Iraq: Standing at a Crossroad with Limited Fixes to an Economy that is Desperate for Transformation
Baghdad, May 27, 2021 – Oil price volatility and COVID-19 have increased Iraq’s economic woes and deepened existing economic and social fragilities.
With global oil markets trends turning positive, the outlook for Iraq is set to improve. The new edition of the Iraq Economic Monitor for Spring 2021 titled “Seizing the Opportunity for Reforms and Managing Volatility” expects the economy to gradually recover on the back of rising oil prices and rising OPEC+ production quotas, with GDP forecasted to gradually grow by 1.9 percent in 2021 and 6.3 percent on average in 2022-2023. Higher oil revenues in tandem with the devaluation effect are projected to narrow the fiscal deficit to 5.4 percent of GDP in 2021.
Nevertheless, the fiscal stance remains expansionary with budget financing needs forecasted to average US$13.7 billion per year (7.5 percent of GDP) in the outlook period (2021-2023), an elevated level compared to pre-COVID-19 levels. Despite being watered down, the 2021 budget includes reforms such as measures to improve public financial management and domestic revenue mobilization efforts. If implemented they could help moderate the fiscal deficit and exchange rate pressures. However, more structural issues such as public wages and pension rigidities remain unaddressed.
The report finds that this cautious improvement in the outlook masks sizeable risks that can materialize anytime. Dependency on oil for growth, exports and revenues coupled with growing budget rigidities threatens macroeconomic stability with oil price down cycles and failure to implement structural fiscal reforms in an election year. Continued underinvestment, linked with weak execution of public investment and an unfavorable business climate for private investments in non-oil sectors, hampers pro-growth programs and service delivery. Delays in vaccine rollout could lead to additional lockdowns with negative knock on effects on the services sectors’ activities. And finally, the potential deterioration in security conditions amidst high regional geopolitical tensions could reverse many of the past economic gains.
To manage those risks and avoid a repetition of the past economic performance Iraq has a way forward: the ambitious reforms devised under the GoI white paper. The economic monitor notes that the Iraq experience has repeatedly showed that oil prices and reforms are inversely related. Successive governments have launched reforms under the pressure of low oil prices and amidst persistently high perception of corruption as well as weak public service delivery. Such combination gave rise to social and political tensions that undermined the success of most reform initiatives.
“Structural reforms are of essence for the creation of a sustainable economic future in Iraq,” said Saroj Kumar Jha, World Bank Mashreq Regional Director. “Building back better is key to create the imperative jobs for youth and help restore the poise of Iraqis, let alone the transformations required to build economic equal opportunities for women”.
This time is different. The country stands at a crossroad where quick fixes are limited, and the economy needs a serious transformation if it is to create jobs for its growing youth. The IEM Spring 2021 Edition estimates that Iraq can have an annual fiscal gain of US$11 billion if pro-growth policies in non-oil sectors are implemented alongside tackling budget rigidities. Accelerating the vaccination program could also help speed up the recovery and gradually reverse the surge in poverty observed during the summer of 2020. With oil prices trending above the US$60/barrel, Iraq could use those windfalls to soften the social repercussions of those intended reforms and invest in its human and physical capital.
One area that is not explicitly referred to in the white paper but is instrumental to achieving economic transformation in Iraq is increasing women’s labor force participation rate. Female labor force participation in Iraq is among the lowest in the world, and even when women do enter the labor force, they are 3 times as likely to be unemployed compared to men. Obstacles to entering and remaining in the labor market vary drastically for women from different socio-economic groups, and across critical turning points in women’s lives.
To remedy this, labor market interventions are needed to ensure a better match of labor supply and demand. Such interventions include a focus on the existence and accessibility of demand-driven skills training programs, improving access to affordable and quality childcare, providing incentives to the private sector to invest in sectors that employ more women and providing culturally acceptable income-generation options for women and supporting such initiatives to scale. Specific legislation and regulations could contribute to limiting women’s access to employment opportunities including ambiguous child marriage legislation, as well as striking gender inequalities in property and inheritance rights. Revisions to laws and regulations are needed, and although addressing social norms can be challenging, some interventions aimed at correcting misperceptions can be effective in improving labor market participation of women in Iraq.
The economic report offers a non-exhaustive set of recommendations to help the GoI reach its objective of increasing labor force participation rate by 5 pp in 2025. These recommendations call for a better match between labor supply and demand (e.g. via the development of credible matchmaking services), the establishment of gender-specific solutions in the workplace, and the creation of an inclusive legislative framework (e.g. via the elimination of occupational and sectoral restrictions).
Beyond the intrinsic value of empowering women, greater gender equality in the labor market is smart economics. Boosting the labor force participation of women in Iraq to the average rate of its income group would increase GDP per capita by almost 31 percent. A remarkable gain in country wealth.