Iraq Economic Structure

Iraq’s fiscal situation and sluggish economic development have been stalling the nation’s political, economic and social progress for quite sometime. While the Iraqi economy averaged a growth of 6% during 2005-2008, the main driving factors had been oil export earnings and government spending. The country also needs growth drivers such as increase in oil production and private sector activity, which sadly does not look likely in the near future. Hence, the Iraqi government must tap existing oil contracts and improve the overall macroeconomic stability in the near term.

Iraq’s fiscal situation and sluggish economic development have been stalling the nation’s political, economic and social progress for quite sometime. While the Iraqi economy averaged a growth of 6% during 2005-2008, the main driving factors had been oil export earnings and government spending. The country also needs growth drivers such as increase in oil production and private sector activity, which sadly does not look likely in the near future. Hence, the Iraqi government must tap existing oil contracts and improve the overall macroeconomic stability in the near term. In the medium term, it needs to implement structural reforms to attract greater foreign investments and pave way for a more diversified economy led by private sector growth.[br]

 

It is, however, feared that low oil prices with stagnant oil production might put extensive fiscal strains on Iraq by 2010. Iraq’s fiscal strains in 2009 included the nation’s Council of Representatives (CoR) implementing a $4 billion cut in the 2009 budget in goods, services, maintenance and non-financial assets spending. Though Iraq has sufficient fiscal reserves to address the budget’s projected deficit of $16 billion in 2010, the deficit could go higher, up to $25 billion, if oil production and prices do not increase above the March 2009 mark.

 

Also, it is estimated that Iraq will have small amounts of fiscal reserves to finance budget deficits in 2010 and 2011. This will translate into limited financing to cover capital expenditure, military projects and other critical needs. Iraq has completed a Stand-By Arrangement with the IMF, aided by the Paris Club, to boost the country’s economic reform agenda. Iraq has also received almost $75 billion in debt forgiveness from the Paris Club and bilateral creditors. With funding from the IRFFI (International Reconstruction Fund Facility for Iraq), the UN and the World Bank have started promoting key reforms in the private and banking sector. Iraq is also working towards accession to the WTO, as part of its fiscal reforms initiatives.

 

Iraq Economic Structure: World Bank Contribution[br]

 

In 2010, the World Bank has approved a Fiscal Sustainability Development Policy Loan worth $250 million to Iraq. This helps the country face the fiscal crisis and support medium-term economic reform programs. The World Bank program in Iraq comprises four completed projects and 20 active projects. Fifteen of these projects are financed by the Iraq Trust Fund and the remaining five by the International Development Association (IDA), a member of the World Bank Group that provides financing to the world’s least developed countries.