further political risk in the short-term. Lingering reforms. political tensions, weak administrative capacity and widespread corruption continue to pose a downside risk and could further limit the government’s reform effort and its capacity to implement investment for 24 An increase of US$1 in the annual average of Iraq’s reconstruction. Following the parliamentary elections, oil export prices results in US$1.4–1.5 billion higher oil difficult political negotiations could prevent the exports and oil revenue. ECONOMIC OUTLOOK AND RISKS 23 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY 3 SPECIAL FOCUS: ENERGY SUBSIDY REFORM IN IRAQ 25 The Time is Now Introduction: Economic Rationale of subsidies for fossil fuels totaled US$325 billion in Energy Subsidy Reforms 2015—more than double the value of subsidies for renewables.27 Approximately 13 percent of global CO2 Developing countries need more and cleaner emissions are linked to the use of subsidized fossil energy to overcome poverty and to set them on fuels. More importantly, subsidies are not properly strong growth paths. At the heart of the debate about targeted and often fail to help the poor. the future of global energy is how to expand supplies Energy subsidies are popular, easy and access to energy for the world’s poor in ways to introduce, but difficult to dismantle, even that meet the needs of both the current generations though there is ample evidence that generalized and all future generations. Energy subsidies can subsidies are inefficient and inequitable. This is be large within a country context and are found in more so with subsidies for goods that are purchased virtually every country.26 Justifications for their use by a large segment of the population, such as food, vary from social welfare protection, job creation, the fuel, and electricity. The most visible subsidies are encouragement of new sources of energy supply, and price subsidies, measured as the difference between economic development to energy security. end-user prices paid and price levels that would have Energy subsidies, however, are expensive, prevailed in a competitive, deregulated market. These lead to overuse of fossil fuels, deter private sector “price gaps” are often financed in part or wholly by investment by making new forms of renewable energy uncompetitive, and undermine climate 25 This section is based on sector inputs provided by Paul change mitigation efforts. These subsidies compete Baringanire, Senior Energy Specialist. for limited resources that could otherwise be suitable to 26 World Bank (2010): Subsidies in the Energy Sector. An deliver essential services to the poor, widen the scope Overview. for rent seeking and may contribute to misallocation 27 Energy Sector Management Assistance Program of resources towards energy-intensive sectors. Global (ESMAP). 25 FIGURE 27 • Electric Power Transmission and FIGURE 28 • Electricity Generated, Billed, and Distribution Losses, Latest Available Collected Indicator 90 80 80 70 70 60 In KWh 60 50 Percent of output 50.6 40 50 30 40 20 30 10 Oil Exporter average 0 20 Total generated Total billed Eq. collected 10 0 Source: Ministry of Electricity, 2015 Operating Statistics. Lebanon Jordan Egypt, Arab Rep. Iran, Islamic Rep. Morocco Tunisia Syrian Arab Republic Alderia Yemen, Rep. Iraq Libya Rationale for Reform in Iraq Source: World Development Indicators. Iraq’s electricity sector suffers from a series of simultaneous and compounding challenges, which makes it unable to generate adequate revenue to sustain itself or to improve services for the government, reducing resources available for consumers. Years of neglect have led to a dilapidated other government programs. If a growing budgetary grid infrastructure with low operational efficiency burden is what typically drives a price subsidy reform, and high levels of losses, where over 50 percent it is however, easier to reduce energy subsidies at a of electricity generated is lost in transmission and time when input prices are lower and as a result also distribution (Figure 27) and an additional 20 percent subsidies levels fall. lost because of poor revenue collection. Actual Fuel subsidies have been part of the social electricity paid is less than 30 percent of production, contract in the MENA region but recent economic but covers only about 10 percent of the cost of and political developments suggest a new social production because tariffs are non-cost-reflective contract is needed. The development model followed (Figure 28). The sector depends on government broadly by the region is one where the state provides direct budgetary support, implicit fuel subsides and free health and education for all, subsidizes food and guarantees to undertake capital investments and fuels and the public sector is the main formal sector finance its operational expenditure. employer. As a result, citizen engagement and voice Iraq has made significant progress in has been limited and the quality of public service has restoring its power generation from a peak been lacking.28 Falling oil prices resulted in a high demand