Due to the current conflict in Iraq, the information on these pages may not reflect current conditions in the country.

Country Risk Rating

E
The highest-risk political and economic situation and the most difficult business environment. Corporate default is likely. - Source: Coface

Business Climate Rating

E
The highest possible risk in terms of business climate. Due to a lack of available financial information and an unpredictable legal system, doing business in this country is extremely difficult.

Strengths

 

  • World’s fourth-largest proven crude oil reserves, second-largest OPEC producer, and fourth-largest producer worldwide
  • Low oil extraction costs
  • Strong growth in the labor force
  • International financial support (IMF and bilateral loans)

Weaknesses

  • Under-diversified economy, highly dependent on the oil sector
  • Severe tensions between the ruling Shia majority and the rest of the country
  • Tensions with autonomous Kurdistan, which is a major contributor to the oil sector
  • Cost of reconstruction and assistance to victims following the armed conflict
  • Small GDP share of non-oil and gas private sector
  • Weak and limited banking sector
  • Deficiencies in institutions, as well as in education, health, and welfare systems
  • Widespread corruption

 

Current Trends

Weak recovery in economic activity

Iraq was rocked by the COVID-19 pandemic in 2020. As the case count increased rapidly, the government was forced to limit the spread of the virus by closing borders, schools, and universities and imposing a national lockdown. Furthermore, the Iraqi economy is heavily dependent on the energy sector, especially oil activity (one-third of GDP in 2019), but oil production declined sharply during the crisis, in line with the downturn in external demand. Oil exports (44% of GDP in 2019) also suffered from the parallel fall in oil prices, which hurt government revenues too, as oil accounts for 90% of the total. Domestic demand was impacted as well. Household consumption (62% of GDP in 2019) declined due to lower incomes, which had a severe impact on the country's economy, pushing it into a deep recession.

In 2021, growth is expected to rebound slowly, while remaining below its pre-crisis level. Exports and therefore oil production is set to recover. Moreover, oil prices are expected to rise slightly. Oil production should also increase due to investments in many fields, including the Majnoun and Halfaya fields. New developments, such as the Kirkuk extension, will enable the country to boost production. These developments will coincide with the recovery of FDI, which contracted in 2020. However, this expansion of production will be significantly hampered by the application, albeit partial, of the restrictions contained in the OPEC+ agreement, which are expected to continue in 2021. Private sector investment will likely be slow to resume due to corporate risk aversion and economic uncertainties related to the crisis. Despite households’ strong propensity to save, consumption should recover slightly owing to spillover from increased oil wealth.

Twin deficits largely determined by oil

The current account balance is mainly determined by oil revenues, which declined sharply in 2020. Notwithstanding the decrease in imports caused by the fall in household consumption, the collapse in oil exports resulted in a large deficit. The deficit is expected to narrow significantly in 2021 as exports resume and oil prices edge up. However, the sharply increased oil surplus will not eliminate the deficit because imports are also set to resume as domestic demand recovers.

A sizeable public deficit opened up in 2020 due to the collapse in oil revenues and increased spending to cope with the pandemic. The Ministry of Finance was forced to provide the Ministry of Health with nearly USD 42 million from the contingency reserve to fight the virus. In addition, the Central Bank of Iraq set up a fund made up of donations from financial institutions, including itself and the Trade Bank of Iraq, to support the Ministry of Health. The central bank also lowered its reserve requirements and implemented a moratorium on interest payments for small and medium-sized enterprises. In 2021, the public deficit will probably remain high, as government revenues are not expected to return to pre-crisis levels due to lower investment levels as well as OPEC restrictions, which will curb oil revenues.

Because of the need for additional financing, both public and external, public debt swelled considerably in 2020 and should continue to deteriorate in 2021. In particular, its external share (60% of GDP in 2019) has increased and has been a source of major concern. The increase in debt could further weaken foreign exchange reserves, which are already stretched by debt servicing, and absorb a portion of the oil revenues. The Iraqi dinar is pegged to the U.S. dollar at a rate of ID 1,182 to USD 1, while the black market rate averaged ID 1,229 over the May-August 2020 period.

A fragile political and social situation

The political and social situation remains unstable. Despite becoming rarer during the lockdown, the demonstrations that began in October 2019 are still ongoing, sometimes turning violent. Protesters are upset about widespread corruption, the lack of public services, the lack of job opportunities, and foreign interference (American and Iranian) in Iraqi politics, through armed militias in the case of Iran. More generally, they believe that they are not benefiting from the country’s oil wealth and are calling for the political system to be overhauled. Prime Minister Mustafa al-Kadhimi, who was appointed on a transitional basis after Adel Abdul-Mahdi resigned in November 2019 under popular pressure and that of Ayatollah Ali al-Sistani, is trying to ease tensions as the pro-Iran and nationalist factions clash in parliament. Prime Minister Kadhimi has scheduled early parliamentary elections for June 2021. As far as foreign policy is concerned, Iraq strives to maintain neutral relations with its main allies, the United States and Saudi Arabia on the one hand and Iran on the other. Despite the prime minister’s efforts to attract Saudi investment in the energy sector, Saudi Arabia remains cautious in its investment decisions due to the strong Iranian presence in Iraqi politics.

Source:

Coface (02/2021)
Iraq