The World Bank IRAQ ECONOMIC MONITOR LABOURING THROUGH THE CRISIS Spring 2016 Global Practice for Macroeconomics & Fiscal Management MIDDLE EAST AND NORTH AFRICA REGION Iraq economic monitor | Labouring through the crisis Preface The Iraq Economic Monitor provides an update comments on the content of this publication, please on key economic developments and policies over contact Toru Nishiuchi (tnishiuchi@worldbank.org), the past six months. It also presents findings from Sibel Kulaksiz (skukaksiz@worldbank.org) or Eric recent World Bank work on Iraq. It places them Le Borgne (eleborgne@worldbank.org). Questions in a longer-term and global context, and assesses from the media can be addressed to Zeina El Khalil the implications of these developments and (zelkhalil@worldbank.org). other changes in policy on the outlook for Iraq. Its coverage ranges from the macro-economy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Iraq. The Iraq Economic Monitor is a product of the World Bank’s Iraq Macroeconomics and Fiscal Management team. It was prepared by Toru Nishiuchi (Economist), under the general guidance of Eric Le Borgne (Lead Economist), Sibel Kulaksiz (Senior Economist) and Auguste Kouame (Practice Manager). Alan Moody (Lead Private Sector Development Specialist) authored the Special Focus on investment climate. Ashwaq Maseeh (Consultant) managed database, May Ibrahim (Senior Executive Assistant) provided Arabic translation and Zeina El Khalil (Communications Officer) print-produced the report. The findings, interpretations, and conclusions expressed in this Monitor are those of World Bank staff and do not necessarily reflect the views of the Executive Board of The World Bank or the governments they represent. For information about the World Bank and its activities in Iraq, including e-copies of this publication, please visit www.worldbank.org/ en/country/iraq (English) or www.worldbank.org/ ar/country/iraq (Arabic). To be included on an email distribution list for this Iraq Economic Monitor series and related publications, please contact Nada Abou Rizk (nabourizk@worldbank.org). For questions and Preface | 1 The World Bank Table of Contents Preface......................................................................................................................................................... 1 EXECUTIVE SUMMARY................................................................................................................................ 4 ‫الملخ�ص التنفيذي‬............................................................................................................................................... 7 Recent Economic Developments and Prospects.................................................................... 8 Global and Regional Context: the Slowing Global Economy and Falling Oil Prices.......................................... 8 Political and Social Context: the ISIS Insurgency Remaining as a Major Threat.............................................. 10 The Real Sector: Losing the Non-Oil Economic Output by the ISIS Insurgency.............................................. 11 Labor Market and Employment: 800,000 Jobs Lost by the ISIS Insurgency.................................................... 13 Public Finance: Deteriorating Fiscal Position.................................................................................................. 14 Inflation, Money and Banking: Low Inflation amid Economic Deceleration.................................................... 16 The External Sector: Expanding Current Account Deficit................................................................................ 18 Economic Outlook and Risks: Critically Depending on the ISIS and Oil Prices.............................................. 19 Challenges: Remaining Vulnerable to the Security Problems......................................................................... 21 Special Focus: Building Iraq’s Investment Climate ............................................................................. 23 Introduction: Investment Climate for All........................................................................................................ 23 The Investment Climate in Iraq: Progress Made but Much Remaining to be Done........................................ 24 Future Priorities: Strengthening the Investment Climate for Jobs................................................................... 29 Appendix: Selected Data on Iraq.................................................................................................. 31 References................................................................................................................................................ 35 List of Figures Figure 1. The sharp decline in global oil prices followed the ISIS insurgency............................................. 5 Figure 2. Global economy slowed in 2015 due to slower growth in developing countries......................... 9 Figure 3. Oil price decline led to contrasting growth performance in the region........................................ 9 Figure 4. The ISIS insurgency pushed quarterly GDP growth into negative for five quarters.................... 11 Figure 5. The ISIS insurgency severely hurt the non-oil economy….......................................................... 12 Figure 6. … which is evident by international comparison ….................................................................... 12 Figure 7. … and GDP growth decomposition........................................................................................... 13 Figure 8. Iraq’s crude production robustly grew despite the ISIS insurgency............................................ 13 Figure 9. Iraq’s oil price sharply fell since mid-2014................................................................................ 13 Figure 10. Despite increased oil export volumes, oil export revenues continued to decline....................... 13 Figure 11. Increase in security-related expenditure led to decline in non-oil investment............................ 15 Figure 12. Overall fiscal balance deteriorated due to lower oil revenues.................................................... 15 Figure 13. Debt to GDP ratio doubled since the twin shocks to finance the large fiscal deficit................... 16 Figure 14. Inflation has been subdued........................................................................................................ 17 Figure 15. Contracting monetary aggregate reflects fiscal consolidation and weak non-oil sector.............. 17 Figure 16. Current account deficit is deteriorating due to low oil price...................................................... 18 Figure 17. International reserves have been falling to finance the current account deficit.......................... 18 Figure 18. Security-related expenditure will impose additional burden on Iraq’s fiscal deficit.................... 19 Figure 19. Security-related imports will also push Iraq’s current account deficit further down................... 19 Figure 20. Poor investment climate hits small firms................................................................................... 24 Figure 21. The quality of Iraqi governance is poorly perceived................................................................... 26 Figure 22. FDI inflows to Iraq remain low.................................................................................................. 26 Figure 23. Doing Business, progress towards best practice........................................................................ 27 Figure 24. Electricity is the foremost binding constraint............................................................................. 28 Iraq economic monitor | Labouring through the crisis Figure 25. Electricity problems cloud investment climate in Baghdad........................................................ 28 List of Boxes Box 1. Global oil prices continued to fall sharply.................................................................................... 9 Box 2. Regional conflict and economic and social disruptions exacerbated the structural vulnerabilities.14 Box 3. The regional conflict and fiscal crisis hindered public services delivery..................................... 15 Box 4. Banking sector remains weak, but reforms are taking place...................................................... 17 Box 5. Global oil prices are projected to gradually recover................................................................... 19 Box 6. Global and regional economies are expected to pick up but at a slower pace........................... 20 Box 7. Iraq’s Doing Business reform highlights.................................................................................... 25 List of Key Abbreviations Used bpd barrel per day CBI Central Bank of Iraq CSO Central Statistical Organization of Iraq DPF Development Policy Financing FDI Foreign Direct Investment GDP Gross Domestic Product IDPs Internally Displaced Persons IFIs International Financial Institutions IMF International Monetary Fund ISF Iraqi Security Forces ISIS Islamic State of Iraq and Syria KRG Kurdistan Regional Government MENA Middle East and North Africa NIC National Investment Commission PPP Public Private Partnership RFI Rapid Financing Instrument SMEs Small and Medium Enterprises SOEs State-Owned Enterprises SOMO State Oil Marketing Organization TFER Task Force for Economic Reforms and Private Sector Capacity Table of Contents | 3 The World Bank EXECUTIVE SUMMARY i. Iraq is facing daunting challenges of ISIS expand oil-production, but also because of the surge insurgency, political upheaval, and profound in government spending including security-related economic and humanitarian crises. In mid-2014, imports to combat ISIS. Total international reserves the ISIS group managed to capture and control nearly have declined from US$66.7 billion at end-2014 to one-third of Iraq’s territory plunging the country into US$54.3 billion at end-2015. In light of pressing a deep political and security crisis. Despite progress fiscal and balance of payment needs, the IMF made by the Iraqi Security Forces to recapture supported Iraq through a one-off disbursement of some ISIS-controlled cities, the insurgency group US$1.2 billion in July 2015 under its Rapid Financing still holds large swaths of the country, including Instrument (RFI). In addition, to safeguard economic Fallujah, about 40 miles from Baghdad. As a result stability and basic service delivery, the World of the ongoing conflict, 20,035 Iraqis died in 2014, Bank disbursed another US$1.2 billion through a the most since 2007, and a further 17,080 died in Development Policy Financing (DPF) in December 2015; and 4 million persons are internally displaced. 2015. This situation poses a major humanitarian, social and development crisis. The population remains iii. Implementation of political reforms, extremely vulnerable to the ongoing security and announced in August 2015, has been slow economic issues. Extreme poverty is widespread, due to constitutional constraints and systemic exacerbated by constant and recently worsening resistance to changes. Sparked by demonstrations violence. Poverty reached 22.5 percent in 2014 against weak public service delivery in August nationwide; and in the ISIS-affected governorates, 2015, Prime Minister Haider al-Abadi launched a the direct impact of economic, social and security major restructuring of the administration with the disruptions is estimated to have caused a doubling elimination of the three vice-president and three of the poverty rates to 41.2 percent. Internally deputy prime minister positions, a reduction in displaced persons (IDPs) make up half of Iraq’s poor the number of ministries from 33 to 22, and the in 2014. elimination of 128 Secretary General positions. Implementation of these political reforms, however, ii. Compounding the ISIS-related crisis, the has been challenged on constitutional grounds and sharp decline in global oil prices has resulted by antagonized political figures. Faced with large in significant decline in oil export revenues shocks of a sudden nature and of unknown duration, (Figure 1). Lower oil revenues, by US$40 billion, in the Government has, nonetheless, been undertaking addition to higher humanitarian and security-related some fiscal consolidation measures. expenditure, led to a fiscal deficit of 14.5 percent of GDP in 2015. In fact, the deficit could have reached iv. Iraq’s economic prospects are subject to 18.4 percent if the government had not implemented significant risks. Large fiscal and external financing a number of fiscal consolidation measures. The gaps have arisen for 2016 as oil prices to date in 2016 current account deficit worsened from 0.7 percent have been significantly below the budgeted US$45 of GDP in 2014 to 6.6 percent estimated for 2015, per barrel (Iraq’s average selling price in January reflecting significant decline in oil export revenues. was US$22 per barrel). Under the assumption of a At the same time, imports remained unchanged ramp up in oil production, an increase in oil-related in 2015 in part reflecting capital goods needed to FDIs, structural reforms, implementation of the IMF 4 | Executive Summary Iraq economic monitor | Labouring through the crisis program, and a lessening of the incremental impact 5,000 120 of the ISIS insurgency going forward, the economy 4,500 100 4,000 is projected to recover in 2016 from a low base with 3,500 ISIS insurgency Number of death US$ per barrel 80 3,000 a growth rate of 7.2 percent and to hover around 5 2,500 60 percent in the next few years. However, a weaker- 2,000 1,500 40 than-projected global growth or continued excess 1,000 