supply of about 5GW in 2005 to 14GW fiscal burden for governments and made maintaining in 2016, but continues to face challenges, the same level of subsidies very difficult. Public-sector including a high demand growth of over 10 employment also slowed down at the same time when percent per annum. Even with the high growth of young people’s expectations and aspirations have generation capacity and investments, the grid supply been increasing. A new social contract must involve is only available, on average, about 15 hours per elements where the state promotes competition and day. New highly efficient generating units (mainly the private sector takes a larger role in the economy gas turbines) have been installed, but their ability to and subsidies are replaced with targeted cash transfers that favor the poor. Certainly, these changes don’t apply the same to all countries, and the case of electricity subsidies for Iraq is discussed below. 28 Devarajan & Mottaghi (2015). 26 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY FIGURE 29 • Planned Energy Generation Mix- FIGURE 30 • Intra Block Billing, Higher 2017/22 Consumers Benefiting from Lower Block Subsidy 100 50 80 2% 40 5% 4% (In percent) 60 Percent billed 8% 30 17% 40 20 20 4% 10 0 19% 28% 7% 5% 2017 2018 2019 2020 2021 2022 0 1–1500 1501–3000 3001–4000 > 4000 Steam (using HFO) Imported gas Domestic natural gas Billed within block 1501–3000 cross-subsidy Diesel (gas oil) Crude oil Hydro 3001–4000 cross-subsidy >4000 cross-subsidy Imports of electricity Source: Ministry of Electricity. Source: Ministry of Electricity. operate is often affected by lack of fuel supply and more than 3000KWh. As a result, subsidies are other inputs (e.g. water). untargeted among the domestic consumer block The cost of producing electricity is high in categories and efficient and rational use of electricity Iraq and shifting to gas-based generation is key to is not promoted as a result. reduce the cost of production. In 2017, the portion As the sector operates at a loss, investments of low-cost natural gas-based generation is expected require large government guarantees, that if to have increased to about 47 percent of the total called, would further increase the already high installed capacity (Figure 29). However, more than level of public debt. At end-June 2017, the government 50 percent of the fuel used to produce electricity still had issued guarantees on foreign currency debt for consists of gasoline, crude oil and heavy fuel oil which an amount of US$2.7 billion (1.3 percent of GDP) and are both more expensive and less efficient. guarantees for service payment in foreign currency Electricity consumption is not only heavily for an amount of US$19.4 billion (11.3 percent of subsidized, but subsidies accrue to the largest GDP). If called, these service guarantees could over consumers. All households benefit from subsidies, time increase the public debt which in end-2017 has which favor large consumers of electricity (Figure 30). reached 58 percent of GDP. For example, 44 percent of the total amount billed in Iraq in 2016 is billed at prices applicable for the 1–500 KWh block. However, of that 44 percent, only Reform Progress 19 percent (less than half) is billed to consumers which consume within that level. The rest is billed Since late 2015, the GoI has started to reform to those households that consume more than 1500 and restructure the sector, to gradually bring it up KWh, but that, for the first 1500 KWh, benefit from the to international industry standards. The GoI has subsidized rate of ID 10 per KWh. Large consumers initiated actions to improve the sector’s commercial continue to benefit from these intra-block cross- performance and sustainability by increasing tariffs subsidies also at the second block (1501–3000 KWh) nearly fourfold effective January 2016. In October which is billed at ID 35 KWh. This tariff block consists 2016 the MoE adopted a strategy to reduce operational 40 percent of total billing, but about a third of that losses, increase tariff collection and improve electricity amount is collected from households that consumer availability. This includes the introduction of private Special Focus: Energy Subsidy Reform in Iraq 27 FIGURE 31 • Iraq Electricity Tariffs – 2015/18 FIGURE 32 • Contracts for Revenue Collection Average Cycle of Billing 20 800 15 700 600 US¢/KWh 10 8.11 500 Million ID 5.53 5.16 400 5 300 1.70 200 0 100 2015 2016 2017 2018 0 Zaiyona Yarmouk Harthiya Domestic Commercial Government Industrial Agriculture Average Cillections before Collections after Source: Ministry of Electricity. Source: Ministry of Electricity. sector revenue collections services starting with pilot consumers are adjusting their consumption to their contracts in the Baghdad area. A new Electricity Law29 ability to pay for electricity services underscoring the was issued in March 2017, which provides, for the first impact of price signaling effect. time, the legal framework for the sector’s reforms and The tariff structure adopted in January governance to: (i) introduce private sector