Iraq: Non oil sector growth will lag

The outlook for Iraq’s economy remains a tale of two halves, with the oil sector set to substantially outperform the non-oil sector in 2022. We forecast real GDP growth of 7.6% this year, driven by the ongoing ramp-up in oil output, while non-oil activity will lag amidst political paralysis and global price pressures.

Iraq’s oil production averaged 4.35mn b/d over January to May, representing a substantial 10.9% expansion over the first five months of 2021. The country is benefitting from the easing of OPEC+ production curbs that were introduced to keep a floor under prices through the demand drop-off during the Covid-19 pandemic. While base effects will start to eat in to that growth rate (the producers’ bloc started easing restrictions in the second half of last year), there is scope for Iraq to boost production further following the OPEC+ agreement to increase production by 648k b/d in aggregate for August – although given that production dipped in May, Iraq may already be running up against its upside limits.

Oil production, '000 b/d

Source: Bloomberg, Emirates NBD Research

Oil production fell to just 20% of GDP in 2020 (last available full year figures) as the pandemic took hold, compared to its usual proportion of around 40%. As the sector recovers, the headline growth rate will likewise accelerate, although even with the strongest projected GDP growth rate since 2016 this year and 5.4% next year, Iraq’s economy will remain smaller in dollar terms at the end of 2023 than it was in pre-pandemic 2019. Arguably, a failure to adequately use the oil windfall that Iraq has benefitted from this year is holding back the recovery from the pandemic (GDP contracted -15.7% in 2020), and while the headline growth figure is positive, the experience for the population at large will remain a challenging one.

With oil prices comfortably above USD 100/b this year and production ramping up, the Iraqi government has seen a cash injection the like of which has been absent since 2014. However, failure by politicians to form a government since elections eight months ago has left this largely unspent through a lack of policy direction and a supreme court judgement that has forced the caretaker administration to abide by the 2021 spending limits. This will limit capital investment in essential infrastructure development and repair, not least in the water and energy sectors – the source of many protests in recent years – and it will also curb the government’s ability to support the population through a period of elevated price growth.

CPI inflation, % y/y

Source: Haver Analytics, Emirates NBD Research

Headline CPI inflation has averaged 5.3% over the first five months of 2022, as global price pressures emanating from reopening frictions and the war in Ukraine have been brought to bear. This has kept inflation at similar levels to those seen over the same period last year, even as the 20% devaluation of the dinar in December 2020 has passed through the base. While petrol subsidies have kept the rise in transport costs low by global measures – just 2.0% y/y in May – the 8.5% rise in food prices will weigh heavily on households, especially with unemployment still high. With government formation having suffered another setback in recent weeks, the resolution of any of these issues in the near term appears unlikely, running the risk of social unrest which would further hold back the recovery.