IRAQ ECONOMIC MONITOR Reemerging Pressures: Iraq’s Recovery at Risk Spring/Summer 2023 Iraq Economic Monitor Reemerging Pressures: Iraq’s Recovery at Risk With a Special Focus on Financial Intermediation in Iraq Spring/Summer 2023 Middle East and North Africa Region © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclu- sions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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TABLE OF CONTENTS Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix ّ ‫مل‬ ‫خص تنفيذي‬ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii 1.  Recent Economic and Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Oil and Gas Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Monetary Policy and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.  Outlook, Risks, and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Risks and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Special Focus Enhancing Financial Intermediation in Iraq: Transformational Reforms Needed to Develop an Effective and Efficient Financial System . . . . . . . . . . . . . . . . . . . . . .21 Selected Recent World Bank Publications on Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 iii List of Figures Figure 1 The Economy Strongly Rebounded in 2022… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 2 …Bringing Per Capita GDP Growth in Line with other Peers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 3 The Economic Rebound Was Driven by the Oil Sector… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 4 …while Agriculture Contracted, and Non-Oil Industries Stagnated . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 5 Oil Production and Export Volumes Increased with Higher Demand… . . . . . . . . . . . . . . . . . . . . . . . .4 Figure 6 …while Oil Export Prices Declined after Reaching a Multi-Year High . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 7 Higher Oil Prices in 2022 Boosted KRG Oil Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 8 Higher Oil Revenues Improved Iraq’s Fiscal Balance in 2022… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 9 …but Wage Bill and Transfers Remain a Significant Share of Expenditures . . . . . . . . . . . . . . . . . . . 6 Figure 10 Public Investment Remained Low and Under-Executed Vis-a-Vis Recurrent Spending . . . . . . . . . .7 Figure 11 The Budget for 2023 Amplifies the Previous Trend of Fiscal Expansion . . . . . . . . . . . . . . . . . . . . . . 8 Figure 12 Inflationary Pressures Resurfaced in Early 2023 Following Exchange Rate Pressures... . . . . . . . . 9 Figure 13 …Driving Up Inflation in 4M-23 due to High Import Dependence of Consumer Goods . . . . . . . . . .9 Figure 14 The Credit to Private Sector Steadily Accelerated throughout 2022 . . . . . . . . . . . . . . . . . . . . . . . . .11 Figure 15 The Economy Remains Cash-Based, despite Modest Improvements . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 16 The Current Account Surplus Strengthened in H1-22 before Deteriorating Again . . . . . . . . . . . . 15 Figure 17 Higher Oil Exports Drove Up the Trade Balance despite Higher Imports . . . . . . . . . . . . . . . . . . . . .15 Figure 18 The Current Account and the Financial Account Improved in 2022… . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 19 …Leading to a Surge in Reserves but Pressures Reemerged in 2023 . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 20 Key Constraints in the Iraqi Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 21 Selected Access to Finance Indicators in Iraq Compared to MENA Average, Based on Enterprise Survey (2022) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Figure 22 Progress on Financial Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 Figure 23 Gender Gap in Financial Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Figure 24 Age Gap in Financial Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 List of Boxes Box 1 Iraq: Drivers of the Informal Sector (Findings from an Enterprise Survey) . . . . . . . . . . . . . . . . . . . . . 3 Box 2 Impact of the Dinar Revaluation on Iraq’s Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Box 3 Selected Financial Sector Indicators – Regional Benchmarks, 2021 . . . . . . . . . . . . . . . . . . . . . . . . 27 List of Tables Table 1 Iraq: Selected Economic and Financial Indicators, 2020–2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Table 2 Iraqi Banking Sector Market Structure (December 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 iv IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK ACRONYMS ACH Automated Clearing House IQD Iraqi Dinar AML/CFT Anti-Money Laundering and Countering IT Information Technology Financing of Terrorism KRG Kurdistan Regional Government ATMs Automated Teller Machines KRI Kurdistan Region of Iraq bbl Barrel for Crude Oil KYC Know Your Customer Bpd Barrel Per Day LHS Left Hand Side BIS Bank for International Settlements M2 Broad Money CAB Current Account Balance mbpd Million barrel per day CBI Central Bank of Iraq MENA Middle East and North Africa COSIT Central Organization for Statistics and MFI Micro Finance Information Technology MoF Ministry of Finance COVID-19 Coronavirus Disease 2019 MoO Ministry of Oil DFS Digital Financial Services NBFIs Non-Banking Financial Institutions FAO Food and Agriculture Organization NIM Net Interest Margin FDI Foreign Direct Investment NGO Non-Profit Organization FINDEX Financial Inclusion Database MSMEs Micro, and Small Medium Enterprises FSB Financial Stability Board NFIS National Financial Inclusion Strategy FSI Financial Sector Indicators NPLs Non-Performing Loans FX Foreign Exchange NRS National Risk Assessment GDP Gross Domestic Product OPEC Organization of the Petroleum Exporting GHG Greenhouse Gas Countries GIESW Global Information and Early Warning PIM Public Investment Management System System PIP Public Investment Policy GoI Government of Iraq POS Point of Sale IEA International Energy Agency pp Percentage Points IEM Iraq Economic Monitor PPP Public Private Partnership IFS International Financial Statistics PSPs Payment System Providers ILO International Labour Organization RHS Right Hand Side IMF International Monetary Fund RTGS Real Time Gross Settlement v SDGs Sustainable Development Goals WDI World Development Indicators SOBs State-Owned Banks UMICs Upper Middle-Income Countries SOMO Iraq State Oil Marketing Organization USD United States Dollar WB(G) World Bank (Group) y/y year-on-year vi IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK ACKNOWLEDGMENTS T he Iraq Economic Monitor provides an update Syed Mehdi Hassan (Senior Financial Sector Special- on key economic developments and policies ist), Buddy Buruku (Senior Financial Sector Specialist), over the previous six months and presents Saba Bint Abbas (ET Consultant), Sergio Jose De findings from recent World Bank work on Iraq, placing Mesquita Gomes (Senior Financial Sector Special- them in a longer-term and global context and assess- ist), Andrius Skarnulis (Financial Sector Economist), ing the implications of these developments and other Nabeel Ahmed Khan (Associate Investment Officer), changes in policy regarding the outlook for Iraq. Its Sheirin Iravantchi (Senior Financial Sector Specialist), coverage ranges from the macro-economy to busi- and Leila Aghabarari (Consultant), under the super- ness environment and private sector development. It vision of Irina Astrakhan (Practice Manager, EMNF2). is intended for a wide audience, including policy mak- The report benefitted from comments received from ers, business leaders, financial market participants, Mohamed Qaradaqi (Senior Energy Specialist, IMNE1) and the community of analysts and professionals and Bilal Al Sugheyer (Senior Country Officer, CMEIB). engaged in Iraq. Special thanks to Ekaterina Stefanova (Senior Program The Iraq Economic Monitor is a product of Assistant, EMNMT) for her administrative support. the Middle East and North Africa (MENA) unit in the The findings, interpretations, and conclu- Macroeconomics, Trade & Investment (MTI) Global sions expressed in this Monitor are those of World Practice of the World Bank Group. The report was Bank staff and do not necessarily reflect the views of written by Majid Kazemi (Economist), Ashwaq Mas- the Executive Board of the World Bank or the gov- eeh (Economist), and Zeina Alsharkas (Economist). ernments they represent. For information about the The report was prepared under the direction of World Bank and its activities in Iraq, please visit www​ Jean-Christophe Carret (Country Director, MNC02), .worldbank.org/en/country/iraq (English) or www.wo​ Eric Le Borgne (Practice Manager, EMNMT), Norbert rldbank.org/ar/country/iraq (Arabic). For questions Fiess (Lead Country Economist, EMNDR), and Rich- and comments on the content of this publication, ard Abdulnour (Country Manager for Iraq, MNCIQ). please contact Majid Kazemi (mkazemi@worldbank. The first chapter includes inputs from Syed Mehdi org), Ashwaq Maseeh (amaseeh@worldbank.org), Hassan (Senior Financial Sector Specialist, EMNF2), Zeina Alsharkas (zalsharkas@worldbank.org) or Eric Dalal Moosa (Senior Economist, HSASP), and Gharam Le Borgne (eleborgne@worldbank.org). Dexter (Private Sector Specialist, ETIIC). The Special The data cut-off date for this report was June Focus chapter on the financial sector was prepared by 20, 2023. vii EXECUTIVE SUMMARY Recent Economic and Policy After moderating in 2022, consumer price Developments inflation ticked up in early 2023, fueled by the depreciation of the Iraqi dinar in the parallel Iraq’s economy continued its recovery after the market. The June 2022 emergency law for urgent sharp, pandemic-induced recession in 2020 needs for food security and energy imports helped but growth constraints in the oil sector have curb headline and core inflation to 5.0 and 4.3 per- reemerged. Real gross domestic product (GDP) cent in 2022, respectively. Tighter enforcement of growth accelerated to 7.0 percent in 2022 driven by financial reporting standards for Central Bank of the tapering of OPEC+ production cuts in the first nine Iraq (CBI) dollar auctions since November 2022 months of 2022. Oil GDP, accounting for 61 percent caused supply-demand mismatch of dollars and led of real GDP in 2022, grew by 12.1 percent despite the to the depreciation of the dinar in the parallel mar- OPEC+ agreement in the last quarter of the year. In ket, pushing inflation to 7.2 percent year-on-year in contrast, non-oil GDP growth was muted as non-oil January 2023. In response to the currency depreci- industries stagnated and agriculture activities con- ation, the CBI revalued the dinar in February 2023 tracted due to the drought and associated water to IQD1,300/USD, up by 10.3 percent. Inflation and shortages. The recent growth spurt pushed per cap- the parallel market rate depreciation have since ita GDP growth to 5.4 percent in 2022, however, as moderated but the gap over the official rate remains the capital-intensive oil sector drove the rebound, the significant, highlighting persisting exchange rate positive impact on the labor market was limited. Iraq’s pressures. rapid population growth (2.4 percent per annum) Fiscal and external account balances ben- highlights a need for higher growth to improve welfare efitted from the oil windfall in 2022 but this trend outcomes and to close the growing income gap with significantly moderated in early 2023. Total gov- peers. Oil GDP, the main driver of recent growth has ernment revenues surged by 48.2 percent in 2022, been constrained by new crude oil production limits spurred by higher oil prices and export volumes. announced in late 2022 and extended in April 2023. Total expenditures grew less than revenues (by As a result, GDP growth fell to 2.6 percent (year-on- 20.5 percent). Growth in the former was the result year) in the first quarter of 2023. of the passing of the Emergency Food Security Law ix (June 2022), before which expenditures had been oil prices to US$71/bbl in May 2023 and extension of constrained to their 2021 (nominal) levels due to a production quotas. lack of an approved budget for the year. As a result, Iraq’s economic outlook in the medium term the fiscal balance recorded a significant surplus of continues to hinge on oil sector developments. 11.7 percent of GDP and debt-to GDP moderated Overall GDP is forecast to contract by 1.1 percent in to 40.8 percent. Despite rising imports, the current 2023 driven by a projected 4.4 percent contraction account registered a sizeable surplus of 20.7 percent of oil GDP (assuming oil production is bound by the of GDP (US$55 billion) in 2022, as exports (domi- April 2023 OPEC+ production quotas). By contrast, nated by oil) increased by 74 percent. The favorable non-oil GDP growth is projected to accelerate in 2023, oil market dynamics brought total reserves excluding partly assisted by the budget expansion. Limited link- gold up to US$89.0 billion (covering 14.7 months of age between oil and non-oil sectors coupled with imports). However, this trend in reserve accumulation public sector dominance in formal employment is pro- slowed in early 2023 as external account pressures jected to continue to result in a stunted and largely resurfaced with the lower oil prices, leading reserves informal private sector. Low appetite for reforms, even to start declining in May 2023. amid softening oil prices, and modest non-oil growth The new budget is excessively expansion- potential, in part due to a deteriorating business envi- ary, and lacks the structural reforms that Iraq ronment and continued widespread corruption, are needs to develop a vibrant and sustainable econ- expected to constrain long-term economic growth. omy. Two decades after the 2003 war, Iraq’s highly oil Higher public expenditures and imports will weigh dependent development model is set to endure. The on both the fiscal and current account balances, with drive for fiscal reforms to address budget rigidities the former turning into a deficit. The revaluation of the and to mobilize non-oil revenues has yet to materi- dinar is expected to reduce dinar-denominated oil alize. The current government, formed in October revenues while expenditures are set to increase signif- 2022 after a year-long political stalemate, proposed icantly with the budget. A stronger dinar is expected a budget covering a three-year 2023-2025 horizon to also lead to higher imports and undermine export which was only ratified in June 2023 and signals a competitiveness. significant expansionary fiscal stance. Expenditures, The economic outlook remains subject to heavily skewed toward recurrent spending, are set significant risks, largely due to deep structural to increase by 59 percent notably due to a sharp challenges. High dependence on oil leaves the econ- increase in the wage bill, which will likely crowd out omy vulnerable to shocks in oil markets and global much-needed investments. The budget does not suf- demand as highlighted by the recent softening of oil ficiently address longstanding structural challenges, prices. Pre-existing drivers of fragility, including a high including on economic diversification, improving pub- prevalence of corruption, low labor force participation, lic financial management, addressing fiscal rigidities, especially females, high private sector informality, the and boosting domestic revenue mobilization. With rev- lack of job opportunities, financial sector imbalances, enues dominated by oil, the budget assumes an oil poor service delivery, and security risks remain key price of US$70/bbl and 3.5 mbpd of exports whereas challenges. Heightened climate change vulnerabili- the breakeven oil price to cover all expenditures actu- ties and further commodity price volatility associated ally stands at US$112/bbl (almost double 2022). This with the Russian invasion of Ukraine would inten- will result in a fiscal deficit of US$39.7 billion repre- sify existing poverty trends and raise food insecurity. senting 14.3 percent of GDP and equivalent to almost The recent spike in inflation has also highlighted the half of the record reserves accumulated following the exchange rate market as a source of risk that had 2021-2022 oil boom. If fully executed, the highly pro- been previously contained with the currency peg. cyclical