participation 2018, simplified the number of tariffs (Table 1), in the generation and distribution functions, and but did not remove subsidies for large electricity (ii) decentralize management of electricity services. residential consumers. The newly approved tariff Results in recent past has been mixed but structure is simpler since it only includes 4 tariff blocks promising regarding increased sector revenues instead of 7. However, the intra-block subsidization from electricity sales. The GoI increased tariffs on has been increased compared to previous tariffs. For average by fourfold effective January 2016 from the example, a household that consumes 3500 KWh per average of US$1.7/KWh to US$8.0/KWh. However, month will pay 10ID/kWh for the first 1500KWh, 35ID/ unable to improve the quality of service and facing KWh for the next 1500 KWh and 80 ID/KWh for the protests from hoteliers in the holy sites of Karbala and remaining 500 KWh. With this current structure, all Najaf tariffs have been reduced by 30 percent in 2017 households are subsidized at the same rate for the and again by 16 percent in 2018 (Figure 31). The same level of consumption, regardless of their total 2018 modest average decrease in tariffs is buttressed consumption. by an increase in the Government category tariff rate which increases both the underlying implicit government subsidy and the sector exposure to the Government’s Reform Plan “circular debt” (non-payments from the government The GoI has committed to continue the reform affiliated institutions). The revenue contract process to achieve fiscal sustainability in a five- management services are yielding positive initial year period. This will include implementing a new results. The experience from the first pilot areas roadmap by the MoE towards cost recovery and of Zaiyoni, Yarmouk and Harthiya (Baghdad) are operations efficiency comprising of: (i) the MoE policy impressive with the initial revenue collection from one single billing cycle,30 far exceeding the total annual amount collected under normal MoE collection procedures (Figure 32). In addition, a reduction in the 29 The Electricity Law No. (53) of 2017. electricity demand in these areas seems to imply that 30 One billing cycle is equivalent to 3 months. 28 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY TABLE 1 • Current vs. Alternative Tariff Structure Alternative Tariff Structure (block tariffs and removing Tariff structure Approved Tariff 2017 Tariff – Highest invoice subsidies for high level consumers) – Highest invoice Residential type in 2017 Sturcture2018 amount (ID per month) amount (ID per month) 1–500 10 10 20,000 15,000 501–1000 10 1001–1500 20 1501–2000 40 35 120,000 105,000 2001–3000 80 3001–4000 120 80 240,000 320,000 4001–5000 200 120 440,000 600,000 Source: Ministry of Electricity. to corporatize the departments of electricity production, FIGURE 33 • Effects of Increase in Tariffs and transmission, distribution and maintenance and (ii) a Loss Reduction Policy tariff rationalization policy that enables the MoE to implement a new electricity tariff structure to achieve Revenues (US$ Bills) 10 the five-year fiscal stabilization plan. 8 Electricity sales The targets for the performance 6 improvements are captured in the five-year fiscal 4 stabilization plan implemented by MoE. This 2 includes actions to improve revenue collections, 0 through the ongoing revenue management services –2 2015 2016 2017 2018 2019 2020 2021 2022 contracts and implementation of a Revenue Protection Program (RPP) initially targeting the high Increase In Revenue from Tariff Increase Increase in Revenue from Loss Reduction value customers (industry and commercial consumer IPP Payment Requirements(US$ Billion) categories) who are about 0.5 percent of the total Total Annual Electricty Sales Collections (DPF Impact) number of electricity consumers (about 15,000 of Source: Ministry of Electricity. the total 3.0 million consumers) but the value of their energy billed constitute about 35 percent of the total billing. This, coupled with government agencies (who constitute about 45 percent of the value of the total reduced cost of electricity generation (gas-to- power) energy billed) paying regularly their electricity bills, to about IQD72/KWh. The MoE expects to have a is expected to lead to a net cumulative increase in positive cash flow by 2022. electricity sales revenue collections of about US$ 9. The MoE’s tariff rationalization policy 6 billion from 2017 to 2022 (Figure 33). The increase requires full elimination of intra-block subsidies in revenue collection is mainly generated thanks to among household consumers categories. The loss reduction. If ring fenced, the higher electricity alternative tariff structure (Table 1, last column), revenue would be able to cover the required annual Independent Power Producers’ (IPP)31 repayment obligations and thus reduce the risk of increased public 31 IPP capacity is expected to increase to about 20GW debt arising out of the guarantees issued to IPPs. The equivalent to about 40 percent of the country’s total increase in revenue