20 500 global oil supply could put downward pressure on 0 0 Jan Apr Jul Oct Jan Apr Jul Oct Jan global oil prices and renew pressures on Iraq’s twin 2014 2015 2016 deficits. Any worsening of the ISIS insurgency would materially and negatively impact Iraq’s economy. Civilian deaths from violence (left) Oil price (right) Domestic political tensions could rise anew, which could undermine the reform effort. The large fiscal FIGURE 1. The sharp decline in global oil prices followed the ISIS insurgency consolidation effort, especially highly sensitive Source: Iraq Body Count, and World Bank. streamlining of the wage bill, could also give rise to social tensions, impact the implementation of reforms and exacerbate further existing fragilities whole, not just firms. A key task of the Government and conflict. Given the rapid worsening of the fiscal is to balance the interests of society and individual stance in line with the further drop in oil prices in firms. A stronger investment climate does not equate 2016, the Iraqi authorities have requested from the with a more comfortable life for individual firms. The IMF to have a Stand-By Arrangement as soon as Government must manage these trade-offs: global possible. analysis of the World Bank’s investment climate surveys shows that firms facing strong competition v. Iraq has recently achieved some important are on average 50 percent more likely to innovate steps towards strengthening its investment than firms reporting no such pressure. Innovation, climate, but much remains to be done. The World in turn, is a key ingredient for productivity Bank’s Doing Business 2016 Report ranks Iraq 161st improvement. The special focus section explores out of 189 economies, significantly behind other the different aspects of the investment climate in countries in the region such as United Arab Emirates order to better understand their importance. With (31), Bahrain (64), Qatar (68), and Oman (70). Iraq this background, we then look at Iraq’s investment ranks 142nd for starting a business and 189 for climate and recent efforts to strengthen it. Finally, resolving insolvency—the worst score in the world— we look at priorities for improving Iraq’s investment because it is not possible to legally close a business. climate going forward. In Iraq, there are at least 5 procedures and it takes around 51 days to register a property. Rampant corruption and soaring costs due to electricity shortages and deteriorating security also complicate running a business in Iraq. The KRG’s investment and trade regime is considered significantly more favorable to the conduct of business. vi. An attractive investment climate is integral to economic growth and poverty reduction. Firms operating in the private sector are at the heart of the development process: as part of their search for profit they innovate, invest, and employ, collectively driving economic growth and underpinning the growth in incomes that enables poverty reduction. An attractive investment climate benefits society as a Executive Summary | 5 ‫‪The World Bank‬‬ ‫العامة‪ ،‬وال�سيما تب�سيط قانون الأجور الذي يت�سم بح�سا�سية كبيرة‪،‬‬ ‫�أن يت�سبب هو الآخر في ت�أجيج التوترات االجتماعية‪ ،‬وي�ؤثر في تنفيذ‬ ‫الإ�صالحات ويفاقم �أكثر من حدة نقاط ال�ضعف ومن ال�صراع‪.‬‬ ‫وبالنظر �إلى التدهور ال�سريع في الو�ضع المالي بما يعك�س ا�ستمرار‬ ‫الهبوط في �أ�سعار النفط في ‪ ،2016‬فقد طلبت الحكومة العراقية من‬ ‫�صندوق النقد الدولي و�ضع ترتيبات ا�ستعداد ائتماني في �أقرب وقت‬ ‫ممكن‪.‬‬ ‫وقد خطا العراق في الآونة الأخيرة بع�ض الخطوات‬ ‫‪ v‬‬ ‫‪.‬‬ ‫المهم على طريق تدعيم مناخه اال�ستثماري‪ ،‬ولكن ال يزال �أمامه‬ ‫الكثير مما ينبغي عمله‪ .‬وي�ضع تقرير ممار�سة �أن�شطة الأعمال‬ ‫لعام ‪ 2016‬ال�صادر عن البنك الدولي العراق في المرتبة رقم ‪161‬‬ ‫من بين ‪ 189‬اقت�صاد ًا عالميا‪ ،‬وهي مرتبة تقل كثير ًا عن غيره من‬ ‫بلدان المنطقة كالإمارات العربية المتحدة (‪ ،)31‬والبحرين (‪،)64‬‬ ‫عمان (‪ .)70‬وي�أتي العراق في المرتبة رقم‬ ‫وقطر (‪ ،)68‬و�سلطنة ُ‬ ‫‪ 142‬فيما يتعلق بت�أ�سي�س ال�شركات ورقم ‪ 189‬فيما يتعلق بت�سوية‬ ‫حاالت الإع�سار‪ -‬وهي �أدنى مرتبة في العالم ‪ -‬لأنه ال يمكن قانون ًا‬ ‫ت�صفية ال�شركات‪ .‬وفي العراق يتطلب الأمر اتخاذ ‪� 5‬إجراءات على‬ ‫الأقل وي�ستغرق نحو ‪ 51‬يوم ًا لت�سجيل عقار �أو مبنى‪ .‬كما �أن الف�ساد‬ ‫المتف�شي والتكاليف الباهظة ب�سبب انقطاعات الكهرباء وتدهور‬ ‫الأمن تزيد هي الأخرى من تعقد �إدارة ال�شركات في العراق‪ .‬و ُيعد‬ ‫نظام اال�ستثمار والتجارة لدى حكومة �إقليم كرد�ستان مواتي ًا بدرجة‬ ‫�أكبر بكثير للقيام بن�شاط تجاري‪.‬‬ ‫ويمثل وجود مناخ ا�ستثماري جذاب �أمراً البد منه‬ ‫‪ .vi‬‬ ‫لتحقيق النمو االقت�صادي والحد من الفقر‪ .‬ويحتل ت�سيير‬ ‫ال�شركات بالقطاع الخا�ص موقع القلب من عملية التنمية‪ :‬فهذه‬ ‫ال�شركات‪ ،‬في �إطار �سعيها للربح‪ ،‬تبتكر وت�ستثمر وتوظف النا�س‪،‬‬ ‫وهو ما يدفع في النهاية بالنمو االقت�صادي وي�ؤدي لنمو الدخل‬ ‫مما يتيح الحد من الفقر‪ .‬ومن �ش�أن وجود مناخ ا�ستثماري جذاب‬ ‫�أن يعود بالنفع على المجتمع كله‪ ،‬ال على ال�شركات وحدها‪ .‬ومن‬ ‫المهام الرئي�سية للحكومة �أن توازن بين م�صالح المجتمع وال�شركات‬ ‫المنفردة‪ .‬كما �أن وجود مناخ ا�ستثماري �أقوى لي�س مرادفا لإتاحة‬ ‫ة لل�شركات الفردية‪ .‬والبد للحكومة من �أن‬ ‫ة ومواءم ً‬ ‫حياة �أكثر راح ً‬ ‫ت�أخذ في ح�سبانها هذه المفا�ضالت‪ :‬فالتحليل العالمي ال�ستق�صاءات‬ ‫البنك الدولي الخا�صة بمناخ اال�ستثمار يظهر �أن احتماالت االبتكار‬ ‫في ال�شركات التي تواجه مناف�سة قوية تزداد بن�سبة ‪ 50‬في المائة‬ ‫ة بال�شركات التي ال تواجه مثل هذه ال�ضغوط‪.‬‬ ‫في المتو�سط مقارن ً‬ ‫واالبتكار‪ ،‬بدوره‪ ،‬يمثل مكون ًا رئي�سي ًا لتح�سين الإنتاجية‪ .‬وي�ستك�شف‬ ‫ق�سم محور التركيز الخا�ص الجوانب المختلفة لمناخ اال�ستثمار بغية‬ ‫التو�صل لفهم �أف�ضل لمدى �أهميتها‪ .‬وفي �ضوء تلك الخلفية ننظر‬ ‫بعدها في مناخ اال�ستثمار بالعراق وما ُبذل في الآونة الأخيرة من‬ ‫جهود لتدعيمه‪ .‬وفي النهاية ننظر في الأولويات الالزمة لتح�سين‬ ‫مناخ اال�ستثمار في العراق م�ستقب ً‬ ‫ال‪.‬‬ ‫| ‪6‬‬ ‫الملخ�ص التنفيذي‬ ‫‪Iraq economic monitor | Labouring through the crisis‬‬ ‫الملخ�ص التنفيذي‬ ‫منها المالية �أو ذات ال�صلة بميزان المدفوعات‪ ،‬قام �صندوق النقد‬ ‫يواجه العراق تحديات ج�سام ًا من تمرد حركة داع�ش‪،‬‬ ‫‪ .i‬‬ ‫الدولي بم�ساندة العراق من خالل �صرف مبلغ مقطوع قدره ‪1.2‬‬ ‫واال�ضطراب ال�سيا�سي‪ ،‬والأزمات االقت�صادية والإن�سانية المتجذرة‪.‬‬ ‫مليار دوالر في يوليو‪/‬تموز ‪ 2015‬من خالل �أداة التمويل ال�سريع لدى‬ ‫ففي منت�صف عام ‪ ،2014‬تمكنت حركة داع�ش من اال�ستيالء‬ ‫ال عن ذلك‪ ،‬ومن �أجل �صون اال�ستقرار االقت�صادي‬ ‫ال�صندوق‪ .‬وف�ض ً‬ ‫وال�سيطرة على قرابة ثلث م�ساحة العراق لتلقي بالبلد في هوة �أزمة‬ ‫وتقديم الخدمات الأ�سا�سية‪ ،‬قام البنك الدولي في دي�سمبر‪/‬كانون‬ ‫�سيا�سية و�أمنية عميقة‪ .‬وعلى الرغم مما �أحرزته قوات الأمن العراقية‬ ‫الأول ‪ 2015‬ب�صرف مبلغ �آخر قدره ‪ 1.2‬مليار دوالر من خالل �أداة‬ ‫من تقدم نحو ا�ستعادة بع�ض المدن التي ا�ستولت عليها داع�ش‪ ،‬لم‬ ‫تمويل ال�سيا�سات الإنمائية‪.‬‬ ‫تزل الحركة المتمردة ت�ستحوذ على م�ساحات كبيرة من الأر�ض‬ ‫العراقية‪ ،‬ومن بينها الفالوجة الواقعة على م�سافة نحو ‪ 40‬مي ً‬ ‫ال‬ ‫وات�سم تنفيذ الإ�صالحات ال�سيا�سية‪ ،‬التي �أُعلن عنها‬ ‫‪.‬‬‫‪ iii‬‬ ‫ة لل�صراع الم�ستمر‪ ،‬لقي ‪ 20035‬عراقي ًا حتفهم‬ ‫من بغداد‪ .‬ونتيج ً‬ ‫في �أغ�سط�س‪�/‬آب ‪ ،2015‬بالبطء ب�سبب قيود د�ستورية ومقاومة‬ ‫في عام ‪ ،2014‬وهو العدد الأعلى منذ عام ‪ ،2007‬كما لقي ‪17080‬‬ ‫�أنظمة و�أجهزة الدولة للتغيير‪ .‬وبت�أثير مظاهرات اندلعت �ضد �سوء‬ ‫�شخ�ص ًا �آخر حتفهم في عام ‪ ،2015‬و�أ�صبح ‪ 4‬ماليين �شخ�ص في‬ ‫تقديم الخدمات العامة في �أغ�سط�س‪�/‬آب ‪� ،2015‬شرع رئي�س الوزراء‬ ‫عداد النازحين والم�شردين داخلي ًا‪ .‬وي�شكل هذا الو�ضع �أزمة كبرى‪،‬‬ ‫حيدر العبادي في عملية �إ�صالح هيكلي كبرى للجهاز الإداري �شملت‬ ‫�إن�ساني ًا‪ ،‬واجتماعي ًا‪ ،‬و�إنمائي ًا‪ .‬وال يزال ال�سكان معر�ضين ب�شدة‬ ‫�إلغاء منا�صب نواب رئي�س الجمهورية الثالثة وثالثة من نواب رئي�س‬ ‫لخطر الم�شكالت الأمنية واالقت�صادية الجارية‪ .‬فالفقر المدقع‬ ‫الوزراء‪ ،‬وخف�ض عدد الوزارات من ‪� 33‬إلى ‪ ،22‬و�إلغاء منا�صب ‪128‬‬ ‫متف�ش بينهم‪ ،‬يفاقمه العنف الم�ستمر الذي ازداد �سوء ًا في الآونة‬ ‫من الأمناء العموميين‪ .‬غير �أن هذه الإ�صالحات ال�سيا�سية واجهت‬ ‫الأخيرة‪ .‬وبلغت ن�سبة الفقر ‪ 22.5‬في المائة عام ‪ 2014‬على م�ستوى‬ ‫تحديات على �أ�س�س د�ستورية ومن جانب �شخ�صيات �سيا�سية من‬ ‫العراق ككل؛ �أما في المحافظات التي ت�أثرت بعمليات داع�ش فيقدَ ر‬ ‫المت�ضررين‪ .‬وفي مواجهة مثل هذه ال�صدمات القوية ذات الطبيعة‬ ‫�أن الآثار المبا�شرة لال�ضطراب االقت�صادي واالجتماعي والأمني‬ ‫المفاجئة والأمد غير المحدد‪ ،‬ف�إن الحكومة تقوم رغم ذلك كله‬ ‫قد ت�سببت في ت�ضاعف معدالت الفقر لت�صل �إلى ‪ 41.2‬في المائة‪.‬‬ ‫بتنفيذ بع�ض �إجراءات �ضبط �أو�ضاع المالية العامة‪.‬‬ ‫وفي عام ‪ 2014‬كان عدد النازحين والم�شردين داخلي ًا يمثل �أكثر من‬ ‫ن�صف فقراء العراق‪.‬‬ ‫ة لمخاطر‬ ‫وتظل �آفاق الم�ستقبل االقت�صادي للعراق عر�ض ً‬ ‫‪ .iv‬‬ ‫جمة‪ .‬فقد طر�أت فجوات في التمويل المالي والخارجي لعام ‪2016‬‬ ‫ال عن الأزمات ذات ال�صلة بتمرد داع�ش‪ ،‬جاء‬ ‫وف�ض ً‬ ‫‪ .ii‬‬ ‫في ظل انخفا�ض �أ�سعار النفط فيما م�ضى من عام ‪� 2016‬إلى ما يقل‬ ‫االنخفا�ض الحاد في �أ�سعار النفط العالمية ليت�سبب في حدوث‬ ‫كثير ًا عن الرقم المقدَ ر في الموازنة وهو ‪ 45‬دوالر ًا للبرميل (ففي‬ ‫هبوط ملمو�س في عائدات ت�صدير النفط (انظر ال�شكل ‪ .)1‬و�أدى‬ ‫يناير‪/‬كانون الثاني كان متو�سط �سعر بيع النفط العراقي ‪ 22‬دوالر ًا‬ ‫هبوط عائدات النفط‪ ،‬بمقدار ‪ 40‬مليار دوالر �أمريكي‪ ،‬عالوة على‬ ‫للبرميل)‪ .‬وفي �ضوء افترا�ض حدوث ارتفاع في �إنتاج النفط‪ ،‬وزيادة‬ ‫زيادة النفقات ذات ال�صلة بالم�شكالت الإن�سانية والأمنية‪� ،‬إلى‬ ‫في اال�ستثمار الأجنبي المبا�شر ذي ال�صلة بالنفط‪ ،‬والإ�صالحات‬ ‫حدوث عجز في الموازنة بلغت ن�سبته ‪ 14.5‬في المائة من �إجمالي‬ ‫الهيكلية‪ ،‬وتنفيذ برنامج �صندوق النقد الدولي‪ ،‬وتقليل الآثار‬ ‫الناتج المحلي في عام ‪ .2015‬وفي حقيقة الأمر‪ ،‬فقد كان من الممكن‬ ‫الإ�ضافية لتمرد داع�ش م�ستقب ً‬ ‫ال‪ ،‬فمن المتوقع لالقت�صاد العراقي �أن‬ ‫�أن ي�صل العجز �إلى ‪ 18.4‬في المائة لو لم تنفذ الحكومة عدد ًا من‬ ‫يتعافى في عام ‪ 2016‬من خط الأ�سا�س المنخف�ض ليتحقق معدل نمو‬ ‫�إجراءات �ضبط �أو�ضاع المالية العامة‪ .‬و�ساء عجز الح�ساب الجاري‬ ‫يبلغ ‪ 7.2‬في المائة‪ ،‬على �أن يراوح حول ‪ 5‬في المائة تقريب ًا خالل‬ ‫من ‪ 0.7‬في المائة من �إجمالي الناتج المحلي في عام ‪ ،2014‬لي�صل‬ ‫ال�سنوات القليلة المقبلة‪ .‬غير �أن من الممكن لحدوث �ضعف �أكثر مما‬ ‫�إلى قرابة ‪ 6.6‬في المائة‪ ،‬وهي الن�سبة التقديرية لعام ‪ ،2015‬مما‬ ‫هو متوقع في النمو العالمي �أو ا�ستمرار الفائ�ض في �إمدادات النفط‬ ‫يعك�س االنخفا�ض الملمو�س في عائدات ت�صدير النفط‪ .‬وفي الوقت‬ ‫العالمية �أن يلقي ب�ضغوط نزولية على �أ�سعار النفط العالمية ويجدد‬ ‫نف�سه‪ ،‬ظلت الواردات بال تغير في عام ‪ ،2015‬وهو ما يعك�س في جزء‬ ‫ال�ضغوط الواقعة على ن�سبتي العجز المزدوج اللتين يعاني منهما‬ ‫منه تكلفة ال�سلع الر�أ�سمالية الالزمة للتو�سع في �إنتاج النفط‪ ،‬ولكنه‬ ‫العراق‪ .‬ومن �ش�أن حدوث �أي ت�صاعد في تمرد داع�ش �أن يحدث �أثر ًا‬ ‫يرجع �أي�ض ًا �إلى ارتفاع الإنفاق الحكومي بما في ذلك الواردات ذات‬ ‫�سلبي ًا ملمو�س ًا على اقت�صاد العراق‪ .‬فالتوترات ال�سيا�سية الداخلية‬ ‫ال�صلة بالأمن لمحاربة داع�ش‪ .‬وتراجع �إجمالي االحتياطيات من‬ ‫قد تزداد من جديد‪ ،‬وهو ما قد يقو�ض من جهود الإ�صالح‪ .‬ويمكن‬ ‫النقد الأجنبي من ‪ 66.7‬مليار دوالر في نهاية عام ‪� 2014‬إلى ‪54.3‬‬ ‫للمجهود الكبير المبذول في �سبيل �إجراءات �ضبط �أو�ضاع المالية‬ ‫مليار دوالر في نهاية ‪ .2015‬وفي �ضوء االحتياجات الملحة‪� ،‬سواء‬ ‫الملخ�ص التنفيذي‬ ‫‪| 7‬‬ The World Bank Recent Economic Developments and Prospects exporting countries. Brazil and Russia have been Global and Regional suffering from recessions, due partly to the sharp decline in commodity prices, and partly to external Context: the and domestic challenges. Chinese economy decelerated due to its economic rebalancing, Slowing Global and its weak demand for commodities imposed downward pressures on global commodity prices. Economy and In light of anticipated tightening of U.S. monetary policy, developing countries, especially commodity Falling Oil Prices exporters, faced significant currency depreciation, reduced capital inflows and enhanced financial Global economy grew slower than previously market volatility. Unlike developing countries, high- projected in 2015. The slower growth is largely income countries maintained growth momentum. attributable to economic slump in key emerging Stronger domestic demand, particularly in the United countries which heavily rely on commodity exports. States where employment conditions are robust, and China’s economic rebalancing not only slowed higher credit growth and lower unemployment in its economy but commodity-exporting countries the euro area led the growth. The recovery remains through decline in its demand. Anticipated monetary fragile in Japan despite substantial policy stimulus. tightening in the United States imposed another downward pressure on commodity exporters through currency depreciation, reduced capital inflows and enhanced financial market volatility. Oil-exporters in the Middle East and North Africa suffered from Regional Economy significant decline in oil prices and revenues. 