budget could lead to a rapid depletion of the On the upside, the improvements in domestic polit- recent oil windfall and renewed fiscal pressures, espe- ical tensions regarding government formation can cially given the recent and pronounced dip in global pave the way for further investment in the economy x IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK and boost potential GDP. Furthermore, the prospects state-owned banks with weak institutional capacities of reduced regional geopolitical tensions could boost that primarily provide financing to public sector entities regional trade and FDI opportunities for Iraq. and state-owned enterprises. The private commercial Urgent implementation of financial sector banking sector is weak and has limited capacity to reforms and modernization of its banking sector support financial intermediation and is geared towards architecture, currently major barriers to economic maximizing revenues from the foreign exchange auc- diversification, are a critical condition to bolster tions. Furthermore, the non-banking financial sector is the private sector and unlock much-needed job nascent with small and underdeveloped capital mar- creation. Financial access in Iraq is amongst the low- kets, unregulated Micro Finance Institutions, and an est in the world, with only 19 percent of adults owning underdeveloped insurance sector. To tackle these a bank account, highlighting a significant underuti- challenges, the sector’s reform priorities include lized source of financing. Crucially, lack of financing institutional reforms in state-owned banks, and incen- remains the top constraints for small and medium tivizing digital financial services so as to increase enterprises and firms operating in the informal sec- financial intermediation and promote financial inclu- tor, undermining private sector-led growth and job sion in Iraq. The full implementation of these reforms creation. As this report’s Special Focus highlights, can help restore public confidence in the financial sec- this is in part due to the banking sector structure and tor and help mobilize Iraq’s wealth towards solving the operations, which is dominated by undercapitalized pressing development challenges of the country. Executive Summary xi ‫ملخّص تنفيذي‬ ‫السوق املوازية‪ ،‬مام دفع التضخم ليصل إىل ‪ 7.2%‬عىل أساس سنوي‬ ‫أحدث التطورات عىل صعيد االقتصاد والسياسات العامة‬ ‫يف يناير‪/‬كانون الثاين ‪ .2023‬واستجابة لخفض قيمة العملة‪ ،‬أعاد البنك‬ ‫املركزي العراقي تقييم الدينار يف فرباير‪/‬شباط ‪ 2023‬إىل ‪ 1300‬دينار‬ ‫واصل االقتصاد العراقي تعافيه بعد الركود الحاد الناجم عن جائحة فريوس‬ ‫عراقي‪/‬دوالر‪ ،‬بزيادة قدرها ‪ .10.3%‬وقد تراجع معدل التضخم وانخفض‬ ‫كورونا يف عام ‪ ،2020‬لكن القيود عىل النمو يف قطاع النفط برزت مجددا‪.‬‬ ‫سعر الرصف يف السوق املوازية منذ ذلك الحني‪ ،‬لكن الفجوة عن السعر‬ ‫وتسارع منو إجاميل الناتج املحيل الحقيقي إىل ‪ 7.0%‬يف عام ‪ 2022‬مدفوعاً‬ ‫الرسمي ال تزال كبرية‪ ،‬مام يعكس استمرار ضغوط سعر الرصف‪.‬‬ ‫بتقليص تخفيضات اإلنتاج التي قررتها أوبك واملنتجون من خارجها يف‬ ‫استفادت أرصدة حسابات املالية العامة واملعامالت الخارجية‬ ‫األشهر التسعة األوىل من عام ‪ .2022‬ومنا إجاميل الناتج املحيل النفطي‪،‬‬ ‫من اإليرادات النفطية غري املتوقعة يف عام ‪ ،2022‬لكن هذا االتجاه خف‬ ‫الذي شكل ‪ 61%‬من إجاميل الناتج املحيل الحقيقي يف عام ‪ ،2022‬بنسبة‬ ‫بشدة يف أوائل عام ‪ .2023‬وارتفع إجاميل اإليرادات الحكومية بنسبة‬ ‫‪ 12.1%‬بالرغم من اتفاق أوبك واملنتجني من خارجها يف الربع األخري من‬ ‫‪ 48.2%‬يف عام ‪ ،2022‬مدفوعاً بارتفاع أسعار النفط وحجم الصادرات‪ .‬كام‬ ‫نفس العام‪ .‬وعىل النقيض من ذلك‪ ،‬فقد سجل إجاميل الناتج املحيل غري‬ ‫قلت الزيادة يف إجاميل النفقات عن اإليرادات (بنسبة ‪ .)20.5%‬ويرجع‬ ‫النفطي منوا ً ضعيفاً حيث أصيبت الصناعات غري النفطية بالركود وانكمشت‬ ‫النمو يف األوىل إىل إقرار قانون األمن الغذايئ الطارئ (يونيو‪/‬حزيران‬ ‫نقص يف املياه‪ .‬وقادت‬‫األنشطة الزراعية بسبب الجفاف وما ارتبط به من ٍ‬ ‫‪ ،)2022‬والذي كانت النفقات قبله مقيدة عند مستوياتها (االسمية) لعام‬ ‫الطفرة األخرية يف النمو إىل ارتفاع معدل منو نصيب الفرد من إجاميل‬ ‫‪ 2021‬بسبب عدم وجود موازنة معتمدة لذلك العام‪ .‬ونتيجة لذلك‪ ،‬سجل‬ ‫الناتج املحيل يف عام ‪ 2022‬ليصل إىل ‪ ،5.4%‬ومع ذلك‪ ،‬ونظرا ً ألن قطاع‬ ‫رصيد املالية العامة فائضاً كبريا ً بنسبة ‪ 11.7%‬من إجاميل الناتج املحيل‪،‬‬ ‫النفط الذي يتسم بكثافة رأس املال هو الذي دفع هذا االنتعاش‪ ،‬فقد كان‬ ‫كام تراجعت نسبة الدين إىل إجاميل الناتج املحيل لتصل إىل‪.40.8%.‬‬ ‫التأثري اإليجايب عىل سوق العمل محدودا ً‪ .‬ويربز النمو السكاين الرسيع يف‬ ‫وبالرغم من ارتفاع الواردات‪ ،‬فقد سجل حساب املعامالت الجارية فائضاً‬ ‫ة إىل زيادة النمو لتحسني نواتج الرفاهة وسد‬ ‫العراق (‪ 2.4%‬سنوياً) الحاج َ‬ ‫كبريا ً بنسبة ‪ 20.7%‬من إجاميل الناتج املحيل (‪ 55‬مليار دوالر) يف عام‬ ‫فجوة الدخل املتنامية مع البلدان النظرية‪ .‬وقد واجه إجاميل الناتج املحيل‬ ‫‪ ،2022‬حيث زادت الصادرات (التي تخضع لهيمنة النفط) بنسبة ‪.74%‬‬ ‫النفطي‪ ،‬وهو املحرك الرئييس للنمو األخري‪ ،‬قيودا ً بسبب السقوف الجديدة‬ ‫وأدت ديناميكيات سوق النفط املواتية إىل ارتفاع إجاميل االحتياطيات‬ ‫إلنتاج النفط الخام التي أعلن عنها يف أواخر عام ‪ 2022‬وتم متديدها يف‬ ‫باستثناء الذهب إىل ‪ 89‬مليار دوالر (تغطي ‪ 14.7‬شهرا ً من الواردات)‪ .‬غري‬ ‫أبريل‪/‬نيسان ‪ .2023‬ونتيجة لذلك‪ ،‬فقد تراجع منو إجاميل الناتج املحيل إىل‬ ‫أن هذا االتجاه يف تراكم االحتياطيات تباطأ يف أوائل عام ‪ 2023‬مع عودة‬ ‫‪( 2.6%‬عىل أساس سنوي) يف الربع األول من عام ‪.2023‬‬ ‫الضغوط عىل حساب املعامالت الخارجية إىل الظهور مع انخفاض أسعار‬ ‫بعد الرتاجع الذي شهده عام ‪ ،2022‬ارتفع تضخم أسعار‬ ‫النفط‪ ،‬مام أدى إىل بدء تراجع االحتياطيات يف مايو‪/‬أيار ‪.2023‬‬ ‫املستهلكني يف أوائل عام ‪ ،2023‬مدفوعاً بانخفاض قيمة الدينار العراقي‬ ‫تتسم املوازنة الجديدة بكونها توسعية بشكل مفرط ‪ ،‬وتفتقر‬ ‫يف السوق املوازية‪ .‬وساعد قانون الطوارئ الصادر يف يونيو‪/‬حزيران ‪2022‬‬ ‫إىل اإلصالحات الهيكلية التي يحتاجها العراق لتطوير اقتصاد حيوي‬ ‫بشأن االحتياجات العاجلة لألمن الغذايئ وواردات الطاقة عىل الحد من‬ ‫ومستدام‪ .‬وبعد عقدين من حرب عام ‪ ،2003‬من املتوقع أن يستمر‬ ‫التضخم الكيل والتضخم األسايس ليصال إىل ‪ 5.0%‬و‪ 4.3%‬يف عام ‪،2022‬‬ ‫منوذج التنمية الذي يعتمد بشكل كبري عىل النفط يف العراق‪ .‬و مل يتحقق‬ ‫عىل الرتتيب‪ .‬وتسبب التشدد يف تطبيق معايري التقارير املالية ملزادات‬ ‫السعي اىل اجراء اصالحات مالية ملعالجة اوجه الجمود يف املوازنة وتعبئة‬ ‫الدوالر للبنك املركزي العراقي منذ نوفمرب‪/‬ترشين الثاين ‪ 2022‬يف عدم‬ ‫اإليرادات غري النفطية لغاية االن‪ .‬واقرتحت الحكومة الحالية‪ ،‬التي‬ ‫تطابق جانبي العرض والطلب عىل الدوالر وانخفاض قيمة الدينار يف‬ ‫‪xiii‬‬ ‫ال تزال آفاق املستقبل االقتصادي للعراق عرضة ملخاطر كبرية‪،‬‬ ‫تشكلت يف أكتوبر‪/‬ترشين األول ‪ 2022‬بعد مخاض سيايس طويل دام‬ ‫ويرجع ذلك يف األساس إىل التحديات الهيكلية العميقة‪ .‬ويؤدي االعتامد‬ ‫عاماً كامالً‪ ،‬موازنة تغطي أفقاً زمنياً ميتد لثالث سنوات من ‪ 2023‬إىل‬ ‫ة للصدمات يف أسواق النفط‬ ‫الكبري عىل النفط إىل جعل االقتصاد عرض ً‬ ‫‪ ،2025‬تم التصديق عليها بحلول يونيو‪/‬حزيران ‪ 2023‬والتي تؤرش سياسة‬ ‫والطلب العاملي كام يتضح من تراجع أسعار النفط يف اآلونة األخرية‪ .‬وال‬ ‫مالية عامة توسعية بشكل كبري‪ .‬ومن املتوقع أن تزداد النفقات‪ ،‬التي متيل‬ ‫تزال العوامل املحركة للهشاشة القامئة من قبل‪ ،‬ومنها ارتفاع معدل انتشار‬ ‫بشدة نحو اإلنفاق املتكرر‪ ،‬بنسبة ‪ ،59%‬ال سيام بسبب الزيادة الحادة يف‬ ‫الفساد‪ ،‬وانخفاض املشاركة يف القوى العاملة‪ ،‬ال سيام اإلناث‪ ،‬وارتفاع‬ ‫فاتورة األجور‪ ،‬والتي من املرجح أن تؤدي إىل مزاحمة االستثامرات امللحة‪.‬‬ ‫نسبة القطاع الخاص غري الرسمي‪ ،‬ونقص فرص العمل‪ ،‬واختالالت القطاع‬ ‫والتعالج املوازنة بشكل كايف التحديات الهيكلية القامئة منذ وقت طويل‪،‬‬ ‫ٍ‬ ‫تحديات رئيسية‬ ‫املايل‪ ،‬وسوء تقديم الخدمات‪ ،‬واملخاطر األمنية‪ ،‬تشكل‬ ‫ومنها التحديات املتعلقة بتنويع النشاط االقتصادي‪ ،‬وتحسني إدارة املالية‬ ‫تغرُّي املناخ وزيادة تقلب‬‫للبالد‪ .‬ومن شأن ارتفاع قابلية التأثر مبخاطر ُّ‬ ‫العامة‪ ،‬ومعالجة أوجه الجمود يف املالية العامة‪ ،‬وتعزيز تعبئة اإليرادات‬ ‫أسعار السلع األولية املرتبطة بغزو روسيا ألوكرانيا أن تكثف من اتجاهات‬ ‫املحلية‪ .‬ومع هيمنة النفط عىل اإليرادات‪ ،‬تفرتض املوازنة سعرا ً للنفط‬ ‫الفقر الحالية وأن تعمق من مستوى انعدام األمن الغذايئ‪ .‬وقد أبرز‬ ‫قدره ‪ 70‬دوالرا ً للربميل و‪ 3.5‬ماليني برميل يومياً من الصادرات‪ ،‬يف حني أن‬ ‫سوق سعر الرصف كمصدر للخطر الذي‬ ‫االرتفاع األخري يف التضخم أيضاً َ‬ ‫را‬‫سعر التعادل للنفط لتغطية جميع النفقات يقف فعليًا عند ‪ 112‬دوال ً‬ ‫كان يتم احتواؤه يف السابق بربط سعر العملة الوطنية‪ .‬أما عىل الجانب‬ ‫با)‪ .‬ان ذلك من شأنه ان يؤدي إىل‬ ‫للربميل (أي ضعف عام ‪ 2022‬تقري ً‬ ‫اإليجايب‪ ،‬فيمكن أن يؤدي انخفاض مستوى التوترات السياسية الداخلية‬ ‫عجز يف املوازنة قدره ‪ 39.7‬مليار دوالر وهو ما ميثل ‪ 14.3%‬من إجاميل‬ ‫فيام يتعلق بتشكيل الحكومة إىل متهيد الطريق ملزيد من االستثامر يف‬ ‫نصف االحتياطيات القياسية املرتاكمة يف‬ ‫الناتج املحيل وما يعادل تقريباً َ‬ ‫االقتصاد وتعزيز إجاميل الناتج املحيل املحتمل‪ .‬عالوة عىل ذلك‪ ،‬فإن‬ ‫أعقاب الطفرة النفطية يف السنتني (‪ .)2021–2022‬إذا تم تنفيذها بشكل‬ ‫احتامالت انحسار التوترات الجيوسياسية اإلقليمية ميكن أن تعزز التجارة‬ ‫كامل‪ ،‬ميكن أن تؤدي املوازنة املسايرة للتقلبات الدورية إىل استنزاف رسيع‬ ‫اإلقليمية وفرص االستثامر األجنبي املبارش بالنسبة للعراق‪.‬‬ ‫ملكاسب النفط املفاجئة األخرية وتجدد الضغوط املالية‪ ،‬ال سيام بالنظر إىل‬ ‫يعد التنفيذ العاجل إلصالحات القطاع املايل وتحديث بنية القطاع‬ ‫االنخفاض األخري والواضح يف أسعار النفط العاملية إىل ‪ 71‬دوالرا ً للربميل يف‬ ‫يا حواجز رئيسية أمام التنويع االقتصادي‪ ،‬رشطًا‬ ‫املرصيف‪ ،‬والتي تشكل حال ً‬ ‫مايو ‪ 2023‬ومتديد العمل بحصص اإلنتاج الحالية‪.‬‬ ‫مهاًم لتعزيز القطاع الخاص وإطالق العنان لخلق فرص العمل امللحة‪ .‬يعترب‬ ‫ً‬ ‫ة‬‫ال تزال اآلفاق االقتصادية للعراق عىل املدى املتوسط مرهون ً‬ ‫الوصول املايل يف العراق من بني أدىن املعدالت يف العامل ‪ ،‬حيث ميتلك ‪ 19‬باملائة‬ ‫بتطورات قطاع النفط‪ .‬ومن املتوقع أن ينكمش إجاميل الناتج املحيل‬ ‫يا ‪ ،‬مام يسلط الضوء عىل مصدر متويل كبري‬ ‫فقط من البالغني حسابًا مرصف ً‬ ‫بانكامش متوقعٍ بنسبة ‪4.4%‬‬‫ٍ‬ ‫الكيل بنسبة ‪ 1.1%‬يف عام ‪ 2023‬مدفوعاً‬ ‫غري مستغل بالكامل‪ .‬وبشكل حاسم ‪ ،‬ال يزال نقص التمويل ميثل أكرب القيود‬ ‫يف إجاميل الناتج املحيل النفطي (بافرتاض تقيد البالد بحصص إنتاج النفط‬ ‫التي تواجه الرشكات الصغرية واملتوسطة والرشكات العاملة يف القطاع غري‬ ‫وفقاً التفاق منظمة أوبك واملنتجني من خارجها يف أبريل‪/‬نيسان ‪.)2023‬‬ ‫الرسمي ‪ ،‬مام يضعف النمو الذي يقوده القطاع الخاص وخلق فرص العمل‪.‬‬ ‫وعىل النقيض من ذلك‪ ،‬من املتوقع أن يتسارع منو إجاميل الناتج املحيل‬ ‫يا إىل هيكل وعمليات‬ ‫كام يربز القسم الخاص يف هذا التقرير ‪ ،‬يرجع ذلك جزئ ً‬ ‫غري النفطي يف عام ‪ ،2023‬مدعوماً بالتوسع يف املوازنة بشكل جزيئ‪.‬‬ ‫القطاع املرصيف القدمية ‪ ،‬التي تهيمن عليها البنوك اململوكة للدولة ذات رأس‬ ‫ومن املتوقع أن تستمر الروابط املحدودة بني القطاعات النفطية وغري‬ ‫املال املنخفض والتي تتمتع بقدرات مؤسسية ضعيفة حيث توفر التمويل يف‬ ‫النفطية‪ ،‬مقرتنة بهيمنة القطاع العام عىل التوظيف يف القطاع الرسمي‪ ،‬يف‬ ‫املقام األول لكيانات القطاع العام والرشكات اململوكة للدولة‪ .‬القطاع املرصيف‬ ‫خلق قطاع خاص متعرث وغري رسمي إىل حد كبري‪ .‬ومن املتوقع أن يؤدي‬ ‫التجاري الخاص ضعيف ولديه قدرة محدودة عىل دعم الوساطة املالية‬ ‫انخفاض الرغبة يف اإلصالحات‪ ،‬حتى يف ظل تراجع أسعار النفط‪ ،‬وضعف‬ ‫وموجه نحو تعظيم اإليرادات من مزادات الرصف األجنبي‪ .‬عالوة عىل ذلك ‪،‬‬ ‫إمكانات منو القطاع غري النفطي‪ ،‬وهو ما يرجع جزئياً إىل تدهور بيئة‬ ‫فإن القطاع املايل غري املرصيف ناشئ بأسواق رأس املال الصغرية والغري متطورة‬ ‫األعامل واستمرار تفيش الفساد‪ ،‬إىل تقييد النمو االقتصادي عىل املدى‬ ‫‪ ،‬ومؤسسات التمويل الصغرى غري املنظمة ‪ ،‬وقطاع التأمني الغري متطور‪.‬‬ ‫الطويل‪ .‬وسيؤثر ارتفاع النفقات العامة والواردات عىل أرصدة حسابات‬ ‫ملواجهة هذه التحديات ‪ ،‬تشمل أولويات إصالح القطاع اإلصالحات املؤسسية‬ ‫املالية العامة واملعامالت الجارية‪ ،‬مع تحول األوىل إىل عجز‪ .‬ومن املتوقع‬ ‫يف البنوك اململوكة للدولة ‪ ،‬وتحفيز الخدمات املالية الرقمية لزيادة الوساطة‬ ‫أن تؤدي إعادة تقييم الدينار إىل تقليص عائدات النفط املقومة بالدينار‪،‬‬ ‫املالية وتعزيز الشمول املايل يف العراق‪ .‬ميكن أن يساعد التنفيذ الكامل لهذه‬ ‫بينام من املتوقع أن تزيد النفقات بشكل كبري يف ضوء املوازنة‪ .‬ومن‬ ‫اإلصالحات يف استعادة ثقة الجمهور يف القطاع املايل واملساعدة يف تعبئة ثروة‬ ‫املتوقع أن يؤدي ارتفاع قيمة الدينار أيضاً إىل زيادة الواردات وتقويض‬ ‫العراق من أجل حل تحديات التنمية امللحة يف البالد‪.‬‬ ‫القدرة التنافسية للصادرات‪.‬‬ ‫‪xiv‬‬ ‫‪IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK‬‬ 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS Output and Demand welfare outcomes and closing the previous years’ growing gap with peers. Iraq’s economy grew rapidly in 2022, driven by On the supply side, growth was led by a strong expansion of the oil sector, but started the oil sector and contact-intensive services in to weaken markedly in 2023. Real gross domes- 2022, and by non-oil sector in Q1-23. The oil tic product (GDP) growth accelerated to 7 percent in sector growth was driven by improved oil market 2022, in line with oil market developments (Figure 1). conditions (see oil and gas developments section). Growth was driven by the tapering of OPEC+ produc- Services edges up, driven by personal services, tion cuts in the first nine months of 2022 (9M-22). Oil trade and hotels, and transport services, in line GDP, accounting for 61 percent of real GDP in 2022, with stronger domestic demand and the rebound grew by 12.1 percent despite the OPEC+ agreement in religious tourism (Figure 3).1 However, agricul- in the last quarter of the year, curtailing output. In con- ture production contracted, as unfavorable rainfall trast, non-oil GDP growth was muted owing primarily volume and distribution constrained domestic pro- to the contraction in agriculture activities impacted by duction from rainfed areas in 2022 (Figure 4).2 This water shortage and as non-oil industries stagnated. However, GDP growth decelerated to 2.6 percent 1 It is estimated that 21 million pilgrims have visited Iraq in the first quarter 2023 (Q1-23) year-on-year (y/y) in 2022, https://www.aljazeera.com/gallery/2022/9/17​ as OPEC+ production cuts (see oil and gas section /millions-of-shia-pilgrims-mark-arbaeen. below) and the oil export dispute with Türkiye led oil 2 This is in addition to the policy decision to halve the area GDP growth to fall to 1.3 percent y/y. The economic planted with irrigated crops to reduce water demand. Cereal harvest is estimated to have declined by 40 per- rebound in 2022 helped increase Iraq’s per capita cent (y/y), with the production of wheat and barley, Iraq’s GDP growth to 5.4 percent (Figure 2). However, Iraq’s main staples, falling by 46 and 35 percent in 2022 (y/y), rapid population growth (2.4 percent per annum) respectively (FAO, Global Information and Early Warning highlights the need for higher growth to improve System (GIESW), February 2023). 1 FIGURE 1 • The Economy Strongly Rebounded …Bringing Per Capita GDP Growth in FIGURE 2 •  in 2022… Line with other Peers 30 15 10 GDP per capita growth, 20 constant prices Y/Y growth, percent 5 10 0 0 –5 –10 –10 –15 –20 2014 2015 2016 2017 2018 2019 2020 2021 2022 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1-23 Non-oil GDP GDP Oil GDP UMIC Iraq MENA (oil exporters) Source: Iraqi Central Organization for Statistics and Information Technology (COSIT) Source: COSIT, World Development Indicators (WDI), and World Bank staff calculations. and World Bank staff calculations. FIGURE 3 • The Economic Rebound Was Driven by FIGURE 4 • …while Agriculture Contracted, and the Oil Sector… Non-Oil Industries Stagnated 120 20 Y/Y Contribution to overll growth, 15 80 Y/Y growth, percent 10 40 percent/PP 5 0 0 –5 –40 –10 –80 –15 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1-23 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1-23 Agriculture Oil Non-oil industry Agriculture Oil Non-oil industry Services, other Public sector services Overall GDP Services, other Public sector services Overall GDP Source: COSIT, WDI, and World Bank staff calculations. Source: COSIT, WDI, and World Bank staff calculations. contraction highlights Iraq’s food security risks and On the demand side, growth was driven by come despite the provisions in the Emergency Law consumption, aided by higher public spending. for Food Security and Development which allo- Although public consumption was initially weakened cated funds to meet urgent demand for staples.3 following the delays in budget approval, the Emergency Underperformance of the labor intensive agriculture Law enacted in June 2022,4 drove up government spend- sector adds to the challenge of high unemployment and reinforces high level of rural-urban migration 3 In June 2022, the parliament passed an Emergency Law for and informality (see Box 1 on urban informality in Food Security and Development that allowed the govern- Iraq). In Q1-23, growth was primarily driven by non- ment to transfer public funds to meet urgent needs for food security, energy imports, social security transfers, job cre- oil industries and agriculture (Figure 4). Output in ation, and essential development projects, among others. the latter increased with better rainfall, resulting in 4 The law authorized additional spending on social assis- favorable yields and increased production for winter tance, conversion of daily workers to contractual employees, crops, including wheat and barley. and food and energy subsidies, among others. 