collections is complemented by planned installed capacity by 2022. Special Focus: Energy Subsidy Reform in Iraq 29 would keep the same tariff blocks, but for example environment where utilities can run as efficient, would bill households consuming 3500 KWh at ID 80 ring-fenced businesses, albeit within the policy for the entire amount of electricity consumed. This frameworks established by the MoE; and alternative structure aims to maintain the average iii. Transparency and accountability- the setup tariff at IQD72/KWh, the same level of subsidies but of the regulator’s office, initially focusing on differentiated by consumption block and provide setting-up industry performance benchmarks incentives for a more efficient energy consumption at complemented by performance management the household level. contracts are expected to increase accountability Additional undertakings to enhance from the various sector management with sector performance include the adoption regard to system performance indicators and of a corporatization policy. It defines a new bench marks. Transparency of information industry and enterprise governance structure and on performance through publication of a platform for commercialization of the distribution, comprehensive annual reports and separate generation and transmission businesses making financial statements of the sector, performance them more accountable for performance, including against key performance indicators in the cost reductions, efficiency and customer service performance contract, or benchmarked data improvements. The sector corporatization policy from comparative utilities will encourage authorizes the MoE to: (i) convert the Electricity operations efficiency. Directorates responsible for generation and distribution into joint-stock company incorporated under the Companies Law; (ii) establish a Transmission Impact of Subsidy Reform on the Service Provider (TSP) responsible for the wheeling of Economy electricity over the high voltage network and system/ Removing electricity subsidies would have no market operator; (iii) establish a Holding Company; overall negative effects on the economy and and (iv) declare the Holding Company and its on the poor. Static simulations on the impact of a subsidiaries as self-financed, effective January 2020. fourfold increase in the electricity tariffs suggest that The corporatized companies, in accordance the subsidy reform would result in an overall increase with Iraqi laws, will no longer be eligible for direct in GDP thanks to a very large increase in investment. If budget allocations and thus result in reduced the GoI would implement a subsidy reform for the full subsidies to the sector. The new sector structure energy sector, it would protect the poorest if savings will instead empower the new companies to enter from the reform were used to offset the impact of price into private sector partnerships, either immediately increases for the poor and the reform would still result through outsourcing of services such as bill collection in a budgetary surplus. and revenue cycle management, or in the form of A Computable General Equilibrium (CGE) Public Private Partnerships (PPP) and/or eventual model was used to assess the impact of a fourfold privatization. The corporatization of the sector is increase in the electricity tariffs, thereby effectively expected to provide: removing the electricity subsidies. The CGE model uses 2012-based complete set of national accounts i. Clarity of roles and responsibilities: data, a social accounting matrix and electricity input Government’s policy, regulatory and ownership and tariff data.32 Budget and national accounts roles will be clearly separated institutionally and electricity data are then updated to 2015. The and functionally by removing from the MoE CGE model is then used to assess the impact of an electricity operations and regulatory roles, which would retain policy functions; ii. Autonomy of operations. The corporate institutional arrangements will provide an 32 This is the most recent year with a complete set of data. 30 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY average fourfold increase in tariffs (or 312.8 percent of relatively energy intensive goods and services increase), consistent with the tariff increase adopted increases and reduced exports of these types of in early 2016. The effects of electricity tariff increases goods; Finally, the government’s fiscal balance were examined in a simulation for four key aspects would improve thanks to the reduction of subsidies. of Iraq’s economic performance: i) government Eventually, markets adjust to the modified relative revenues; ii) consumer price indices (CPIs); iii) real prices as do imports and exports. consumption by household types; and iv) economic In a static simulation scenario,36 increased growth by sector. electricity tariffs would reduce the subsidy for At 2012 prices, electricity was 91.1 percent electricity consumption by 88.8 percent, and subsidized. The total unsubsidized value of domestic reduce the fiscal deficit by 0.1 percent of