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.

Iraq’s Attempt To Diversify Into Manufacturing

For decades Iraq has talked about diversifying its economy away from being dependent upon oil. Part of that has been various attempts to promote industry and manufacturing. From 2008 to 2011 there was an increase in output from this sector, but Iraq remained one of the least industrialization nations in the Middle East.

IMF Report On Iraq’s Economy Sees Short-Term Growth, But Long-Term Structural Problems

In May 2013, the International Monetary Fund (IMF) released a short report on Iraq’s economy. It predicted continued growth in the short to medium-term, but warned of structural problems as well. Iraq is obviously famous for its oil industry, which still has huge potential to expand. The issue with the country’s economy is that there is little else to build upon. The government also plays a dominant role with all its inefficiencies, and that has a negative effective upon the business environment. That represents the dichotomy of Iraq. Oil presents a huge source of wealth, but it could undermine the country as well.

In the aggregate, Iraq looks like it has a bright future. Its economy grew 8.4% in 2012, and is expected to grow 9% this year. That contributed to per capita Gross Domestic Product (GDP) going from $1,300 in 2004 to an estimated $6,708 by 2013. Inflation dropped as well from 6% in late-2011 to 3.6% by the end of 2012, but is expected to go up this year to 5%. Its foreign reserves went from $61 billion at the end of 2011 to $70 billion by the end of 2012, while the reserves held at the Development Fund for Iraq increased from $16.5 billion to $18 billion. Iraq failed to execute its investment budget as it usually does, which contributed to those amounts. Overall, Iraq will probably be one of the fastest growing economies in the next few years. That is due to the predicted expansion of the oil industry. At the same time, the IMF noted that there are governance issues that will have a detrimental affect.

	2010	2011	2012	2013
Real GDP growth	5.9%	8.6%	8.4%	9.0%
GDP	$135.5 bil	$180.6 bil	$212.5 bil	$233.3 bil
GDP per capita	$4.278	$5.529	$6,305	$6,708

The IMF pointed to budget execution and the exchange rate as two problems that Baghdad had. The government suffered from not only poor budget planning and execution in the last few years, but large off budget spending as well. In 2013, that led to a large number of unfunded projects. The IMF suggested that public expenditures be reduced as a result by cutting the number of government jobs, and slashing energy subsidies and support for state-owned enterprises. Recently there has been a run on the dinar. That created a gap between the official exchange rate offered at state-run banks and the rate offered at private money exchanges. The IMF believed that the dinar needed to be stabilized. It suggested that the authorities support the Central Bank of Iraq’s policies, which are aimed at achieving that goal. After 2005, the Iraqi government suffered from a lack of trained staff to plan and execute the budget.  That led to almost the entire budget going to paying government employees, and very little for investment. The money that was set aside for that task in the capital budgets was hardly spent as well. Officials eventually improved, but then in recent years the budget has grown tremendously due to rising oil prices. This has led to far more money being appropriated than the bureaucracy can handle, and the investment rate has gone right back down. The government appears to be more interested in the amount of each budget, so that it can brag to the public rather than whether those funds can actually be expended. As for the dinar, it is being manipulated by political parties, gangs, money exchanges, and foreign countries right now. The acting Central Bank Governor Dr. Abdul Basit Turki claims that he is reforming the anti-money laundering department, and trying to place more regulations on the weekly money exchanges, but there doesn’t appear to be any changes on the ground yet.

More importantly, the IMF noted the major structural problems that could hinder Iraq in the long-term. First, Iraq is heavily dependent upon oil. Its GDP and growth are directly related to how much petroleum it can produce and export. That means that if oil prices were to drop, Iraq’s budget and growth would be threatened as well. The government’s entire development plan is based upon boosting oil output as quickly as possible. The money that it raises is supposed to help diversify the economy, but that hasn’t happened. Instead, this has swelled the government’s coffers, and increased the state’s role. This is a classic example of the oil curse. Like many other bodies, the IMF has suggested that the authorities speed up their reforms to support the private sector, so non-oil jobs can be created. Finally, political and security instability were noted. Iraq has seen a huge increase in investment in recent years, but that was directly related to the end of the civil war when foreigners finally felt comfortable about sending their money to the country. Now security is worsening as the insurgency is growing. The rival political parties have been in an on going test of wills against each other that has led to deadlock in Baghdad as well. Together this has economic repercussions as major legislation like the oil law has no chance of being passed in the current political environment. The growing threat by militants could also scare away investors. All together this poses a daunting set of barriers to Iraq’s future. The government isn’t following its own suggestions, and warnings by various international bodies about its oil dependency. Instead, it is making the situation worse. The fact that Iraq’s ruling elite are at each other’s throats doesn’t help either, because it means that no major decisions can be made or the business environment improved. Finally, the worsening security situation could reverse the flow of investment to Iraq.

