Iraqi Economy Suffering amid War and Low Oil Prices

August 19, 2015Iraqby EW News Desk Team

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Iraq's war with Islamic militant group ISIS has taken a toll on the economy, with the Shiite government losing land to the terrorist organization. Further, the low-priced oil market hampers the government's national budget. Almost 95 percent of the national budget derives from oil income.

Iraq currently has a $102.5-billion budget, but the state carries a deficit of $12.4 billion. An estimated $27 billion is reserved for defense spending, but more funds are needed. Like Europe, Iraq has undergone a series of austerity measures that helped fund the war effort, but the cuts hurt businesses around the nation, especially the manufacturing and construction sectors. Officials have halted construction efforts to bolster the military, hurting the constructor sector in the process, and more businesses that relied on government contracts have suffered exponentially.

Since the ISIS onslaught, the government has spent next to nothing on government contracts, forcing some businesses to lay off workers, and the state is indebted to numerous companies. However, the government is left with little options, as lower oil prices plague the nation's revenue stream, and the cost of the war effort proves more costly.

Root Problems

Iraq underwent a period of prosperity after the removal of Saddam Hussein, as the government embarked on such strategies as lifting import tariffs and spending more on infrastructure. Trouble began in 2006, when sectarian violence disrupted economic activity. The nation was further compounded by insufficient energy infrastructure, leaving many to rely on diesel-based generators instead. Protests have erupted across the country in the wake of government mismanagement and lacking infrastructure, but the economy does not have the necessary diversification to sustain itself without reliance on high oil prices. In addition, the Kurdish regional government is selling oil independently in the north, leaving the southern government without unified support in meeting budget obligations.

Loan Packages

To counter the crisis, authorities have taken such measures as issuing bonds, $5 billion on the international level and $2 billion domestically, along with imposing consumption and excise taxes. Iraq also gained access to $1.7 billion from the World Bank, including a $1.24 billion emergency loan package from the International Monetary Fund in July. The IMF stated that the loan was meant to help in such matters as fighting ISIS and compensating for lower oil prices. According to the organization's data, Iraq's economy contracted 2.1 percent in 2014 and it may only grow 0.5 percent in 2015. The IMF also predicts that the country's budget deficit will increase to 17 percent of GDP, a stark contrast from 5.0 percent in 2014.