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Iraq’s Economy in 2017

Iraq’s economy has been languishing ever since the 2003 coalition invasion of that country. There’s been some improvement in the economy, but it comes in fits and starts. The economy makes significant progress for a time, and then reverses due to both internal and external factors. This includes the price of oil and the country’s internal political and social situations.

Where is Iraq’s economy in 2017, and where is it likely to go in the coming years?

On the optimistic side, Iraq’s economy has been so low for so long that it has nowhere to go but up. While that may sound like a simplistic view, there’s more than a grain of truth to it. Even just a return to a stable situation would represent dramatic improvement in the war-torn country’s circumstances. Iraq doesn’t need to boom in order to move forward.

Iraq’s Recent Gross Domestic Product (GDP) Performance

Like many of the major oil producing and exporting countries, Iraq has experienced economic weakness since the decline in oil prices, after the 2014 price peak. According to the World Bank, Iraq’s GDP was $171.489 billion for all of 2016. This compares with a 2014 peak of $234.648 billion.

GDP fell promptly in 2015, and has not recovered since. Further, according to projections by the World Bank the economy is expected to continue to decline slightly in 2017. It is expected to contract by 3%, based on a projected 6% reduction in oil production.

Though the price of oil has remained relatively stable throughout the year, Iraq is attempting to abide by an agreement among OPEC ministers in November 2016 to reduce combined oil production by 1.2 million barrels per day. Although both production and exports are projected to increase in 2018 and 2019, reduced production has taken its toll on the Iraqi economy.

The Intimate Connection Between Oil and the State of Iraq’s Economy

Due to the country’s huge reserves and historic production, the link between oil and Iraq’s economy cannot be underestimated. Oil exports represent 95% of Iraq’s foreign revenues, and exert an incredible influence on the domestic economy. Both manufacturing and agricultural output have declined since the coalition invasion in 2003, making Iraq even more dependent on oil revenues than it had been previously.

This gives the price of oil itself an exaggerated impact on Iraq’s economy. This is particularly true since Iraq’s oil production has increased substantially since 2004. After bottoming out at 1.3 million barrels per day in 2003 Iraq’s oil production has more than tripled to well over 4 million barrels per day.

That makes the price of a barrel of oil the primary culprit in Iraq’s recent economic weakness. Oil has fallen from over $100 per barrel in 2014, to hovering at or below $50 per barrel in 2016 and 2017.

What this means is that Iraq has lost nearly half of its foreign revenues, simply as a result of a major decline in the price of oil.

Other Factors Affecting Iraq’s Economy

The political situation within Iraq continues to be a negative factor as well. The current government lacks the control to keep the country fully unified, as well as to implement needed reforms and programs. But much of that has to do with the various factions within the country’s population.

It’s estimated that more than 2 million people in Iraq are “internally displaced”. That means that they exist in the country, but without a permanent home. That lack of stability by the displaced groups also has a negative impact on the overall state of the nation’s economy. In addition, there are deep divisions among the countries various religious factions, as well as different ethnic groups, such as the Kurds in the northern part of the country.

The internal discord has led to a lack of basic provisions, resulting in food shortages and a lack of potable water.

Iraq’s Employment Picture

The weakness in oil, as well as the domestic factors above, are combining to have a negative impact on employment. 14 years after the coalition invasion, employment within Iraq has still failed to improve on a fundamental level.

Due to the unrest within the country, accurate employment information is hard to come by in Iraq. The official unemployment rate is estimated at somewhere between 16% and 30% of the workforce. It’s also been speculated that the under-employment rate is dramatically higher, at around 60% of the workforce.

Because of the weakness in both manufacturing and agriculture, employment in both sectors is weak. Still, more than 20% of the country’s workforce is employed in agriculture. At the opposite end of the spectrum however, relatively few Iraqis work in the oil industry, despite the fact that it generates nearly all of the country’s foreign revenue.

Symptomatic of a country with a struggling economy is the presence of black-market activities. It’s possible that the official unemployment rate is exaggerated by the fact that a very large percentage of Iraqis work in the black-market. Since those activities aren’t officially reported, the employment picture can appear weaker than it actually is. Participation in the black-market may also help to explain the high estimate of under-employed workers.

Whether workers are unemployed or under-employed, it’s clear that the workforce of Iraq is making a less than optimal contribution to the nation’s economy. That’s a situation that won’t be cured soon, or unless fundamental weaknesses in the economy are corrected.

Further complicating the employment picture is the fact that it is estimated that there are more than 2 million Iraqis living outside the country. As some begin to migrate back into Iraq, there will be additional pressure on the labor market.

Oil – The “X” Factor in the Future of Iraq’s Economy

Despite various domestic issues within Iraq, future performance of its economy will largely depend upon the price of oil. Should the price of oil rise back to $100 per barrel, or anything close, Iraq’s economy should firm.

Should the price of oil remain at an elevated level, relative to the current price, the economy should gradually begin to broaden as well. That’s because more predictable higher prices will increase investment in the country. Foreign concerns will become more interested in investing in Iraq given the size of the country’s oil wealth, and the potential profit to be earned for bringing that oil to market.

Iraq is believed to have the fifth largest oil reserves in the world, estimated at more than 143 billion barrels, and is the fourth largest producer, at nearly 4.5 million barrels per day.

A doubling of the price of oil could easily double Iraq’s foreign revenue. Should the elevated price levels continue for several years, it may give the Iraqi economy a chance to solidify, and enable the country to redevelop a stable middle-class. At that point, the country’s fortunes could permanently improve.

Oil and the Iraqi Economy – And Their Impact on the Iraqi Dinar

A currency is a reflection of a nation’s economic prosperity and stability. Despite having among the largest oil reserves in the world, Iraq’s economic stability is so weak that it’s currency, the Iraqi Dinar, is considered to be an exotic currency. It is for all of the reasons described above, that the Iraqi Dinar is currently trading at 1,169.75 IQD = 1 US Dollar.

It’s worth noting however that back in the 1980s, when Iraq was more unified and its economy was more solid, the situation was reversed and the Dinar traded as high as 1 IQD = $3.2169 US dollar at its peak.

Certainly the world situation has changed substantially since the 1980s. It would be unrealistic to expect Iraqi Dinar to go back to the exchange rates that it maintained at that time. But it does demonstrate how quickly and thoroughly currency exchange rates can change.

A significant increase in the price of oil may never get Iraqi Dinar to a level of parity with the US dollar, but increasing it from the current level to say, 500 IQD = 1 US Dollar, would double an investor’s return on their money.

Will it happen? The world is constantly changing, so anything is possible. But where the Iraqi Dinar is concerned, keep a close eye on the price of oil.