At first look, Iraq looks to be a dynamic economy with high economic growth rates and vast natural wealth. Under the surface, there are major structural problems that severely limits realizing that potential. The oil curse means that Iraq can bring in huge amounts of cash, while the majority of the population faces high poverty and unemployment with the best hope being getting a job with the government. Unless Iraq changes its regulations, and begins to truly support its private sector this trend will not be broken. The political and security situation may not allow that to happen by blocking necessary legislation and decreasing investment. These were the warnings that the IMF tried to raise. It’s yet to be seen whether Baghdad is listening.

SOURCES

International Monetary Fund, “IMF Executive Board Concludes 2013 Article IV Consultation with Iraq,” 5/21/13

Joint Analysis Policy Unit, “Iraq Budget 2013, Background Paper,” Inter-Agency Information and Analysis Unit, January 2013

Special Inspector General for Iraq Reconstruction, “Quarterly Report and Semiannual Report to the United States Congress,” 7/30/12

- “Quarterly Report to the United States Congress,” April 2013

Tijara Provincial Economic Growth Program, “Assessment of Current and Anticipated Economic Priority In Iraq,” United States Agency for International Development, 10/4/12

Iraq Improves On Failed State List, But Still Problems With Scoring

For the last several years Iraq has been in the top ten in the Fund for Peace’s Failed States List. The country has made slight improvements however, and in 2013 was ranked number 11. The Fund for Peace uses a program to go through reports about each country in the world throughout the year, and this software then formulates scores for each nation. Iraq obviously has many problems, but there are some issues with its ranking.

In the 2013 Failed States list Iraq did a little better going from number nine to eleven. In 2012 Iraq had a score of 104.3, while this year that went down to 103.9. These numbers come from twelve indictors that the Fund for Peace uses. Demographic pressures includes diseases, natural disasters, population growth, food security, and Iraq got an 8.3 out of 10. On refugees and internally displaced persons it received an 8.8. Group grievances covers ethnic and sectarian violence on which Iraq received a 10.0 out of 10. Iraq got an 8.3 on human flight, which covers professionals and intellectuals leaving the country. On uneven economic development the country scored an 8.4, followed by a 7.3 on poverty and economic decline, 8.6 on delegitimization of the state, 7.6 on public services, 8.6 on human rights and rule of law, 10.0 on the security forces, 9.6 on factionalized elites, and 8.5 on external intervention. On half of those indicators, demographic pressures, refugees, group grievances, delegitimization of the state, human rights and rule of law, security apparatus, Iraq received a worst score in 2013 than 2012, factionalized elites stayed the same, while the remaining five, human flight, uneven economic development, poverty and economic decline, public services, and external intervention, improved. 

Iraq’s Ranking On Failed States List 2005-2013

	2013	2012	2011	2010	2009	2008	2007	2006	2005
Demographic Pressures	8.3	8.0	8.3	8.5	8.7	9.0	9.0	8.9	8.0
Refugees	8.8	8.5	9.0	8.7	8.9	9.0	9.0	8.3	9.4
Group Grievances	10.0	9.7	9.0	9.3	9.7	9.8	10.0	9.8	8.3
Human Flight	8.3	8.6	8.9	9.3	9.1	9.3	9.5	9.1	6.3
Uneven Economic Development	8.4	8.7	9.0	8.8	8.6	8.5	8.5	8.7	8.7
Poverty and Economic Decline	7.3	7.7	7.0	7.6	7.6	7.8	8.0	8.2	8.2
Delegitimization of the State	8.6	8.4	8.6	9.0	9.0	9.4	9.4	8.5	8.8
Public Services	7.6	7.8	8.0	8.4	8.4	8.5	8.5	8.3	8.9
Human Rights and Rule of Law	8.6	8.3	8.6	9.1	9.3	9.6	9.7	9.7	8.2
Security Apparatus	10.0	9.9	9.5	9.5	9.7	9.9	10.0	9.8	8.4
Factionalized Elite	9.6	9.6	9.6	9.6	9.6	9.8	9.8	9.7	10.0
External Intervention	8.5	9.0	9.3	9.5	10.0	10.0	10.0	10.0	10.0

