Iraq Economic Monitor Turning the Corner: Sustaining Growth and Creating Opportunities for Iraq’s Youth With a Special Focus on Transforming Agriculture for Economic Diversification and Job Creation FALL 2019 Middle East and North Africa Region Cover photo: Vegetable Garden in Iraq with trees. Credits: © Shutterstock/Red On Iraq Economic Monitor Turning the Corner: Sustaining Growth and Creating Opportunities for Iraq’s Youth With a Special Focus on Transforming Agriculture for Economic Diversification and Job Creation FALL 2019 Middle East and North Africa Region TABLE OF CONTENTS Abbreviations........................................................................................................... iv Acknowledgments....................................................................................................... v Executive Summary................................................................................................... vii ‫ملخص تنفيذي‬........................................................................................................... x Chapter 1. Recent Economic and Policy Developments.......................................................... 1 Introduction................................................................................................................................................................................1 Output and Demand................................................................................................................................................................2 Oil and Gas Developments....................................................................................................................................................4 Public Finance...........................................................................................................................................................................6 External Sector..........................................................................................................................................................................8 Monetary Policy and Prices...................................................................................................................................................9 Business Environment and Private Sector Development............................................................................................ 11 Outlook and Risks..................................................................................................................................................................13 Outlook.............................................................................................................................................................................13 Risks and challenges...................................................................................................................................................13 Chapter 2. Special Focus: Transforming Agriculture for Economic Diversification and Job Creation....19 The need to revive the Iraq’s Agriculture Sector............................................................................................................19 The Challenges for Iraq’s Agriculture Development.....................................................................................................22 Iraq’s Large Agriculture Growth Opportunities...............................................................................................................24 Towards an Agriculture Transformation Agenda............................................................................................................26 References..............................................................................................................31 List of Figures Figure 1. Non-oil GDP is markedly rebounding in 2019...................................................................................................3 Figure 2. Bringing the overall GDP growth to 4.8 percent at end-2019, and to overperform that in MENA region.........................................................................................................................................................3 ii Figure 3. GDP has barely grown in real per capita............................................................................................................4 Figure 4.a. A broad-based recovery especially with growth in energy, agriculture, and services............................4 Figure 4.b. And in their contributions to overall output........................................................................................................4 Figure 5. Private Consumption is estimated to pick up in 2019.....................................................................................5 Figure 6. But FDI remains low at only US$I billion in 2019..............................................................................................5 Figure 7. Increase in exports volume is partially compensated for lower oil price...................................................6 Figure 8. Actual price of oil exports is only 3 dollars above budgeted price.............................................................6 Figure 9. Large fiscal loosening is expected to turn budget balance into a deficit in 2019...................................7 Figure 10. Wage bill is the single largest and fastest growing budget item..................................................................7 Figure 11. Wage bill is also the highest compared to MENA and other groups of countries..................................7 Figure 12. Execution rate for investment expenditure is low.............................................................................................7 Figure 13. Fifty eight percent of total debt stock is external..............................................................................................8 Figure 14. Sixty eight percent of that stock is long term, 14 percent is held by bilateral donors and multilaterals agencies......................................................................................................................................8 Figure 15. CAB declined to an estimated 2.3% of GDP Q1 2019....................................................................................9 Figure 16. With less favorable trade balance and increased import...............................................................................9 Figure 17. Increased oil exports volume has managed so far to keep the reserves at almost US$68 billion.....9 Figure 18. But the continuous decline in oil prices and lower prices will dip the reserves at end-2019...............9 Figure 19. Deflationary pressures are observed................................................................................................................10 Figure 20. Despite rising prices in non-tradeable services..............................................................................................10 Figure 21. Broad money picked up due to increased economic activity.....................................................................10 Figure 22. Credit to private sector is decreasing................................................................................................................10 Figure 23. Increased confidence in the banking sector is leading to higher total deposit.....................................11 Figure 24. And to higher total assets.....................................................................................................................................11 Figure 25. Account ownership is the lowest compared to peers...................................................................................11 Figure 26. Iraq ranks unfavorably on all doing business indicators ranking compared to MENA........................12 Figure 27. Jobs are dominant by the public sector...........................................................................................................12 Figure 28. Key constraints identified by firms, by size......................................................................................................12 Figure 29. Logistics quality has deteriorated with conflict...............................................................................................12 Figure 30. The rising food demand and imports in Iraq (const. US$ billion)............................................................. 