Economy - overview: Iraq's GDP grew by 11% in 2016, the best performance in the past decade, but declined in 2017 as domestic consumption fell. During 2016, security and financial stability throughout Iraq began to improve as Iraqi Security Forces made gains against the ongoing insurgency and oil prices slowly rose. The Iraqi Government entered into a Stand-By Arrangement (SBA) with the IMF in July 2016, which helped stabilize its finances by encouraging improved fiscal management, needed economic reform, and expenditure reduction. Iraq passed its first SBA review in December 2016, and additional progress on the program is critical to its long-term fiscal health. Diversification efforts – a key component to Iraq’s long-term economic development – require a strengthened investment climate to bolster private-sector engagement. Sustained improvements in the overall standard of living depend heavily on global oil prices, the central government passage of major policy reforms, and progress in the conflict with ISIL.
Iraq's largely state-run economy is dominated by the oil sector, which provides more than 90% of government revenue and 80% of foreign exchange earnings, and is a major determinant of the economy's fortunes. Oil exports in 2016 averaged 3.3 million barrels per day from southern Iraq, up from 2015. Moreover, the slow recovery of global oil prices improved export revenues throughout 2016, although monthly revenue remained below 2015 levels. Iraq's contracts with major oil companies have the potential to further expand oil exports and revenues, but Iraq will need to make significant upgrades to its oil processing, pipeline, and export infrastructure to enable these deals to reach their economic potential.
Iraqi oil exports from northern fields are hampered by fundamental disagreements between the Iraqi Government and autonomous Kurdistan Regional Government (KRG) in Iraq’s Kurdistan region (IKR) on the roles of federal and regional authorities in the development and export of natural resources. In 2007, the KRG passed an oil law to develop IKR oil and gas reserves independent of the federal government. The KRG has signed about 50 contracts with foreign energy companies to develop its reserves, some of which lie in territories whose status is in dispute between Baghdad and Erbil. Some of the companies have left or returned blocks, citing lack of commercial prospects. In 2014, the KRG began exporting its oil unilaterally through its own pipeline to Turkey, which Baghdad claims is illegal. In the absence of a national hydrocarbons law, the two sides have entered into four provisional oil- and revenue-sharing deals since 2009, all of which collapsed. In September 2016, the two sides began implementing a fifth ad hoc agreement to split oil exports from Baghdad-controlled fields in Kirkuk.
Iraq is making slow progress enacting laws and developing the institutions needed to implement economic policy, and political reforms are still needed to assuage investors' concerns regarding the uncertain business climate. The Government of Iraq is eager to attract additional foreign direct investment, but it faces a number of obstacles, including a tenuous political system and concerns about security and societal stability. Rampant corruption, outdated infrastructure, insufficient essential services, skilled labor shortages, and antiquated commercial laws stifle investment and continue to constrain growth of private, nonoil sectors. Under the Iraqi constitution, some competencies relevant to the overall investment climate are either shared by the federal government and the regions or are devolved entirely to local governments. Investment in the IKR operates within the framework of the Kurdistan Region Investment Law (Law 4 of 2006) and the Kurdistan Board of Investment, which is designed to provide incentives to help economic development in areas under the authority of the KRG.
Inflation has remained under control since 2006. However, Iraqi leaders remain hard-pressed to translate macroeconomic gains into an improved standard of living for the Iraqi populace. Unemployment remains a problem throughout the country despite a bloated public sector. Encouraging private enterprise through deregulation would make it easier for Iraqi citizens and foreign investors to start new businesses. Rooting out corruption and implementing reforms - such as restructuring banks and developing the private sector - would be important steps in this direction.
Definition: This entry briefly describes the type of economy, including the degree of market orientation, the level of economic development, the most important natural resources, and the unique areas of specialization. It also characterizes major economic events and policy changes in the most recent 12 months and may include a statement about one or two key future macroeconomic trends.
Source: CIA World Factbook - This page was last updated on January 20, 2018