2 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK BOX 1  IRAQ: DRIVERS OF THE INFORMAL SECTOR (FINDINGS FROM AN ENTERPRISE SURVEY)a A recent World Bank survey finds that the dominance of the public sector in the economy, legacies of conflict and political tensions, corruption, and weak business environment are major drivers that push Iraqis into informal businesses. An integrated approach is needed to address the underlying drivers of informality and promote the transition to the formal economy, with particular attention to women, youth, and forcibly displaced populations. This may include: a) Strengthening governance (strengthen legal environment and investment climate, and fight corruption), b) Reducing barriers to formalization (streamline registration and raise awareness among firms and workers about their rights and obligations under the relevant legislation), and c) Creating incentives for formalization (e.g., through improved access and quality of services for workers and businesses or integrating social security access with formal employment).b Between August 2021 and February 2022, the World Bank conducted a novel survey to understand urban informal businesses and the people who work in them. Recognizing that the lack of a sample frame for informal businesses is a key issue, the survey used an innovative adaptive clustering approach. Other surveys in Iraq that captured the informal sector in detail used the household as the primary unit of data collection, instead of the business itself. The survey enumerated a total of 3,008 blocks across the four cities, consisting of 5,193 informal businesses (Table B1.1). The final sample consisted of 1,996 interviews. Key findings • The large public sector presence including in the labor market has limited the opportunities for the private sector, which remains largely informal and stunted. Informal businesses in Iraq are relatively small, with 2.2 workers per business on average, including the owner, and most often a family member. In contrast to most countries where informal businesses are often female headed, 93% of businesses are owned by men in Iraq. The business owner is 39 years old on average and has 6.6 years of experience. Businesses headed by females had no co-owners. More than 80% of owners were the only breadwinners of the family, highlighting the importance of the business to the welfare of the family, which on average, consisted of 6 members (in line with the national average). • An unconducive business environment and years of conflict and political unrest have driven informality. Owners often cited work-hour flexibility as well as the inability to find another source of income as reasons for starting the business. A third of owners were still actively looking for a wage job at the same time. About 80% of the main owners started their business during the pandemic due to the absence of another source of income. • Lack of access to credit and resources remain a persistent challenge. Informal businesses were on average young, about 6 years old. In terms of sectoral distribution, about 53% operated in wholesale and retail trade, 12% in manufacturing (mostly bakeries and similar) and the remaining in services. More than 80% had used the owners’ own savings to start the business, and 13% borrowed from family or friends, especially among women-owned businesses. These businesses rarely use a bank account to conduct daily activities. The average value of sales in the month prior to the survey was not high—around IQD1.5 million (equivalent to about US$1,028). Around 63% of businesses reported having a profit, while 19% broke even and 18% reported having a loss. • Widespread corruption increased the hurdles of registering a business. The most cited reason for not registering with the Ministry of Trade relates to government-related obligations. More than two-thirds of the owners mentioned wanting to avoid taxes, and almost two-thirds also reported wanting to avoid informal payments (corruption) associated with formalization. Another common reason is to circumvent inspections by government officials, especially for businesses operating from home (likely also related to bribe demands). TABLE B1.1 • Informal Businesses Interviewed Starting Blocks Threshold Number of Total Number of Blocks Informal Business Units Cityc Universe of Block Enumerated Informal Businesses Enumerated Enumerated Interviews Completed Baghdad 28,296 1,272 13 1,352 2,282 680 Basra 11,645 520 16 554 1,609 599 Sulaymaniyah 6,013 470 4 760 871 294 Najaf 3,950 317 1 342 431 423 Total 49,904 2,579 — 3,008 5,193 1,996 a Source. Abdel Ahad, J. and Dalal Moosa and Vanessa Moreira May 31, 2023). Understanding Urban Informal Business and the People who Work in Them: Findings from the Iraq Informal Sector Informal Survey. World Bank: D.C. Available at: https://documents.worldbank.org/en/publication/documents-reports/documentdetail/0990712231530301​ 74/p1716390bd039e07d0996e09fadf7d2b515. b A diagnostic of the informal economy in Iraq, ILO, November 2021, https://www.ilo.org/wcmsp5/groups/public/---arabstates/---ro-beirut/documents/publication/wcms_830086.pdf. c The city of Baghdad covers 204.2 Km2 and has a population of 7.5 million. The city of Basra covers 181 Km2 and has a population of 1.4 million. The city of Sulaymaniyah covers 20.1 Km2 and has a population of 780 thousand. The city of Najaf has a population of 930 thousand. Recent Economic and Policy Developments 3 ing. As a result, primary government spending (i.e., Iraq’s draft budget for 2023 aims to ramp up invest- recurrent expenditures excluding interest payments) ment expenditures to almost US$37 billion annually, rose by 23.5 percent in 2022 in nominal terms, includ- more than triple 2022 actual spending. ing a 31 percent increase in social welfare expenditures. Higher government spending coupled with easing infla- Oil and Gas Sector Developments tion, in 2022, improved household purchasing power and drove up private consumption. Higher purchas- Oil production climbed strongly before being cur- ing power of the dinar following the devaluation and tailed by new OPEC+ production limits starting the spillovers from the significant fiscal expansion are in the last quarter of 2022. The strong rebound expected to drive consumption to grow further in 2023. in global oil demand and the resulting tapering of The contribution of investment to overall OPEC+ production quotas boosted Iraq’s oil output growth remained limited. Public investment was to an average of 4.45 million barrel per day (mbpd) in constrained by the lack of an approved budget, which 2022 (Figure 5). Since November 2022, new OPEC+ hindered the use of oil windfalls for new investments. production cuts announced in response to declining As a result, government investment expenditures prices led crude production to fall in the fourth quarter contracted by 9.8 percent in 2022 (nominal terms). of 2022 (Q4-22) to an average of 4.5 mbpd and to 4.15 Meanwhile, Iraq’s investment climate remains poor, mbpd in the first five months 2023 (5M-23).5 In the including due to a lack of business-friendly legisla- latter period, production volumes were on average tion, a volatile security environment, administrative 278,000 bpd below the quota due to a combination inefficiencies, and systemic corruption. Moreover, of maintenance in the giant southern oil terminal and infrastructure gaps, lack of access to finances, and disruptions to exports in the north (see below). the excessively large role of State-Owned Enterprises Oil export revenues also surged in 2022 (SOEs) in Iraq’s economy undermine the competi- buoyed by higher oil export volumes and prices but tive landscape. This suboptimal investment condition started softening in early 2023 as both softened. constrains growth and undermines the country’s Higher oil production boosted crude oil export volumes reconstruction drive, which add to social grievances. The Government of Iraq’s (GoI) program announced 5 As part of OPEC+ members announced production cuts in October 2022 aims to improve the investment envi- in April 2023, Iraq production would fall by 211,000 bpd ronment and support investors. As with similar earlier starting May 2023 and maintained constant through to programs, implementation is likely to be challenging. the end of the year. FIGURE 5 • Oil Production and Export Volumes …while Oil Export Prices Declined after FIGURE 6 •  Increased with Higher Demand… Reaching a Multi-year High 6 15 130 14 5 10 110 12 4 5 10 90 US$, billion Percent Mbpd US$/bbl 3 0 8 70 2 –5 6 1 –10 50 4 0 –15 30 2 May-19 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22 Feb-23 May-23 10 0 May-19 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21 Aug-21 Nov-21 Feb-22 May-22 Aug-22 Nov-22 Feb-23 May-23 Oil production (LHS) Oil exports (LHS) Production gapa (RHS) Crude oil, Brent (LHS) Budgeted Price (LHS) Average Iraq export price (LHS) Crude oil exports value (RHS) Source: Iraq’s Ministry of Oil (MoO) and World Bank staff calculations. Notes: a Crude oil production gap relative to OPEC+ quota. Source: MoO, Iraq’s Ministry of Finance (MoF) and World Bank staff calculations. 4 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK to an average of 3.3 mbpd in 2022, up by 9.7 percent. FIGURE 7 • Higher Oil Prices in 2022 Boosted KRG Average oil export prices also rose by 40 percent to Oil Revenues US$95.6/bbl in 2022 (Figure 6). As a result, crude oil exports receipts soared to a record US$115.7 billion in 15 0.5 2022, growing by 53 percent compared to 2021. How- 12 0.4 ever, oil exports volumes and prices fell in 5M-23 in line US$, billion 9 0.3 with the OPEC+ agreements for 2023 and the halting of Mbpd exports (0.45 mbpd) via the oil pipeline through Türkiye, 6 0.2 following the ruling of an arbitration case with the Interna- 3 0.1 tional Chamber of Commerce between Iraq and Türkiye. Higher oil prices in 2022 also mitigated 0 0.0 2018 2019 2020 2021 2022 pressures on the Kurdistan Regional Government KRG oil export value (LHS) KRG oil export revenues (LHS) (KRG) finances but pressures re-emerged in 2023. KRG oil export volumes(RHS) As a result of the uncertainties caused by the legal dis- pute between the Federal Government and KRG, oil Source: Deloitte, KRG Department of Media and Information, and World Bank staff calculations. export volumes from the Region declined to an average of 0.4 mbpd in 2022 (Figure 7).6 However, a 43 percent surge in KRG oil prices, provided a more than offset- fall from almost four-fifths of total energy supply today ting gain.7 Higher oil revenues allowed the authorities to slightly over one-fifth by 20508, Iraq would need to to meet pressing obligations towards public sector sal- shift its oil and energy development model entirely. It aries and International Oil Companies (IOCs). However, is therefore more urgent than ever for Iraq to address in 2023 the halting of oil exports through Türkiye since the intertwined climate and development challenges of March 2023 and softening oil prices, have added to fis- Iraq most notably through the development of renew- cal pressures, despite new transfers (through loans due able energy sources and the elimination of gas flaring.9 to legal limitations) from the federal government. The GoI sets ambitious goals for increasing 6 KRG oil exports in 2022 were impacted after Iraq’s Fed- crude oil production capacity and upgrading the eral Supreme Court in February 2022 ruled that current energy sector but needs to invest more in climate oil exports from the region were illegal, which reduced resilience. Crude oil production has undergone a the list of buyers willing to lift KRG crude oil. The Federal three-fold increase since 2003, and authorities have set Government and KRG signed a deal on April 4, 2023, to restart northern exports with Iraq’s State Oil Marketing a target to ramp up oil production capacity to 8 mbpd Organization (SOMO) marketing the crude oil in coordi- by 2028. Meanwhile, a series of investment project con- nation with the KRG but has yet to be fully operationalized, tracts have been agreed in recent years to raise crude mainly due to Türkiye’s halting of these exports at the oil production capacity and reduce reliance on gas port of Ceyhan. Bilateral discussions regarding resump- imports through increasing the capture of associated tion of exports were ongoing as of mid-June 2023. gas and increasing solar power generation. However, 7 KRG exports its oil at a lower price compared to the rest of Iraq despite having the same quality, largely due to these plans have often faced delays owing to several risks associated with operations, contracts, and other reasons including delays in budget ratification, secu- geopolitical factors. This gap was almost US$11 per bar- rity challenges, inadequate infrastructure, and political rel in 2022. Furthermore, total gross oil revenue in 2022 instability. The successful implementation of energy reached over US$12 billion, but the net revenues were projects and achieving the desired outcomes hinges only US$5.7 billion, after deductions for international oil on strong institutional and governance arrangements companies, loans, transport, and storage fees. 8 IEA “Net Zero by 2050 A Roadmap for the Global Energy to improve efficiency and accountability of operations. Sector” May 2021. Energy sector investments also need to be consistent 9 Accessible at https://openknowledge.worldbank.org​ with Iraq’s Nationally Determined Contributions (NDCs). /handle/10986/38250. See the Special Focus chapter Furthermore, as global demand for fossil fuel could of the previous IEM (Fall 2022) for a summary. Recent Economic and Policy Developments 5 Public Finance Government revenues remained dominated by oil proceeds, while non-oil revenues declined. Rising oil revenues improved Iraq’s fiscal position Oil revenues grew by over 61 percent and accounted considerably in 2022, but their softening through- for 95 percent of total government revenues in 2022 but out early 2023 raised concerns. Total government their share is estimated to have declined to 92.5 per- revenues surged by 48.2 percent in 2022, spurred by cent in 4M-23 following the fall in oil export prices by the oil windfall. Total expenditures grew more mod- 22.2 percent y/y. Implementation of measures intro- erately by 20.5 percent, driven by the passing of the duced in 2021 to increase non-oil revenues has been Emergency Food Security Law in June 2022, before limited while enacting new efforts were hindered by which expenditures had been constrained to their both implementation challenges and limited legislative 2021 levels due to a lack of an approved budget for the authority of the caretaker government in 2022, leading year. As a result, the fiscal account recorded a signif- non-oil revenues to decline by 41.5 percent in 2022 (Fig- icant surplus of 11.7 percent of GDP (Figure 8). Iraq’s ure 8). Recent progress with digitalization of customs fiscal accounts would be less favorable on accrual procedures needs to be complemented with stricter basis due to significant unaccounted domestic and enforcement of customs rules and some degree of external arears.10 A combination of oil supply disrup- autonomy to the revenue authorities to collect additional tions and weaker global demand resulting in a decline revenues. Diversifying government revenues is in line in oil prices in the second half of 2022 and the recent with the new government priorities to reduce reliance OPEC+ quotas cuts in October 2022 and April 2023, on oil revenues in funding the state budget by reform- have renewed pressures on Iraq’s public finances due ing tax and customs systems.11 This is crucial to reduce to their overdependence on oil revenues. Total reve- nues declined in 4M-23 by 23.3 percent y/y, as oil 10 Most of the domestic arrears are owed to domestic revenues fell by 18.3 percent y/y. This fiscal procycli- banks and the Central Bank of Iraq, and external arrears relate to payments to international oil companies. cality once again highlights the necessity of prudent 11 The new government agenda sets a target to reduce reli- fiscal policy and underscore the need for implemen- ance on oil revenue in funding the state budget to 80 tation of fiscal reforms to reduce budget rigidities and percent in 3 years by diversifying and maximizing the boost domestic revenue mobilization. non-oil revenue. FIGURE 8 • Higher Oil Revenues Improved Iraq’s …but Wage Bill and Transfers Remain a FIGURE 9 •  Fiscal Balance in 2022… Significant Share of Expenditures 60 15 100 10 90 40 5 80 20 Percent of GDP Percent of GDP 70 0 0 60 US$, billion –5 –20 50 –10 40 –40 –15 30 –60 –20 20 2015 2016 2017 2018 2019 2020 2021 2022 10 0 Oil revenues (LHS) Non-oil revenues (LHS) 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recurrent Non-oil investment expenditures (LHS) expenditures (LHS) Wage bill Transfers (including pensions) Oil investment Fiscal balance (RHS) Investment expenditures Goods and services expenditures (LHS) Interest payments Other expenditures Source: MoF and World Bank staff calculations. Source: MoF and World Bank staff calculations. 