25 Figure 31. Agriculture production of selected commodities (1000 MT)...................................................................... 25 Figure 32. Achieving agriculture transformation in Iraq: The four pillars.....................................................................27 List of Boxes Box 1.  Iraq’s Humanitarian Context.........................................................................................................................................2 Box 2.  Potential GDP Estimation for Iraq.............................................................................................................................14 Box 3.  Global and Regional Economic Outlook............................................................................................................... 15 Box 4.  Potential GDP Estimation for Iraq – Technical Annex........................................................................................ 18 Box 5.  Why invest in Iraq’s agriculture and food system?.............................................................................................. 20 Box 6.  Vegetable production in Iraq.................................................................................................................................... 22 Box 7.  Production of dates, a key export product............................................................................................................ 26 Box 8.  Repurposing agricultural subsidies........................................................................................................................ 28 List of Tables Table 1.  Iraq. Selected Economic and Financial Indicators, 2014-2021.................................................................... 16 iii ABBREVIATIONS AML/CFT Anti-Money Laundering and Combating PDS Public Distribution System of Terrorism Financing PP Percentage Point Bpd Barrel per day PPP Public-Private Partnership BOP Balance of Payments SMEs Small and Medium Enterprises CAB Current Account Balance SOEs State-Owned Enterprises CBI Central Bank of Iraq TFP Total Factor Productivity CPI Consumer Price Index UMI Upper Middle Income COSIT  Central Organization for Statistics and WB World Bank Information Technology WDI World Development Indicators DB Doing Business WGI Worldwide Governance Indicators DSA Debt Sustainability Analysis EMDEs Emerging Market Developing Economies FDI Foreign Direct Investment GCC Gulf Council Countrie GoI Government of Iraq GDP Gross Domestic Product GVA Gross Value Added GW Giga Watt HRP Humanitarian Response Plan H1-19 Half Year 2019 ICA Investment Climate Assessment ICP1 International Corruption Perception Index IDP Internally Displaced Person IQD Iraqi Dinar ISIS Islamic State of Iraq and Syria KRG Kurdistan Regional Government MBPD Million Barrel Per Day MENA Middle East North Africa MoF Ministry of Finance MoO Ministry of Oil MW Mega Watts NPLs Non-Performing Loans OPEC  Organization of Petroleum Exporting Countries iv IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH ACKNOWLEDGMENTS T he Iraq Economic Monitor provides an update EMNF2), Ghada Ismail (Financial Sector Specialist, on key economic developments and policies EMNF1), and Carlos Lopez Quiroga (Senior Oil and over the previous six months and presents Gas Specialist, IEEXI). findings from recent World Bank work on Iraq, The findings, interpretations, and conclusions placing them in a longer-term and global context and expressed in this Monitor are those of World Bank assessing the implications of these developments staff and do not necessarily reflect the views of the and other changes in policy regarding the outlook Executive Board of the World Bank or the governments for Iraq. Its coverage ranges from the macro- they represent. For information about the World Bank economy to business environment and private sector and its activities in Iraq, please visit www.worldbank. development. It is intended for a wide audience, org/en/country/iraq (English) or www.worldbank. including policy makers, business leaders, financial org/ar/country/iraq (Arabic). For questions and market participants, and the community of analysts comments on the content of this publication, please and professionals engaged in Iraq. contact Wael Mansour (wmansour@worldbank.org), The Iraq Economic Monitor is a product of Ashwaq Maseeh (amaseeh@worldbank.org), Bledi the Middle East and North Africa (MENA) unit in the Celiku (bceliku@worldbank.org), or Eric Le Borgne Macroeconomics, Trade & Investment (MTI) Global (eleborgne@worldbank.org). Practice in the World Bank Group. The report was led by Wael Mansour (Senior Economist, MTI) and Ashwaq Maseeh (Economist, MTI), with contributions from Bledi Celiku (Economist, MTI). The Special Focus is authored by Timothy Robertson (Senior Agriculture Specialist, SMNAG), Bekzod Shamsiev (Senior Agriculture Economist, SCAAG), Irina Klytchnikova (Senior Economist, SAGDR), Laurent Debroux (Program Coordinator, SMNAG), Samantha Constant (Consultant, SMNSO) and Jean Claude Leon Balcet (Consultant, SMNSO). The report was prepared under the direction of Eric Le Borgne (Practice Manager, MTI), Chakib Jenane (Practice Manager, SMNAG), Ramzi Neman (Head of Baghdad Office, MNCO2) and Saroj Kumar Jha (Country Director, MNC02). Several reviewers offered helpful comments and advice. These included Syed Hassan (Lead Financial Sector Specialist, ACKNOWLEDGMENTS v EXECUTIVE SUMMARY Recent Economic Developments job creation. This is evident through the expansion of social assistance programs and the decision to Iraq’s economy is gradually rebounding in assimilate large numbers of individuals into the public 20191. GDP grew at 4.8 percent year on year (y/y) in sector and the army. As a result, recurrent spending the first half of 2019 (H1-19), reversing the contraction has increased by 28.8 percent in H1-19 (y/y) at the observed in the past two years. Growth comes mainly expense of growth-enhancing public investment. This at the back of a rise in crude oil production (up 6.3 not only puts a drag on growth but also increases percent so far) and a rebound in non-oil economic social vulnerabilities as the reconstruction program activity (up 5.6 percent in H1-19 y/y). The latter is for the liberated areas remains severely lagging, and underpinned by better rainfall and record agriculture the infrastructure gap persist elsewhere in the country. yields, an improvement in electricity production, Furthermore, domestic revenue mobilization is weak and an expansionary fiscal policy linked to growing with non-oil revenues representing only 8 percent of wage bill and public consumption. Such positive budgetary receipts, well below expectations. Customs developments are expected to bring the overall real exemptions coupled with poor tax compliance and GDP growth to an estimated 4.6 percent by end-2019, collection have led a 24.4 percent decline in taxation reversing a 0.6 percent contraction in 2018, with the receipts, partially offsetting the rise in oil revenues. non-oil economy likely to accelerate over 5 percent. As a result, the 7.9 percent of GDP surplus in 2018 is Iraq’s economy has outperformed that of regional expected to turn into a 4.6 percent deficit by end-2019. peers this year, but its population dynamics requires This will bring public debt-to-GDP to 49.7 percent, up much higher growth to sustain current level of welfare. from 49.3 percent in 2018. Rising reliance on short- Despite recent improvements, Iraq continues to be term and costly domestic financing increases risks in need of humanitarian assistance as more than 1.5 and threatens to crowd-out private sector credit. million Internally Displaced Persons (IDPs) are yet to In the absence of clear structural reforms return home. and accelerated reconstruction efforts, growth The Government