2. Among developing countries in the Middle East and North Africa (MENA), oil- importing and exporting countries contrasted growth performance. In most oil-importing Global Economy countries, lower oil prices, as well as lower food prices, supported higher consumption and helped 1. Slower growth prospects in key emerging reduction in fuel subsidies. This in turn resulted in countries, the decline in commodity prices, and higher growth at 3.5 percent in 2015, up from 2.8 the elevated security situations have contributed percent in 2014, with inflation kept subdued and to slower global growth in 2015. The World Bank government debt remained stable (Figure 3). On the revised its estimates downwards by 0.4 percentage contrary, developing oil-exporting countries have points to 2.4 percent in December 2015, from been suffering from below fiscal break-even levels its previous estimates in June 2015 (Figure 2). of oil prices, with average growth rate decelerating Developing countries are estimated to grow slower from 2.3 percent in 2014 to 1.7 percent in 2015. from 4.9 percent in 2014 to 4.3 percent in 2015, Current account balances in region’s oil exporters, largely attributable to slower growth in commodity- which were all surplus in 2013, swung into deficit 8 | Recent Economic Developments and Prospects Iraq economic monitor | Labouring through the crisis 8 7 7 6 6 5 5 4 Percent 4 3 Percent 3 2 1 2 0 1 -1 0 -2 2010 2011 2012 2013 2014 2015 2016 -3 est. proj. 2010 2011 2012 2013 2014 2015 2016 est. proj. World High income Developing countries Developing MENA Developing oil exporters Oil importers FIGURE 2. Global economy slowed in 2015 due to slower FIGURE 3. Oil price decline led to contrasting growth growth in developing countries (Year-on-year growth) performance in the region (Year-on-year growth) Source: World Bank (2016). Source: World Bank (2016). Note: Developing oil exporters include Algeria, Iran, Iraq and Libya. Oil importers are Egypt, Tunisia, Djibouti, Jordan, Lebanon, Morocco and West Bank & Gaza. Box 1. Global oil prices continued to fall sharply Global crude oil prices fell by 47 percent from US$96.2 per barrel in 2014 to US$50.8 per barrel in 2015, the lowest annual level since 2004. From November 2015, oil prices declined steadily, slipping below US$30 per barrel in mid- January in a slide that may not reflect fundamentals. Weak oil prices mirrored continued ample supply from non- OPEC producers, expectations of an expansion of Iranian exports in light of earlier-than-expected lifting of sanctions, OPEC’s continued resolve to defend market share, high stocks due to mild weather conditions in the northern hemisphere, and weakening growth prospects in major oil-importing economies. Oil production in non-OPEC countries recorded gains, averaging nearly 2 million bpd over 10 consecutive quarters until the third quarter of 2015. More than two-thirds of production gains came from the United States. Despite sharp cuts in investment, U.S. production has remained more resilient than projected, thanks to efficiency gains and cost cuts. OPEC (excluding new member Indonesia) crude oil production averaged 31.6 million bpd, up from 30.5 million bpd a year earlier. Most of the gains came from Iraq and Saudi Arabia. Iraq’s output reached a record 4.3 million bpd in September, but the country is not expected to exceed this level in 2016 under the strain of low oil prices and a costly conflict against ISIS. At the OPEC meeting on December 2015, the Organization decided to keep producing at current levels, with key exporter, Saudi Arabia, intent on maintaining market share. The group abandoned its 30 million bpd production target, which had been in place since the beginning of 2012. Adding to the uncertainty were expectations that Iran would increase exports earlier-than-expected. Global oil consumption has faced two offsetting pressures: weakening real income growth and sharply lower prices. While weakening growth, especially in emerging countries, has weighed on consumption, the sheer magnitude of the oil price decline, two-thirds of which was attributable to production increase, has spurred consumption. On balance, consumption growth reached a five-year high at 1.8 percent in 2015, despite some weakening in the fourth quarter to 1.1 percent as a result of lower heating oil consumption amidst mild winter weather in the northern hemisphere. While gasoline demand remained robust, weak diesel demand reflected economic rebalancing in China and tepid global industrial activity. by 2015 except Iran. Similarly, fiscal balances were have compounded problems in affected countries, severely hurt, particularly in the Gulf Cooperation including Iraq, through marked deterioration in Council countries. For instance, Saudi Arabia has fiscal balances due to increased security-related lost about a half of its 2015 fiscal revenues due to the expenditure. significant decline in oil prices, equivalent to US$110 billion or about 15 percent of GDP. In addition to lower oil prices, civil unrest and violent insurgencies Recent Economic Developments and Prospects | 9 The World Bank people at end-2015. In addition, 4 million Iraqis Political and have been internally displaced and about 250,000 Syrian refugees have flooded into the country. This Social Context: situation poses a major humanitarian crisis and places an enormous strain on the local economy and the ISIS Insurgency public service delivery. The standard of living has deteriorated and a noticeable share of the population Remaining as a Major has fallen into poverty or is vulnerable to falling into poverty. Food and rent prices are increasing, Threat especially in the Kurdistan Regional Government (KRG) which is hosting over 1.8 million internally The ISIS insurgency since mid-2014 has not only displaced persons (IDPs) and Syrian refugees. seriously affected Iraq’s security situation but also imposed humanitarian and social crises to Iraq. 5. Implementation of political reforms, ISIS controls nearly one third of Iraq’s territory, announced in August 2015, has suffered a setback while more than 30,000 civilians were killed and due to constitutional constraints and systemic 4 million Iraqis have been internally displaced and resistance to changes. Responding to weeks about 250,000 Syrian refugees have flooded into of countrywide demonstrations over the lack of the country. Implementation of political reforms has basic services across the country, including power been delayed, and the dispute between the central shortages, and to a call for drastic change and to government and the Kurdish regional government fight corruption, Iraq’s cabinet approved in August continues. 2015 a series of significant administrative reforms. These include the reduction of number of cabinet 3. Since mid-2014, the ISIS insurgency has positions from 33 to 22, abolition of the country’s seriously affected Iraq’s security situation. ISIS three vice-presidents, spending cuts, and restart of has rapidly extended its control to nearly one third corruption investigation programs. Implementation of Iraq’s territory, plunging Iraq into a deep political of these reforms, especially the political ones, and security crisis. In 2015, some notable progress however, has been delayed due to legal challenges has been made by Iraqi Security Forces (ISF) to and oppositions by affected groups. By end-2015, recapture some of ISIS-controlled cities, such as the Government closed six ministries, consolidated Tikrit in March and Ramadi in December. In late others and cut more than 300 senior officials. Social March 2016, the Iraqi army launched an offensive to tensions are growing among both those negatively retake Mosul. The insurgency group, however, still affected by the reforms and those frustrated holds large swaths of the country, including Fallujah, against delayed implementation of the reforms. To about 40 miles from Baghdad. The ISIS insurgency accelerate fight against corruption, Prime Minister is hurting the country’s economic and social al-Abadi reshuffled his cabinet. development prospects. Violence and sabotage also hinder the revival of the non-oil economy in much of 6. The dispute between the central Iraq due to destruction of infrastructure and assets, government and the KRG continued in 2015. and disruption of trade routes. The KRG and the central government reached an agreement in November 2014 under which the KRG 4. The ISIS insurgency has brought not only would deliver export revenues of 550,000 bpd to severe security challenges, but humanitarian the State Oil Marketing Organization (SOMO) and and social crises to Iraq. The number of civilian the central government would transfer 17 percent deaths from violence more than doubled from 9,851 in 2013 to 20,035 in 2014 and additional 17,080 killed in 2015. The total documented civilian deaths from violence since 2003 are estimated at 171,479 10 | Recent Economic Developments and Prospects Iraq economic monitor | Labouring through the crisis of its net state expenditures,1 which corresponds to 20 about US$12 billion a year to the Erbil government. 15 However, implementation of this agreement 10 ISIS insurgency stopped by mid-2015, with the KRG ramping up 5 Percent independent oil sales while transfers from Bagdad 0 to the KRG have also been significantly below the -5 agreed level. Baghdad government transferred only -10 US$1.9 billion in 2014 and US$2 billion in 2015, -15 respectively. Recently, the KRG and the Iraqi federal Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2011 2012 2013 2014 2015 government held discussions on the resumption of the oil revenue sharing agreement. FIGURE 4. The ISIS insurgency pushed quarterly GDP growth into negative for five quarters (Year-on-year growth) Source: Central Statistical Organization of Iraq (CSO). The Real Sector: in June 2014, Iraq’s economy contracted in five Losing the Non-Oil consecutive quarters (Figure 4). As a result, Iraq’s economy contracted 2.2 percent on an annual Economic Output by basis in 2014, which is the lowest since 2003 (Figure 5). After contracting over five consecutive the ISIS Insurgency quarters, the oil sector strongly led the economy in the third quarter of 2015, reflected to a bounce The ISIS insurgency and the oil price shock since mid- of the economy estimated at 2.4 percent on an 2014 have severely impacted the economy. The non- annual basis in 2015. On the expenditure side, the oil sector is projected to contract by 9.0 percent in economic crisis, coupled with political instability 2015 following an 8.8 percent fall in 2014. In contrast, in 2014, decelerated private-sector consumption growth in the oil sector has remained resilient, with and investment, and limited government spending, output rising 12.9 percent in 2015 to a new high particularly on investment projects. of 3.50 million barrels per day, supported by the southern oil fields which are beyond ISIS’ reach and 8. The poor performance is attributable to which account for 90 percent of total production. After conflict-led contraction in the non-oil sector. The contracting 2.1 percent in 2014, real GDP is estimated non-oil sector contracted 8.8 percent in 2014 and to have rebounded to 2.4 percent in 2015, dragged by projected to a contract additional 9.0 percent in conflict-led contraction in the non-oil sector. 2015, due to the loss of economic output in the ISIS- occupied territories that have seen the destruction of infrastructure assets, disruption of trade routes and deterioration in investor confidence (Figure 6). Ongoing fiscal consolidations since mid-2015 Economic Growth impose further downward pressures on the non- oil economy as government expenditure is a major 7. The ISIS insurgency since mid-2014 has contributor to the non-oil economy. In 2014 and the sharply decelerated Iraq’s non-diversified, oil- first three quarters of 2015, all of the non-oil sectors dependent economy. Since the ISIS insurgency negatively contributed to GDP growth (Figure 7). The contraction in non-oil economy can be observed 1  Net state expenditures are defined as gross expenditures in various subsectors. The building and construction minus KRG’s contribution to the cost of the Iraqi government’s subsector was the main drag, contracting 23.3 sovereign expenses such as the military and federal oil- percent and 66.4 percent, and contributing to the contractor payments. Recent Economic Developments and Prospects | 11 The World Bank 20 20 15 15 10 10 Percent ISIS insurgency 5 Percent 5 0 0 -5 -5 -10 -10 -15 -15 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 est. proj. est. proj. GDP Non-oil GDP Iraq Oman Saudi Arabia U.A.E. FIGURE 5. The ISIS insurgency severely hurt the non-oil FIGURE 6. … which is evident by international economy… (Year-on-year growth) comparison... (Year-on-year growth) Source: Central Statistical Organization of Iraq (CSO). Source: World Bank projections. overall growth by -2.3 percentage points and -5.0 day (bpd) over the past five years (Figure 8). The oil percentage points in 2014 and the first three quarters sector continues to expand in the southern oil fields, of 2015, respectively. The manufacturing subsector which accounts for over 90 percent of production sharply contracted 48.9 percent in 2015, dragging the and beyond the reach of the insurgency group.2 Oil overall growth by 0.9 percentage points. Reflecting production level in 2015 stood at an average of 3.5 disruption of trade routes, wholesale and retail trade million bpd, up from 3.11 million bpd in 2014, and subsector grew negatively at 15.0 percent in 2014. already reached the end-2016 production target In light of the contraction in the non-oil economy, at 4.1 million bpd in January 2016. The largest banking and insurance subsector contracted 19.1 importers of Iraq’s crude oil in 2014 were China, percent in the first three quarters of 2015. The followed by India and the United States. The major agriculture sector grew at -8.3 percent and -17.0 obstacles to expansion plans include inadequate percent, contributing -0.3 percentage points and storage, pumping, and pipeline capacity in the south -0.6 percentage points to the overall growth in 2014 to facilitate larger export volumes. and in the first three quarters of 2015. 