Iraq: Risk Assessment
Country Risk Rating
Business Climate Rating
- Huge oil reserves (10% of world reserves, fourth-largest proven crude oil reserves in the world, 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)
- Under-diversified economy and highly dependent on the oil sector
- Small GDP share of non-oil and gas private sector
- Low public investment, resources focused on salaries, pensions, subsidies, and social aid
- Weak and limited banking sector
- Severe tensions between the ruling Shia majority and the rest of the population, including Sunnis and Kurds, with frequent demonstrations
- Tensions with autonomous Kurdistan, a major contributor to the oil sector
- High inequalities, especially between those with access to oil resources and those without
- Deficiencies in institutions, as well as in education, health, and welfare systems
- Widespread corruption, nepotism, and patronage
A recovery led by the oil industry
Despite some (limited) state support, the Iraqi economy was hard hit by the COVID-19 pandemic and the global economic pause in 2020, primarily because of its under-diversification and dependence on oil activity (60% of GDP and 90% of state revenue). In 2022, growth will increase, driven by the recovery of the world economy and the associated hydrocarbon demand. Between January and September 2021, the oil price rose by 54%, prompting the country to increase its production, notably at the Kirkuk field. However, this expansion was hampered by the application, albeit partial, of restrictions under the OPEC+ agreement. Iraq’s OPEC+ quota is expected to increase in 2022, alongside monthly output increases planned for all members. Iraq will benefit handsomely from this price increase and production via export revenues. The non-oil economy will also rebound owing to spillover from oil wealth.
Despite a slight improvement, the recovery of household consumption remains slow and fragile, a lasting consequence of the 25% dinar devaluation by the Central Bank of Iraq in 2020 (from ID 1,190 per USD 1 to ID 1,450), which reduced Iraqis’ buying power, particularly for imported products. This devaluation has had a damaging impact on domestic consumption in an economy that is so dependent on imports and so under-diversified. Thus, while 25% of the population lives below the poverty line, foodstuffs, electricity (unreliable supply), and water prices have all increased, feeding severe inflationary pressures.
The investment will be driven by international projects, as illustrated by the USD 27 billion contract signed by the Total Group with Iraq, consisting of four parts spread over 25 years and covering oil and gas development and the construction of a photovoltaic plant. This is the most significant investment by a foreign company in Iraq. Non-oil and public investment will lag.
The moderate public deficit but comfortable current account surplus
The Iraqi current account balance is mainly determined by oil revenues, which increased substantially in 2021 and will continue on this trend in 2022. Other Iraqi exports (jewelry, precious metals, aluminum, and agricultural products) will also benefit from strong demand and rising prices. Thus, despite the resumption of imports linked to the rebound in the domestic market, oil revenues will ensure that Iraq has a significant current account surplus.
The budget deficit, which widened considerably in 2020 due to the fall in oil revenues and increased spending to deal with the pandemic, will remain in moderate drought, despite the surge in hydrocarbon income, which forms the mainstay of government revenue. In 2022, government revenue was not expected to return to pre-crisis levels. The budget balance will remain in deficit without reducing the public wage bill and reforms to pensions, which absorb much of the resources. The debt is financed by drawing on foreign exchange reserves.
Public debt, whose share of GDP jumped in 2020 due to the devaluation of the Iraqi dinar, the increase in the deficit, and the reduction in domestic product, remains relatively high. Its external portion (48% of GDP in 2020) has increased and is a source of concern. Debt sustainability and reduction will depend on structural measures, notably public sector wages.
Much uncertainty after the recent elections
The political and social situation remains unstable, as illustrated by the numerous anti-government protests led by the Tishreen movement nationwide since 2019. Protestors are demonstrating against unemployment, corruption, the breakdown of public services, and violence by armed militias, sometimes with foreign links (notably to Iran), and are calling for a regime change. To calm the unrest, Prime Minister Mustafa al-Kadhimi, who has been in place since April 2020, was entrusted with organizing early legislative elections in October 2021 instead of in 2022 as initially planned. The day before the elections, protest movements called for a boycott. As a result, only 34% of the voters went to the polls. The party of the Shia leader Moqtada al-Sadr (nationalist party) became the leading force in parliament, with 73 seats out of 329, ahead of the Kurdish parties (58), the Sunni party Taqaddum (43), the Shia State of Law coalition led by former Prime Minister Al-Maliki (37), and about 30 independents, some of which emerged from the protest movement. The pro-Iranian Fatah Alliance coalition, previously a major political force in parliament, saw a sharp decline from the 2018 elections, taking only around 20 seats, down from 48. Despite high expectations, the likelihood of reform is low for 2022, considering the poor turnout, foreign influences, the lack of a solid majority due to the fragmented parliament, and the stranglehold of traditional parties with regional, religious, or ethnic bases and their leaders, who are often backed by armed militias.
On the foreign policy front, while Iraq has tried to maintain balanced relations with its main allies, the U.S. and Saudi Arabia, on the one hand, and Iran on the other, the rise of Sadr’s anti-American and anti-Iranian party in parliament could change things.