of Iraq (GoI) maintains recovery in Iraq may be short-lived. This is a policy of fiscal loosening based on expanding particularly the case given the oil markets outlook subsidies and the public sector wage bill to where both prices and exports are expected to weaken ensure social peace amidst weak private sector given softer global demand and the uncertainty around the renewal of the OPEC++ agreement. Risks 1 All analysis in this report includes latest available data from over the medium-term continue to be present both on authorities with a cut-off date of October 1st, 2019. EXECUTIVE SUMMARY vii the upstream and downstream. Lack of diversification infrastructure including streamlining micro and budget rigidities linked to the public sector wage finance regulations, enactment of laws on bill reduce Iraq’s financial buffers and increase its digital payment systems, rollout of national vulnerability to external shocks. They also threaten ID, strengthening bank licensing regime, and to further delay reconstruction and outdo the recent operationalization of the deposit insurance positive government efforts especially in the electricity scheme. and agriculture sectors. Creating an adequate fiscal • Third, business and investment climate space for growth-enhancing programs will be key for reforms to lower the costs and complexity of diversification and job creation, without which the doing business in Iraq. This includes reforms to impressive increases in oil production will mean little business registration and operations, investment for most Iraqis. With IDPs returning to their homes, policies and PPPs. Moreover, addressing digital there will be an increasing need to open economic economy constraints by focusing on affordable opportunities and maintain flexible social assistance access to high-speed internet, digital government in these parts of the country. services, and scaling up entrepreneurship Lack of jobs, corruption, and poor service ecosystem can encourage youth participation in delivery remain among the most important risks business and improve service delivery. to growth and fiscal sustainability. Young Iraqis • Fourth, building a social protection and have taken the streets in October 2019 to raise those labor systems that provide opportunities for concerns. These demonstrations exposed the fragility all. This includes improving coverage, targeting, of the existing socio-economic system. The social equity, and sustainability of social safety nets and unrest is expected to be addressed through more pensions, and developing quality private-sector short-term fiscal stimulus - cash transfers, public relevant employment programs and policies. employment and housing schemes among others - These reforms can create needed fiscal space to appease demonstrators. However, results might for investment into human capital programs. not be satisfactory as job creation and meaningful anti-corruption and structural reforms will require a Transforming Agriculture for Economic longer time frame. Diversifying through labor-intensive Diversification and Job Creation sectors such as in agriculture could be a path forward and help improve household welfare while deeper Strong agriculture sector development structural reforms take place. is a critical element of Iraq’s vision of a more In addition to sector-specific policies, a diversified and private-sector led economy. cross-cutting economic reform agenda addressing Agriculture contributes a substantial share of Iraq’s impediments for private sector-led growth and job economy (5 percent of total GDP), is the largest creation could build on four pillars. source of employment in the country (approximately • First, a public sector reform program that 20 percent) and is dominated by the private sector. ensures macroeconomic stability through Thirty percent of the population live in the rural fiscal reforms including domestic revenue areas and are largely dependent on agriculture for mobilization and consolidation of recurrent their income and livelihood. Agriculture production spending; accompanied by reforms to boost has large potential for expansion. It occupies only a transparency and accountability through sound limited fraction of Iraq’s cultivable area (about a third public financial management especially in public or 5 million ha); it is practiced predominantly by small investment management and budget accounting farmers, and irrigation, once it is rehabilitated, has the and management systems. potential to greatly increase crop yields. Agriculture • Second, financial sector reforms to boost is also a key pathway for overall job creation in Iraq. private sector access to credit and financial It can offer employment particularly to IDPs and help inclusion through improving the corporate close the gender gap. Iraq is heavily dependent on governance of state-owned-banks in preparation food imports, its agriculture can expand based on for their restructuring; and reinforcing credit its comparative advantage to respond to the growing viii IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH domestic, and regional and international export in rural infrastructure, agri-logistics and demand. marketing. The required financing would be Sizeable growth opportunities exist in the found partly through reallocating the subsidies sector. In the short term through import substitution currently earmarked for agriculture inputs and and export on regional markets, and, in the long term, commodities. by integrating into global agri-business value chains. • Investing in knowledge and technology Iraq’s domestic market offers an immediate consumer used for modern agriculture production and base to expand production of grain (wheat), fresh agri-business both upstream at production level fruits and vegetables, as well as dairy products and and downstream at processing and marketing meat. Exports offer opportunities for agribusiness level. This includes building partnerships with development, spearheaded by dates and other high international centers of excellence; exploring the value crops (fresh fruits and vegetables), to respond use of knowledge innovation labs; expanding to regional consumer demand in the short term, investment in relevant high-performing and European demand in the medium/long term. technologies, such as tissue culture, precision Processing of agriculture commodities offers large irrigation, and small mechanization; and boosting value added and job creation opportunities, as current the use of digital platforms, solar powered agribusiness value chains are under-developed desalination, and hydroponics. with a low ratio of product processing from primary agriculture. A transformation agenda is possible for agriculture in Iraq, organized around four pillars. • Building institutional capacity of public agencies in charge of technical support service, as well as the capacity of private producers and value chain organizations. This can be achieved through facilitating decentralized administration (vertical coordination) in priority for research and extension services; promoting evidenced-based policy planning and programming; reforming the land tenure regime to boost productivity in the sector; strengthening of intra-governmental coordination (horizontal coordination). • Improving competitiveness and fostering market access. This entails rethinking the role of the state in the sector and encourage private sector involvement, repurposing agriculture subsidies towards more effective agricultural growth, and developing market information systems. Moreover, this involves investing in competitive and quality standards including in traceability and in food safety to boost the potential for exports markets. It also requires improving farmers’ access to finance and rehabilitating markets facilities and road network. • Investing in high value production systems through R&D, innovation and extension to promote a diversified agri-food sector, adaptation to climate change, and investment EXECUTIVE SUMMARY ix ‫ملخص تنفيذي‬ ‫الرضيبــي إىل انخفــاض إيـرادات الرضائــب بنســبة ‪ ،% 24.4‬مضللــة الزيــادة يف‬ ‫التطورات االقتصادية األخرية‬ ‫إي ـرادات النفــط‪ .