GDP electricity supply was ID 7,493.8 billion, which in 2016. As a major user of electricity, a significant included: portion of the increased payments for power would amount to an internal transfer within the government i. Energy input costs amounting to ID3,940.5 itself which would increase revenues. As a result of billion, including crude oil, gasoline, diesel and higher prices, government consumption increases fuel oil;33 as well. The net result is positive37 and is translated ii. Imported electricity at a cost of ID 1,897.4 in a decrease of the deficit by 0.1 percent of GDP. billion;34 Higher electricity prices would also increase CPI iii. Other input costs amounting to ID1,656.0 billion, inflation by 3.0 percent, driven by a total increase including labour and capital, intermediate inputs in the price index for electricity of 219.9 percent. and the costs associated with transmission and Price indices will increase relatively more for building distribution.35 and construction (3.8 percent); water (3.2 percent); and agriculture, hunting, forestry and fishing (2.2 The aggregate subsidy is reflected in the percent), all of which employ significant numbers amount received from consumers through electricity of people. All households38 would face a reduction bill collection. The aggregate revenues for domestic in real consumption as a result of the increased electricity consumption, equivalent to the subsidized electricity costs. The burden would be shared more or value, was ID665.5 billion ID or approximately 8.9 less equally between richer and poorer households, percent of the unsubsidized costs, (i.e., the subsidy rate was 91.1 percent). A subsidy reform would increase overall prices because of the increased cost of 33 Measured at international prices, quantity data are from electricity, decrease demand for power and other the IEA. goods and services from households in response 34 Data obtained from BOP. to higher prices and reduce power generation 35 Data are from CSO. initially in response to the reduced demand. Also, 36 In the static exercise only 2015 (current period of investment and production would shift to goods and analysis) and impact on next period, 2016, are assessed. services that are less electricity intensive, the extent It does not consider dynamic changes that may take of these adjustments depending on underlying price place over time as a result of the changes in power tariff rates. Nor does it account for the growth and evolution of and substitution elasticities; The reduction in the the economy over the period analyzed/period of impact. demand for goods and services would reduce the 37 Revenues would increase more than expenditure. demand for labor and lower employment would lead 38 To assess the possible distributional consequences to reduced incomes; The composition of international of changes in power subsidies, the Iraqi CGE model trade will tend to change because the relative price includes ten groups of households, five income of electricity between Iraq and the rest of the world quintiles of rural households and five quintiles of urban has changed, resulting in greater shares of imports households. Special Focus: Energy Subsidy Reform in Iraq 31 Change in GDP (Fixed Prices) by FIGURE 34 •  FIGURE 35 • Change in National Accounts at Sectors Fixed Prices Personal Services GDP at Fixed Market prices General Government Ownership of Dwellings Private Consumption Finance, Insurance, Real estate Government Consumption Transport , Communications Wholesale, Retail Trade, Hotels Investment Building and Construction Net Export Water –5% 0% 5% 10% 15% 20% 25% Other Manufacturing (In percent) Agriculture, Forestry, Hunting Electricity Source: “Iraq: Assessment of the Economic Impact of Energy Subsidy Reduction,” P. Griffin, 2017. Refined Petroleum Products Crude Oil & Natural Gas –4% –2% 0% 2% 4% 6% 8% (In percent) incorporates also dynamic effects. Simulations to Source: “Iraq: Assessment of the Economic Impact of Energy Subsidy Reduction,” P. Griffin, 2017. estimate the impact of the elimination of electricity subsidies were conducted for the period 2017 through 2025. To establish the baseline over this period, against which the electricity subsidy reform (ESR) with reductions ranging between –2.0 percent and was assessed, assumptions included: i) government –1.6 percent. consumption increases of 1.5 percent annually in Energy subsidy reform would be beneficial real terms through 2025; ii) transfers to households to investment sectors, except for more power remain constant at 2016 levels; and iii) the current intensive sectors. Building and construction would account balance was fixed at –0.5 percent of GDP. benefit the most boosted partly by higher public Dynamic CGE simulations for the ESR adopts the investment as a result of higher revenues (Figure 34). baseline assumptions plus i) a 50 percent reduction This would be especially relevant now, at a time where in electricity subsidy rates in 2017; and ii) remaining Iraq is undergoing a big reconstruction effort after electricity subsidies removed in 2018. the conflict ended. The only other sectors that would After electricity subsidy reforms are gain are finance, insurance, real estate and business introduced, the average growth rate increases to and other manufacturing, and by only a small amount. 