6 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK exposure to oil revenue volatility and to create fiscal Public Investment Remained Low and FIGURE 10 •  space for investments in human and physical capital. Under-Executed vis-a-vis Recurrent Spending While the procyclicality of fiscal policy was partly moderated due to legal restrictions, 190 182.7 expenditure rigidities persist.12 Recurrent expendi- 170 Budget excution rate, percent 128.8 150 tures grew by 25.3 percent in 2022, accounting for 114.8 113.3 130 105.8 almost 90 percent of total budget. This was primarily 110 91.6 80.3 79.5 77.0 due to large wage bill and transfers allocations (Fig- 90 74.8 69.9 63.8 61.0 ure 9) and as the “Emergency Law for Food Security 70 46.9 37.4 50 30.4 29.7 and Development” bill in June 2022 allocated IQD25 28.2 19.6 30 13.2 trillion (US$17.2 billion or 6 percent of GDP) of fund- 10 ing for urgent food security and development needs. –10 Oil Non-oil Current Oil Non-oil In Q1-23, expenditures edged up by 0.9 percent y/y, revenues revenues expenditures investment investment as the approval of the budget for 2023 faced delays 2019 2020 2021 2022* thereby restricting spending. Despite being OPEC’s Source: MoF and World Bank staff calculations second largest oil producer, Iraq imports most of its Note: * The realization rate in 2022 is calculated based on the 2021 budget targets. refined oil products due to a growing shortfall in refin- ing capacity.13 Energy subsidies also remained high estimated at 6.4 percent of GDP in 2022 in line with to 40.8 percent in 2022, from 55.1 percent in 2021. higher oil prices and overconsumption.14 Rightsiz- The decline reflects non-policy factors related to the ing current expenditures, including the wage bill and large fiscal surplus of oil revenues and large price energy subsidies, will help generate fiscal space for effects driving the nominal GDP growth (27.2 per- other development needs. In addition, adopting fis- cent y/y). The record oil revenues have also allowed cal rules to protect the finite oil wealth will be key to the government to clear some external arrears for promote a more sustainable economic development energy imports from Iran, further contributing to model for Iraq and buffer against future shocks. total debt reduction.15 Other debt sustainability risks The lack of an approved budget for 2022 limited new investments and impacted the exe- cution of existing projects. The supplementary 12 In the absence of an approved budget for 2022, gov- financing, approved by the parliament in June 2022, ernment spending for 2022 was restricted by Article 13 of the Financial Management Law No. 6 of 2019 allocated only a small portion, under IQD10 trillion (amended), which stipulates that the disbursement of (US$6.9 billion or 2.6 percent of GDP), for develop- funds is limited to one-twelfth of actual expenditures in ment projects. In Q1-23, however, investments more the previous year. than doubled (y/y) driven by the previous year’s accu- 13 Imports rose from less than US$4 billion in 2021 to over mulated surplus and in lined with the government US$6 billion in 2022. In response, Iraq’s MoO is looking plans in the 2023 budget. Nonetheless, significant to develop the refining sector. Latest news indicates that commercial production of the much-delayed Karbala oil investment needs remain, including in infrastructure refinery has finally begun. The refinery has the capacity and provision of other public services, following per- to refine 140,000 barrels per day to help meet growing sistent under-realization of budget investment targets domestic demand for petrol, kerosene and heating oil, in recent years (Figure 10). In addition, inefficiencies while reducing imports. in public investment management and corruption fur- 14 IMF, Fossil Fuel Subsidy Database. ther inhibit the impact of existing levels of investment 15 The government is reported to have cleared US$1.6 billion in debt to Iran for gas and electricity imports fol- spending. lowing the passage of the emergency bill in 2022. In June The improving fiscal balance helped 2023, Iraq also announced that it would pay US$2.76 bil- reduce the debt-to-GDP ratio in 2022. Iraq’s pub- lion of debt to Iran, following the issuance of a waiver of lic debt-to GDP ratio is estimated to have declined sanctions by the US. Recent Economic and Policy Developments 7 include those related to service guarantees to elec- FIGURE 11 • The Budget for 2023 Amplifies the tricity sector16 and contingent liabilities related to Previous Trend of Fiscal Expansion restructuring of the two largest state-owned banks (SOBs). The adoption of a medium-term debt man- 160 agement strategy would help mitigate part of these 140 120 risks through evaluating cost-risk trade-offs, while 100 maintaining cash or reserve buffers, or establishing 80 US$, billion committed lines of credit. 60 The budget for 2023 is strongly procy- 40 clical, excessively expansionary, and lacks the 20 structural reforms that Iraq needs to develop a 0 vibrant and sustainable economy. The approved –20 budget17 envisages an annual spending of IQD199 –40 2016 2017 2018 2019 2020 2021 2022 2023 trillion (US$153 billion), an expansion of 59 percent Budget compared to 2022 actual expenditures and imply- Fiscal deficit Total revenues ing an almost doubling of the breakeven oil price Total expenditures Trend - Expenditures to US$112/bbl.18 Expenditures are heavily skewed Source: MoF and World Bank staff calculations. toward recurrent spending, which account for 74.3 percent of the total spending envelop, notably due to a sharp increase in the wage bill. Revenues extends the loose fiscal stance for the following two are envisaged to remain dominated by oil, based on years. The budget also fails to tackle longstanding an oil price assumption of US$70/bbl and 3.5 mbpd structural challenges, including on economic diver- of exports. Even with these ambitious assumptions, sification, improving public financial management, this will result in a large fiscal deficit of IQD51.6 trillion addressing expenditure rigidities, and boosting (US$39.7 billion or 14.3 percent of GDP), equivalent domestic revenue mobilization. The latter is even to more than half of the recent record reserves accu- more crucial as the decision to revalue the Iraqi dinar mulated following the 2021-22 oil boom and dwarfing up by 10.3 percent would also result in lower dinar- the deficit at the peak of the pandemic in 2020 (Fig- denominated oil revenues (see Box 2 on the impact ure 11). The deficit is to be financed through the of dinar revaluation). surplus from oil sales or domestic and external bor- rowing. The budget bill includes an agreement with KRG to transfer 12.7 percent of the federal budget 16 These are estimated at over US$21 billion in 2017 (7.8 to the region in return for 0.4 mbpd of crude oil. The percent of the 2022 GDP) but are not included in public budget proposes the establishment of new funds, debt. IMF, Article IV, February 2023. including the Iraq Fund for Development to boost 17 The draft budget was submitted to the parliament, with investments with a capital of IQD1 trillion (US$0.8 bil- delay, in March 2023 and the budget was approved in June with minor amendments. lion). While establishing a mechanism to invest the oil 18 The expansion partly owes to several issues including: wealth is crucial, such measures need to be closely overdue ministry projects, extra employment opportuni- coordinated with fiscal and monetary policy.19 The fis- ties provided by the public sector for new graduates, and cal risks related to the highly procyclical budget and debt obligations—external and internal. over reliance on oil have already partly materialized 19 See Box 2 of WB Iraq Economic Monitor Spring 2022 considering the recent oil export price and extension on fiscal rules (https://www.worldbank.org/en/count​ ry/iraq/publication/iraq-economic-monitor-spring-20​ of production quotas. The budget’s the three-year 22-harnessing-the-oil-windfall-for-sustainable-growth) horizon of the budget (covering 2023-25) mitigates and the WB handbook on Strategic Investment Funds previously experienced budget uncertainties for (https://​op​e​n​k​n​o​w​l​e​d​ge​.wo​r​l​d​b​a​nk​.org​/en​t​i​t​i​es​/pu​b​l​i​ subsequent years, its significant expansion poses it c​a​t​i​on​/47​6​7​3​8​d1​-22​f0​-51​a0​-ab​df​-4d​e​5​f​a​3​5​3392). 8 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK Monetary Policy and Prices the volumes of the USD credits and remittances sold for dinar (see Figure B2.2). This supply-demand mismatch After moderating in 2022, the depreciation of the resulted in the depreciation of the dinar against the dol- Iraqi dinar in the parallel market in early 2023 lar. To curb the impact on inflation and reduce the gap fueled consumer price inflation. The passage of the between the official and the parallel market exchange emergency law in June 2022 to meet urgent needs for rates, in February 2023, the CBI set the dinar to dol- food security, energy imports and existing subsidies lar exchange rate at IQD1,300/USD from IQD1,450/ contributed to easing of the headline and core inflation, USD. Following the announcement, the parallel market at 5.0 and 4.3 percent in 2022, respectively (Figure 12).20 rate remained elevated at IQD1,588/USD in February However, the depreciation of the dinar in the parallel 2023, but eased thereafter to an average of IQD1,452/ market since November 2022 (see Box 2 below) led to USD in May. The CBI has not changed its policy rate a surge in headline and core inflation in January 2023. despite the increase in global interest rates especially High reliance on imported essential products, along- the US Federal Reserve Board considering the dollar side limited domestic production, further exposes the peg, which also led to capital outflows. economy to exchange rate volatilities, adding to price Notwithstanding the revaluation of the dinar, pressures for food and transportation (Figure 13). Mea- the central bank of Iraq pursued a strongly procy- sures to control the depreciation of the dinar helped clical stance amid a global and domestic context ease price pressures in February to April (see below). of rising inflation. To curb inflationary pressures aris- In response to the currency depreciation, the ing in 2022, the CBI: (1) raised its capital from 3 trillion Central Bank of Iraq (CBI) revalued the dinar upward dinars (approximately US$2 billion) to 5 trillion dinars, by 10.3 percent in February 2023. Closer enforce- and its gold reserves by 35 percent in May 2022; and ment of due diligence measures and financial reporting (2) extended the maturity for some of its financial standards for transactions through the CBI dollar auc- tions since November 2022 led to a sharp decline in 20 Headline inflation in Kurdistan Region of Iraq remained daily traded volumes. As a result, part of the demand for higher in 2022 at 7.1 percent, driven by higher food, utili- dollars was redirected to the parallel market, reducing ties, and transport prices. FIGURE 12 •  Inflationary Pressures Resurfaced in FIGURE 13 • …Driving Up Inflation in 4M-23 due Early 2023 Following Exchange Rate to High Import Dependence of Pressures… Consumer Goods 60 10 10 6 8 9 40 5 Y/Y contribution to CPI, pp 6 8 7 Percent Percent 4 4 20 6 2 Percent 0 5 3 0 4 –2 2 3 –20 –4 2 1 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 1 0 0 Headline Inflation Food and Non-Alcoholic Beverages Transportation House Supplies, Appliances & Maintenance Clothes and Footwear Miscellaneous Services and Goods Food and non-alcoholic Health (LHS) beverages (LHS) Transport (LHS) Communication (LHS) Recreation, culture Headline inflation (RHS) & restaurants (LHS) Core inflation (RHS) Inflation Y/Y, percent (LHS) Contribution to CPI, pp (RHS) Source: COSIT and World Bank staff calculations. Source: COSIT and World Bank staff calculations. Recent Economic and Policy Developments 9 products. These measures aimed to strengthen the protection. To improve women’s financial inclusion, the CBI balance sheets to allow interventions in curbing CBI issued a circular to prohibit gender-based discrimi- liquidity growth. Meanwhile, the policy rate remained nation in access to financial services, which contributed unchanged at 4 percent, and broad money (M2) grew to improving Iraq’s 2023 Women, Business, and the Law steadily throughout 2022 and early-2023 (Figure 15). Index. The CBI has also conducted a survey on commer- Monetary policy thereby was not only accommo- cial banks with gender-disaggregated indicators. The dative but strongly procyclical given the strong real KRG has also adopted a new labor law that mandates GDP growth, all the while inflation was accelerating. equal pay for work of equal value, prohibiting sexual ha- The growth of credit to the private sector accelerated rassment in the workplace (see the Special Focus on in 2022 thanks to CBI’s initiative to allocate financial the financial sector). In response to the heightened due resources to the private sector, as well as agricultural, diligence measures adopted by correspondent banks housing, and renewable energy projects (Figure 14).21 that resulted in widening of the FX spreads and even- However, with the expiry of some the CBI sectoral ini- tual devaluation, CBI tightened financial reporting of tiatives credit growth declined in early 2023. remittances and transfers and implemented enhanced Iraq remains a cash-based economy, despite anti-money laundering controls. These efforts have some reform initiatives. In Q1-23, the deposit-to-M2 borne fruit as Iraqi banks have established several new ratio amounted to 49 percent, against 51 percent cur- correspondent relationships. CBI’s efforts to improve rency in circulation. CBI has adopted several retail pay- transparency in the banking sector are another positive ment systems, but their effectiveness is limited as they step towards reducing avenues for corrupt actors in ad- do not support transacting between bank accounts vance of Iraq’s upcoming Financial Action Task Force and mobile wallets. In August 2022, the CBI raised the (FATF) review. Broader anti-corruption efforts need to upper limit of the electronic payment cards by 27 per- continue, including through the implementation of the cent. The new Iraqi Government announced several 2021-24 National Integrity and Anti-Corruption Strategy, initiatives in January 2023 to facilitate the usage of recommendations of the approved National Risk As- Electronic Payments. The CBI issued circulars to man- sessment, establishing a Treasury single account, and date the usage of POS in financial transactions, such the digital transformation of the economy for greater ac- as reducing the merchant fees, mandating linkage of countability and transparency. bank accounts and introducing incentives to promote Notwithstanding CBI’s efforts, the finan- POS usages. However, Iraq remains a cash-based cial sector continues to face several regulatory, society despite the increasing availability of digital pay- supply-, and demand-side challenges, which ham- ment mechanisms. Only 14 percent of adults reported per progress towards greater financial inclusion. making or receiving a digital payment, approximately According to Global Findex Database 2021, around 25 percentage points behind MENA average (Global 20 million adults in Iraq remain financially excluded, Findex, 2021). Lack of trust in the banking system, with women making up more than half of the unbanked limited availability of e-payments infrastructure (ATM, population (52 percent). Lack of sufficient funds, high POS) and lack of financial literacy are the main con- cost of financial services, and lack of trust in financial straints holding back the digital transformation that institutions remain the leading barriers to account own- will facilitate e-Payments (see the Special Focus on the ership. CBI data reveals that account ownership among financial sector). adult was at 26 percent in 2022, up from 24 percent in The CBI introduced new measures to enhance 2021. The national coverage of financial access points the legal and regulatory framework and financial in- for various financial institutional categories remains clusion, including the equal provision of financial and banking services for women. Improvements in- 21 In June 2022, CBI increased the financial allocation for clude developing legal and regulatory frameworks for private sector projects and housing loans and extended licensing of payment service providers, modernization the repayment of loans granted to the agriculture and of payments system, and strengthening of consumer manufacturing sectors until end-2022. 