‬ونتيجــة لذلــك‪ ،‬مــن املتوقــع أن يتحــول الفائــض املــايل اىل‬ ‫الناتــج املحــي اإلجــايل البالــغ ‪ % 7.9‬يف عــام ‪ 2018‬إىل عجــز بنســبة ‪4.6‬‬ ‫االقتصــاد العراقــي يســتعيد عافيتــه ببــطء خــال عــام ‪ :2019‬يف النصــف االول‬ ‫‪ %‬بحلــول نهايــة عــام ‪ .2019‬وســيؤدي ذلــك إىل رفــع نســبة الديــن العــام إىل‬ ‫مــن ‪ 2019‬حقــق الناتــج املحــي االجــايل منــوا ً بلــغ ‪ % 4.8‬باملقارنــة مــع‬ ‫الناتــج املحــي اإلجــايل إىل ‪ ،% 49.7‬بعــد أن كانــت ‪ % 49.3‬يف عــام ‪ .2018‬إن‬ ‫العــام الســابق مــا أفــى اىل تحقيــق تحــول عكــي يف االنكــاش الــذي شــهده‬ ‫االعتــاد املتزايــد عــى التمويــل املحــي قصــر األجــل واملكلــف ســوف يزيــد‬ ‫االقتصــاد خــال العامــن املاضيــن‪ .‬ويــأيت هــذا النمــو‪ ،‬وبشــكل أســايس‪ ،‬كمحصلة‬ ‫مــن املخاطــر ويهــدد مبزاحمــة االئتــان املقــدم للقطــاع الخــاص‪.‬‬ ‫للزيــادة يف انتــاج النفــط الخــام (وصــوالً اىل ‪ % 6.3‬حتــى االن) واالنتعــاش يف‬ ‫يف غيــاب اإلصالحــات الهيكليــة الواضحــة وبطــئ عمليــة إعــادة اإلعــار‪،‬‬ ‫النشــاط االقتصــادي غــر النفطــي (بزيــادة مقدارهــا ‪ % 5.6‬يف النصــف األول من‬ ‫قــد يكــون تعــايف النمــو يف العـراق قصــر األجــل‪ .‬وتبــدو هــذه الحالــة قامئــة‬ ‫العــام ‪ 2019‬باملقارنــة مــع العــام املــايض سنة‪/‬ســنة)‪ .‬ويعــزى االنتعــاش االخري اىل‬ ‫بشــكل خــاص إذا مــا أخذنــا بعــن االعتبــار توقعــات أســواق النفــط حيــث‬ ‫تحســن مســتويات هطــول األمطــار وانتــاج محاصيــل زراعيــة قياســية‪ ،‬وتحســن‬ ‫يرجــح أن ترتاجــع األســعار والصــادرات بالنظــر لرتاجــع الطلــب العاملــي‬ ‫إنتــاج الكهربــاء‪ ،‬وسياســة ماليــة توســعية مرتبطــة بزيــادة فاتــورة األجــور‬ ‫والشــكوك املتعلقــة بتجديــد اتفاقيــة (أوبــك ‪ .)++‬وتتواصــل املخاطــر عــى‬ ‫واالســتهالك العــام‪ .‬ومــن املتوقــع أن تــؤدي مثــل هــذه التطــورات اإليجابيــة إىل‬ ‫املــدى املتوس ـط​​‪ .‬إذ يــؤدي غيــاب التنويــع االقتصــادي وعــدم مرونــة املوازنــة‬ ‫رفــع منــو الناتــج املحــي اإلجــايل الحقيقــي إىل مــا يقــدر بنحــو ‪ % 4.6‬بحلــول‬ ‫املرتبطــة بفاتــورة األجــور يف القطــاع العــام اىل التقليــل مــن الفوائــض املاليــة‬ ‫نهايــة عــام ‪ ،2019‬مقارنــة باالنكــاش الــذي بلــغ ‪ % 0.6‬يف عــام ‪ ،2018‬يف‬ ‫يف العـراق كــا يزيــد مــن هشاشــة االقتصــاد أمــام الصدمــات الخارجيــة‪ .‬كــا‬ ‫جــح أن تتســارع وتــرة منــو االقتصــاد غــر النفطــي اىل أكــر مــن ‪.% 5‬‬ ‫حــن يُر ّ‬ ‫تهـدّد هــذه العوامــل مبزيــد مــن التأخــر يف إعــادة اإلعــار وتقويــض الجهــود‬ ‫لقــد تفــوق االقتصــاد العراقــي يف أدائــه عــى نظرائــه يف املنطقــة هــذا العــام ‪،‬‬ ‫الحكوميــة اإليجابيــة األخرية‪،‬خاصــة يف قطاعــي الكهربــاء والزراعــة‪ .‬وســيكون‬ ‫لكــن ديناميكيــة الســكان فيــه تتطلــب منــوا ً أعــى بكثــر للحفــاظ عىل املســتوى‬ ‫إيجــاد حيــز مــايل مناســب للربامــج التــي تعــزز النمــو رشطـاً أساســياً لتحقيــق‬ ‫الحــايل مــن االزدهــار‪ .‬ولكــن وعــى الرغــم مــن التحســن األخــر‪ ،‬فــان العـراق ال‬ ‫التنويــع وخلــق فــرص العمــل‪ ،‬التــي بدونهــا لــن تعنــي الزيــادة الكبــرة يف‬ ‫ي ـزال بحاجــة إىل املســاعدات اإلنســانية حيــث أن هنــاك أكــر مــن ‪ 1.5‬مليــون‬ ‫إنتــاج النفــط ســوى القليــل بالنســبة ملعظــم العراقيــن‪ .‬ومــع عــودة النازحــن‬ ‫مــن النازحــن مل يعــودوا إىل مناطقهــم بعــد‪.‬‬ ‫إىل مناطقهــم‪ ،‬ســتكون هنالــك حاجــة متزايــدة لتوفــر الفــرص االقتصاديــة‬ ‫تواصــل الحكومــة العراقيــة اعتــاد سياســة ماليــة توســعية تســتند‬ ‫والحفــاظ عــى مســاعدة اجتامعيــة مرنــة يف هــذه األج ـزاء مــن البــاد‪.‬‬ ‫اىل زيــادة اإلعانــات املاليــة وفاتــورة أجــور القطــاع العــام لضــان الســلم‬ ‫يظــل نقــص الوظائــف‪ ،‬والفســاد‪ ،‬وســوء تقديــم الخدمــات مــن بــن‬ ‫االجتامعــي يف ظــل ضعــف قــدرة القطــاع الخــاص عــى توليــد فــرص العمــل‪.‬‬ ‫أهــم املخاطــر التــي تهــدد النمــو واالســتدامة املاليــة‪ .‬لقــد خــرج الشــباب‬ ‫ويبــدو هــذا واضحـاً مــن خــال التوســع يف برامــج املســاعدة االجتامعيــة وقرار‬ ‫العراقــي يف تظاهـرات يف ترشيــن األول ‪ 2019‬البــداء هــذه الهمــوم واملخــاوف‪.‬‬ ‫اســتيعاب أعــداد كبــرة مــن األفــراد يف القطــاع العــام والجيــش‪ .‬ونتيجــة‬ ‫وكشــفت هــذه التظاهــرات عــن هشاشــة النظــام االقتصادي‪-‬االجتامعــي‬ ‫لذلــك‪ ،‬زادت النفقــات التشــغيلية بنســبة ‪( % 28.8‬يف النصــف األول مــن‬ ‫الحــايل‪ .‬ويتوقــع أن يتــم التعامــل مــع هــذه االضطرابــات االجتامعيــة مــن‬ ‫العــام ‪ 2019‬باملقارنــة مــع العــام املــايض سنة‪/‬ســنة) عىل حســاب االســتثامرات‬ ‫خــال املزيــد مــن الحوافــز املاليــة قصــرة األجــل ‪ -‬مثــل التحويــات النقديــة‪،‬‬ ‫ززة للنمــو‪ .‬وهــذا ال يضــع عائقـاً أمــام النمــو فحســب‪ ،‬وامنــا يزيــد‬ ‫العامــة املعـ ّ‬ ‫والتوظيــف يف القطــاع العــام‪ ،‬وبرامــج اإلســكان وســواها ‪ -‬وذلــك مــن اجــل‬ ‫أيضـاً مــن جوانــب الهشاشــة االجتامعيــة حيــث ال يـزال برنامــج إعــادة إعــار‬ ‫تهدئــة غضــب املتظاهريــن‪ .‬ومــع ذلــك‪ ،‬فــان النتائــج قــد ال تكــون مرضيــة ألن‬ ‫املناطــق املحــررة يعــاين مــن تلكــؤ شــديد‪ ،‬وحيــث الزالــت فجــوة البنيــة‬ ‫ايجــاد الوظائــف ومكافحــة الفســاد بشــكل حقيقــي واإلصالحــات الهيكليــة‬ ‫التحتيــة قامئــة يف أماكــن أخــرى مــن البــاد‪ .‬وعــاوة عــى ذلــك‪ ،‬فــإن تعبئــة‬ ‫ســوف تتطلــب إطــارا ً زمنيــاً أطــول‪ .‬ولكــن التنويــع مــن خــال القطاعــات‬ ‫اإليــرادات املحليــة تبــدو ضعيفــة حيــث ال متثــل اإليــرادات غــر النفطيــة‬ ‫الكثيفــة العاملــة مثــل الزراعــة قــد ميثــل طريقــاً إىل األمــام ويســاعد عــى‬ ‫ســوى ‪ % 8‬فقــط مــن إي ـرادات املوازنــة‪ ،‬وهــذا أقــل بكثــر مــن التوقعــات‪.‬‬ ‫تحســن رفــاه األرسة بينــا تتواصــل اإلصالحــات الهيكليــة األعمــق‪.‬‬ ‫وقــد أدت اإلعفــاءات الجمركيــة جنبـاً اىل جنــب مــع ضعــف الجبايــة واالمتثــال‬ ‫ ‪x‬‬ ‫‪IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH‬‬ ‫املــدى الطويــل‪ ،‬مــن خــال االندمــاج يف سالســل القيمــة التجاريــة الزراعيــة‬ ‫باإلضافــة إىل السياســات القطاعيــة‪ ،‬ميكــن ألجنــدة إصــاح اقتصــادي‬ ‫العامليــة‪ .‬ويوفــر الســوق املحــي للعــراق قاعــدة اســتهالك فوريــة لتوســيع‬ ‫شــامل تتصــدى للمعوقــات التــي تحــول دون منــو القطــاع الخــاص وخلــق‬ ‫إنتــاج الحبــوب (القمــح) والفواكــه والخــروات الطازجــة وكذلــك منتجــات‬ ‫فــرص العمــل أن تســتند إىل أربعــة دعائــم‪.‬‬ ‫األلبــان واللحــوم‪ .‬وتقــدم الصــادرات فرصـاً لتطويــر األعــال التجاريــة الزراعيــة‬ ‫أوالً ‪ ،‬برنامــج إلصــاح القطــاع العــام يضمــن اســتقرار االقتصــاد الــكيل مــن‬ ‫التــي تتصدرهــا التمــور وغريهــا مــن املحاصيــل عاليــة القيمــة (الفواكــه‬ ‫خــال اإلصالحــات املاليــة مبــا يف ذلــك تعبئــة اإليــرادات املحليــة وحــر‬ ‫والخــروات الطازجــة) لالســتجابة لطلــب املســتهلكني اإلقليميــن عــى املــدى‬ ‫النفقــات التشــغيلية‪ ،‬عــى أن تصاحــب ذلــك إصالحــات لتعزيــز الشــفافية‬ ‫القصــر‪ ،‬والطلــب األورويب عــى املــدى املتوســط​​‪ /‬الطويــل‪ .‬وتوفــر معالجــة‬ ‫واملســاءلة مــن خــال اإلدارة املاليــة العامــة الســليمة وبخاصــة يف إدارة‬ ‫الســلع الزراعيــة فرص ـاً كبــرة للقيمــة املضافــة وتوفــر الوظائــف‪ ،‬نظ ـرا ً ألن‬ ‫االســتثامرات العامــة ونظــام محاســبة وإدارة املوازنــة‪.‬‬ ‫سالســل القيمــة التجاريــة الزراعيــة الحاليــة تعــاين مــن ضعــف التطويــر‬ ‫وتشــتمل عــى نســبة متدنيــة ملعالجــة املنتجــات مــن مــن الزراعــة األوليــة‪.‬‬ ‫ثانيـاً ‪ ،‬إصالحــات القطــاع املــايل لتعزيــز وصــول القطــاع الخــاص إىل االئتــان‬ ‫والشــمول املــايل مــن خــال تحســن الحوكمــة يف البنــوك اململوكــة للدولــة‬ ‫أجنــدة التحــول االقتصــادي تبــدو ممكنــة بالنســبة للزراعة‬ ‫اســتعدادا ً إلعــادة هيكلتهــا‪ ،‬وتعزيــز البنيــة التحتيــة االئتامنيــة مبــا يف ذلــك‬ ‫يف العـراق‪ ،‬وهــي تتمحــور حــول أربــع دعائم ‪:‬‬ ‫تبســيط ورفــع كفــاءة اجـراءات التمويــل للمرشوعــات الصغــرة‪ ،‬وســن قوانــن‬ ‫تغطــي نظــم الدفــع الرقميــة‪ ،‬وتعميــم البطاقــة الوطنيــة‪ ،‬وتعزيــز نظــام‬ ‫بنــاء القــدرات املؤسســية للدوائــر العامــة املســؤولة عــن خدمــات‬ ‫ترخيــص البنــوك‪ ،‬وتفعيــل نظــام تأمــن الودائــع‪.‬‬ ‫الدعــم الفنــي‪ ،‬وكذلــك قــدرة املنتجــن مــن القطــاع الخــاص‪ .‬وميكــن تحقيــق‬ ‫ثالثــاً ‪ ،‬إصالحــات بيئــة األعــال واالســتثامر لتقليــل تكاليــف وتعقيــدات‬ ‫ذلــك مــن خــال تســهيل اإلدارة الالمركزيــة (التنســيق العمــودي) يف ســياق‬ ‫مامرســة األعــال يف العــراق‪ .‬ويشــمل ذلــك اإلصالحــات الخاصــة بتســجيل‬ ‫إعطــاء األولويــة لخدمــات البحــث واالرشــاد‪ ،‬وتعزيــز التخطيــط وبرمجــة‬ ‫االــركات واعاملهــا‪ ،‬وسياســات االســتثامر والرشاكــة بــن القطاعــن العــام‬ ‫السياســات باالســتناد اىل األدلــة العلميــة ‪ ،‬وإصــاح نظــام حيــازة األرايض‬ ‫والخــاص‪ .