Iraq: Oil sector outweighing growth challenges elsewhere

Iraq is enjoying an oil windfall as the real economy is being boosted directly by increased oil production, while high global prices will improve the fiscal and current account balances and should also feed through indirectly into increased economic activity. There remain impediments to growth, however, with rising food prices hitting households hard just as the country is getting over the Covid-19 pandemic, while a six-month failure to form a government following October elections poses risks to policy formation and general stability.

Real GDP growth, % y/y

Source: Haver Analytics, Emirates NBD Research

Oil economy set to drive growth

The easing of OPEC+ production curbs has seen Iraq’s oil production average 4.28mn b/d over the first three months of 2022, up 9.6% from the 3.91mn b/d produced over the same period last year. Given that output is still below that of Iraq’s allotted production quota (by around 220,000 bbl in March), there is prospect for further gains over the coming months, but there remains the risk that Iraq will continue to struggle to hit its allowance. Nevertheless, we expect that the oil economy will be the primary driver of economic growth this year, contributing heavily to our forecast expansion of 7.6%, which if realised would be the strongest growth rate since 2016. In 2023 we expect that growth will remain robust at 5.4%. It is worth noting here that even these two strong expansions would be insufficient to recoup what was lost through the pandemic – according to our forecasts, Iraq’s GDP will still be smaller at end-2023 than it was in 2019.

Oil production, b/d

Source: Bloomberg, Emirates NBD Research

Non-oil outlook more mixed

The outlook for the non-oil economy is more mixed. The high oil prices of recent months, in tandem with the increased production, will result in much improved fiscal and current account balances for Iraq, with the potential that these then feed through into greater economic output. Revenues from oil exports in March were at the highest level since 1972, and we forecast a budget surplus of 10.4% this year even as we expect that government spending is ramped up. Increased government spending should help boost economic growth. However, there is a significant risk that this does not materialise until late into the year. Iraq is still without a government six months on from October elections, meaning that a new budget has not yet been passed, and any government spending allowance is based on last year’s budget, when oil income was far lower. Meanwhile, the lack of coherent government as the differing factions fail to reach agreement will heighten investor concerns over potential instability, thereby further curtailing non-oil activity and investment.

CPI inflation, % y/y

Source: Haver Analytics, Emirates NBD Research

The lack of government could also hamper efforts to help support households as they struggle with rising prices and the ongoing fallout from the pandemic. New Covid-19 cases have been low since the last wave over January/February tailed off but unemployment remains high and households are facing new challenges from rising global food prices. We anticipate that inflation should moderate this year as the effects of the 2020 currency devaluation have passed through the base, but with bread prices heading higher on the back of global pressures we have revised up our 2023 CPI inflation forecast to an average of 5.0%, compared with 6.4% last year. There have already been protests over the rising price of bread, which will exacerbate extant political risks should they intensify.