1.4 percent in 2017 and to 1.5 percent thereafter The agriculture, forestry, hunting and fishing sector when the full energy subsidy reforms are included. would be the largest loser, falling by almost 3 percent The baseline average annual real GDP growth for possibly because of a reallocation of labor from this period is 1.3 percent (Table 2). This includes the agriculture to more productive sectors. relatively slow growth of oil GDP, which averages 0.5 The subsidy reform would result in an overall percent. The impact of the reconstruction on GDP increase in real GDP of 1.6 percent. It would result growth has not been incorporated in these simulations. in an overall reduction in private consumption of 0.9 Thanks to the impact of electricity subsidies, non-oil percent, a very large increase in Investment of 24.6 GDP average annual growth would increase by an percent, and a decline in net exports of 2.3 percent additional 0.2 percent a year in comparison to the as imports increase because of the large increase in baseline (2.6 percent). Underlying the increased growth investment activity (Figure 35). resulting from subsidy reforms are assumptions that To account for the natural evolution of the the growth of government consumption and the current economy and its growth over time, the Iraq CGE account deficit remain constant. Economic growth 32 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY TABLE 2 • Dynamic Analysis: Average Growth of National Accounts in Real Terms (2017–2025) National Accounts (fixed prices) Base Line Electricity Subsidy Elimination Pct. Change Period Avg Period Avg GDP at Factor Prices 1.3% 1.4% Oil GDP at Factor Prices 0.5% 0.5% Non-Oil GDP at Factor Prices 2.6% 2.8% GDP at Market Prices 1.4% 1.4% Consumption 1.9% 1.9% Private 2.2% 2.1% Government 1.5% 1.5% Investment 3.6% 4.4% Exports 0.6% 0.7% Less Imports 1.5% 1.5% Source: “Iraq: Assessment of the Economic Impact of Energy Subsidy Reduction,” P. Griffin, 2017. in this context is stimulated by increased investment on consumers through general increase in prices is which grows on average 4.4 percent, or 0.8 percent also expected to be mild because electricity constitutes higher than baseline. Private consumption would grow a relatively small share of inputs in the production less rapidly, as resources would shift from private process for most sectors. Moreover, poor households consumption to investment in the non-oil sectors. that spend relatively larger share of expenditure on food Average growth rates for private consumption would be will be largely insulated from electricity price increase 1.3 percent in comparison to 2.2 percent in the baseline as the production of food is less electricity-intensive scenario. CPI would grow on average at 1.8 percent, an than non-food items. The CGE simulations assume increase of 0.2 percent compared to baseline results. that implicit (i.e. no collection and fuel subsidies) and explicit (i.e. tariffs below costs) are gradually eliminated by 2022 according to the MoE roadmap. Impact on Poverty Implementing a subsidy reform for the full energy sector would protect the poorest if The full impact on households of the reform of savings derived from the subsidy reform are used electricity supplies and pension reforms is expected to offset the impact of commodity price increases to be negligible in the short term and lead to an for the poor. The CGE simulations also assess increase in poverty by 0.1 percent in the long term. the impacts of the combined removal of electricity The microsimulation analysis conducted to gauge and crude oil and gas subsidies and calculate the the effect of electricity subsidy reform on household required compensation to the bottom 40 percent of consumption and welfare using results from the CGE the income distribution to fully offset the impact of the analysis concludes that the direct and indirect effect subsidy reform. A combined subsidy reform would of residential tariffs on household welfare is minimal decrease consumption even more in the following because electricity comprises only a small share of total years, increase investment more sharply, and results household expenditure (approximately 2.4 percent) and in a budgetary surplus of 11.9 percent of GDP. This the price increase does not affect users who consume surplus compares to an estimated transfer to the below the lifeline tariff, as it is the case for the poor. bottom 40 percent of the income distribution of 2.2 The knock-on welfare impact of non-residential tariffs percent of GDP to offset the subsidy removal. Special Focus: Energy Subsidy Reform in Iraq 33 The proposed improvement in revenue Conclusion collection is unlikely to materially adversely commercial viability of productive enterprises. Reform of electricity subsidies would come at The government reforms are expected to result in an the