FEAS Yearbook FEAS Yearbook 2020 | Page 58

Republic of Iraq

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Iraq’s economic outlook hinges on the evolution of COVID-19, global oil markets prospects, and reforms implementation. The economy is forecast to gradually recover on the back of rising oil prices and OPEC+ production quotas. GDP growth is projected to rise to 1.9 percent in 2021 and 6.3 percent on average over the subsequent two years. Delays in vaccine rollout would lead to additional lockdowns, which in turn impact economic activity. Non-oil GDP is forecast trecover in 2021, growing by 5.5 percent before converging to historical potential GDP growth trend in 2022-23.

Economic recovery and mass vaccination will gradually reverse the surge in poverty, projected by 7 to 14 percentage points rise at the national poverty line of IQD110,881 per person per month. The disproportional impact of the shock on the informal sector, dominated by the poor and vulnerable, will worsen inequality. The currency devaluation is estimated to push inflation to 8.5 percent in 2021 due to limited capacity for import substitution. This will present an additional pressure on households’ wellbeing and poverty reduction.

The fiscal stance remains expansionary as the wage bill and pensions are expanded in the 2021 budget law to regularize wage arrears, while reform measures were attenuated in Parliament debate. Higher oil revenues coupled with the devaluation effect are projected to narrow the fiscal deficit to 5.4 percent of GDP in 2021. Financing needs are forecast to remain elevated compared to pre-COVID-19 levels, averaging at US$13.7 billion/year in the outlook period.

The projected oil recovery will boost exports while devaluation is expected to have an impact on imports. This will also contribute to the current account deficit declining to 4.4 percent of GDP by 2023 and reduce pressures on the central bank’s FX reserves. Reforms could help motivate new FDI which could further appease external financing needs.

Sizeable risks cloud the prospects for Iraq’s economic recovery over the medium-term. Oil price down cycles, failure to implement fiscal and structural reforms in an election year, delays in vaccine rollout, deteriorating security conditions amidst high regional geopolitical tensions are significant downside risks to the outlook.

Economic outlook