10. Higher reliance on oil inevitably makes the Iraqi economy vulnerable to oil price shocks. The recent collapse in global oil prices has had a major impact on Iraq’s fiscal and external positions. Oil Sector After surging to an average of US$104 per barrel in the 2012-2013 period, Iraq’s oil export price fell to 9. The hydrocarbon sector is the major US$48 per barrel in 2015 and is expected to drop contributor to the Iraqi economy and its key to US$30 per barrel in 2016, according to the latest growth driver through these challenging times. World Bank projections (Figure 9). Iraq’s monthly oil With 144 billion barrels in 2015, Iraq is the second export revenues declined from US$5,161 million in biggest oil producer in OPEC after Saudi Arabia, December 2014 to US$2,920 million in December and has the fifth largest proven oil reserves in the 2015 (Figure 10). The increased oil export volumes world. The hydrocarbon sector accounts for 50 have been more than offset by the decline in oil prices. percent of the country’s GDP, 98 percent of the In addition to the fiscal crisis and related service country’s exports, and more than 90 percent of delivery issues, the revenue sharing agreement central government revenue. Although Iraq’s oil with the KRG collapsed as Baghdad broke its fiscal production has grown slower than expected due to transfers’ commitments under the deal while the infrastructure constraints and the ongoing conflict, crude oil production grew by 950,000 barrels per 2  Libya’s crude production has been significantly affected by civil unrest since 2011. 12 | Recent Economic Developments and Prospects Iraq economic monitor | Labouring through the crisis 20 120 15 100 US$ per barrel 10 80 Percent 5 60 0 40 -5 20 -10 2010 2011 2012 2013 2014 2015 0 Q1-Q3 n r l ct n r l ct n r l ct n Ju Ju Ju Ap Ap Ap Ja Ja Ja Ja O O O Agriculture Oil Non-oil industry Services GDP 2013 2014 2015 2016 FIGURE 7. … and GDP growth decomposition FIGURE 9. Iraq’s oil price sharply fell (Year-on-year growth) since mid-2014 Sources: CSO, and World Bank calculation. Source: Iraq Ministry of Oil. 9,000 120 8,000 4 100 7,000 Barrel, million 3.5 6,000 80 US$, million Barrel per day, million 3 5,000 60 2.5 4,000 3,000 40 2 2,000 1.5 20 1,000 1 0 0 n r l ct n r l ct n r l ct n Ju Ju Ju 0.5 Ap Ap Ap Ja Ja Ja Ja O O O 0 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 est. proj. Revenues (left) Volumes (right) Iraq Libya FIGURE 8. Iraq’s crude production robustly grew despite FIGURE 10. Despite increased oil export volumes, oil the ISIS insurgency export revenues continued to decline Source: IMF (2015). Source: Iraq Ministry of Oil. KRG stopped suppling its oil to the SOMO, instead The internal displacement of 4 million Iraqis and independently exporting its oil. the influx of Syrian refugees has exacerbated local economic situations. 11. Labor force participation remains exceedingly low in Iraq, especially for women and Labor Market and the youth. Unemployment is officially estimated at 11 percent in 2011, although actual levels, Employment: 800,000 particularly among the youth, are significantly higher. Only 15 percent of adult Iraqi women of Jobs Lost by the ISIS working age participate in the labor force while 70 percent of adult men are employed, well below the Insurgency already low rates of female labor force participation in the Middle East and North Africa Region. Youth The ISIS insurgency has not only reduced constitute nearly half the population in Iraq, yet employment by 800,000 since mid-2014, but also their labor force participation is low and stagnant. In shifted employment from more productive/higher 2012, 42 percent of young Iraqi men and 93 percent earning jobs to less productive/low earning jobs. of young women were out of the labor force. Among Recent Economic Developments and Prospects | 13 The World Bank the youth aged 15-29, 72 percent of women and 18 percent of men were neither in school nor employed. Public Finance: 12. The ISIS insurgency has led to an estimated Deteriorating Fiscal reduction in employment by 800,000. Also, employment appears to be shifting away from more Position productive/higher earnings jobs in manufacturing and construction to less productive/lower earnings The twin crisis has resulted in a sharp deterioration and possibly more informal jobs in agriculture and of the fiscal deficit, widening from 5.6 percent of services. The displacement of 4 million Iraqis, in GDP in 2014 to an estimated 14.5 percent in 2015, addition to the influx of 250,000 Syrian refugees, due to significantly lower oil revenues and higher has further disrupted local economic conditions. humanitarian and security-related expenditure. The Public Distribution System provides the only Government implemented fiscal consolidation safety net for the vast majority of the poor, and is measures in mid-2015, aimed at improving revenue currently being stretched to its limits. However, the collections, in particular from oil, and at containing 2.8 million new poor are left largely uncovered by non-oil primary spending. The large fiscal deficit, any public safety net. The Government is considering meanwhile, has been financed through external important reforms to the Social Security Network to borrowing, including loans from the IMF under the improve its targeting coverage and efficiency. Rapid Financing Instrument and the World Bank under the Development Policy Financing. Box 2. Regional conflict and economic and social disruptions exacerbated the structural vulnerabilities The structural vulnerabilities that were evident prior to the crisis have been exacerbated by the ongoing violence and economic and social disruptions. Microsimulation estimates suggest a reversal of the hard-won welfare gains of the past, with poverty rising from 19.8 percent in 2012 to 22.5 percent in 2014. Poverty was accompanied by a massive human capital deficit—in health, education and access to basic services. Many Iraqis live close to the poverty line, vulnerable to increases in the price and availability of necessities, and/or the loss of assets and livelihoods. According to the World Bank projections, the recent shocks have increased the number of people living below the poverty line by an estimated 2.8 million by end-2014. IDPs make up half a million of Iraq’s poor in 2014, with an estimated poverty rate of 40 percent, almost twice the average. The Kurdistan Region experienced a quadrupling of poverty rates to 12.5 percent, due to the large influx of IDPs and Syrian refugees and the increased competition for jobs, goods and services. In the ISIS-affected governorates, the direct impact of economic, social and security disruptions is estimated to have doubled poverty rates to 41.2 percent. The increasing trend in poverty is expected to continue during the regional crisis. The ensuing population displacement, and the postponement of spending on socio-economic infrastructure, will further hinder the government’s ability to deliver services. The population remains extremely vulnerable to the ongoing security problems, the continued lack of basic services, scarcity in access to food and basic necessities and increases in their prices. Available data and analysis suggest a weak relationship between economic growth and welfare. The resumption of growth alone will not suffice to restore welfare and livelihoods. Estimates covering the crisis period suggest that welfare is getting eroded a lot faster than it was built up, and that many of the new poor have fallen from closer to the high end to the middle of the distribution. This vulnerability to poverty and shocks will remain an enduring challenge during the crisis period. Large existing human capital deficit and lack of access to infrastructure and services further limit coping strategies and resilience to these shocks. In the short term, the dominant effect of the renewed insurgency on poverty is not through slower growth, but displacement. IDPs will have lost access to whatever employment they had, along with their access to PDS rations, as well as the basic social services needed to maintain their quality of life. Insecurity will further deter the creation of formal private sector jobs, which would have provided an alternative path out of poverty. Preliminary projections of poverty for 2014 and 2015 only take into account the slowdown in GDP per capita growth and suggest an increase in poverty by 5 to 6 percentage points. While this does not take into account internal displacement, insecurity and loss of livelihoods, it provides a rough lower bound—one that already eliminates the small gains of the past. 14 | Recent Economic Developments and Prospects Iraq economic monitor | Labouring through the crisis 12 10 ISIS insurgency 60 and 40 Percent of GDP 8 Percent of GDP 20 6 0 4 -20 2 -40 -60 0 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 est. est. proj. est. est. proj. Oil revenues Non-oil revenues Current expenditures Non-oil investment Security-related expenditure Capital expenditures Overall fiscal balance FIGURE 11. Increase in security-related expenditure led FIGURE 12. Overall fiscal balance deteriorated due to to decline in non-oil investment lower oil revenues Sources: Iraq Ministry of Finance, and World Bank. Sources: Iraq Ministry of Finance, and World Bank. 13. Further worsening in oil prices throughout in the public sector and military jobs consume a 2015 widened the fiscal deficit, despite fiscal large part of the recurrent budget, making Iraq an consolidation efforts. The decline in oil prices since outlier in terms of the wage bill (as a share of GDP) the second half of 2014 led to more than 40 percent worldwide—even among oil exporting countries. As decline in oil export revenues. Lower oil revenues, in a result of the fiscal consolidation measures since addition to higher humanitarian and security-related mid-2015, the wage bill is expected to decline from expenditure, led fiscal deficit reaching 5.6 percent of 16 percent of GDP in 2015 to 14 percent in 2016. GDP in 2014. To address the crisis-led fiscal deficit, While the fiscal adjustment measures successfully the 2015 budget law introduced fiscal consolidation reduced the deficit initially projected at 18.4 percent measures and the Government also under-executed of GDP, it remains unsustainable at an estimated budget spending, in particular on non-oil capital 14.5 percent of GDP in 2015 (Figure 12). investment, leading to a marked improvement in non-oil primary balance (Figure 11). The wage bill Box 3. The regional conflict and fiscal crisis hindered public services delivery The Iraq’s current security and fiscal situation has affected the Government’s capability to provide basic services, and spending priorities. The scale and speed of the displacement crisis created a major challenge for both the Baghdad and Erbil governments. Many Iraqi IDPs and Syrian refugees reside in the same host communities, placing strains on the local economy and access to public services. Shelter and food security are of particular concern. Other issues relate to access to clean water, power cuts, and a severe shortage of fuel. Electricity demand has sharply increased in host communities. Significant upgrades to the electricity sector would be needed to supply additional power. Iraq’s economy was already seeing supply side strains in public service delivery prior to the crisis. Fragile network infrastructure and electricity shortages in Iraq are binding constraints on the quality of life and private sector development. The security situation made it difficult for the Government to focus on reconstruction, especially for the water and electricity network infrastructure. Lack of sanitation and inadequate electricity are the most prevalent deprivations in Iraq. A recent World Bank poverty assessment shows that almost all households are connected to the public electricity grid, but that connection is no guarantee of electricity supply (World Bank, 2014). In fact, on average, electricity supply is rarely higher than 12 hours per day. Baghdad is by far the worst hit in terms of electricity, with more than three-quarters of all households in the capital receiving less than 8 hours of electricity a day. Garbage collection and the availability of sewage services have increased over time, but are still very limited overall, reaching less than 50 percent of the population. In particular, rural areas seem to have almost no garbage collection and sewage services, and the North, Center and the South are also underserved. Similar to the other services, the quality of sanitation does not appear to be satisfactory. Access to water continues to be significantly lower in rural areas: while access is above 90 percent in urban areas, it falls to 63 percent in rural areas. Recent Economic Developments and Prospects | 15 The World Bank from a Eurobond issue of US$2 billion. The latter was 150 100 initially scheduled in 2015, but postponed due to 125 75 the lack of appetite towards Iraq’s Eurobonds.3 The 100 budget also envisages significant domestic financing Percent of GDP US$, million 75 50 but the capacity of domestic banks to subscribe to 50 25 large Treasury bills subscription is limited outside 25 0 0 of the Central Bank of Iraq (CBI) discounting large 2010 2011 2012 2013 2014 2015 proj. 2016 proj. volume of such government securities. External debt (left) Domestic debt (left) Debt-to GDP ratio (right) 16. The large deficit financing has more than doubled Iraq’s public debt-to-GDP ratio. Prior to FIGURE 13. Debt to GDP ratio doubled since the twin the crisis, Iraq’s gross public debt-to-GDP ratio was shocks to finance the large fiscal deficit moderate, averaging 35.2 percent of GDP in the Source: Iraq Ministry of Finance, and World Bank. three years to 2014 (Figure 13). Starting in 2015, however, the debt ratio has been increasing. The 14. The large fiscal deficit was mostly financed stock of domestic debt increased from 11.6 percent domestically, with some notable external of GDP in 2014 to 27.8 percent of GDP in 2015, in financing. Identified sources of financing include part linked to indirect financing of the deficit by the borrowing from state-owned banks, partly through CBI (as it is rediscounting Treasury Bills bought by the a modification of the reserve requirement and state-owned banks). Loans from the IFIs increased indirect central bank financing, the accumulation external debt to 34.7 percent of GDP in 2015, up of domestic arrears and external financing. The IMF from 27.3 percent of GDP in 2014. While