appropriate time if enacted now. Oil prices are improvement of revenue collection and an increase still relatively low and projected to stay around these in the supply of electricity through the grid from the levels. In addition, the GoI now has the legal framework current average of 14.6 hours per day to 20 hours to allow for reforms to take place. CGE simulations per day in the next year. For productive enterprises, show that the overall benefits of the subsidy reform given the unpredictability and paucity in supply from outweigh the negative impact to the poorest 40 the public grid, and the higher costs associated with percent of the income distribution as this cohort can private substitutes such as generators, these entities be fully compensated for the reduction of the subsidy may be able to lower costs while increasing output amount. Last but not least, simulations also show that and productivity. Updated CGE simulations confirm subsidy reform would increase government revenue that more power and better revenue collection would and investment, to a large extent in the building and result in higher government revenue and investment, construction sector—making this a very timely reform with positive impact on economic activity. to boost the reconstruction effort. 34 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY REFERENCES Baringanire, P., and Bhatia, M. (2017). Iraq Vision World Bank. February 2018. Programmatic Develop- 2030 Energy Policy Note. ment Policy Financing, Report No. 120058-IQ. Damage and Needs Assessment of Seven Directly World Bank Group. 2012. Iraq Investment Climate Affected Governorates, Government of Iraq, Assessment. Washington, DC. January 2018. World Bank Group. 2014. “The Unfulfilled Promise Devarajan, S. & Mottaghi, L. (2015). Towards a new of Oil and Growth: Poverty, Inclusion and social contract (English). Middle East and North Welfare in Iraq, 2007–2012”. WP/93858/V3. Africa (MENA) Economic Monitor. Washington, Washington, DC. DC: World Bank Group. World Bank Group. 2018. Doing Business Report Griffin, P. (2017). Iraq: Assessment of the Economic 2018, Reforming to Create Jobs, World Bank, Impact of Energy Subsidy Reduction. Washington, DC. Economic Consulting Associates (2017). Cost of World Bank Group. 2018. Iraq Doing Business 2018: Service and Tariff Design/Rationalization Study Recent Reforms in Iraq Pave the Way for More for Electricity Supply in Iraq. Progress Going Forward. Washington, DC. Energy Sector Management Assistance Pro- World Bank Group; and external contribution.2016. gram. (ESMAP), http://www.esmap.org/ “Kurdistan Region of Iraq, Reforming the Energy_Subsidy_Reform. Economy for Shared prosperity and protecting International Monetary Fund. 2018. Iraq: 2018 Staff the Vulnerable”. Washington, DC. Report Third Review of the Three-Year Stand-By World Bank Group. “Republic of Iraq Public Arrangement. Washington, DC. Expenditure Review-Toward More Efficient Krishnan, N. and Olivieri, S., 2016. “Losing the Gains of Spending for Better Service Delivery”. A World the Past: The Welfare and Distributional Impacts Bank Study. Washington, DC. 2014. of the Twin Crises in Iraq 2014”, February 2016. World Bank (2010). Subsidies in the Energy Sector. World Bank Policy Research Working Paper An Overview. WPS7567. World Bank Group. 2018. Global Economic Pros- pects: Divergences and Risk, January 2018. Washington, DC. 35 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY APPENDIX: SELECTED DATA ON IRAQ TABLE 3 • Selected Macroeconomic Indicators 2014 2015 2016 2017 2018 2019 2020 2021 Economic growth and prices Real GDP (percentage change) 0.7 4.8 11.0 –0.8 2.5 4.1 1.9 2.1 Non-oil real GDP (percentage change) –3.9 –9.6 –8.1 4.4 3.0 3.1 3.4 3.9 GDP deflator (percentage change) –0.7 –26.9 –12.9 16.2 6.5 0.3 2.2 3.1 GDP per capita (US$) 6,517 4,869 4,533 5,088 5,415 5,512 5,597 5,741 GDP (in ID trillion) 273.6 209.7 202.7 233.7 255.1 266.3 277.4 291.9 Non-oil GDP (in ID trillion) 149.5 139.8 134.1 143.4 154.0 165.6 178.6 193.5 GDP (in US$ billion) 234.7 179.8 171.7 197.7 215.8 225.3 234.7 246.9 Oil production (mbpd) 3.1 3.7 4.6 4.5 4.6 4.8 4.8 4.9 Oil exports (mbpd) 2.62 3.35 3.79 3.80 3.89 4.08 4.10 4.12 Iraq oil export prices (US$ pb) 96.5 45.9 35.6 48.7 53.3 50.8 49.3 48.6 Consumer price inflation (percentage change; end of period) 1.6 2.3 –1.0 0.4 2.0 2.0 2.0 2.0 Consumer price inflation (percentage change; average) 2.2 1.4 0.4 0.1 2.0 2.0 2.0 2.0 (In percent of GDP) National Accounts Gross domestic investment 25.7 24.4 20.6 17.4 17.9 17.4 16.9 16.5 Of which: public 18.0 15.1 11.4 8.9 9.6 8.9 8.2 7.5 Gross domestic consumption 69.9 81.6 87.5 81.3 81.7 81.9 82.7 83.5 Of which: public 18.3 22.3 23.0 20.8 22.3 21.3 20.3 19.2 Gross national savings 28.3 18.0 12.0 18.1 17.7 17.3 15.6 15.5 Of which: public 13.0 3.0 –2.1 7.2 11.2 11.6 10.0 10.3 Saving - Investment balance 2.6 –6.5 –8.6 0.7 –0.2 –0.1 –1.3 –1.0 (continues on next page) 37 TABLE 3 • Selected Macroeconomic Indicators (continued) 2014 2015 2016 2017 2018 2019 2020 2021 (In percent of GDP, unless otherwise indicated) Public Finance Government