The Fund for Peace did a better job scoring Iraq this year, but there were still some questions. In 2012, there were several problems including with demographic pressures, group grievances, and economic decline. This year the Fund seemed to be slightly more accurate. Poverty and economic decline got a score of 7.3 in 2013, down from 7.7. That’s likely because of the growing Gross Domestic Product (GDP). Per capita GDP for instance went from $1,300 in 2004 to $6,400 in 2012. Legitimacy of the state increased from 8.4 to 8.6 probably because of the protest movement in Sunni provinces. There were still some issues however. Demographic pressures went up from 8.0 to 8.3. That covers natural disasters, disease, environment, food and water security, population growth, and mortality. According to the United Nations malnutrition had slight progress, while the others had no noticeable changes. Likewise refugees received a worst score of 8.8 up from 8.5. That was despite the United Nations High Commissioner for Refugees reporting steady increases in refugee and displaced persons returns since 2010. The most glaring scores however were for group grievances and security apparatus that went from 9.7 to 10.0 and 9.9 to 10.0 respectively. Obviously the insurgency is taking off again, but 10.0 was the score Iraq received when it was still in a civil war in 2007. Yes, violence is up, but it’s nowhere near the level it was at during the sectarian conflict when several thousands were ending up dead each month, the government largely shut down, and daily life was completely disrupted. The Fund for Peace provides no specific data on each individual state, and therefore there was no way to check what sources or information it used for Iraq. Given its past and present problems there’s definitely room to question how they come up with their scores.

Overall, the Failed States List can be a useful tool to identify the most troubled countries around the world, and Iraq is definitely one of those, but its score could be contested. Iraq saw steady improvement with its security situation after the civil war ended in 2008, which opened the door to a dramatic increase in foreign investment and business. This year its seen a reversal with the rebirth of the insurgency. Still from 2008 to 2013 Iraq’s overall score only improved by +6.6 points. The positive changes in the country should have brought about a greater change, which brings up the point about what sources the Fund is using for its rankings. Obviously, any large study such as this will have issues, and Iraq is a perfect example. That means where exactly each country ranks doesn’t really matter. Rather what countries are at the bottom is what the Fund for Peace’s work is good for.

SOURCES

Amlot, Robin, “IMF updates on Iraq economy,” CPI Financial, 5/22/13

Foreign Policy and The Fund For Peace, “Failed States 2013,” Foreign Policy

UNICEF, “The Situation of Children and Women in Iraq,” December 2012

UNHCR Iraq Operation, “Monthly Statistical Update on Return – March 2013,” United Nations High Commissioner for Refugees, May 2013

Behind Iraq’s Impressive GDP Growth Rate

Iraq’s economy is noteworthy for its contradictions. Many experts believe that it will be one of the fastest growing economies in the world over the next few years. That’s mostly because of its tremendous oil and natural gas wealth that fuels the entire nation. On the other hand, unemployment, underemployment, and poverty are relatively high. The Gross Domestic Product (GDP) is a perfect example of a figure that appears to show the promise of the country, but upon further inspection shows the large structural problems within Iraq.

Iraq’s economy is expected to expand tremendously over the next few years. The Central Bank of Iraq thinks that the GDP will grow 9.4% from 2012-2016. That would be up from 5-6% growth in 2011. The World Bank said that the GDP would grow 12.6% in 2012, and 10.2% in 2013, while the International Monetary Fund (IMF) predicted 11.1% in 2012, and 13.5% in 2013. The Central Bank stated that it thought the GDP would go from approximately $170 billion in 2011 to $360 billion by 2015. All of this is due to the expected development of the oil and gas industry. It contributes 59% of GDP, and 63% of real GDP. Foreign energy companies working to boost production and exports, new infrastructure slowly coming on line, and continued high prices for Iraqi crude are the major reasons why the Central Bank, the World Bank, and the IMF all have rosy views of Iraq’s economy. The country also needs massive investment in nearly everything after years of wars and sanctions. That adds further avenues for the expansion of the economy.

Since 2003, the GDP has steadily gone up with only one small dip. In 2002, before the U.S. invasion, GDP stood at $20.5 billion. It then dropped to $13.6 billion, because of the war, but then quickly recovered to $25.8 billion in 2004, $31.4 billion in 2005, $45.1 billion in 2006, $57.0 billion in 2007, $86.6 billion in 2008, then declining to $65.2 billion in 2009 because of the world recession, before rebounding to $82.2 billion in 2010. All of this growth was based upon the oil industry. As exports increased, so did the GDP. When exports jumped from an average of 790,000 barrels a day in 2003 for instance, to 1.47 million in 2004, the GDP went up +46.5%. Likewise, when there was only marginal expansion of exports such as from 2006 to 2007, there was a slow down in GDP growth going from +5.9% to +4.1% respectively.