10 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK scant, with only four bank branches and five Auto- Around 90 percent of banks’ credit in Iraq is held by mated Teller Machines (ATMs) per 100,000 adults. seven public banks. Based on a survey conducted CBI’s general collateral requirements and strict con- on 608,500 SMEs in 2021, the total demand for ditions to access loans, such as the requirement of SMEs finance for the median loan size (equivalent to having a public employee as a guarantor tend to affect US$35,000) was US$11.1 billion (6.6 percent of GDP), women more than men as they have a smaller network but only a part was met, leaving a US$6 billion fund- and less access to collateral.22 ing gap.23 Lack of SME-oriented financing incentivizes Limited access to financing exacerbates SMEs to rely on informal sources for finance. challenges faced by SMEs in Iraq, which hinders private sector development. Only 9 percent of the 22 In partnership with the World Bank, the Iraqi Private Banks League launched a small loan initiative with total lending reaches SMEs, mainly through the One eased conditions for female entrepreneurs. Trillion Dinar Initiative, with the National Bank of Iraq 23 Source. International Finance Corporation (IFC), Novem- being the dominant provider. Private banks remain ber 2022. Market Bite Iraq – Economic Recovery Creates small with limited capital to support private sector. Opportunity to Invest in Small and Medium Businesses. The Credit to Private Sector Steadily FIGURE 14 •  FIGURE 15 • The Economy Remains Cash-Based, Accelerated throughout 2022 despite Modest Improvements 180,000 80 30 25 140,000 20 60 Y/Y change, percent IQD million Percent 15 100,000 10 40 60,000 5 0 20,000 20 Apr-11 Dec-11 Aug-12 Apr-13 Dec-13 Aug-14 Apr-15 Dec-15 Aug-16 Apr-17 Dec-17 Aug-18 Apr-19 Dec-19 Aug-20 Apr-21 Dec-21 Aug-22 Apr-23 –5 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Broad money (LHS) Deposits to M2 ratio (RHS) Credit to private sector Broad money Currency in circulation to M2 ratio (RHS) Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. BOX 2  IMPACT OF THE DINAR REVALUATION ON IRAQ’S ECONOMY Background. In February 2023, the GoI announced a 10.3 percent revaluation of dinar, adjusting the peg to the dollar from 1,450 IQD/USD to 1,300 IQD/USD, marking a partial reversal of the 22.7 percent devaluation of December 2020 (Figure B2.1). The policy aimed to stabilize foreign exchange market volatility and the resulting spike in inflation (see the second paragraph in the monetary section for more details). The macroeconomic impact of the revaluation on Iraq’s economy comes through the following key channels: Growth. A stronger dinar could lead to higher purchasing power and thus higher consumption. However, this additional demand is likely to be met through higher imports. Crucially, the devaluation lowers the competitiveness of exports, all of which will affect economic growth. Inflation. Given Iraq’s high dependence on imports to meet the demand for food and raw materials, a stronger currency could curb the rise in inflation, especially through the retail prices of essential items. The value of the Survival Minimum Expenditure Basket (SMEB) which includes key basic commodities increased by 19 percent compared to the value before the devaluation of the currency (UNOCHA, 2022). However, with the current revaluation, this response could be weaker. Empirical studies show that appreciations in developing countries (continued on next page) Recent Economic and Policy Developments 11 BOX 2  IMPACT OF THE DINAR REVALUATION ON IRAQ’S ECONOMY (continued) Parallel Market and Official Rate, IQD:USD FIGURE B2.1 •  Devaluation (Dec 2020) Revaluation (Feb 2023) 1,700 30 1,600 25 20 1,500 IQD:USD 15 Percent 1,400 10 1,300 5 1,200 0 1,100 –5 1/1/20 2/1/20 3/1/20 4/1/20 5/1/20 6/1/20 7/1/20 8/1/20 9/1/20 10/1/20 11/1/20 12/1/20 1/1/21 2/1/21 3/1/21 4/1/21 5/1/21 6/1/21 7/1/21 8/1/21 9/1/21 10/1/21 11/1/21 12/1/21 1/1/22 2/1/22 3/1/22 4/1/22 5/1/22 6/1/22 7/1/22 8/1/22 9/1/22 10/1/22 11/1/22 12/1/22 1/1/23 2/1/23 3/1/23 4/1/23 5/1/23 6/1/23 ER gap (RHS) Parallel rate (LHS) Official rate (LHS) Source: CBI, media, and World Bank staff calculations. Notes: The exchange rate gap is defined as the deviation of the parallel market rate relative to the official rate. FIGURE B2.2 • CBI Daily Auctions and Exchange Rate Gaps 350,000,000 30 300,000,000 25 250,000,000 20 200,000,000 Percent USD 15 150,000,000 10 100,000,000 50,000,000 5 0 0 1/3/22 1/18/22 2/2/22 2/17/22 3/4/22 3/19/22 4/3/22 4/18/22 5/3/22 5/18/22 6/2/22 6/17/22 7/2/22 7/17/22 8/1/22 8/16/22 8/31/22 9/15/22 9/30/22 10/15/22 10/30/22 11/14/22 11/29/22 12/14/22 12/29/22 1/13/23 1/28/23 2/12/23 2/27/23 3/14/23 3/29/23 4/13/23 4/28/23 5/13/23 5/28/23 6/12/23 USD volume sold: Cash (LHS) USD credits & remittances sold for Dinars (LHS) ER gap (RHS) Source: CBI, media, and World Bank staff calculations. Notes: The exchange rate gap is defined as the deviation of the parallel market rate relative to the official rate. (continued on next page) 12 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK BOX 2  IMPACT OF THE DINAR REVALUATION ON IRAQ’S ECONOMY (continued) FIGURE B2.3 • Exchange Rate and CPI Inflation 10 4 8 3 6 2 4 2 1 Percent 0 0 –2 –1 –4 –2 –6 –8 –3 –10 –4 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 M/M inflation (RHS) Y/Y inflation (LHS) IQD depreciation* (LHS) Source: COSIT, CBI, media, and World Bank staff calculations. Notes: *Positive values show dinar’s depreciation against the dollar in the parallel market. induce a weaker response from imports and consumer prices compared to similar-sized depreciations.a Nonlinearities in the relationship between exchange rate movements in developing countries have also been observed (Caselli and Roitman, 2016). Given that the exchange rate system in Iraq is a peg to the dollar, movements of exchange rates could be captured by the gap between the official and parallel exchange rates and whether this gap translates into a domestic shock.b Figure B2.3 shows that the gap reached its peak in February, but inflationary pressures started to ease off as the gap started to narrow in response to the revaluation announcement. External. A stronger dinar is expected to lead to a surge in imports, while exports become less competitive, adding pressure on existing reserves and fiscal buffers.c Following the devaluation of the Iraqi dinar in December 2020, imports declined by 16 percent in 2021 (y/y) driven by private imports’ downward adjustment following the measure. Given the previously exhibited responsiveness of imports to exchange rate changes the revalued currency in 2023, will make it even harder for the capacity-constrained domestic production to compete with imported goods.d On the exports side, a stronger currency is projected to reduce the export competitiveness of already weak non-oil exports and the broader goal of diversifying the economy away from oil. However, given that non-oil exports constitute only 4 percent of total trade, the direct impact of appreciation on exports the external account is expected to be modest. Another channels through which the currency revaluation could affect the external sector is through outflows, as tourism outside Iraq becomes relatively cheaper. As the appreciation reduces the dinar value of remittances, it could also lead to an increase in their value as expats try to support families in Iraq. Fiscal. The main impact of the revaluation is the direct impact of lowering the dinar-denominated value of oil revenues. Accordingly, at the revalued exchange rate of IQD1,300/USD, oil revenues are estimated to be 6 percent lower, and the primary budget balance lower by IQD12 trillion compared to without the revaluation. Furthermore, the approved budget for 2023 expands the recurrent expenditures by 32.2 percent compared to 2022, which could potentially exacerbate the effects of the exchange rate revaluation depending on the component of goods and services of government expenditures and the correspondent government import bill. However, the stronger currency will also have a direct revaluation effect in reducing the dinar value of external debt stock and servicing cost. Overall, while the exchange rate revaluation has managed to curb some of the short-term inflationary pressures, the macroeconomic impacts are mixed. This is especially the case in the negative impact of the revaluation on export competitiveness of domestic production, a necessary condition for economic diversification, which had already been negatively impacted by consecutive appreciations of the dinar over the years relative to main trading partners. This highlights the importance of macroeconomic policy coordination. Crucially, a sustainable response to macroeconomic imbalances is the implementation of structural reforms, including in the financial sector as outlined in the Special Focus chapter, towards economic diversification. References Brun-Aguerre, R., A. Fuertes, and M. Greenwood-Nimmo. 2017. “Heads I Win; Tails You Lose: Asymmetry in Exchange Rate Pass-Through into Import Prices.” Journal of the Royal Statistical Society 180 (2): 587–612. (continued on next page) Recent Economic and Policy Developments 13 BOX 2  IMPACT OF THE DINAR REVALUATION ON IRAQ’S ECONOMY (continued) Caselli, F., and A. Roitman. 2016. “Non-Linear Exchange Rate Pass-Through in Emerging Markets.” IMF Working Paper 16/1, International Monetary Fund, Washington, DC. Ha, J., Kose, M.A. and Ohnsorge, F. eds., 2019. “Inflation in Emerging and Developing Economies: Evolution, Drivers, and Policies.” World Bank Publications. UNOCHA (2022). Iraq humanitarian needs overview, Humanitarian program cycle, March 2022. a See Brun-Aguerre, Fuertes, and Greenwood (2017) for more details. The median values of +0.02 for appreciations of between 5 and 10 percent, and only slightly higher for appreciations of between 10 and 20 percent. b Kose et al. (2019) show that the median pass-through associated with large currency depreciations in emerging and developing countries is higher in countries with less flexible exchange regimes and without inflation targeting central banks. c The government imports amounted to 30 percent of total import in 2022. The expansionary budget of 2023 is likely to increase the reliance on imports to execute the 2023 budget, which in turn affects economic growth. d Based on Iraq’s quarterly data, imports and exports are inelastic in response to exchange rates shocks as measured by widening gap between official and parallel exchange rates (insignificant – 0.02, and significant 0.2, respectively). External Sector the dollar shortage, the CBI took measures including introducing a new electronic platform to disclose infor- Iraq’s external account continued to benefit from mation about financial transfers and end users and higher oil exports in 2022 but this trend reversed revalued the dinar against the dollar to curb inflation with declining oil exports in early 2023. Driven by (see Box 2). In addition, the CBI also announced that higher oil exports, the current account registered a size- it would start allowing imports from China in yuan. The able surplus of 20.7 percent of GDP (US$55 billion) expansionary fiscal policy and the stronger dinar are (Figure 15). The goods trade balance reached 25.7 per- expected to drive a sharp growth in imports in 2023. cent of GDP (US$68 billion), driven by higher exports Despite weakening net foreign invest- and despite rising imports (Figure 16). The sharp ment flows, CBI’s international reserves surged increase in exports was supported by both soaring oil through late 2022 but have since ebbed, follow- prices and production volumes. However, oil exports ing oil-related developments of the trade balance were constrained again in Q4-22 with the new OPEC+ (Figure 17). The surge in oil exports pushed read- agreement, and further weaknesses continued into the ily accessible official reserves (i.e., excluding gold) first half of 2023 as both volumes and prices continued to record levels of US$89 billion in 2022 (covering to soften. Monthly, oil export revenues fell from an aver- 14.7 months of imports) (Figure 18). This accumula- age of US$9.6 billion in 2022 to US$7.4 billion in 5M-23, tion of reserves was also supported by improvements which together with rising imports are expected to have in the financial accounts as portfolio and net official significantly reduced the current account surplus. investments improved. Net official investment flows In line with the economic recovery, import also recovered to US$18.7 billion in 2022 due to growth accelerated. Public imports surged by sustained recovery of trade credits and claims held 66 percent in 2022 due to a sharp rise in consump- abroad. Nonetheless, recurrent security challenges tion and capital imports due to rising import prices and weak regulatory environment drove net FDI flows financed through the Emergency Law Food Secu- to decline and amount to only 0.9 percent of GDP in rity. Private imports, which constitute 64 percent of 2022. In 2023, the accumulation of official reserves total imports, also increased by 24.4 percent, owing (excluding gold) slowed before starting to decline in to the rise in both construction and capital imports, May to US$92.8 billion, as external account financing in part aided by the CBI’s housing sector initiative. pressures reemerged. The financing of imports faced challenges towards GoI has unveiled plans to undertake steps the end of 2022 and early 2023 following the volatil- towards improving tariff collection, but struc- ity in the parallel exchange market. To compensate for tural bottlenecks remain substantial. The budget 14 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK The Current Account Surplus FIGURE 16 •  FIGURE 17 • Higher Oil Exports Drove Up the Strengthened in H1-22 before Trade Balance despite Higher Deteriorating Again Imports 8 120 8 35 6 6 30 100 25 4 4 Percent of GDP Percent of GDP 80 US$, billion 20 2 2 60 15 0 0 10 –2 40 –2 5 –4 20 –4 0 Q1–19 Q2–19 Q3–19 Q4–19 Q1–20 Q2–20 Q3–20 Q4–20 Q1–21 Q2–21 Q3–21 Q4–21 Q1–22 Q2–22 Q3–22 Q4–22 Q1–23 Q1–19 Q2–19 Q3–19 Q4–19 Q1–20 Q2–20 Q3–20 Q4–20 Q1–21 Q2–21 Q3–21 Q4–21 Q1–22 Q2–22 Q3–22 Q4–22 Q1–23 CAB (LHS) Oil price, US$/bbl (RHS) Oil export volume, mbpm (RHS) Trade balance (LHS) Exports (RHS) Imports (RHS) Source: CBI, MoO, and World Bank staff calculations. Source: CBI and World Bank staff calculations. The Current Account and the Financial FIGURE 18 •  …Leading to a Surge in Reserves but