‬واىل جانــب ذلــك‪ ،‬فــإن معالجــة قيــود االقتصــاد الرقمــي مــن خــال‬ ‫مــن اجــل زيــادة اإلنتاجيــة يف القطــاع‪ ،‬وتعزيــز التنســيق مابــن املؤسســات‬ ‫الرتكيــز عــى الوصــول إىل اإلنرتنــت عــايل الرسعــة بســعر منخفــض‪ ،‬والخدمــات‬ ‫الحكوميــة (التنســيق األفقــي)‪.‬‬ ‫الحكوميــة الرقميــة‪ ،‬وتوســيع بيئــة ريــادة األعــال ميكــن أن تشــجع عــى‬ ‫تحســن القــدرة التنافســية وتعزيــز الوصــول إىل األســواق‪ .‬وهــذا يتطلــب‬ ‫وتحســن مــن تقديــم الخدمــات‪.‬‬ ‫ّ‬ ‫مشــاركة الشــباب يف األعــال التجاريــة‬ ‫إعــادة التفكــر يف دور الدولــة يف القطــاع وتشــجيع مشــاركة القطــاع الخــاص‪،‬‬ ‫رابعـاً‪ ،‬بنــاء نظــم الحاميــة والعمــل االجتامعيــة التــي توفــر الفــرص للجميــع‪.‬‬ ‫وإعــادة توجيــه اإلعانــات الزراعيــة لتحقيــق منــو زراعــي أكــر فعاليــة‪ ،‬وتطويــر‬ ‫ويتضمــن ذلــك تحســن جوانــب التغطيــة واالســتهداف واالنصــاف واالســتدامة‬ ‫نظــم معلومــات الســوق‪ .‬وعــاوة عــى ذلــك ‪ ،‬فــإن هــذا ينطــوي عــى‬ ‫يف شــبكات األمــان االجتامعــي ونظــم التقاعــد‪ ،‬وتطويــر برامــج وسياســات‬ ‫االســتثامر يف معايــر التنافــس والجــودة مبــا يف ذلــك يف التتبــع وســامة الغــذاء‬ ‫توظيــف عاليــة الجــودة يف القطــاع الخــاص‪ .‬ومــن شــأن هــذه االصالحــات أن‬ ‫مــن أجــل تعزيــز إمكانــات خلــق أســواق جديــدة للتصديــر‪ .‬كــا يتطلــب‬ ‫تفــي إىل خلــق حيــز مــايل رضوري لالســتثامر يف برامــج رأس املــال البــري‪.‬‬ ‫تحســن وصــول املزارعــن إىل التمويــل وإعــادة تأهيــل البنــى التحتيــة لألســواق‬ ‫وشــبكات الطــرق‪.‬‬ ‫التحــول بالزراعــة نحــو التنويــع االقتصــادي وخلــق فــرص‬ ‫االســتثامر يف نظــم اإلنتــاج عاليــة القيمــة مــن خــال البحــث والتطويــر‬ ‫العمــل‬ ‫واالبتــكار واالرشــاد لتشــجيع قطــاع متنــوع لألغذيــة الزراعيــة‪ ،‬والتكيــف مــع‬ ‫التغــر املناخــي‪ ،‬واالســتثامر يف البنيــة التحتيــة الريفيــة والخدمــات اللوجســتية‬ ‫يعــدّ التطويــر القــوي للقطــاع الزراعــي رشطـاً أساســياً يف رؤيــة العـراق‬ ‫الزراعيــة والتســويق‪ .‬وهــذا يتطلــب متوي ـاً ميكــن بلوغــه جزئي ـاً مــن خــال‬ ‫القتصــاد أكــر تنوعـاً يقــوده القطــاع الخــاص‪ .‬تســاهم الزراعــة بحصــة كبــرة‬ ‫إعــادة تخصيــص اإلعانــات الحكوميــة املكرســة حاليــاً للمدخــات والســلع‬ ‫مــن االقتصــاد العراقــي (‪ % 5‬مــن الناتــج املحــي االجــايل)‪ ،‬وهــي أكــر مصــدر‬ ‫الزراعيــة‪.‬‬ ‫للعمــل يف البــاد (حــوايل ‪ )% 20‬ويهيمــن عليهــا القطــاع الخــاص‪ .‬ويعيــش‬ ‫ثالثــون باملائــة مــن الســكان يف املناطــق الريفيــة ويعتمــدون إىل حــد كبــر‬ ‫االســتثامر يف املعرفــة والتكنولوجيــا املســتخدمة يف اإلنتــاج الزراعــي‬ ‫عــى الزراعــة للحصــول عــى الدخــل وســبل العيــش‪ .‬ويحمــل اإلنتــاج الزراعــي‬ ‫الحديــث واألعــال التجاريــة الزراعيــة ســواء فيــا يتعلــق باملراحــل األوليــة‬ ‫ء محــدودا ً فقــط مــن مســاحة‬ ‫إمكانــات كبــرة للتوســع‪ .‬ولكنــه يشــغل جــز ً‬ ‫عــى مســتوى اإلنتــاج أو املراحــل النهائيــة عــى مســتوى التصنيــع والتســويق‪.‬‬ ‫العـراق القابلــة للزراعــة (حــوايل الثلــث أو ‪ 5‬ماليــن هكتــار)‪ ،‬وحيــث ميــارس‬ ‫ويشــتمل ذلــك عــى بنــاء رشاكات مــع مراكــز التميــز الدوليــة‪ ،‬اســتخدام‬ ‫الزراعــة يف الغالــب صغــار املزارعــن‪ ،‬وأمــا الــري‪ ،‬فــا أن تتــم إعــادة تأهيلــه‬ ‫مختــرات االبتــكار املعــريف‪ ،‬توســيع االســتثامر يف التكنولوجيــات ذات األداء‬ ‫حتــى تصبــح لديــه القــدرة عــى زيــادة ناتــج املحاصيــل بدرجــة كبــرة‪ .‬كــا‬ ‫العــايل‪ ،‬مثــل زراعــة الخاليــا النباتيــة والــري الدقيــق واملكننــة الصغــرة‪،‬‬ ‫تعتــر الزراعــة مســارا ً رئيســياً إليجــاد فــرص عمــل شــاملة يف العـراق‪ ،‬إذ ميكــن‬ ‫وتعزيــز اســتخدام املنصــات الرقميــة وتحليــة امليــاه بالطاقــة الشمســية‬ ‫أن تقــدم فــرص عمــل وبخاصــة للنازحــن وتســاعد يف ســد الفجــوة بــن‬ ‫والزراعــة املائيــة‪.‬‬ ‫الجنســن‪ .‬وإذا كان العـراق يعتمــد بشــكل كبــر عــى الــواردات الغذائيــة‪ ،‬فــان‬ ‫الزراعــة فيــه ميكــن أن تتوســع اســتنادا ً اىل التفاضليــة يف االســتجابة للطلــب‬ ‫املحــي املتزايــد كــا للطلــب االقليمــي والــدويل للصــادرات الزراعيــة‪.‬‬ ‫هنــاك فــرص منــو كبــرة يف هــذا القطــاع ميكــن أن تتحقــق عــى املــدى‬ ‫القصــر مــن خــال اســتبدال االســترياد بالتصديــر يف األســواق األقليميــة‪ ،‬وعــى‬ ‫‪ xi‬ملخص تنفيذي‬ 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS import gas and pay for electricity from Iran. Finally, the Introduction active pursuit to tackle electricity supply shortages has led the GoI to sign 5-years deals with Siemens The Government of Iraq (GoI) has been in and General Electric worth US$14 billion to upgrade emergency mode since its formation in 2018. electricity infrastructure3. The GoI also started the These include managing the domestic political process to link Iraq with the electricity grids of Turkey, process and the appointment of most cabinet Jordan and Gulf countries. members, stabilizing internal security, establishing Development challenges remain numerous. a new foreign policy anchored on non-intervention, The accumulated heritage of poor basic public building trust with neighboring countries, and tackling services, unemployment, increased poverty as a electricity shortages ahead of the summer period. result of years of conflict and internal displacement, a A year later, the GoI has been relatively successful macroeconomic environment that is highly dependent in many areas. Civilian casualties fell to it its lowest on oil windfalls and inadequately equipped to level since 2003 (see Box 1). Relationship between withstand external shocks, all present threats to the Baghdad and Erbil improved markedly. This included country’s stability. To deal with these challenges and the lifting of sanctions on KRG’s international flights fend some of the rising pressure from the population, and commercial banks, resolving outstanding issues the GoI is focusing on economic reforms and long- on 250,000 bpd agreed under the budget 2019 law, term development priorities with an objective of and resuming discussions over a new deal for oil creating an enabling environment for private sector- commitments, customs and disputed areas. Moreover, led growth and diversification. Iraqi leaders have visited all neighboring countries This first chapter of the Iraq Economic and signed various memoranda of understandings Monitor (IEM) examines recent economic and linked with trade, energy, finance and security policy developments with a lens on highlighting cooperation 2. The US also gave Iraq an additional 120 days extension in June 2019 allowing Iraq to 3 The first phase of the agreement with Siemens is worth US$785 million, includes the construction of a 500 MW gas-fired power 2 High level visits included Saudi Arabia, Kuwait, Jordan, Iran and plant, the upgrade of 40 gas turbines and the installation of 13 Turley. substations and 34 transformers across Iraq. RECENT ECONOMIC AND POLICY DEVELOPMENTS 1 Box 1 • Iraq’s Humanitarian Context The humanitarian context in Iraq has transitioned into a post-conflict phase, yet vulnerable people continue to face immense challenges. By end-2018, civilian casualties fell to its lowest level since 2003, when the conflict claimed the lives of over 206,548 Iraqi civilians (Figure B1). More than 4 million people have returned home, from an overall high of 6 million at the height of the conflicti. In January 2019, there were approximately 1.8 million IDPs in Iraq, and as of May 2019, that number had fallen to 1.67 millionii. Moreover, an estimated 6.7 million people across Iraq in 2019 (18 percent of Iraq’s population of which 98 percent of women and children) are still in need of some form of humanitarian assistance (decreased from 8.7 million in 2018). Dire living conditions, including economic hardship, insufficient basic services such as health, water, and sanitation, are faced by the 4 million returnees. Nearly 2.5 million Iraqis remain food insecure; 5.5 million people require health care; 2.3 million need water and sanitation assistance, 2.6 million children lack access to education and 2.3 million people are in need of shelter and non-food items (Humanitarian Response Plan, 2019). Budgets for the most vulnerable especially IDPs and host communities are still limited, exacerbating the already weak basic services such as electricity, water supply, and infrastructure. With IDPs returning