Iraq’s debt supports Iraq through a disbursement under the outlook remains vulnerable to adverse shocks, they Rapid Financing Instrument (RFI) in the amount of are unlikely to put the debt on an unsustainable path, US$1.2 billion. The IMF concluded the 2015 Article given the implementation of programmed fiscal IV consultation with Iraq, and the Executive Board consolidations, a rebound in economic activity, and approved the RFI on July 29, 2015. In addition, to Iraq’s substantial underground wealth. safeguard economic stability and basic service delivery, the World Bank disbursed another US$1.2 billion of the Development Policy Financing (DPF). Access under the IMF’s RFI and the World Bank’s DPF helped address part of Iraq’s urgent balance of Inflation, Money payments and budget needs. and Banking: 15. The Parliament approved the 2016 budget in December 2015, with a sizeable deficit to be Low Inflation financed externally. Reflecting unfavorable market sentiments, the Government amended the 2016 amid Economic draft budget in December 2015 to reduce reliance on external financing. The size of the approved Deceleration budget is ID 103.1 trillion (US$88.4 billion) with a deficit of ID 21.4 trillion (US$18.4 billion). Revenue Inflation remained low, at least in the areas where is estimated to reach ID 81.7 trillion (US$70.1 data are available, while inflation in conflict-affected billion)—based on an assumed oil price of US$45 areas is likely high due to supply disruption. Both per barrel and average oil production of 3.6 million reserve and broad money contracted in the second bpd. The Government plans on closing the financing gap through diverse sources, including borrowing 3  In February 2016, Standard & Poor’s rated Iraq’s long-term from international financial institutions (IFIs), and foreign debt as ‘B-’ and short-term foreign and domestic debt as ‘B.’ 16 | Recent Economic Developments and Prospects Iraq economic monitor | Labouring through the crisis 8 30 6 25 4 20 Percent 15 2 Percent 10 5 0 0 -2 -5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 -10 2011 2012 2013 2014 2015 -15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Transportation Housing, Water, Electricity & LPG 2011 2012 2013 2014 2015 Food and Non-Alcoholic Beverages Headline inflation Core Inflation Reserve money Broad money FIGURE 14. Inflation has been subdued FIGURE 15. Contracting monetary aggregate reflects (Year-on-year growth) fiscal consolidation and weak non-oil sector Source: CSO. (Year-on-year growth). Source: Central Bank of Iraq. Box 4. Banking sector remains weak, but reforms are taking place The effectiveness of monetary policy in Iraq continues to be hampered by the weakness of the monetary transmission channels due to an inefficient banking sector. The challenging fiscal situation has resulted in an increase in directed lending that the leading state-owned banks (Rasheed and Al-Rafidain) have provided to state-owned enterprises, mostly to cover current operating costs (e.g., wages), as well as the Government deficit. Banking supervision remains weak, including regulatory forbearance with Rasheed and Al-Rafidain. Amid a weak banking sector, the Central Bank of Iraq is pressing ahead with reforms and is tightening supervision. The CBI has gained some momentum to clean-up of the balance sheets of these banks from pre-2003 assets and large valuation losses. The Iraqi authorities are taking steps to open government business to private banks. The CBI is strengthening banking supervision and is pushing ahead with financial sector reforms through the planned introduction of a deposit insurance scheme, a credit information bureau, and with the restructuring of Rasheed and Al-Rafidain. The authorities are also promoting growth and lower distortions in the banking sector by improving the playing field between public and private banks. The rise in insecurity, however, may deter foreign banks from entering Iraq or prompt those already there to leave, thus slowing the development of the sector. half of 2015, likely due to the fiscal consolidations and trade and food supply moderately boosted food decelerated non-oil economy. The ISIS insurgency inflation, to an average rate of 5.5 percent. Inflation not only slowed credit growth due to disruption in is likely higher in conflict-affected areas, due to economic activity, but also destroyed the physical supply disruption, although data in occupied cities assets of some banks and of their clients. are not available. Meanwhile, food prices increased especially in the northern governorates that host a 17. Inflation remained low in 2015. Following large number of IDPs and Syrian refugees though this a peak at over 50 percent in 2006, inflation has is expected to be a temporary price pressure as local markedly declined since. Headline inflation, supplies are expected to adjust to increased local measured as year-on-year change in the consumer demands. Both reserve and broad money contracted price index, continued to remain low at 1.4 percent in the second half of 2015, likely reflecting the fiscal in 2015, compared to 2.2 percent in 2014, at least in consolidation efforts and the contraction in non-oil areas of the country where data are available (Figure economic activity (Figure 15). 14).4 In the second half of 2015, the disruption in 18. The ISIS insurgency not only decelerated 4  Data for Al-Anbar, Nineveh and Salahuddin is not available credit growth, reflecting decelerated economic due to the current security situation. Recent Economic Developments and Prospects | 17 The World Bank 50 80 16 40 14 Months of imports 30 60 12 Percent of GDP 20 US$, billion 10 10 40 8 0 6 -10 20 4 -20 2 -30 0 0 -40 2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016 prel. est. proj. prel. est. proj. Foreign Reserves (left) Coverage Ratio (right) Exports Imports Current account balance FIGURE 16. Current account deficit is deteriorating due FIGURE 17. International reserves have been falling to to low oil price finance the current account deficit Sources: Iraqi authorities; IMF and World Bank projections. Sources: Iraqi authorities; IMF and World Bank projections. growth but also destroyed the physical assets 19. Iraq’s current account deficit has widened of banks. Credit growth to the private sector is due to continued decline in oil prices. After slipping impacted due to the decline in public investment. into a deficit in 2014, partly due to the decline in Credit growth to the private sector decelerated from oil revenues and also because of the high imports 16 percent in 2013 to only 5 percent in 2014 and of military-related equipment to combat the ISIS, further decelerated in 2015. Non-performing loans the current account deficit worsened in 2015. With ratios increased from 6.7 percent in 2013 to 7.6 oil prices declining from US$97 per barrel in 2014 percent in 2015 because of the ISIS activities and to US$48 per barrel in 2015, oil export revenues reduced private sector activity. The ISIS insurgency almost halved from US$84 billion in 2014 to US$44 not only disrupted daily economic activity, but also billion in 2015. As a result, the current account destroyed the physical assets of some banks and of deficit deteriorated from 0.7 percent of GDP in 2014 their clients. In addition, trade disruption led to a fall to 6.6 percent of GDP in 2015 (Figure 16). However, in import financing, and the risk of money laundering the fiscal consolidation efforts, in particular the and terrorist financing has increased. tightening of non-oil investment expenditure, have mitigated somewhat further deterioration of the current account deficit as imports of goods have been subdued. The External Sector: 20. The current account deficit was mostly financed by the use of international reserves. Expanding Current International reserves of the CBI have declined from US$67 billion at end-2014 to US$54 billion at end- Account Deficit 2015 because of the decline in oil revenues (Figure 17). In terms of months of imports, it is expected The twin crisis has led to worsening of the current that the coverage ratio declined from 13.7 months account deficit, reflecting a sharp drop in oil export of imports at end-2014 to 10.2 months at end-2015. revenues and high imports of military-related equipment. Despite the fiscal consolidation efforts reducing goods imports, the current account deficit deteriorated from 0.7 percent of GDP in 2014 to 6.6 percent in 2015. The widened current account deficit was mostly financed by the use of international reserves. 18 | Recent Economic Developments and Prospects Iraq economic monitor | Labouring through the crisis Economic Outlook 15 10 5 and Risks: Critically Percent of GDP 0 -5 Depending on the -10 -15 -20 ISIS and Oil Prices -25 2012 2013 2014 2015 est. 2016 proj. Given favorable assumptions on the ISIS insurgency Iraq Oman Saudi Arabia U.A.E. and oil prices, the economy is projected to recover from a low base, growing at 7.2 percent in 2016 and FIGURE 18. Security-related expenditure will impose additional burden on Iraq’s fiscal deficit to hover around 5 percent in the next few years. With Source: World Bank projections. the Iraqi selling oil price is projected at US$30, fiscal and external positions are expected to remain under pressure. Higher-than-projected oil price would 25 improve both the fiscal and external balances. 20 15 Percent of GDP 10 21. The economic outlook for 2016-18 5 is improving though critically depending on 0 -5 assumptions regarding ISIS and oil prices. Under -10 the assumption of a ramp up in oil production, an -15 -20 increase in oil-related FDIs, structural reforms, 2012 2013 2014 2015 2016 est. proj. implementation of the IMF program, and a lessening of the incremental impact of the ISIS insurgency Iraq Oman Saudi Arabia U.A.E. going forward, the economy is projected to recover from a low base in 2016 with a growth rate of 7.2 FIGURE 19. Security-related imports will also push Iraq’s current account deficit further down percent and to hover around 5 percent in the next Source: World Bank projections. few years, despite the ongoing fiscal consolidations Box 5. Global oil prices are projected to gradually recover For 2016, crude oil prices are projected to average US$37 per barrel, a 27 percent decline from the 2015 average. Oil prices is expected to gradually recover from their current lows over the course of the year, resulting from a number of factors. First, part of the sharp oil price drop in early 2016, which does not reflect fundamentals of oil demand and supply, is likely to reverse. Second, high-cost oil producers are expected to sustain persistent losses and increasingly implement production cuts that are likely to exceed any additional capacity coming to the market. Third, demand is expected to strengthen somewhat, along with a modest pickup in global growth. The magnitude of expected recovery in oil prices would be smaller than the rebounds that followed sharp drops in 2008, 1998, and 1986. In these declines, prices rebounded from their troughs by around 50 percent within a six months, and approximately doubled after twelve months. In 1998 and 2008, significant OPEC production cuts contributed to the price recovery, while in 1986 OPEC sought to regain its market share, somewhat similar to its current intent on defending its share. The currently expected price recovery over the course of 2016 is less than that in the previous episodes owing to large stocks and prospects for continued ample supplies (including from OPEC) and anemic demand. On balance, the price outlook remains subject to considerable downside risks. These include a larger-than-expected increase in Iran’s exports and a possible recovery of exports from Libya. Short-cycle U.S. shale production may again turn out to be more resilient than currently anticipated if companies achieve further productivity gains. Ample supply would particularly weigh on prices if global demand were to also weaken more than expected. Prices may thus have to fall further to reduce production and investment, especially for short-cycle U.S. shale production. Recent Economic Developments and Prospects | 19 The World Bank Box 6. Global and regional economies are expected to pick up but at a slower pace 2016 global growth is expected to pick up, though at a slower pace than previously projected, reaching 2.9 percent in 2016 and 3.1 percent in 2017-18. A modest upturn in global activity in 2016 and beyond is predicated on a continued recovery in major high-income countries, a gradual slowdown and rebalancing in China, a stabilization of commodity prices, and an increase in global interest rates that is gradual and stays well contained. Growth forecast for high-income countries is projected to show some improvement in 2016 in light of gradual tightening cycle of the U.S. Federal Reserve, and continued accommodative policy stance in the euro area and Japan. Conditions for a continued but fragile upturn in the euro area still appear in place, despite soft external demand and rising geopolitical concerns. Though gradually dissipating, legacies from the global financial crisis continue to be felt across high-income countries, limiting both aggregate demand and the underlying growth potential of these economies. The modest pickup in growth in developing countries is expected in 2016 and 2017, thanks to continued growth momentum in high-income countries, stabilization of commodity prices, still-accommodative monetary policy in major economies, and a steady process of rebalancing in China. With stabilizing commodity prices, growth in commodity exporters is expected to resume. Among low-income countries, growth is mostly steady or rising. However, forecasts for 2016 have been downgraded for some countries from previous