FIGURE 19 •  Account Improved in 2022… Pressures Reemerged in 2023 20 120 20 16 12 100 16 Months of imports 8 80 US$, billion US$, billion 4 12 0 60 –4 8 40 –8 20 4 –12 –16 0 0 Q1–19 Q2–19 Q3–19 Q4–19 Q1–20 Q2–20 Q3–20 Q4–20 Q1–21 Q2–21 Q3–21 Q4–21 Q1–22 Q2–22 Q3–22 Q4–22 Q1–23 Q1–19 Q2–19 Q3–19 Q4–19 Q1–20 Q2–20 Q3–20 Q4–20 Q1–21 Q2–21 Q3–21 Q4–21 Q1–22 Q2–22 Q3–22 Q4–22 Q1–23 Curent account Reserve assets Capital and financial account (exc. reserves) Foreign reserves (exc. gold) (LHS) Coverage ratio (RHS) Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. law 2023 stipulates the implementation of elec- tic revenue mobilization were not adequately tronic and automated systems to collect customs addressed. Regarding customs, trade procedures aims to increase non-oil revenues. However, addi- are cumbersome, costly, and time-consuming, and tional measures were not introduced and an article trade facilitation and policy reforms remain lagging. in the budget bill introducing modest duty fees on Unharmonized tariff between KRI and the rest of Iraq energy products was dropped in the budget law. creates incentives for misreporting and smuggling Moreover, other structural challenges on domes- (Figure 19). Recent Economic and Policy Developments 15 2 OUTLOOK, RISKS, AND OPPORTUNITIES Outlook oil revenues for the government while expenditures are expected to increase significantly in line with the Given its sheer lack of diversification, Iraq’s eco- expansionary budget. However, the latter is projected nomic outlook is predominantly tied to that of to be underrealized relative to the budget target (espe- the oil sector. Overall GDP is forecast to contract by cially for the investment component) as oil prices 1.1 percent in 2023 driven by a projected 4.4 percent are expected to remain well below the breakeven oil contraction of oil GDP under the assumption that oil price of US$112/bbl that the approved budget would production matches the OPEC+ production quotas require. As a result, the fiscal account balance is fore- agreed in April 2023. Non-oil GDP growth is, however, cast to register a deficit starting from 2023, which is projected to partly offset the contraction in the oil-GDP: expected to slightly moderate in 2024 with projected it is forecast to expand by 4.0 percent in 2023. This higher oil revenues before widening again in 2025. growth is mostly driven by the large fiscal expansion. The growing fiscal pressures are projected to lead to In 2024-25, overall GDP growth is forecast to rebound an increase in public debt. The current account sur- as oil production steadily grows, recovering to its 2022 plus is forecast to moderate significantly to an average peak by mid-2024 and growing thereafter in line with a of 1.9 percent of GDP in 2023-25, driven by an average gradual increase in production capacity. Limited link- oil price projection of US$80.2/bbl, and higher govern- age between oil and no-oil sectors coupled with public ment expenditures and a stronger dinar drive a surge sector dominance in formal employment will likely con- in imports and undermine export competitiveness. All tinue to result in a stunted and largely informal private these factors collectively, in turn, add pressures on sector. An environment of low appetite for reforms international reserves and the exchange rate peg. amid high oil prices, and Iraq’s modest non-oil growth potential constrain long-term economic growth. Higher expenditures and imports will weigh Risks and Opportunities on both the fiscal and current account balances, with the former turning into a deficit. The revalua- Iraq’s economic outlook remains subject to sig- tion of the dinar will result in lower dinar-denominated nificant risks, not least that of a material fall in oil 17 prices, especially if combined with lower oil produc- in the main Asian markets (China and India). While tion. The economy’s high dependence on oil leaves it the agreement between the Federal Government and vulnerable to volatilities in the oil market and fluctua- KRG have improved prospects of revenue sharing, a tions in global demand as highlighted by the decline in prolonged disruption to oil exports from KRI could add oil prices in 5M-23. Heightened climate change vulner- to these oil sector related risks to Iraq’s economy. abilities, further commodity price volatility associated Iraq’s significant development challenges with the Russian invasion of Ukraine would intensify require the full implementation of comprehensive pre-existing poverty trends and raise food insecurity. economic reforms as previously identified.24 Fiscal The recent spike in inflation has also highlighted a new reforms need to be two-pronged: (i) maintain sustain- source of risks that had been previously contained due ability of expenditures through rightsizing of current to appreciation of the dinar relative to neighboring coun- expenditures including the wage bill, pensions, and tries. In addition, long-standing sources of risk related subsidies and (ii) improve oil revenue management to broader security challenges, high level of corrup- through utilization of fiscal rules and enhanced tion, and social grievances due to poor public service non-oil revenue mobilization. These reforms rely on delivery and lack of employment opportunities could improved public financial management, including, further impact economic outcomes. On the upside, the the roll out of the treasury single account and regular improvements on domestic political tensions regard- reporting to facilitate economic planning and improve ing government formation can pave the way for further transparency. While Iraq’s significant developmental investment in the economy to improve potential GDP challenges call for more investment, namely in energy growth. Furthermore, the prospects of reduced regional and infrastructure, public investment needs to crowd geopolitical tensions could pave the way for boosting in private financing, taking into account absorption regional trade and FDI opportunities for Iraq. capacity constraints and other externalities, notably Risks to global economic growth and oil climate change issues.25 A more proactive mone- markets could significantly impact the economic tary policy, including responsiveness to recent global outlook. Any change in global growth trajectory financing conditions, will help curb inflationary pres- from the current assumption of moderately weaker sures while providing enough financing to maintain global growth would materially impact Iraq’s econ- economic growth and protect CBI reserves support- omy. For example, under a scenario in which global ing the currency peg. Financial sector reforms related growth is slower and only recovers more gradually to reforms of SOBs and improving financial interme- to the 2022 peak by end of 2023, Iraq’s GDP growth diation will be a necessary condition for promotion of would be lower by 0.2 pp. On the other hand, if for SMEs and private sector driven growth (see the Spe- example global growth recovers more quickly starting cial Focus). These reforms need to be complemented in the last quarter of 2023 this could increase Iraq’s with better targeted social protection measures to mit- GDP growth by as much as 0.7 pp. Similarly, through igate any possible impact on vulnerable households. the price channel and at projected production lev- els in 2023, every US$1 reduction in oil prices would directly reduce oil revenues by US$1.1 billion, equiva- 24 See Box 1.1 in Iraq Economic Monitor Fall 2020 for an lent to 0.4 percent of GDP downward impact on fiscal overview of the previous comprehensive reform plan, http://documents.worldbank.org/curated/en/98107163​ and external balances. These sensitivities highlight the 7593726857/Iraq-Economic-Monitor-The-Slippery-Road​ potential risks for Iraq’s economy especially under a -to-Economic-Recovery. downside scenario of prices and quantities relative 25 Climate-informed investment management can be to the outlook assumptions, the risks of which have considered in two phases: upstream public invest- increased in the first half of 2023. In addition to global ment policy (PIP) and downstream implementation of those policies through public investment manage- demand aspects, a further source of oil-related risks ment (PIM). See the recent World Bank Reference facing Iraqi oil exports is the competition in export mar- Guide for Climate-Smart Public Investment for more kets, including with the heavily discounted Russian oil information, http://hdl​.handle.net/10986/38390. 18 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK TABLE 1 • Iraq: Selected Economic and Financial Indicators, 2020–2025 2020 2021 2022 2023e 2024p 2025p (Percent of GDP unless otherwise noted) GDP and Prices Real GDP (percentage change) –12.0 1.6 7.0 –1.1 6.0 3.7 Real oil GDP (percentage change) –12.6 –0.7 12.1 –4.4 7.7 4.1 Real non-oil GDP (percentage change) –11.2 4.9 0.0 4.0 3.5 3.0 GDP per capita (US$) 4,498 5,044 6,265 6,384 6,909 7,099 GDP (IQD trillion) 215.7 301.2 383.1 361.7 396.8 417.0 Non-oil GDP (IQD trillion) 152.3 163.6 163.7 190.5 208.0 224.1 GDP (US$ billion) 180.9 207.7 264.2 n.a. n.a. n.a. Oil production (mbpd) 4.00 3.97 4.45 4.26 4.58 4.77 Oil exports (mbpd) 2.99 3.02 3.31 3.24 3.53 3.69 Iraq oil export prices (US$/bbl) 38.4 68.4 95.6 79.4 81.3 79.8 Iraq break even oil price, expenditures (US$/bbl) 68.2 60.7 66.7 88.0 85.4 86.8 Consumer price inflation (percentage change; average) 0.6 6.0 5.0 6.7 5.5 4.6 Public Finance Government revenue and grants 29.3 36.2 42.2 34.7 34.8 33.9 Government oil revenue 26.5 31.6 40.1 32.3 32.6 31.8 Government non-oil revenue 2.8 4.6 2.1 2.3 2.2 2.1 Expenditures 41.4 32.2 30.5 37.7 36.0 36.4 Current expenditure 33.8 27.8 27.4 33.0 31.5 31.4 Wages and salaries 18.6 14.1 11.4 15.4 14.8 14.7 Goods and service 2.9 2.3 4.0 4.6 4.4 4.4 Interest payment 1.0 0.5 0.9 0.6 0.5 0.5 Other 11.2 10.9 11.1 12.4 11.9 11.9 Investment expenditure 7.6 4.4 3.1 4.7 4.5 5.0 Oil investment 4.7 2.6 0.3 2.7 2.6 2.9 Non-oil investment 2.9 1.9 2.8 2.0 1.9 2.1 Primary fiscal balance –11.0 4.5 12.6 –2.5 –0.7 –2.0 Budget balance –12.1 4.0 11.7 –3.1 –1.3 –2.5 Gross budget financing needs –14.6 2.1 9.6 –6.3 –4.3 –5.3 Public Debt Total government debt 77.4 55.1 40.8 44.6 43.2 44.8 External government debt 40.0 28.5 22.4 24.5 23.7 24.6 Total government debt (US$ billion) 115.2 114.5 107.8 n.a. n.a. n.a. External government debt (US$ billion) 72.4 59.2 59.2 n.a. n.a. n.a. (continued on next page) Outlook, Risks, and Opportunities 19 TABLE 1 • Iraq: Selected Economic and Financial Indicators, 2020–2025 (continued) 2020 2021 2022 2023e 2024p 2025p Monetary Indicators Growth in broad money (percentage change) 15.9 16.7 20.2 n.a. n.a. n.a. Policy interest rate (e.o.p., percent) 4.0 4.0 4.0 4.0 4.0 4.0 External Sector Current account –4.0 12.0 20.7 1.7 2.5 1.5 Trade balance 2.7 18.7 25.7 8.8 9.5 8.6 Exports of goods 25.9 35.2 44.7 35.8 36.4 35.5 Imports of goods 23.2 16.5 19.0 27.0 26.8 26.9 Gross reserves (US$ billion, excl. gold) 48.1 58.2 89.0 62.9 38.7 11.2 In months of imports of goods and services (excl. gold) 10.3 13.9 14.7 7.2 4.1 1.1 Exchange rate (IQD per US$; e.o.p.) 1,450 1,450 1,450 n.a. n.a. n.a. Exchange rate (IQD per US$; average) 1,192 1,450 1,450 n.a. n.a. n.a. Source: Iraqi authorities and World Bank staff estimates and projections. Note: The earlier version of the IEM document that was initially released included erroneous numbers that have now been corrected in this document. 20 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK SPECIAL FOCUS: ENHANCING FINANCIAL INTERMEDIATION IN IRAQ: TRANSFORMATIONAL REFORMS NEEDED TO DEVELOP AN EFFECTIVE AND EFFICIENT FINANCIAL SYSTEM I raq has a potential to develop an effective and Some progress was made by CBI to improve efficient financial system, however, it hinges on and enhance the legal and regulatory framework and implementation of challenging reforms of state- financial inclusion. Notable improvements include owned banks, development of enabling financial developing legal and regulatory frameworks for licens- infrastructure, implementation and enforcement of ing of payment service providers, modernization of AML/CFT measures, incentivizing digital financial ser- payments system, strengthening of consumer pro- vices, as well as carrying out broader macro-fiscal tection including the equal provision of financial and adjustments to foster economic growth. These reforms banking services for women. are critical to increase financial intermediation and However, in spite of these improvements, Iraq’s promote financial inclusion in Iraq. Priorities include financial sector remains dominated by undercapital- restructuring state-owned banks, consolidating pri- ized state-owned banks with weak governance and vate banks and promoting and incentivizing payments institutional capacities. These banks primarily provide through digital channels. financing to public sector entities and state-owned 21 enterprises. Against the backdrop of a non-condu- and adding to potential insolvency. The availability cive industrial organization of the banking sector, the and accuracy of data including key Financial Sector private commercial banking is weak and has limited Indicators (FSI) precludes an accurate assessment capacity to support financial intermediation and is of the financial health/solvency of SOB’s given the geared towards maximizing revenues from the FX auc- absence of updated and audited financial state- tions. Furthermore, the non-banking financial sector is ments (last audited in 2014) of the two largest SOBs nascent with small and underdeveloped capital mar- Rasheed and Rafidain Bank who continue to operate kets, unregulated micro finance institutions (MFIs), without core banking systems. Both banks are in the and an underdeveloped insurance sector. process of implementing core banking systems, but implementation progress is onerous and subject to delays. Exposure of SOBs to SOEs is also assumed Sector Challenges: A Non-Conducive to be problematic given their weak asset quality with Industrial Organization of the reported understated NPLs of 17.2%.26 NPL’s at SOB’s Financial Sector (Figure 20) are likely understated for the above-mentioned rea- sons. Similarly, NPL’s at private Banks increased to The existing health of financial intermediation in 37% at 2021. Additionally, the SOBs are characterized Iraq is well below as compared to other regions by poor governance practices, weak internal controls, in all indicators, covering financial access, depth, and limited risk and financial management capacity, efficiency, and stability. This is driven by several as well as lacking modern core-banking systems and underlying constraints, as discussed below, under- auxiliary automated control and reporting systems, pinned by inadequate progress in reforms, and weak which often jeopardize the accuracy, timeliness, and institutional capacity. The financial system in Iraq efficiency of financial and operational reporting. remains fragile both on efficiency and stability indica- tors due to heavy reliance on state owned enterprises Constraint: Ill-equipped and weakly (SOEs), low net interest margins (NIM), and high non governed private banking sector operating performing loans (NPLs). in the uneven playing field Constraint: Dominance of Linked to the previous challenge, private banks undercapitalized and inefficient state- suffer from an uneven playing field that favors owned banks (SOBs) state-owned banks. While CBI encouraged private banks to support government agencies by providing The financial intermediation is constrained by banking services to them, the lack of public trust and the predominance of SOBs that are undercapital- the limited range of retail products significantly con- ized, inefficient, have weak corporate governance and lack modern financial infrastructure that hinders 26 The Iraqi economy is characterized by a significantly large interoperability with other banks, exacerbated by the and dominant presence of the public sector, represented by SOEs which have a complicated and inconclusive absence of core banking systems. The financial sec- effect on government’s finances. These SOEs are reg- tor is largely dominated by seven under-capitalized ularly utilized as vehicles to achieve political and social and under-provisioned SOBs, which collectively own objectives at the expense of their productivity and prof- over 80 percent of total assets and account for about itability. Around 80 percent of the exposure is with the 70 percent of the total credit in the economy. SOEs, and three-fourths of these are deemed nonviable. SOBs are primarily geared to provide Whereas the private sector is very small, largely informal, politically disadvantaged, and has limited means to grow financing to the public sector entities and sup- and contribute to the economy. Consequently, due to port quasi-fiscal financing directed at supporting inefficacies of both demand and supply side the role of SOEs, which distorts the risk and return characteristics the financial sector in intermediating credit to the private of SOBs’ balance sheet, weakening loan performance sector remained small and ineffective. 