to their homes, there will be an increasing need to open economic opportunities and maintain flexible social assistance in these parts of the country. Figure B1• Civilian casualties have been decreasing 4,500 4,000 Civilian Casualties, Number 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Aug-08 Feb-09 Aug-09 Feb-10 Aug-12 Aug-13 Aug-16 Aug-17 Aug-06 Aug-07 Aug-10 Aug-11 Feb-13 Feb-14 Aug-14 Aug-15 Feb-17 Feb-18 Aug-18 Aug-19 Feb-07 Feb-08 Feb-11 Feb-12 Feb-15 Feb-16 Feb-19 Source. Iraq Body Count database. i This is in addition to 257,000 refugees are registered with UNHCR in neighboring countries, UNHCR, regional update, September 27, 2019. https://www.unhcr.org/5d8e11477.pdf. ii Humanitarian Response Plan (HRP), January-December 2019, Feb 2019. Output and Demand some of the main macroeconomic policy Iraq’s economy is gradually rebounding, after challenges. It uses the most recent available data the contraction in the last two years. GDP grew at to paint a picture of the macroeconomic environment 4.8 percent year on year (y/y) in the first half of 2019 and gives its perspective on the medium-term outlook reversing the contraction of 2017-18. Growth can be and risks associated with these macro outcomes. mainly attributed to a rise in crude oil production (up 2 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH Figure 1 • Non-oil GDP is markedly rebounding in Figure 2 • Bringing the overall GDP growth to 4.8 2019 percent at end-2019, and to overperform that in MENA region 30 30 25 25 Year-on-year growth, percent, % Year-on-year growth, percent, % 20 20 15 15 10 10 5 5 0 0 -5 -5 -10 -15 -20 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e Non-oil GDP Oil GDP Non-oil GDP Overall GDP growth MENA GDP growth Sources. Iraqi authorities; and World Bank staff calculations. Sources. Iraqi authorities; and World Bank staff calculations. 6.3 percent) and a rebound in non-oil economic activity and higher crude oil production led to the oil sector (up 5.6 percent in H1-19, y/y). Crude oil production expanding by an estimated 4.4 percent (y/y) in the is a significant success story for Iraq. Prior to 2014, first half of the year. Oil production has nearly doubled there had been doubts as to whether production over the past decade, averaging 4.8 million barrels could be sustained above 3 million barrels per day per day (mbpd) in H1 2019, up from 4.5 mbpd in H1 (mbpd), whereas it currently is within striking distance 2018. Agriculture sector value-added has increased of 5 mbpd. As for the non-oil sector, improvement sharply by almost 39 percent in H1 2019, making it is underpinned by better rainfall, an improvement in the largest contributor to growth of all non-oil sectors electricity production, and an expansionary fiscal (Figure 4-a). This is largely due to favorable weather policy linked to higher oil prices in 2018 which conditions and record wheat production despite persisted into the early part of this year. These positive widespread fires destroying thousands of acres of developments are expected to bring real GDP growth farmland in late April. With an estimated production of to an estimated 4.8 percent at end-2019, reversing a 4.1 million metric tons for 2019-204, a 32.5 percent rise 0.6 percent contraction seen in 2018, with the non-oil from 2018, such a pickup will have a notable effect economy likely to accelerate over 5 percent. (Figure 1). in terms of import substitution and of social stability Iraq’s economy has outperformed that of as it boosts farmers’ disposable income. Indeed, other regional peers in 2019, but its population agriculture is the largest source of employment after dynamics requires much higher growth to sustain the public sector. There was also significant progress current level of welfare. In 2019, Iraq’s growth is in expanding the electricity supply. As new generating expected to outperform the Middle East and North capacity has come onstream, electricity production Africa’s (MENA) average growth of 1.3 percent (Figure increased to an average of 16,354 MW in the first half 2). Nevertheless, in per capita terms, GDP has barely 2019 (y/y), 5,1471 MW higher than a year earlier. More grown over the past few years, as fertility rates reached investments are needed though to meet high demand, 4.1 following decades of armed conflict and massive which reached 20,874 MW as of June 20195. displacement (Figure 3). As such, Iraq will need to In the context of post-war recovery consistently grow at a much higher pace, exceeding and improved security, the services sector 5 percent yearly, if it is to close the gap with other is also recovering although construction has upper middle-income countries, and more importantly underperformed. The services sector grew by 3.9 maintain a constant level of economic activity and percent in H1-19 and contributed by 1.2 percentage welfare gains for its growing population. point (pp) to overall growth. This comes primarily from The recovery has so far been relatively transport, communication, real-estate and government- broad-based in 2019 with oil production, related services. These tend to benefit from improved agriculture and electricity serving as main pillars security conditions, especially in Baghdad and major of growth (contributing 2.9, 0.6, and 0.2 pp to cities, and a boost in private consumption due to a growth, respectively). Favorable international prices 4 USDA Foreign Agricultural Service, May 2019. 5 Source: Central Bank of Iraq. RECENT ECONOMIC AND POLICY DEVELOPMENTS 3 Figure 3 • GDP has barely grown in real per capita the back of the fiscal stimulus, is estimated to further increase imports of goods to about 34 percent of GDP 125 in 2019, up from 28 percent in 2018.The 2019 budget GDP per capita (Index 2013=100) 120 includes a 27 increase in headline spending, of which 115 110 a 15 percent increase in spending on the public sector 105 wage bill and pensions. 100 Overall investment is making little progress 95 given persistent public investment management 90 constraints and unfavorable business 2013 2014 2015 2016 2017 2018 2019e UMI MENA Iraq environment. Despite an allocation of IQD33 trillion Sources. World Bank staff estimates; and WDI. (12.5 percent of GDP) in the 2019 budget law, capital spending declined by 1.1 percent in the first half of the rising public sector wage bill (Figure 4-b). Construction year (y/y). limited absorptive capacity, inefficiencies in on the other hand has seen some growth so far, public investment management, and weak capacity up 2 percent in the first half of 2019. This is not the at the governates level have all contributed to a poor performance that would be expected in a post-war execution rate that did not exceed 5 percent in H1- recovery phase. Indeed, reconstruction in Mosul and 19 (against 6 percent of GDP in H1-18). Moreover, liberated areas has stalled, and severe housing gaps unfavorable business environment, corruption, persist in other parts of the country. The construction cumbersome bureaucracy, and an opaque regulatory sector should increasingly be more important as environment, are keeping foreign direct investment returnees’ demand for additional housing units and (FDI) at only US$1 billion at end-2019 (0.5 percent of renovation of the existing ones goes up. GDP), at par with 2018 (Figure 6). Foreign investment On the demand side, consumption has ought to become increasingly important in the coming picked up in 2019 on the back of improved years, as the country attempts to move away from its security conditions and an expansionary fiscal reliance on oil, finance reconstruction needs and puts policy. Both private and public consumption are in place reforms to de-risk the private sector. estimated to pick up in 2019 driven by considerable improvement in security, increased returns from the internally displaced, and a sizable primary public Oil and Gas Developments expenditures expansion. The expansionary fiscal policy and a low-inflation environment are estimated While oil production has been steadily on to support household purchasing power, increasing the rise, recent market dynamics have impacted private consumption. Total domestic consumption is crude oil exports signaling potential future strains estimated to increase to grow by 1.6 percent in 2019, on the budget. Iraq crude oil production has been from 0.3 percent in 2018 (Figure 5). Furthermore, steadily ramping up as a result of further investments increased domestic demand for consumer goods on in the field. Production has gone from an average of Figure 4.a • A broad-based recovery especially with growth in energy, agriculture, and services Figure 4.b • And in their contributions to overall output 80 25 60 20 Contribution to growth, Percent (%) Growth rate, Percent (%) 40 15 20 10 0 5 -20 0 -40 -5 -60 -10 -80 -15 -100 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 Agriculture Oil Agriculture Oil Non-oil industry Non-oil industry Services, other Services, other Public sector services Overall GDP Public serctor services Overall GDP Sources: COSIT and World Bank Staff Calculation. Sources: COSIT and World Bank Staff Calculation. 