projections, reflecting lower commodity prices and rising security and political tensions in some countries. Also, developing countries will likely face rising borrowing costs. In particular, countries with large borrowing needs and high levels of dollar-denominated debt could be adversely impacted by rising U.S. interest rates. A combination of low oil prices, currently estimated at US$37 per barrel in 2016, several major conflicts and subdued global economic recovery is expected to keep economic growth in the MENA region low at 3 percent in 2016. Since 2013, MENA has not been able to escape the spiral of slow growth for a variety of reasons including the incidence of war and conflict. These factors are expected to dampen the short-term economic prospects in the region, unless there is some progress in the peace talks. If the recent truce in Syria and the ongoing peace talks in Yemen and Libya materialize, which in turn reduces the spread of insecurity and conflict elsewhere in the region, economic growth in MENA could improve over the medium term. But the base case estimate is that real GDP in the MENA region will grow close to 4 percent in 2017 and 2018, still low by historical standards. slowing the non-oil sector growth. Among the drivers ISIS insurgency. Given stabilization of oil prices, of this gradual recovery is the ongoing ramp up in oil the twin deficits in regional oil exporters are production, expected to reach 5 million bpd by 2019. expected to moderate in 2016 (Figures 18 and 19). On the contrary, despite the fiscal consolidation 22. The Iraqi selling oil price projected at efforts, higher humanitarian and security-related US$30, significantly below the budgeted price expenditure and higher imports of military-related at US$45, will result in the continued twin equipment are expected to push Iraq’s twin deficits deficits. On the fiscal side, despite the ongoing further down in 2016. fiscal consolidation efforts, the overall fiscal deficit is projected to expand to 20 percent of GDP, 24. Given gradual recovery in oil prices, with a large financing gap urging further fiscal increase in oil production and successful consolidations and external financing. The additional implementation of fiscal consolidations, the twin deficit financing will increase the stock of public deficits are projected to switch to surpluses by debt sharply to 87 percent of GDP in 2016. On the 2020. Similarly, the non-oil primary deficit (as a external side, the current account deficit is projected percent of non-oil GDP) is projected to improve from to worsen to 15.3 percent of GDP in 2016. The 53.3 percent in 2016 to 39.3 percent in 2020; such worsening current account deficit will be financed a deficit remains slightly higher than the sustainable by use of the international reserves, falling to US$44 level of consumption of Iraq’s oil wealth (33 percent billion in 2016. of non-oil GDP). This fiscal improvement returns the debt-to-GDP ratio on a downward path starting 23. The marked deterioration in the twin in 2018, and the international reserves would hit deficit in the short term is attributable to the US$32 billion in 2019. 20 | Recent Economic Developments and Prospects Iraq economic monitor | Labouring through the crisis well. Only 15 percent of Iraqi women of working Challenges: age participate in the labor force, well below the already low rates of female labor force participation Remaining in the Middle East and North Africa region of around 25 percent. The labor force lacks basic skills due to Vulnerable to the years of war and sanctions, and massive emigration since 2003. There are also considerable differences Security Problems in the unemployment rates across provinces. In some provinces, notably in the Sunni-majority ones Any worsening of the ISIS insurgency would materially like Anbar, the unemployment rate is estimated to and negatively impact Iraq’s economy. Poverty and be twice the national rate. unemployment are expected to increase due to conflict and displacement. Public services delivery 27. The role of private sector is marginal. has been insufficient, and urges new programs to The public sector in Iraq continues to dominate address the vulnerable delivery of public services. the economy, and is mostly inefficient and low Iraq’s economy is highly dependent on the capital- performing. The size of the public sector in Iraq- intensive oil sector, leaving non-oil private sector measured by public spending-to-GDP ratio is one small and unemployment high. Fight against long- of the highest in the region (61.1 percent of GDP). lasting corruption has made slow progress due to Government and state-owned enterprises employ strong oppositions. approximately half of the labor force. There are limited employment opportunities outside the large 25. Iraq’s economy remains extremely public sector. Decades of state-driven economic vulnerable to the country’s ongoing security policy have not encouraged private sector to grow. problems, which impede investment and the The challenges are compounded by limited credit ability to manage oil resources effectively. Poverty systems and access to finance, an underdeveloped and unemployment are expected to continue financial sector dominated by state-owned banks, rising with higher influx of the IDPs. Aggravation and weak financial regulations misaligned with of social instability risks is high especially in host international standards. This overall economic communities. Iraq’s economy was already suffering situation calls for a dedicated effort of the national from severe structural weakness such as a small government, local authorities and their international non-oil sector, high unemployment, large public partners to stimulating development in non-oil sector, and a weak business environment—all of sectors of the Iraqi economy (see the special focus which are needed for greater resilience to conflict. section of this report on Iraq’s investment climate Among Iraq’s current challenges is to maintain for detailed arguments). delivery of even the prior level of services and public works, which were insufficient to the needs of the 28. Iraq suffers from extensive, pervasive, country. New programs will need to be put into corruption across all levels of government place to address the vulnerabilities created by the and across all sectors. Iraq continually scores current crisis. among the worst countries in the world in various governance and corruption indicators. The extent 26. Unemployment is high, and is expected of public and private sector corruption has eroded to increase due to conflict and displacement. public institutions, prevented effective basic service Unemployment is officially estimated at 11 percent delivery and undermined state security (see the in 2011, although actual levels, particularly among special focus section of this report on Iraq’s water the youth, are likely to be considerably higher. security and management for detailed arguments). Demographic pressure is strong, with 41 percent According to Transparency International’s of the population under 15 years. Labor market Corruption Perception Index 2015, Iraq ranked 161 participation remains exceedingly low for women as of 167 countries. It scored 16 on a scale where 0 Recent Economic Developments and Prospects | 21 The World Bank means that a country is perceived to be highly corrupt and 100 is where a country is perceived to be very clean. Only Afghanistan, Angola, Libya, North Korea, South Sudan, Sudan, and Somalia scored worse. Corruption in Iraq exists at the highest levels. The Commission for Integrity revealed that in 2012, of the 2,667 orders of arrest which were issued, nine involved ministers and 99 were against 61 heads of departments or equivalent. Bureaucratic corruption in Iraq is driven by weak institutions, a lack of experienced staff, confusing legal framework and weak oversight, which provide incentives and opportunities for corruption. The existing anti- corruption framework is ineffective. In August 2015, Prime Minister al-Abadi announced actions to fight corruption and money-laundering including plans for institutional and administration reform, and the adoption of ‘E-Government’ to reduce corruption risk. Implementation of the reforms has suffered a setback due to constitutional constraints and systemic resistance to changes. By end-2015, the Government closed six ministries, consolidated others and cut more than 300 senior officials. Social tensions are growing among both those negatively affected by the reforms and those frustrated against delayed implementation of the reforms. 22 | Recent Economic Developments and Prospects Iraq economic monitor | Labouring through the crisis Special Focus. Building Iraq’s Investment Climate The ‘investment climate’ is the collective term for the underpinning the growth in incomes that enables many and varied contextual factors that can influence poverty reduction. By some estimates, more than 90 a given investment decision. It is a prerequisite for percent of jobs in developing countries are created economic growth and poverty reduction. Iraq through private sector firms and self-employment. has recently made some important steps towards Taxation of private firms and employees also strengthening its investment climate, but much contributes to the payment for public sector remains to be done. This section explores the different employees and the goods and services they provide. aspects of the investment climate in order to better understand their importance, and discusses Iraq’s 30. An attractive investment climate benefits investment climate and recent efforts to strengthen society as a whole, not just firms. A key task of it. Priorities for improving Iraq’s investment climate government is to balance the interests of society going forward are also discussed. and individual firms: a stronger investment climate does not equate with a more comfortable life for individual firms. For example, given the choice, an individual firm is likely to desire less taxation, less regulation, and less competition than is optimal Introduction: for society as a whole. Government must manage these trade-offs: global analysis of the World Bank’s Investment Climate investment climate surveys shows that firms facing strong competition are on average 50 percent more for All likely to innovate than firms reporting no such pressure. Innovation, in turn, is a key ingredient for 29. The investment climate is integral to productivity improvement. economic growth and poverty reduction, and encompasses all factors that can affect an 31. A poor investment climate can raise the investment decision. Fundamentally, the term cost of investment and hiring, resulting in less of refers to ‘…the set of location-specific factors both. Costs associated with enforcing contracts, poor shaping the opportunities and incentives for firms to infrastructure, crime, corruption, poor regulation invest productively, create jobs, and expand’ (World and weak regulatory administration can cost up Bank, 2004). While the full range of issues that to a quarter of sales revenue in some countries. affect the investment climate includes factors such Time also costs money, and delays in connecting as geography, security, market size, and consumer telephones and electricity, or clearing goods through preferences, our primary focus here is on a smaller ports also add to costs, and limit and reduce the set of issues linked that can be readily impacted by range of possible investment opportunities that will government policies such as, infrastructure, laws, be taken up. On the employment front, a recent regulations, and institutional capacities and . Firms evaluation of investment climate reform programs operating in the private sector are at the heart of the in Burkina Faso, Liberia, Rwanda, and Sierra Leone – development process in market economies: as part all countries that originally had very poor investment of their search for profit they innovate, invest, and climates – estimated that over 50,000 jobs had been employ, collectively driving economic growth and created. In Brazil, reform of the tax system in 1996 Special Focus | 23 The World Bank liberalization and regulatory reform in the 1990s. 75 The results were impressive: private investment as a share of GDP almost doubled in both countries, and Large for the period 1980-2002, China’s per capita GDP Percentage of firms 50 Medium rose tenfold, while India’s quadrupled. Poverty rates Small fell in tandem – from almost 60 per cent to around 25 20 per cent in China, and from over 50 per cent to Informal under 40 per cent for India (World Bank, 2004). 