The Iraqi economy heavily relies on oil exports, which has caused concern for the World Bank. They have cautioned about the decreasing cash reserves in the country.
The World Bank recently released a report stating that the Iraqi economy is recovering. This growth is mainly due to the rise in oil prices, after suffering from the COVID-19 pandemic’s impact in 2020. Unfortunately, other industries in Iraq are still struggling with economic downturns.
Although Iraq has achieved record oil revenues and received approval for its new fiscal budget, the World Bank warns that the country could miss a crucial chance to implement necessary reforms. These reforms are essential for fostering private sector growth and creating millions of jobs over the next ten years.
The World Bank’s Iraq Economic Monitor report shows that the country experienced a remarkable surge in real GDP growth of 7% in 2022, mainly due to the thriving oil industry. However, this growth rate dropped to 2.6% per year in the first quarter of 2023. Additionally, the value of the Iraqi dinar in the parallel market decreased, leading to an increase in consumer price inflation in early 2023.
During the first nine months of 2022, the oil market was favorable, leading to a substantial rise in total reserves (excluding gold) to an unprecedented $89 billion. However, this trend began to slow down in early 2023.
According to the report, Iraq’s development model, which heavily relies on oil, will encounter significant difficulties if structural reforms are not implemented. It is forecasted that there will be a decrease in overall GDP by 1.1% in 2023. This reduction is primarily caused by a projected 4.4% decrease in oil GDP due to the OPEC+ production quotas that were agreed upon for this year.
According to Jean-Christophe Carret, the Country Director for the Middle East Department of the World Bank (which includes Iran, Iraq, Jordan, Lebanon, and Syria), Iraq is experiencing a significant rebound after a long period of instability. However, it cannot depend solely on oil profits for immediate recovery. Carret also stressed that without a strong political commitment to the required reforms, Iraq risks depleting its reserves at a rapid pace and returning to its previous state in a short period.
He urged for immediate action to accelerate the diversification of economic activity and combat existing fragility factors, all while addressing crucial climate-related issues to ensure the ongoing prosperity of the Iraqi population.
This particular chapter of the report focuses on the Iraqi financial sector. It concludes that the lack of capital in dominant state-owned banks and the weakness of the private commercial banking sector are significant impediments to economic diversification.
The report highlights the significance of implementing banking sector reforms and advancing digital financial services to improve financial intermediation and facilitate financial inclusion. This will help to transform the financial sector into a driving force for economic diversification.