Year	GDP	Per Capita GDP	Real GDP Change	Oil Exports (Mil/Bar/Day)
2002	$20.5 bil	$802	-7.8%	1.3
2003	$13.6 bil	$518	-41.4%	0.79
2004	$25.8 bil	$951	+46.5%	1.47
2005	$31.4 bil	$1,124	+3.7%	1.36
2006	$45.1 bil	$1,568	+5.9%	1.50
2007	$57.0 bil	$1,926	+4.1%	1.66
2008	$86.6 bil	$2,845	+9.5%	1.84
2009	$65.2 bil	$2,087	+4.2%	1.90
2010	$82.2 bil	$2,564	+0.8%	1.89
2011	$170 bil est.	$5,342 est.	+5.6% est.	2.16
2012	$128.1 bil est.	$3,808 est.	+12.6% est.	2.41

The aggregate numbers for Iraq’s Gross Domestic Product hide the large inequalities within the country. First, oil and gas are capital-intensive industries that provide little employment for Iraqis. Only 1% of the workforce is employed in the energy sector. Instead, oil revenues are distributed throughout society through the government. In 2012, it was one of the largest public employers in the world providing 60% of full time work. That percentage was higher in the Kurdistan Regional Government. As oil has expanded, so has the number of government workers going from 28% in 2005 to 43% in 2008 of the entire workforce. The vast majority of these workers do little to no real work. For example, former Planning Minister Ali Baban said in 2010 that 70% of public employees were unproductive. In comparison, agriculture and manufacturing have declined since 2003 due to the repeal of tariffs by the Coalition Provisional Authority, the lack of reliable electricity, and the inability to compete with foreign products, which are heavily subsidized, such as Western wheat and barely. Even with that huge expansion, unemployment is still officially at 11%. Not only that, but those families that do not have a relative in the government are more likely to fall into poverty, because they lack a steady income and pensions. It is one reason why the government poverty rate is still high at 17%. That doesn’t mean private employment hasn’t grown in recent years, but again, that’s largely due to outsourcing by the government. That too has problems as many employers look towards foreign workers, because of their cheap wages, and to make up for the loss of domestic professionals due to a massive brain drain that has happened since the 1990s. Finally, the government is not helping the situation. It is pushing the oil industry as the means to expand the economy, and despite its many promises to diversify and privatize, it is enlarging the state sector instead. These many problems are what the GDP numbers do not reveal. Yes, the figures for Iraq’s economy are going up dramatically, but that does not mean that they are actually helping the majority of the population. If the end result of Baghdad’s policy is the hope for families to have a relative in the public sector who does little actual work that does not make a productive society.

Iraq’s GDP is just one example of where the numbers do not reflect the full reality of what is going on in the country. The expansion of the oil and gas industry with the help of foreign energy companies is driving economic growth. That is benefiting the entire population, but not as much as the figures would have one believe. Money is trickling down, but through the inefficient government with public sector jobs and contracts for private companies. This has given rise to increasing wages, but the vast majority of government workers do nothing, and Baghdad is using its oil revenue to expand the state rather than diversify the economy, which would do a much better job of raising the standard of living for all Iraqis. Until these structural problems are addressed, Iraq will have a fast growing economy, while still dealing with massive disparities.

SOURCES

Adel, Shaymaa, “Iraq reports plunge in poverty and unemployment levels,” Azzaman, 5/5/13

Cordesman, Anthony, “The Changing Situation in Iraq: A Progress Report,” Center for Strategic and International Studies, 4/4/09

Dunia Frontier Consultants, “2011 Year in Review, Foreign Commercial Activity In Iraq,” March 2012

Inter-Agency Information and Analysis Unit, “Iraq Labour Force Analysis 2003-2008,” United Nations Office for the Coordination of Humanitarian Affairs, January 2009

O’Hanlon, Michael and Campbell, Jason, “Iraq Index,” Brookings Institution, July 2012

Peel, Michael, “Iraq faces uphill battle to rebuild,” Financial Times, 5/9/12

Reuters, “Iraq sees at least 9.4 percent GDP growth to 2016: central bank,” 2/19/12

Tijara Provincial Economic Growth Program, “Assessment of Current and Anticipated Economic Priority In Iraq,” United States Agency for International Development, 10/4/12

Yousif, Bassam, “Aspiration and Reality in Iraq’s Post-Sanctions Economy,” Middle East Repot, Spring 2013

- “The economy of Iraq since 2003-a follow-up,” Indiana State University Economics Department, August 2012