IMF Predicts Depressed Oil Market For Nearly A Decade With Huge Impact On Iraq

The International Monetary Fund’s (IMF) recent World Economic Outlook report painted a bleak picture of the world economy. It warned that the world is facing the greatest economic crisis since the Green Depression due to the coronavirus. The situation surpasses the 2008 recession which was previously considered the worse breakdown since 1929. The fact that no one knows how things will work out makes the future unpredictable as well. This has serious repercussions for Iraq which is dependent upon international markets to sell its petroleum to.

The IMF predicted that the world oil market would be affected but the current downtown for almost a decade. Before the virus broke Saudi Arabia and Russia were in the midst of a price war that saw oil prices dramatically decline. Then covid-19 hit and there was a dramatic drop in demand for oil. That resulted in a 65% drop in oil prices. The IMF forecasts that oil would sell for an average price of $35.60 per barrel in 2020, rise to $37.90 in 2021, then stabilize around $45 per barrel for five years after that. This will have a huge impact upon Iraq. It is the most oil dependent country in the world and sells its petroleum for lower than the international rate. Over 90% of its revenue comes from its energy sales. It is already running a huge deficit as its monthly income is not enough to even pay the salaries of its government workers let alone its other bills. That means if the IMF’s predictions hold true Baghdad will be facing a financial crisis for the foreseeable future.

The IMF predicted Iraq’s economy could recover by 2021 but that might be questionable. The Monetary Fund believed the world economy would have a -3% growth rate in 2020, and then covid-19 would be contained by the second half of that year allowing for a +5.8% recovery in 2021. Similarly, Iraq was predicted to have a -4.7% growth rate in 2020, but then go up to 7.2% in 2021. More telling the current account balance which is the trade, investment and money transfers a country has would be at -21.7% in 2020 and -14.1% in 2021. The problem with the IMF’s view is that if oil prices are close to its prognosis it will have to go into debt, raid its foreign reserves, cut contracts, and carry out some form of austerity just to break even with its annual budget. At the same time, Iraq is not rebuilding after the war against the Islamic State which would be a boon to business and does not support its private sector that would provide for some growth outside of oil. Given all that it’s hard to believe that Iraq will have a full and healthy recovery by 2021 as the World Bank wrote.

SOURCES

International Monetary Fund, “World Economic Outlook,” April 2020