22 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK FIGURE 20 • Key Constraints in the Iraqi Financial Sector 1. Reforms of SOBs 7. 2. Weak Transparency and Integrity Uneven Playing Field for Private Banks in the Financial Sector Financial 6. Sector 3. Underdeveloped NBFIs Constraints Lack of Digitization 5. 4. Capability Deficit Inefficient Financial Infrastructure Low financial inclusion. Highly constrained access to finance. Source: World Bank Staff. Iraqi Banking Sector Market Structure (December 2019) TABLE 2 •  Rafidain Rasheed Trade Bank Bank Bank of Iraq Small SOBs SOBs Private Total Number of banks — — — 4 7 69 76 Size (assets US$ mill.) 33,946 16,018 29,699 6,335 85,998 20,630 106,628 Assets (share) 32% 15% 28% 5% 80% 20% 100% Capital (share) 9% 0.8% 24% 2% 36% 64% 100% Deposits (share) 44% 19% 21% 3% 88% 12% 100% Branches 170 162 24 74 430 413 843 Branches (share) 20% 19% 3% 9% 51% 49% 100% Staff 8,879 7,257 1,256 3,400 20,792 9,715 30,507 Source: CBI data. strained their scale. For example, the routing of the ited the uptake of this line of business for private banks. salaries of civil servants through private banks is only Most recently, in 2020, CBI has allowed foreign banks 5 percent, with the rest going through SOBs. GOI and operating in Iraq to confirm letters of credit for Iraq’s oil CBI have issued circulars to enable SOEs and govern- exports to encourage these foreign banks to maintain ment entities to open banking relations with private a presence and operations in the country. This initia- banks for financing imports. CBI has also defined qual- tive is in the early stage, and it is too early to assess the ification criteria for private banks to offer these services related uptake and transaction volume. Independently including a strong rating and the existence of corre- of the results of all these initiatives, a vibrant financial spondence relations. However, the dominant role of sector would still require resolving the underlying con- SOBs and internal government bureaucracy have lim- straints linked to leveling the playing field, developing ENHANCING FINANCIAL INTERMEDIATION IN IRAQ 23 financial infrastructure, and so on. At present, private The primary constraint preventing Iraqi citizens from banks’ operations are mainly limited to the provision greater usage of digital payment channels (such as of short-term loans for wholesale and retail trade, wire ATMs, Point of Sales Terminals, and the proliferation transfers, and currency exchange. of Payment System Providers (PSPs) that leverage off Private commercial banks are not an effective the great penetration and usage of smartphones) is conduit for financial intermediation and economic a combination of their continuing lack of trust in the diversification on account of their weak bal- banking system, lack of widespread availability of dig- ance sheets and inherent asset-liability mismatch ital payments infrastructure (ATM, POS) and weak (Table 3). Private banks account for only 20 percent of levels of financial literacy. According to the Global Fin- the total banking sector assets, and the sector is highly dex (2021), only 14 percent of adults reported making fragmented with 65 weakly governed private banks, or receiving a digital payment, approximately 25 per- unsustainable business models, and limited capacity. centage points behind the MENA average. The largest five private banks account for only about The COVID-19 pandemic made digital one-fifth of the private sector’s total assets and some 5 finance a global urgency, yet there is no specific percent of the overall banking system assets. Several payment system law in Iraq that defines crucial private banks do not appear to have sustainable busi- concepts including netting, finality, or irrevocabil- ness models, beyond traditionally engaging in foreign ity of payments in Iraq. A draft Payments Law duly currency transactions and some trade financing and incorporating the fundamental concepts (such as net- other commission-based services. Credit/total assets ting, finality or irrevocability of payments) has been only average about 28 percent. Given the low level of drafted and is awaiting approval. CBI has adopted sev- intermediation, the liquidity/assets ratio is significant eral retail payment systems, but their effectiveness and at 49 percent. Furthermore, the available data point to viability are still limited as they do not support transact- significant operational inefficiencies with an estimated ing between bank accounts and mobile wallets. The average cost/income ratio of 74 percent. Roughly coverage and availability of physical financial access half of the private banks were converted from legacy points, a critical pillar of the payments’ ecosystem, FX exchange bureaus, and they have maintained rel- also remains limited across the country. The number atively low capital levels. These banks therefore lack of physical branches and ATMs per 100,000 adults the credit appetite and are not equipped to provide compares unfavorably to regional peers. For every sufficient credit intermediation to the Iraqi economy. 100,000 adults, there are only 4 bank branches. The Consequently, the role of the banking system in inter- number of ATMs and POS per capita is low. These fac- mediating credit to the economy remains limited, with tors combined are the main constraints holding back private sector credit accounting for only 13.4% of GDP the digital transformation that will facilitate e-Payments. and playing a highly limited role as an engine for eco- However, financial access point networks nomic growth and financial intermediation. have been growing significantly in the last few years. Moreover, the authorities have promulgated a series of Constraint: Lack of digitization, weak initiatives and orders in January 2023 that incentivize enabling environment for digital payments and foster electronic payments. Among others, public and lack of trust in banks institutions must open accounts and accept electronic payments, and private enterprises will be required to Modern, convenient, and functioning electronic show proof of accepting digital payments to obtain their payment channels have yet to be developed and commercial license renewal. Recent policies issued by made available in Iraq. While the world is gradu- the CBI and the Government of Iraq aimed at promoting ally adopting digital finance, Iraq largely remains a digital payments are due for implementation by mid- cash-based economy, which is driven both by weak 2023. Taking cognizance of the delays in the passage enabling environment as well as lack of trust among of the Payments System Law, the new Iraqi Govern- general public for more innovative payment solutions. ment has identified the issue of digital payments and 24 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK issued a directive in January 2023 announcing several be significantly enhanced to improve judgement and initiatives facilitating the usage of Electronic Payments decision-making based on sufficient information. This and the Central Bank of Iraq has recently issued cir- requires building an integrated Information Technology culars promoting/mandating the usage of POS in (IT) system for banking supervision. Similarly, public, financial transactions through a combination of mea- and private financial institutions lack needed personnel sures including reductions in merchant fees, mandating and skillset to improve their market product offering to linkage of bank accounts and incentives to promote provide liquidity to potential clients currently classified POS usages. Additionally, CBI has undertaken a series as “un-bankable”. Lastly, as discussed above, there is of initiatives to strengthen the financial sector, including a significant lack of knowledge in the supporting struc- developing legal and regulatory frameworks for licens- tures, such as collateral registry and property valuators, ing of payment service providers, modernization of to provide timely and accurate priced inputs to lenders. payments system, and strengthening of consumer pro- tection function at the CBI level. Notwithstanding these Constraint: Weak transparency and efforts, the financial sector continues to face several integrity in the financial sector regulatory, supply, and demand-side challenges which hamper progress towards greater financial inclusion Continuing efforts are required to improve transpar- and increase access to finance. ency and integrity in the financial sector with author- ities recommended to focus their attention on imple- Constraint: Inefficient financial mentation and enforcement of AML/CFT regulations. infrastructure, low coverage of credit CBI has tightened financial reporting of remit- reporting and registry systems tances and transfers and implemented enhanced anti-money laundering controls in response to the Whereas the Central Bank of Iraq implemented heightened DD measures adopted by correspondent functioning payment system infrastructure, like banks that resulted in widening of the FX spreads the Automated Clearing House (ACH) and the Real and eventual devaluation. These efforts have borne Time Gross Settlement (RTGS), the Iraqi financial fruit as Iraqi banks have established several new cor- sector lacks vital supportive infrastructure, such respondent relationships. as a well-functioning credit reporting and collateral CBI’s efforts to improve transparency in the registry systems, which are still in their initial adoption banking sector are another positive step towards reduc- phase with low coverage, limited usage, lack of value- ing avenues for corrupt actors in advance of Iraq’s added services, and limited human resources. The upcoming Financial Action Task Force (FATF) review. existing credit reporting system only covers 1.3 per- Broader anti-corruption efforts need to continue, includ- cent of adults which is significantly lower than MENA ing through the implementation of the 2021-24 National average of 15.8 percent. Similarly, there is limited insti- Integrity and Anti-Corruption Strategy, recommenda- tutional support and resources available, including tions of the approved NRA, establishing a Treasury lack of a moveable collateral registry which if pres- single account, and the digital transformation of the ent would facilitate a sizeable demand for credit from economy for greater accountability and transparency. borrowers like small-scale households and micro, and small medium enterprises (MSMEs), which are likely Constraint: Underdeveloped non-banking to have minimal immoveable collateral. financial sector Constraint: Capability deficit The non-banking financial sector is at a nascent stage of development, with small and under-devel- Significant capability gaps exist across the financial oped capital markets and MFI sector. Debt markets system from the regulators to financial institutions. are largely fueled by government borrowing to meet CBI’s regulatory and supervisory capacity needs to the increasing financing needs of the government. The ENHANCING FINANCIAL INTERMEDIATION IN IRAQ 25 Iraq stock market is still small and growing with a total FIGURE 21 • Selected Access to Finance market cap of roughly US$ 10 billion as of May 2020, Indicators in Iraq Compared to MENA Average, Based on Enterprise Survey resulting in a market cap to GDP ratio of just over 5 (2022) percent. This is materially lower than other countries in the MENA region, ranging from 25 to 90 percent. Just like banking, the insurance sector is dominated by state-owned insurance companies which, due to favor- 61% able government policies, lack public trust and have limited product offerings. In order to encourage the development of the Insurance and Capital Markets, 24% 25% 27% authorities are recommended to undertake diagnostic assessment of the current legal and regulatory frame- work with the support of their international partners 2% 1% with the aim to identify gaps and proceed to address Firms with a Firms using banks Firms identifying and mitigate the identified gaps. bank loan/line to finance access to finance of credit investments as a major constraint The MFI sector is one of the smallest and least developed in the region, with a total portfolio Iraq MENA average size of just US$108 million as of 2020. A compar- Source: Iraq Enterprise Survey, 2022. ison of regional data in 2015, placed Iraq third-to-last in a group of 10 regional peer countries, with a cover- age of 0.26 percent, only exceeding coverage ratios than 5 percent of MSMEs have been able to secure in Sudan and Syria, and significantly underperform- bank lending (Figure 21). Over 80 percent of MSMEs ing with respect to the overall regional average ratio are estimated to be Micro-enterprises with individual of 1.1 percent. The MFI sector in Iraq has stagnated ownership and limited to no assets to meet collateral in outreach and significance, with contracting market requirements and, therefore, rely on funding either share, sluggish portfolio growth and a reduction in the through their own savings or through family/friends. number of active operators. The MFI sector lacks a On the other hand, banks have little experience in lend- comprehensive regulatory and legal framework which ing to MSMEs and lack the necessary skills to analyze limits its potential for mobilizing credit to the MSMEs credit risks and to carry out cash flow analyses. They in Iraq. The microfinance sector is currently under the instead rely on tangible assets for collateral purposes administrative oversight of the Non-Profit Organiza- and often have higher collateral requirements, up to tion (NGO) Directorate which is not geared to regulate 150 percent or more in some instances. The lack of and supervise financial institutions. The current oper- an enabling legal and regulatory framework hampered ational modalities recognize MFIs as not-for-profit the development of the Micro-Finance (MFI) sector, and non-governmental organizations instead of com- further constraining credit availability, especially to mercial entities with clear corporate governance smaller firms. Consequently, access to credit is a key arrangements, and the number of MFIs has fallen constraint to economic growth and job creation in Iraq from 12 in 2010 to a reported 8 to-date. primarily for women and youth as young entrepreneurs end up receiving only 3–5 percent of their financing Consequence of financial sector needs through formal financial institutions. —low financial inclusion and constraints­ Similarly, financial markets lack the needed weak access to finance depth and liquidity to drive the private sector development as private sector credits accounts for Low access to finance for private sector only 9 percent of GDP. Whereas the stock market also The Iraqi private sector lacks access to a sustain- does not fill the financing gap and remains small with able and inclusive source of financing, as fewer total capitalization of less than 5 percent of GDP. 26 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK Financial inclusion significantly behind regional while also ensuring financial consumer protection, average stability, and integrity, along with major financial sec- Financial inclusion is a building block for poverty tor reforms indicated above. reduction and economic growth. Financial ser- The data around financial access shows vices, starting with the entry point of basic transaction