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Iraq continues to expand its oil resources, but further economic diversification is needed, according to QNB Group. Following the Iraq war, oil production has expanded rapidly, resulting in a rise in per capita GDP from USD1,790 in 2005 to over USD6,300 in 2012 despite a difficult social context. However, Iraq’s economy continues to experience structural weaknesses, such as a small non-oil sector, a dominant public involvement in all areas of the economy and an underdeveloped business environment. According to QNB Group, with Iraq’s economy continuing to be primarily driven by developments in the oil sector, economic growth is expected to remain strong in the short-term. However, there are risks to the macroeconomic outlook such as further social instability and weak policy implementation. These risks could translate into lower oil revenues, deteriorating the fiscal position and potentially escalating inflation levels.

Iraq’s macroeconomic performance over the past few years has been sound primarily on the back of a revival in oil production. In 2012, oil production averaged 3.1m barrels a day (b/d), the highest level in over 30 years. Real GDP has accelerated at an average growth rate of 6.4% during 2005-12 reflecting increased oil production and high oil prices.

 Iraq: Per Capita GDP and Oil Production (2005-12)

(Million b/d and Per Capita GDP in USD)

 

Iraq Per Capita GDP and Oil Production

 

Sources: IMF, Bloomberg and QNB Group forecasts

However, high economic growth based on the expansion of the oil sector may not be sufficient to ensure continued prosperity. The lack of economic diversification to date makes Iraq’s economic growth sensitive to the fluctuations of international oil prices and could undermine macroeconomic stability. Hence, economic diversification could be a challenge for the Iraqi government both to create jobs and promote income-generating opportunities for the majority of the population. The International Monetary Fund (IMF) has been involved in supporting the government’s medium-term economic reform program, thereby helping the country improve fiscal sustainability and reduce its vulnerability to sudden drops in oil revenues.

Iraq continues to face development challenges despite the recent resurgence in economic growth. Indeed, there is a need to rebuild infrastructure and institutions, a task made difficult by the prospect of social instability. In addition, the impact of the war and sanctions, have all contributed to a deterioration in Iraq’s social indicators in recent years. For example, the infant mortality rate is one of the worst in the Middle East and North Africa region. Furthermore, school enrolment has declined over the past decade as a result of the low quality of and low returns to education. During 2007-12, consumption among the lowest 40 percent of the population by income group grew only by 1.1% annually, lower than the average rate of consumption growth for the population as a whole (1.8%), suggesting that the income distribution is becoming more skewed.

Looking ahead, QNB Group expects Iraq’s real GDP growth to rise to 6.3% in 2014, as oil production increases further together with a rapid expansion in government services, trade and construction. In addition, investment is set to grow strongly in several large oilfields and as infrastructure development gathers momentum. However, the challenging social context, external shocks and a weak economic structure represent risks to Iraq’s short-term outlook. Over the medium term, the key challenge to the Iraqi economy remains to develop its non-oil sector, which could provide for diversification, higher living standards, and better social conditions for the Iraqi people.


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