4 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH Figure 5 • Private Consumption is estimated to pick up Figure 6 • But FDI remains low at only US$I billion in 2019 in 2019 6 60 50 5 40 4 30 Growth rate, % US$, billion 20 3 10 2 0 2014 2015 2016 2017 2018 2019e -10 1 -20 Public Consumption Private consumption Non-oil GDP growth-RHS 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e Source: World Bank staff calculations. Source: IMF. 3 million barrel per day (mbpd) in 2013 (pre-war with the Sumoud refinery in Baiji. Other plans also include ISIS) to 4.8 mbpd today. Compliance with the OPEC++ using oil to bolster relations with neighbors. Indeed, agreement quotas, which was extended till March plans are set to contracting with Kuwait and Iran on 2020, has capped the Iraq’s production slightly below the development of joint oilfields on the borders and its maximum capacity of 5 mbpd. In the first 9 months building new oil pipelines via Jordan and Turkey. of 2019, crude oil exports have reached a total of 969 Moreover, in September 2019, a total of 7,000 barrels million barrels (about 73 percent of total production), per day were exported to Jordan by trucks. This up 1.64 percent (y/y) from the same period a year follows an agreement signed on January 2019, where earlier (Figure 7). While 97 percent of exports are Iraq agreed to provide Jordan with 10,000 barrels conducted via Basra ports, the rise is attributed to per day (bpd) from the province of Kirkuk6. However, quantities exported via the Turkish port at Ceyhan and boosting oil industry and achieving those plans remain Qayyara oilfield. The increase in oil export volumes constrained by difficulties to maintain and repair has only partially compensated for lower prices. existing transport capacity, insufficient water supply, Indeed, Iraqi crude was sold at an average price of gas reinjection, and persistent inefficiencies in the US$61.5 per barrel for the first 9 months of 2019 contractual and regulatory environment. These plans compared to US$65.5 per barrel in 2018. As a result, would also require additional investment in transport, oil exports revenues have dropped by 6.3 percent in access to water and injection capacity, and storage, the first nine months of 2019 (y/y) reaching a total of mostly to be financed through public resources that US$59.5 billion. Oil market dynamics are unfavorable have not been fully allocated in successive budgets. for Iraq given the decline in global demand and Furthermore, it will require an agreement with other stricter adherence to OPEC++. The price decline oil producers in the future on increasing Iraq’s quota which started in April is gradually eroding fiscal under an OPEC++ type of framework. buffers. Actual oil export prices currently stand at 3 Iraq’s gas sector remains chronically dollars above the budgeted price of 2019, much lower underfunded and underutilized. Lack of investment than an average of 19 dollars a year earlier (Figure 8). in gas infrastructure has led to the daily flaring of 1.7 With a notable improvement in security, billion standard cubic feet of domestic natural gas Iraq is upgrading its oil industry. GoI has ambitious produced in association with crude oil. In addition to plans to increase oil production to reach 7 mbpd the negative environmental and health impact, this over the next 5 years. In January 2019, Iraq reached is roughly equivalent to an annual economic loss deals with Schlumberger, a US firm, and with Iraqi of US$2.5 billion and to more than 10 GW of much drilling company, to boost oil production from needed power generation capacity. Iraq is the second the giant southern Majnoon oilfield to help nearly gas flaring country in the World, importing expensive double its output to 450,000 bpd by 2021. Iraq is fuels and natural gas to run power plants and suffering also working to raise the production capacity in the 6 The agreement did not advertise the price at which oil will be southern and central regions and rehabilitate those exported. It only indicated that exports will be at a discounted price in exchange for lowering tariffs on Iraqi goods imported through destroyed during the conflict in the north, including Jordan’s Aqaba port. RECENT ECONOMIC AND POLICY DEVELOPMENTS 5 Figure 7 • Increase in exports volume is partially Figure 8 • Actual price of oil exports is only 3 compensated for lower oil price dollars above budgeted price 120 10,000 140 110 9,000 100 120 8,000 90 million barrels 100 80 US$/b 7,000 US$ million 6,000 70 80 5,000 60 4,000 60 50 40 3,000 40 30 2,000 20 20 1,000 Jan-13 Jan-14 Jan-15 Sep-12 Sep-15 Jan-16 Sep-16 Jan-17 Sep-17 Jan-18 Jan-19 Sep-13 Sep-14 Sep-18 Sep-19 May-14 May-15 May-16 May-19 May-13 May-17 May-18 0 0 Sep-14 Jun-15 Sep-15 Dec-15 Jun-16 Sep-16 Dec-16 Jun-17 Sep-17 Jun-19 Sep-19 Dec-14 Mar-15 Mar-16 Mar-17 Dec-17 Jun-18 Sep-18 Mar-18 Dec-18 Mar-19 Average Iraq Export Price (US$/bbl) Crude oil, Brent (US$/bbl) Oil exports revenue, US$ million-RHS Oil exports volume, million barrels-LHS Budgeted Pice (US$/bbl) Sources: Iraq Ministry of Oil; and World Bank staff calculations. Sources: Iraq Ministry of Oil; and World Bank staff calculations. expected to turn into a 4.6 percent of GDP deficit by consequently from significant fiscal and balance of end-2019 (Figure 9). payment implications. This comes primarily because Budget rigidities continue to pile up. The GoI of inadequate contractual and regulatory frameworks maintains a loosened fiscal policy of expanding the for investment in the gathering, treatment, processing, public wage bill and subsidies as a tool to ensure social and transport of natural gas. Moreover, a proliferation peace amidst weak private sector job creation (Figure of geographically-fragmented, state-managed SOEs 10). This is evident by the government’s latest decision as a means of control over all operative aspects of the to assimilate all militia fighters into the national army gas value chain has led to duplication of activities and and absorb a large number of graduates from various many inefficiencies that crowd-out private investments. technical universities into ministries and SOEs7. As However, Iraq started to take some steps to capture a result, the public wage bill has so far increased and support increased gas utilization. In mid-July by 13.7 percent in H1-2019 (y/y) and accounts for 2019, Iraq’s Ministry of Oil signed a memorandum of 51 percent of total spending. This is a 42 percent understanding with Honeywell on the Artawi project to increase compared to pre-ISIS war in 2014, placing process associated gas from southern oilfields. The the size of the Iraqi public wage bill ahead of regional project is still in discussion and will require further and high-income countries (Figure 11). This was also preparation to materialize. accompanied by a respective rise of 38.5 and 31.7 percent (y/y) in public consumption of goods and Public Finance services and in social assistance programs, namely for the public distribution system (PDS) and pensions, Iraq’s fiscal position is deteriorating in leaving little fiscal space for public investment. At 2019 due to a sizeable fiscal loosening. The this rate, Iraq requires a minimum oil barrel price of rapid expansion of the public wage bill and of social US$53 to finance only its recurrent spending for this assistance programs coupled with weak domestic year8. Prior to the ISIS crisis, this number stood at an revenue mobilization has led to a marked deterioration average of US$65/barrel in 2013. of Iraq’s fiscal position. Data suggests that recurrent Those rigidities are coming at the expense of spending has risen by 28.8 percent in H1-19 (y/y) growth-enhancing public investments. Investment coupled with a 33 percent drop in non-oil revenues, expenditures have declined by 1.1 percent in H1-19, only to be offset by a 1.1 percent decline in public reflecting serious public investment management investment. As a result, the primary surplus for H1-19 constraints and limited absorptive capacity. Despite reached IQD8.5 trillion (6.7 percent of GDP), down 7 Ministry of Oil has hired 3000 petroleum engineers in 5 months already. 