0 Have a loan Confident that courts Believe regulations from a formal will uphold will be interpreted financial institution property rights consistently FIGURE 20. Poor investment climate hits small firms The Investment Sources: World Bank Investment Climate Surveys and WDR Surveys on Micro and Informal Firms. Note: Based on 10 countries for which formal and informal surveys Climate in Iraq: were conducted, controlling for industry, country, ownership, and firm age. Progress Made but led to a 12 percent increase in employment (IFC, Much Remaining to 2013). be Done 32. A bad investment climate hurts small firms’ more than large ones. Large firms often 34. Iraq’s investment climate remains a work have the resources, existing networks and political in progress, but advances have been made. Several clout to navigate their way through even the important pieces of legislation have been drafted poorest regulatory environments if they perceive with the support of international partners including the potential return as worth the effort. For small the Economic Reform Law and PPP law. These are and informal firms, however, poor regulation, and currently under review by the Government. In 2013- unpredictable and predatory officials can often 14 reforms to reduce the cost of registering a business prove insurmountable barriers (Figure 20). In fact, were implemented but these were outside the scope over 90 percent of firms in developing countries of the Starting a Business indicator and therefore did report an ‘implementation gap’ between what a not affect Iraq’s Doing Business ranking. Several policy or law says, and what the officials charged important SOE reforms were implemented between with administering it actually do. 2010 and 2014 with the support of World Bank Group, including implementation of one PPP (i.e., 33. Improving the investment climate indeed the State Drug Industries) and several administrative drives growth. Much evidence now exists to reforms to improve the commercial viability of SOEs. support the link between improving investment These reforms included commencing the transfer climates and growth, but two of the most compelling of inactive workers to ministerial departments case studies are China and India. In the early 1980s, for retraining and reassignment and aligning and China began its transformation towards a market integrating SOE business planning with annual economy with the introduction of a basic system strategic plans prepared by ministries and also the of property rights and private enterprise, along annual budget planning cycle. with the commencement of trade and investment liberalization as part of a broad and sustained drive 35. Reform efforts accelerated in the second to improve the investment climate. A few years half of 2015. In February 2016 the Government later, India moved to reduce its tariffs and licensing established a Task Force within the Council of requirements, and followed this up with further trade Ministers Secretariat to operate a Regulatory Impact 24 | Special Focus Iraq economic monitor | Labouring through the crisis Box 7. Iraq’s Doing Business reform highlights From 2014 to 2015 Iraq retreated from 146 to 156 in ease of doing business according to the World Bank Doing Business Report. That put the country near the very bottom of the Middle East and North Africa. The nations that did the best were the United Arab Emirates at 22 out of 189 countries, followed by Saudi Arabia at 49, and Qatar at 50. The remainders were in the bottom half and included Iraq at 156, Syria at 175, and Libya at 188. Iraq has regularly been at the wrong end of that spectrum due to its lack of reforms to promote business post 2003. The topics that Iraq did the best back then were construction permits and paying taxes. Getting construction permits took eight steps, and approximately 119 days which put it in the top of the ranked economies at 9 out of 189 in this topic. In the region only the United Arab Emirates at 4 did better, with Saudi Arabia at 21, and Oman at 49. Paying taxes Iraq ranked 52 which put it in middle of the region with the UAE, 1, Saudi Arabia, 3, Oman, 10, and Jordan, 45, doing better, while Iran, 124, and Egypt, 149 did worse.  The 2016 Doing Business report changed its methodology which makes it challenging to compare some date directly with previous years. However, the report ranked Iraq at 161 out of 189 countries. Iraq performs particularly well in one Doing Business indicator: ranking 59 out of 189 economies on the ease of Paying Taxes. In spite of sustained reform efforts over the past years,  in several of the other areas measured by Doing Business, Iraq compare less favorably including Enforcing Contracts (122nd), Resolving Insolvency (189th), Getting Credits (181st), Starting a Business (154th), Trading across Boarders (178th), dealing with construction permits (147th) and Protecting Minority Investors (115th ). Analysis (RIA) process to strengthen evidence dialogue; (6) land reforms; and (7) tax policies. based policy advice in Submissions to the Council Between 2008 and 2016, several reforms in some of Ministers. A broader strategy to develop the of these areas were implemented including the private sector is also in preparation that will support Council of Representatives passing a new Labor the ongoing transition towards a market economy Law. In addition, several important reforms to SOEs by encouraging domestic and foreign investment. were implemented over this period, focusing on The Parliament has previously approved a revised commercialization and managing inactive workers. investment law in 2009 allowing, among other things, In 2016, the scope of work of TFER was reduced foreign ownership of land for housing projects. including responsibility for leading SOE reforms in In 2010, the Cabinet approved an authorizing Iraq being passed on to the Ministry of Industry and framework for the National Investment Commission Minerals. (NIC): the Commission will be responsible for implementing a multi-billion dollar Public-Private 37. Nevertheless, the overall investment Partnership (PPP) infrastructure package, and climate remains poor. A range of composite overseeing a ‘one-stop shop’ for foreign investors to governance indicators that report perceptions about “facilitate the processing of the investment licenses important aspects of the investment climate show that applications, issuing the license, allocating the land, Iraq is significantly below the global average (Figure securing tax exemptions, and facilitating the entry 21).5 Even regionally, Iraq’s performance is poor as and exit of investors and their employees.” evidenced, in particular, in the worst performance of stability and absence of violence in the region. 36. A Task Force for Economic Reforms and Control of corruption is also a critical issue, with Private Sector Capacity (TFER) was established perceptions of the degree to which public power is in 2008. The taskforce is mandated to lead a exercised for private gain in Iraq, as well as ‘capture’ wide range of reforms, and was headed by the of the state by elites and private concerns being worse Prime Minister’s Chief Advisor until 2015. Seven than for all regional comparators with the exception technical working groups were created on: (1) legislative reform; (2) SOEs restructuring; (3) SME 5  The World Wide Governance Indicators aggregate several development; (4) investment policy; (5) social hundred variables measuring perceptions of a range of governance from over 30 different data sources. Special Focus | 25 The World Bank Control of Government Regulatory Corruption Effectiveness Quality 0.5 8 7 7.6 -0.5 6 6.0 -1.5 5 Percent of GDP -2.5 4 4.2 3 3.4 3.7 3.0 3.1 Rule of Stability & Absence Voice & 2.7 2 2.1 2.2 Law of Violence Accountability 0.5 1 1.4 0.7 0 -0.5 n q ey il ge m ile sia ia sia a a in bi az Ira Ira ss na rk Ch ra ne ay Ch ra Br Ru ve Tu et -1.5 iA al do Vi la M ud In na Sa io -2.5 g Re Iraq Iran Jordan Lebanon Libya FIGURE 21. The quality of Iraqi governance is poorly FIGURE 22. DI inflows to Iraq remain low perceived (average, 2005-2014) Source: World Bank Worldwide Governance Indicators. Source: World Bank World Development Indicators. of Yemen. So to for government effectiveness, which public agencies tend to discretionary rent seeking reflects perceptions of the quality of public services, rather than administering effective, transparent and the quality of government officials and their relative unbiased regulation. A poor security environment independence from political pressures, the quality can also raise the threat of appropriation of firm of policy development and implementation, and assets, which can encourage entrepreneurs to degree of credibility that government commitment ‘keep a low’ profile by remaining less visible in to its stated policies has. the informal economy. While costs in the informal sector can often be reduced by evading government 38. The difficult security situation has further regulation and the tax net, opportunities to grow are undermined the investment climate. Violent also reduced through the inability to access formal conflict can severely damage the economy—both financial services, bid for government work, or enter directly and through the negative impact on investor formal contractual arrangements with other firms. sentiment. As security risks increase, the rate of In 2012, it was estimated that almost 67 percent return firms will require to invest increases, and of workers were employed in the informal sector,6 their planning horizon shortens. As a result, realized across a range of sectors including construction, investments shift from longer-term endeavors transport, manufacturing and agriculture. that can collectively build a country’s economic capacity, to shorter-term trading opportunities that 40. The poor investment climate is reflected enable capital to be cycled quickly. Understandably, to low level of foreign direct investment (FDI) government attention is also focused first and in Iraq outside the energy sector. Iraq’s FDI net foremost upon security. The funding needed to inflows, at 1.4 percent of GDP, is low among both sustain the security effort—coupled with revenue its regional and income-level counterparts (Figure loss from falling oil prices—also means that spending 22). While this is perhaps not surprising given the on economic infrastructure and public services are security challenges that Iraq has faced, the practical substantially less than they otherwise would have reality is that Iraq is missing out on both a potentially been (see section 1.5 of this report). important source of finance to grow its economy, but perhaps even more importantly from the 39. The poor security environment since 2003 ‘spillover’ benefits from foreign investment that can has contributed to the growth of informality. lift productivity in the rest of the economy. ‘Informality’ in this context refers to firms and entrepreneurs that operate outside the legal 41. Iraq also has much to do to improve the framework of business. It thrives where governments cannot provide adequate policy certainty or where 6  The informal sector is defined as those without access to social security benefits. 26 | Special Focus Iraq economic monitor | Labouring through the crisis quality of its legal and regulatory environment. Of the 29,000 laws and regulations in Iraq, around U.A.E (rank 31) 75.1 4,000 impact directly or have a significant indirect Oman (rank 70) 65.4 Saudi Arabia (rank 82) 63.2 impact on the private sector, investment and Jordan (rank 113) 57.8 business environment. The laws and regulations Iran (rank 118) 57.4 that apply to specific regulatory transactions and Regional average 56.3 approvals affecting business are often unclear and Egypt (rank 131) 54.4 Iraq (rank 161) 46.1 non-transparent. Furthermore, laws and regulations 0 20 40 60 80 100 often conflict or contradict each other, giving officials’ wide discretion to interpret and apply Distance to frontier score (100=best practice frontier) different laws to identical or similar regulatory transaction or approvals. This increases the cost and FIGURE 23. Doing Business, progress towards best practice risks of doing business in Iraq and also generates Source: World Bank Doing Business 2016 (2015). scope for corruption. The World Bank’s Doing Business 2016 publication ranked Iraq 161st out of 189 countries in 2015. Iraq’s ranking is significantly 43. Important steps have been taken behind regional peers such as United Arab Emirates to improve in the construction permitting (31), Bahrain (64), Qatar (68), and Oman (70). The process. The needs of reconstruction and a fact- composite ‘distance to frontier’, based on 10 topics growing population mean that there will be much included in this year’s aggregate ranking, shows construction activity for the foreseeable future. that Iraq has made the shortest progress among the The Iraq Construction Permits Reform Project was regional comparators towards the best performing launched in May 2013 and has helped re-engineer benchmark economies (Figure 23).7 Iraq ranks the construction permitting process in Baghdad, 142nd for starting a business and 189th for resolving Erbil, and Basra. Other aspects of the project include insolvency—the worst score in the world—because training municipal employees, and introducing new it is not possible to legally close a business. In Iraq, software that will partially automate the permitting there are at least 5 procedures and it takes around process. The project also supports the Government 51 days to register a property. Rampant corruption to implement its recently developed Green Building and soaring costs due to electricity shortages and Code. deteriorating security also complicate running a business in Iraq. 44. Government is building mechanisms that will deliver better regulations. In February 42. Labor and land regulation can be 2016, a high level Regulation Reform Committee particularly prominent impediments for was established within the Council of Ministers businesses. Unclear land ownership titles, laws and Secretariat. The objective of this Committee is regulations undermine make investing in property a to improve the quality of proposed laws and high-risk activity for business. Similarly, Iraq’s labor regulations. The Committee is empowered to regulations severely limit the ability of firms to hire ensure policy proposals received by Cabinet are directly, which in terms undermines the ability of based on hard evidence, and clear logical arguments the labor marker to allocate human resources find and analysis. The Committee will use ‘Regulatory their most productive use. Impact Analysis’ and will coordinate the preparation and provide quality control over regulatory impact documentation by ministries. 