that overall progress was made between 2014 accounts, are a critical tool for individuals and firms to and 2017, with access for adults rising from 11 per- mitigate risks, manage shocks, build resilience, and cent to 23 percent in 2017 (Figure 22). The trend invest in the future. At the macroeconomic level, finan- between 2017 and 2021, however, is less positive, cial inclusion helps enable and accelerate improved with access having declined to 19 percent. Given financial health, job creation, and economic devel- such a low base of financial inclusion to begin with, opment. Because of its potential, and the fact that it is critical that this decline be arrested. Account Digital Financial Services (DFS) enable seven of the ownership in Iraq is lagging approximately 29 per- 17 Sustainable Development Goals (SDGs), DFS is centage points behind the regional average of 48 now viewed as catalytic to financial inclusion at the percent for MENA region (excluding high-income last mile. countries) (see Box 3). The World Bank Global Findex Database According to Findex, the gap in access 2021 found that around 20 million adults in Iraq between men and women is also notable, having remain financially excluded, with women and been eight percentage points in 2014, then dropping youth being overrepresented therein. Address- to six percentage points in 2017 before rising again ing this requires significant national efforts, including slightly to seven percentage points in 2021. Though spurring policy reforms and private sector innovation this gap does need to be addressed, compared to BOX 3  SELECTED FINANCIAL SECTOR INDICATORS-REGIONAL BENCHMARKS, 2021 Financial Access Capital Markets Depth FIGURE B3.1 • Bank Account Ownership FIGURE B3.2 • Domestic Credit to the Private (Regional Comparison)-2021 Sector 250 48% 200 44% 37% Percent of GDP 150 27% 100 19% 50 0 Iraq Egypt Tunisia Morocco MENA NA EAP ECA MENA LAC SA SSA Iraq (exc. HI) Source: International Monetary Fund, International Financial Statistics, data files, Source: Global Findex Database, World Bank. World and Bank and OECD GDP estimates. (continued on next page) ENHANCING FINANCIAL INTERMEDIATION IN IRAQ 27 BOX 3  SELECTED FINANCIAL SECTOR INDICATORS-REGIONAL BENCHMARKS, 2021 (continued) Operational Efficiency Sector Stability FIGURE B3.3 • Credit to SOEs FIGURE B3.4 • Bank Nonperforming Loans to Gross Loans Iraq MENA SA MENA, 7.4% EAP NA SSA, 11.1% ECA ECA, 5.9% LAC EAP, SSA 2.1% LAC, 0.0 0.1 0.2 0.3 0.4 0.5 0.6 Iraq, 17.5% SA, 8.2% 2.8% NA, 0.7% Source: The World Bank Development Indicators (WDI); and CBI. FIGURE 22 • Progress on Financial Access Gender Gap in Financial Access FIGURE 23 •  23% 26% 19% 22% 20% 15% 15% 11% 7% 2014 2017 2021 Account ownership (% age 15+) Account ownership, female (% age 15+) 2014 2017 2021 Account ownership, male (% age 15+) Source: World Bank Global Findex 2021. Source: World Bank Global Findex 2021. the average gender gap across the MENA region of based discrimination in access to financial services. 13 percentage points, Iraq is performing better, though This was counted as a positive reform under the 2023 this should be seen in the context of an overall very Women, Business and the Law Index (Figure 22). In low financial inclusion across the board. As national addition to gaps along gender lines, Iraq also has a efforts to increase access progress, an important goal lag in access along the lines of age, with younger citi- will be to ensure that the gender gap does not widen. In zens (aged between 15 and 25) enjoying lower levels this connection an important milestone was reached of access (Figure 23 and Figure 24). Inefficient finan- when CBI issued a circular in 2022 to prohibit gender- cial sector, weak overall enabling environment and 28 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK FIGURE 24 • Age Gap in Financial Access lending practices that were compounded by weak cor- porate governance, absence of core banking systems leading to challenges in preparing financial statements. 26% An immediate priority is to undertake meaningful 21% reforms including implementing corporate governance measures including the passage of corporate gover- 15% nance bylaws that are awaiting approval, conducting an 12% 12% Asset Quality Review (AQR) to identify the capital defi- 9% ciency of the two largest SOBs. The GOI can leverage AQR findings to establish a strategy for SOBs which should clearly identify and address current imbalances, including the resolution of any capital deficiency, and 2014 2017 2021 set policies that prevent any further accumulation of Account ownership, young (% ages 15–24) Account ownership, older (% age 25+) contingent fiscal liabilities, while ensuring the finan- cial sustainability of institutions going forward. Potential Source: World Bank Global Findex 2021. restructuring approaches could include reform of the SOBs as going concerns or their liquidation, divestiture or crowding in adequate private capital. Additionally, it financial infrastructure, contributing to low trust for is recommended to also take measures to expedite the financial institutions among general public, can be implementation of Core Banking Systems in Rasheed seen as major constraints behind low financial inclu- and Rafidain and to develop Bank Resolution Frame- sion in Iraq. work and plans. Consolidate and rationalize Private Banks Way Forward: Institutional and Regulatory Reforms, Digital Finance, In addition to the reforms of the SOB’s, it is crucial and Innovation to also review and rationalize the private sector banks to ensure that only viable and sustain- Well-functioning financial intermediation in Iraq able private banks that meet the CBI’s prudential requires a major transformation across each requirements continue to operate. Going forward, segment of the value-chain starting from re-strat- capital intermediated by private banks will be crucial egizing the role of regulators and institutions. The to the deepening of the financial system, especially reform methodology can be envisaged as a phased in mobilizing capital to MSMEs and households, and process with key improvements to be made over a to the development and resilience of the Iraqi econ- short-, medium-, and long-term horizon. omy. Out of the 65 private banks, roughly half of the banks were converted from exchange bureaus into Reform State-Owned Banks full-fledged private banks and most of these con- verted entities have non-viable business models, are Given their dominance and systemic importance, barely financially sustainable, and may pose risks in the priority of developing and implementing a com- as much as they are associated with affiliated groups prehensive reform program for the state-owned or holding structures. To mitigate this risk, CBI is rec- banks cannot be overemphasized, particularly alarm- ommended to introduce regulations on definitions ing when the SOBs hold over 80 percent of banking of connected parties and large exposures. It is also assets, and all seven SOBs are deemed to be grossly recommended that CBI conducts an assessment of undercapitalized. The SOB’s have large legacy assets private banks with a view to assess their compliance (primarily loans to SOEs) as a result of past directed with its prudential and supervisory standards and in ENHANCING FINANCIAL INTERMEDIATION IN IRAQ 29 the event of non-compliance set clear timelines to access to finance. Currently, regulation and oversight achieve compliance. Additionally, CBI may consider of the MFIs has been performed by the NGO Direc- introducing an incentive structure for voluntary merg- torate, which lacks both the experience and capacity ers of private banks that are not compliant with CBI to adequately monitor performance and enhance the prudential and supervisory requirements. The ratio- development of financial intermediaries. CBI is in the nalization of the private banks through prudential process of establishing a new regulatory framework for measures is expected to improve their credit inter- NBFI providing for the licensing of MFIs, Leasing and mediation and facilitate access to finance for MSMEs Factoring companies and strengthen the supervisory and Non-Banking Financial Institutions (NBFIs). The capacity of CBI through developing Supervisor train- operationalization of the Deposit Insurance and the ing program strengthening the recently established strengthening of credit guarantee mechanisms will SOB supervision unit and consider implementing also mitigate constraints to access to finance through Risk Based Supervision with concurrent alignment of increased credit intermediation. supervisory and regulatory framework with Bank for International Settlements/Financial Stability Board Enhance Credit Infrastructure Framework (BIS/FSB) standards. Authorities are recommended to continue implementing the recommendations of Another critical area impeding the credit interme- the joint WBG/IMF Financial Sector Assessment diation and access to finance is the absence of a Program (FSAP) and the recommendations of the robust credit infrastructure framework. CBI is rec- recently completed National Risk Assessment (NRS) ommended to enact laws and regulations to foster on Anti-Money Laundering and Countering Financing an enabling environment for private sector by enact- of Terrorism (AML/CFT). ing laws/regulations on credit reporting and secured transactions, insolvency regimes, and consumer Enhance financial sector capacity protection. There is a need to modernize the credit registry to increase the efficiency of its operations and CBI is recommended to work closely with the to expand the scope of value-added services, such international developmental institutions such as as benchmarking, scoring, and automated decision- the WBG and IMF, standard setting bodies (Basel making. Similarly, a thorough review of the collateral Committee and Financial Stability Board) and the regulation and enforcement framework should be banking industry to develop a comprehensive undertaken to support the prompt realization of claims framework to enhance the sector’s capacity. This on secured assets in the event of default. This assess- framework will need to focus on continuous learning ment and review will identify the existing gaps and and training to address competency and knowledge bottlenecks and help design the required reforms. gaps, including developing skills to assess and under- Additionally, there is a need for financial institutions write credit risks, improving financial product offerings to enhance their capabilities to use the modernized and to support development of sound banking oper- credit information system and newly introduced col- ations. The framework should include a program that lateral registry. mandates the accreditation of banking professionals in middle and top management through dedicated Implement NBFIs’ regulatory reform banking and risk management training, particularly to introduce and streamline the implementation of IFRS Bring MFIs under the CBI’s regulatory purview and global auditing standards. and establish adequate regulatory capacity within the CBI to supervise NBFIs. The lack of a Implement financial inclusion measures pathway for transforming MFIs into investable entities, with defined ownership structures and responsibili- Recognizing the immense challenge ahead, the ties, constrains their growth and hampers growth in Central Bank of Iraq has embarked on devel- 30 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK oping a National Financial Inclusion Strategy Developing an NFIS aligns with the broader (2024–2028) as a means of systematically stim- developmental priorities of the Iraqi government. ulating financial access and usage from both a GoI’s Iraq Vision 2030 aims to empower its citizens demand- and supply-side perspective. In this ven- through poverty alleviation, inclusive growth, and ture, Iraq joins the 63 jurisdictions around the world good governance. Concentrating efforts to advance that have a National Financial Inclusion Strategy financial inclusion is also a key recommendation in (NFIS) in place or under development. The develop- the CBI’s National Payments Strategy, which iden- ment and implementation of the NFIS with its focus tifies increased access to transaction accounts and on increasing access to finance for the citizens mobile money accounts, expanded network of agents including women and children when combined with and ATMs, and simplified Know Your Customer (KYC) measures to increase financial awareness and liter- requirements as critical enablers for successful adop- acy and incentivizing digital payments channels is tion of digital payments in Iraq. The strategy also expected to reduce the citizens lack of trust in the advocates for banking sector reforms and enhanced banking sector and contribute to economic develop- financial literacy efforts among Iraqis to build their ment and resilience. confidence and trust in the financial sector. ENHANCING FINANCIAL INTERMEDIATION IN IRAQ 31 SELECTED RECENT WORLD BANK PUBLICATIONS ON IRAQ (For an exhaustive list, visit: https://www.worldbank.org/en/country/iraq) Title Publication Date Document Type Understanding Urban Informal Business and the People who Work in Them: Findings from the Iraq Informal May 31, 2023 Report Sector Informal Survey Iraq Country Climate and Development Report (CCDR) Nov 3, 2022 Report Iraq economic monitor: Harnessing the Oil Windfall for Sustainable Growth, Spring 2022 June 1, 2022 Economic Update COVID-19 Vaccine Inequities and Hesitancy in Iraq April 27, 2022 Report Iraq Reform, Recovery and Reconstruction Fund (I3RF): Trust Fund Annual Progress January 31, 2022 Report Iraq Economic Monitor: The Slippery Road to the Economic Recovery, Fall 2021 September 21, 2021 Economic Update Iraq Economic Monitor: Seizing the opportunity for reforms and managing volatility, Spring 2021 May 27, 2021 Economic Update Iraq Public Expenditure Review for Human Development Sectors May 31, 2021 Public Expenditure Review Iraq-Navigating through COVID-19: A snapshot on how the pandemic affected MSMEs in Iraq February 15, 2021 Report Breaking Out of Fragility: A Country Economic Memorandum for Diversification and Growth in Iraq September 30, 2020 Country Economic Memorandum The Seasonality of Conflict August 31, 2020 Policy Research Working Paper Iraq Economic Monitor: Navigating the Perfect Storm (Redux) May 4, 2020 Economic Update (continued on next page) 33 (continued) Title Publication Date Document Type Multidimensional Poverty Assessment of Internally Displaced Persons in Iraq April 6, 2020 Policy Research Working Paper Iraq’s Universal Public Distribution System: Utilization and Impacts During Displacement February 19, 2020 Policy Research Working Paper EITI as an Instrument of Fiscal Transparency and Accountability: A Case Study of Two FCV Countries November 1, 2019 Brief Doing Business 2020: Comparing Business Regulation in 190 Economies - Economy Profile of Iraq October 24, 2019 Working Paper Iraq Economic Monitor, Fall 2019: Turning the Corner - Sustaining Growth and Creating Opportunities October 20, 2019 Economic Update for Iraq’s Youth EITI as an Instrument of Fiscal Transparency and Accountability in Contexts of Fragility and Violence: August 1, 2019 Brief A Comparative Case Study of Afghanistan and Iraq (Part Two) Mashreq 2.0: Digital Transformation for Inclusive Growth and Jobs: Executive Summary June 25, 2019 Report Jobs in Iraq: A Primer on Job Creation in the Short-Term February 19, 2019 Working Paper Arrested Development: Conflict, Displacement, and Welfare in Iraq January 1, 2019 Report Bringing Back Business in Iraq: Analytical Note January 1, 2019 Report The Reconstruction of Iraq after 2003: Learning from Its Successes and Failures January 1, 2019 Publication Iraq - Interventions to Urgently Improve the Quantity and Quality of Drinking Water January 1, 2019 Brief Doing Business 2019: Training for Reform – Iraq October 31, 2018 Working paper Iraq Economic Monitor: Toward Reconstruction, Economic Recovery and Fostering Social Cohesion October 1, 2018 Working Paper Advancing the Public Procurement – Governance Nexus – The Case of Iraq (English) October 1, 2018 Brief 34 IRAQ ECONOMIC MONITOR: REEMERGING PRESSURES: IRAQ’S RECOVERY AT RISK 1818 H Street, NW Washington, DC 20433