revenue and grants 38.2 30.3 27.4 33.1 39.2 38.0 36.2 34.5 Government oil revenue 36.0 27.5 23.2 28.8 34.1 32.8 30.8 29.0 Government non-oil revenue 2.1 2.8 4.1 3.5 4.4 4.6 4.8 5.0 Expenditure, of which: 43.5 42.6 41.3 35.2 38.3 36.4 34.8 32.2 Current expenditure 25.5 27.5 29.9 26.3 28.7 27.4 26.6 24.7 Capital expenditure 18.0 15.1 11.4 8.9 9.6 8.9 8.2 7.5 Overall fiscal balance (including grants) –5.4 –12.3 –13.9 –2.2 0.9 1.7 1.4 2.3 Non-oil primary fiscal balance, accrual basis (percent of non-oil GDP) –56.1 –45.1 –44.2 –40.2 –44.4 –39.7 –35.4 –31.3 Adjusted Non-oil primary fiscal balance, accrual basis (excl. KRG, –54.4 –43.3 –44.2 –40.2 –38.8 –34.7 –30.9 –27.3 percent of non-oil GDP) Adjusted non-oil primary expenditure (excl. KRG, percent of non-oil 58.3 47.5 50.4 45.9 45.5 41.4 37.7 34.2 GDP) Adjusted non-oil primary expenditure (excl. KRG, annual real growth, –9.2 –24.9 1.3 –2.6 4.3 –4.0 –3.8 –3.5 percent) Memorandum items: Total government debt (in percent of GDP) 32.0 55.1 64.4 57.8 55.2 53.5 50.7 46.9 Total government debt (in US$ billion) 75.2 98.0 110.4 114.3 119.2 120.6 119.0 115.8 External government debt (in percent of GDP) 24.8 36.7 37.2 34.5 34.9 34.3 32.0 28.9 External government debt (in US$ billion) 58.1 66.1 63.9 68.3 75.3 77.4 75.2 71.3 (In percent, unless otherwise indicated) Monetary indicators Growth in reserve money –9.6 –12.6 8.1 –7.1 1.2 2.5 3.3 2.0 Growth in broad money 3.6 –9.0 7.2 –0.5 3.8 3.8 4.3 4.8 Policy interest rate (end of period) 6.0 6.0 4.0 — — — — — (In percent of GDP, unless otherwise indicated) External sector Current account 2.6 –6.5 –8.6 0.7 –0.2 –0.1 –1.3 –1.0 Trade balance 10.9 –0.1 –1.8 6.6 6.5 6.2 5.3 4.7 Exports of goods 39.6 31.4 29.1 34.4 35.3 33.8 31.7 29.9 Imports of goods –28.7 –31.5 –31.0 –27.8 –28.8 –27.6 –26.5 –25.2 Overall external balance –10.0 –7.1 –3.6 2.6 3.8 2.6 0.6 0.7 Gross reserves (in US$ billion) 66.7 53.7 45.4 48.1 55.9 60.8 61.1 61.2 In months of imports of goods and services 10.9 9.2 7.6 7.0 8.2 8.9 8.9 8.9 Exchange rate (dinar per US$; period average) 1166.0 1166.0 1180.0 1182.0 1182.0 1182.0 1182.0 1182.0 Real effective exchange rate (percent change, end of period) 4.7 7.0 5.9 –0.6 — — — — Financing gap (US$ billion) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sources: Iraqi authorities; IMF; and World Bank staff estimates and projections. 38 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY SELECTED RECENT WORLD BANK PUBLICATIONS ON IRAQ (For an exhaustive list, please go to: http://go.worldbank.org/country/iraq/research) Title Publication Date Document Type Damage and Needs Assessment of Seven Directly Affected Governorates 17/1/2018 Report Systematic Country Diagnostic 3/2/2017 Report Programmatic Development Policy Financing 1/12/2016 Report The Kurdistan Region for Iraq: Reforming the Economy for Shared Prosperity and Protecting the Vulnerable. 24/6/2016 Working Paper Iraq Economic Monitor: Laboring Through the Crisis 1/6/2016 Working Paper Decentralization and subnational service delivery in Iraq: status and way forward 14/4/2016 Report Where are Iraq’s poor? mapping poverty in Iraq 23/6/2015 Working Paper Assessing the economic and social impact of the Syrian conflict and ISIS 16/4/2015 Publication Iraq-Electricity distribution 1/4/2015 Brief Iraq-Strengthening capacity of the water sector 18/3/2015 Working Paper Iraq-Diversified development in a resource-rich fragile state: World Bank background note 1/1/2015 Working Paper The unfulfilled promise of oil and growth: poverty, inclusion and welfare in Iraq 2007–2012 1/12/2014 Working Paper A stocktaking of social assistance programs in the Republic of Iraq 8/12/2014 Working Paper The legal and regulatory framework for microfinance in Iraq 1/1/2014 Working Paper Republic of Iraq – Public expenditure review: toward more efficient spending for better service delivery 6/8/2014 Report SABER workforce development country report: Iraq 2013 1/1/2013 Working Paper (continues on next page) 39 (continued) Title Publication Date Document Type Iraq – Country partnership strategy for the period FY13–FY16 13/11/2012 Report Iraq – Investment climate assessment 2012 1/1/2012 Report Iraq – Financial sector review 1/1/2011 Working Paper International Reconstruction Fund Facility for Iraq: World Bank Iraq Trust Fund – progress report 6/12/2010 Working Paper Status of Projects in Execution (SOPE) – FY10: Middle East and North Africa region – Iraq 3/10/2010 Annual Report Doing business 2011: Iraq – making a difference for entrepreneurs: comparing business regulation in 1/1/2010 Annual Report 183 economies Iraq – IEITI Work Plan 1/1/2010 Working Paper International Reconstruction Fund Facility for Iraq (IRFFI) World Bank Iraq Trust Fund – report to donors: 31/12/2009 Working Paper status report as of December 31, 2009 Iraq – World trade indicators 2009: Trade brief 1/12/2009 Brief Iraq – Interim strategy note for the period mid FYO9–FY11 19/2/2009 Interim Strategy Note 40 IRAQ ECONOMIC MONITOR: FROM WAR TO RECONSTRUCTION AND ECONOMIC RECOVERY 1818 H Street, NW Washington, DC 20433 1818 H Street, NW Washington, DC 20433