7  The topics included are: starting a business; construction permits; getting electricity; registering property; getting credit; 45. Iraqi firms have identified electricity protecting investors; paying taxes; trading across border; enforcing contracts; resolving insolvency. An economy’s supply as a particularly important constraint. The distance to frontier score is indicated on a scale from 0 to 100, most recent World Bank Enterprise Survey for Iraq where zero represents the worst performance and 100 the best- was undertaken in 2011, and almost 20 percent practice frontier. Special Focus | 27 The World Bank 60 Electricity 50 Percent of firms surveyed 19.7 40 Practices of the informal sector 16.7 30 Political instability 15.1 20 10 Access to land 10.5 0 q ed l m ac e Se ing N es Ba kuk d Ka il Su Ba ar ym srah ah l Ki a a Th af Inadequately educated workforce 7.0 M al bi ew al uf rg b Ira da aj iQ iiu ic Sm iy Ba Er rb r an La N r gh rv tu in an 0 5 10 15 20 25 la M Losses due to theft as a % of total sales Breakage/spoilage or theft in transit Percent of firms surveyed Informal payments to public officials Electricity FIGURE 25. Electricity problems cloud investment FIGURE 24. Electricity is the foremost binding constraint climate in Baghdad Source: World Bank Enterprise Survey, 2011. Source: Iraq Investment Climate Assessment (2012). of firms at that time identified electricity problems under-developed financial sector, with banking as the number one constraint facing their business dominated by state banks (86 percent of assets), (Figure 24). Iraq faces a severe deficit in the amount and smaller private banks concentrating primarily of electricity it can generate, and high technical and on wholesale and retail trade. Leasing and insurance non-technical losses of the electricity that it does are also under-developed. Iraq lacks important generate. In 2011 Iraqi firms were experiencing 41 institutions that can facilitate lending to SMEs such power outages a month on average, compared to as a credit bureau (which allows lenders to better only 6 globally. While many firms rely of generators manage risk through better knowledge of borrower to fill the gap created by unreliable electricity credit history). Similarly, the absence of a moveable supplies, these are expensive and generate a range property registry means that firms cannot borrow of other costs such as high levels of air pollution using assets such as machinery and equipment in major cities. Iraq’s Integrated Energy Strategy as collateral. While substantial progress has been estimated that the cost of outages to the economy made in developing a modern payments system was around US$40 billion in 2013. Competition from in Iraq, addressing ongoing gaps—notably very informal sector firms (those that operate outside the limited access to transaction accounts and limited regulatory and tax systems) and political instability automation and centralization of customer account were also notable constraints. management of the large state owned banks—could further contribute to improving the ‘ease of banking.’ 46. Iraq’s under-developed financial sector A concerted effort is also needed to build the trust is another major constraint for private sector of Iraqis in the private banking system. In addition development. The ability of the investment climate to general security concerns, ongoing weaknesses in to support the intermediation of funds from savers the ‘anti-money laundering/combatting the financing to lenders to investors is critical for development. of terrorism’ regime pose risks for international Total banking assets in Iraq are estimated at 77 banks and other businesses that might otherwise percent of GDP, compared to 130 percent in the invest in Iraq. Middle East and North Africa region, and total credit is about 29 percent of GDP, compared to 55 percent 47. The costs of weaknesses in the investment in the region. However, the headline credit figures climate vary widely across the country. In 2011 reflect in large part loans and trade credit extended the problematic investment climate cost firms in from state-owned banks to state-owned enterprises Baghdad, with losses attributable to electricity (SOEs). Provision of credit to the private sector fell problems among the highest in the country, and to just 7 percent of GDP in 2014, one of the lowest losses due to compliance with regulations the rates in the world. This is partly explained by Iraq’s highest in the country (Figure 25). 28 | Special Focus Iraq economic monitor | Labouring through the crisis 48. Access to finance for firms in Kurdistan 51. The best way to support the private Region is very difficult. Despite the KRG’s effort sector is to strengthen the investment climate. to streamline business start-up process,8 a dispute One of the key strategic priorities set down by between the central and regional governments on Prime Minister al-Abadi has been to encourage a budget transfers has resulted in the banking system shift towards enabling the private sector. Iraq’s in Kurdistan becoming isolated from the rest of relatively high oil dependency makes it much more the country. As a result, banks in Kurdistan Region vulnerable to oil price fluctuations than producers are even more liquidity-constrained than in those with a more diversified and resilient economic base. elsewhere in Iraq, and private banks operate under A stronger investment climate—particularly one that conditions of competitive disadvantage compared levels the playing field between state and private to public banks. When coupled with the lack of key companies—will help broaden the economic base financial infrastructure such as a credit bureau and into sectors that have higher job creation intensity collateral registry, lending to the private sector has than hydrocarbons. almost ground to a halt. 49. The Government of Basra is reforming its investment policy and promotion regime. A reform program has commenced that will review regulations Key principles and processes relevant to investment, strengthen investor protections and grievance channels, and 52. Strengthening the investment climate support the institutional strengthening of the Basra requires more than just policy changes. Reform Investment Commission. efforts are usefully grounded upon the following principles: -- Reduce corruption and rent-seeking. Aside from the direct costs of corruption, high-level Future Priorities: corruption can lead to elite capture that can distort the entire policy direction of government Strengthening the to the interests of a few at the expense of the many. Investment Climate -- Build policy credibility for investor confidence. for Jobs Countries as disparate as the United Arab Emirates, Morocco, Rwanda and Georgia have 50. Reforms that support job creation should used a strong commitment to investment be prioritized going forward. At almost 3 percent a climate reform to send a signal to domestic year, population growth in Iraq was the ninth fastest and international investors that the country was in the world in 2015. With a labor force growing at ‘open for business.’ this pace the creation of new jobs will be a key to future stability. Sustainable economic growth is the -- Foster public trust and understanding of only way to deliver these jobs, and the only way to reform. The stronger the consensus for reform is, generate this growth in turn will be through a larger the more sustainable the outcome. In advanced and stronger private sector. economies the linkages between private sector growth, jobs and prosperity are well understood, but this is not necessarily the case in a country 8  The KRG has streamlined business start-up process by like Iraq with a long statist tradition. Improved reducing the time taken to start a company by 13 days, and the cost by US$1,100. service delivery is fundamental to building public trust. Beyond this, educating and explaining the Special Focus | 29 The World Bank need for reform is the responsibility of both -- Create incentives, through access to finance and government and the private sector. business support mechanisms, for the informal sector to formally compete;9 -- Craft global lessons for Iraqi conditions. Iraq does not have the resources or institutions of -- Examine tax and regulatory regimes to assure developed countries, and so transplanting such easy entry and compliance for smallest firms; a system without tailoring to the realities of Iraq and will fail. -- Expand support for microfinance. 55. A sustained effort is needed to improve the quality of regulations and the capacity Proposed action areas of regulators. Iraq suffers from poorly crafted regulations as well as regulatory gaps. A range of 53. Further reform of Iraq’s SOE portfolio tools such as the World Bank’s Doing Business should be a key objective. A pervasive role in the indicators are able to assist in targeting regulatory economy coupled with generally poor governance reform efforts. Addressing these issues without standards means Iraq’s SOE portfolio leaks strengthening the capacity and culture of Iraqi significant fiscal resources through corruption and regulatory institutions, however, will only serve to rent-seeking. In addition to the broader dynamic perpetuate the gap between what regulations say loss to the economy that occurs with such a large and what regulators do. The larger the gap, the public sector, a lack of competitive neutrality (i.e., lower is investor confidence. Strengthening the some SOEs compete ‘unfairly’ with the private capacities of regulatory institutions to operate in sector) undermine investor confidence. As part an effective, transparent and predictable manner of its program to restructure and reform its SOEs through improved governance, regulatory reforms the government has established an Asset Valuation and public-private dialogue is therefore essential. Unit within the Ministry of Finance with a mandate to inventory SOE assets and help determine 56. A number of actions could improve their market value. A number of SOEs have been financial access for the private sector. An important identified as commercially viable or having potential step would be to level the playing field between for public-private partnerships (the State Company state-owned and private banks. Compelling state for Drug Industries has already entered into a PPP banks to operate under conditions of competitive with Jordanian company). neutrality would both improve credit allocation and drive efficiency in the banking sector. Access 54. Growing the share of the formal private to improved finance data—including through the sector in the economy is essential. With a large establishment of credit bureaus and moveable asset SOE sector on one hand, and a large informal sector registries—could facilitate better evidence-based on the other, building a robust private sector is decision-making by lenders, and improved oversight challenging. Iraq’s demographic and economic and targeting by regulators. Finally, once government structure means that informality will take time to succeeds in reversing the growth of debt as a share reduce. A policy package shaped to encourage firms of GDP, a shift in debt composition from internal to to formalize over the medium term would include external sources could reduce the degree to which the following: Iraqi firms are ‘crowded out’ of local credit markets. -- Reduce regulatory burden of entry into the formal sector by streamlining registration and licensing procedures; 9  In 2015, the central bank launched a $1.5 billion SME financing initiative. 30 | Special Focus Iraq economic monitor | Labouring through the crisis Appendix: Selected Data on Iraq TABLE 1. Selected Macroeconomic Indicators Special Focus | 31 The World Bank TABLE 2. Iraq at a Glance 32 | Special Focus Iraq economic monitor | Labouring through the crisis TABLE 2. Iraq at a Glance (continued) Special Focus | 33 The World Bank TABLE 3. Millennium Development Goals Note: Figures in italics are for years other than those specified. .. indicates data are not available. cif = cost, insurance, and freight; CO2 = carbon dioxide; fob = free on board; GDP = gross domestic product; GNI = gross national income; HIPC = Heavily Indebted Poor Countries Initiative; IBRD = International Bank for Reconstruction and Development; ICT = information and communication technology; IDA = International Development Association; IFC = International Finance Corporation ;ODA = official development assistance; MDRI = Multilateral Debt Relief Initiative; PPP = purchasing power parity. 34 | Special Focus Iraq economic monitor | Labouring through the crisis References International Finance Corporation. 2013. IFC Jobs Study Assessing Private Sector Contributions to Job Creation and Poverty Reduction. Washington, DC. International Monetary Fund. 2015. Iraq: 2015 Staff Report for Article IV Consultation and Request for Purchase under the Rapid Financing Instrument. IMF Country Report 15/235. Washington, DC. International Monetary Fund. 2015. The Regional Economic Outlook: Middle East and Central Asia. Washington, DC. Looney, R. 2006. Economic Consequences of Conflict: The Rise of Iraq’s Informal Economy. Journal of Economic Issues XL(4), 991-1007. World Bank. 2004. World Development Report 2005: A Better Investment Climate for Everyone. Washington, DC. 2012. Iraq Investment Climate Assessment. Washington, DC. 2014. The Unfulfilled Promise of Oil and Growth: Poverty, Inclusion and Welfare in Iraq, 2007-2012. Washington, DC. 2016. Doing Business in Iraq: Reform Memorandum. Washington, DC. World Bank Group. 2015. Doing Business 2016: Measuring Regulatory Quality and Efficiency. Washington, DC. 2016. Global Economic Prospects, January 2016: Spillovers amid Weak Growth. Washington, DC. Special Focus | 35 The World Bank www.worldbank.org/iq