48 percent compared to its level in H1-18. Given the 8 This number rises to US$73/barrel if all planned public invest- observed budget execution trends, untargeted social ments are also accounted for. Those numbers assume that the ambitious non-oil revenue target of IQD11.8 trillion (4.2 percent policies and the unfavorable oil markets prospects, of GDP) from the 2019 budget law is reached. If not, then the the 7.9 percent of GDP budget surplus in 2018 is breakeven price increases to respectively US$60 and US$80/ barrel (including public investment. 6 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH Figure 9 • Large fiscal loosening is expected to turn Figure 10 • Wage bill is the single largest and fastest budget balance into a deficit in 2019 growing budget item 60 15 20 40 10 18 16 Percent of GDP, % Percent of GDP, % 20 5 14 12 0 0 2013 2014 2015 2016 2017 2018 2019e 10 -20 -5 8 6 -40 -10 4 2 -60 -15 0 -80 -20 2013 2014 2015 2016 2017 2018 2019e Oil revenues Non-oil revenues Primary expenditure Non-oil investment expenditure Compensations of employees Goods and services Oil investment expenditure Interest payments Transfers (including pensions) Interest paymets Investment expenditures Social safety net Overall fiscal balance-RHS Sources. Iraq MoF; and World Bank staff calculations. Sources. MoF; and World Bank staff calculations. Figure 11 • Wage bill is also the highest compared Figure 12 • Execution rate for investment to MENA and other groups of countries expenditure is low 20 160% 123.9% 16 120% Percent, % Percent of GDP, % 12 84.3% 80% 74.9% 56.1% 8 51.8% 45.3% 36.5% 37.3% 40% 29.9% 4 6.0% 6.0% 4.5% 0% 0 Oil revenues Non-oil revenues Current expenditures Investment EMDE Fragile states MENA oil exporters Iraq expenditures (2016) (2015) (2016) (2019e) Total 2018 H1-2018 H1-2019 Sources. WDI; and World Bank staff calculations. Sources. MoF; and World Bank staff calculations. large allocations made for public investment (12.5 (y/y). Nevertheless, non-oil revenues have been well percent in the 2019 budget law), the execution rate below budgetary expectations and have declined by remains below 5 percent in H1-2019, or at IQD1.47 a staggering 33.1 percent over the same period (y/y). trillion (Figure 12). This compares to over 37 percent The decline reflects problems in domestic revenues execution rate for recurrent spending over the same mobilization attributed to poor tax compliance and period. Moreover, while public investments related collection efforts, expansion of customs exemptions, to the oil sector more than doubled in H1-2019 and low growth in 2018 affecting income tax. At 2 (y/y), those related to other sectors declined by 23.2 percent of GDP, non-oil tax revenues in Iraq is one of percent. Such results not only put a drag on long-term the lowest in the world. Expanding domestic revenue sustainable growth. It also signals increases in social mobilization will be key to reduce reliance on oil and vulnerabilities and tensions as the reconstruction create fiscal space in the future for investments in program for Mosul and the seven liberated areas, human and physical capital. service delivery programs across governates, and Public debt is rising in 2019 with risks investment in human capital all remain severely associated with increased reliance on domestic lagging. financing. The projected fiscal deficit is expected to Budgetary revenues remain dominated by oil increase public debt-to-GDP from 49.3 percent in 2018 receipts and poor domestic revenue mobilization. to almost 50 percent in 2019. The most recent debt The Iraqi budget is largely dependent on oil-related sustainability analysis (July 2019)9 concludes that Iraq receipts as they constitute 92 percent of total budget does not face major solvency risks despite its limited revenues. As such, the improvement in production debt carrying capacity. While 53 percent of total debt has translated into a 6.3 percent rise in budgetary oil revenues so far in the first six months of the year 9 IMF 2019 Article IV Consultation and Proposal for Pos-Program Monitoring; Staff Report, July 2019. RECENT ECONOMIC AND POLICY DEVELOPMENTS 7 Figure 13 • Fifty eight percent of total debt stock is Figure 14 • Sixty eight percent of that stock is long external term, 14 percent is held by bilateral donors and multilaterals agencies 1,489 9,884 13,041 35,410 17,799 US$ million US$ million 31,284 75,152 37,064 Legacy external debt External debt Domestic debt Guarentees external Debt-Long and medium term Debt-Short-term Guarentees domestic Domestic bonds for contractors Sources. Iraqi authorities; and World Bank staff calculations. Sources. Iraqi authorities; and World Bank staff calculations. stock10 is external11 (Figure 13), 68 percent of that stock above). Second, a loosening of the fiscal stance and is long term, 14 percent is held by bilateral donors better aggregate demand resulting in a notable 17 and multilaterals agencies, and 9 percent is legacy percent rise in imports of goods and services Q1-18 debt acquired prior to 1990 (Figure 14). Moreover, (Figure 16). Those unfavorable dynamics are expected interest payment represents a mere 2.6 percent of to continue throughout the year. Indeed, the projected budgetary revenues (equivalent to 0.9 percent of dip in international oil price to US$56/barrel coupled GDP). Nevertheless, Iraq faces high liquidity risks as with tougher implementation of Iraq’s commitments gross financing needs continue to rise. Indeed, gross to the OPEC++ quota agreement on oil exports, and financing needs are projected to reach around US$41 continued rising imports are projected to reverse the billion in 2019 (17.4 percent of GDP). In addition to 2018 current account surplus of 6.9 percent of GDP the primary budget deficit, the largest financing need into a projected deficit of 4.6 percent of GDP in 2019. comes from rolling over domestic debt, and to a lesser The worsening of the current account extent amortization of external debt (US$1.7 billion). balance coupled with lower oil prices are Domestic debt is typically more expensive and mostly expected to put pressure on the Central Bank of short term, less than one year. As such, it will have to Iraq’s (CBI) international reserves. So far, oil export be rolled-over on a yearly basis accentuating liquidity volumes have managed to partially compensate for needs over time. More importantly and in the absence the lower prices and keeping the CBI’s gross reserves of new foreign borrowing, as envisaged in the 2019 at almost US$68 billion by August 2019 (Figure 17), budget law, financing the government exclusively up 5.3 percent compared to 2018 (y/y). The situation from domestic markets would also entail risks from is expected though to reverse going forward given the crowding out much needed private sector credit. unfavorable oil markets prospects. Moreover, other sources of external financing are poorly performing. FDI has declined by 52 percent in Q1-2019 (y/y) and External Sector net portfolio outflows widened12. As a result, further pressure is expected on CBI reserves. These are Less favorable terms of trade coupled with projected to decline to an estimated US$60 billion at fiscal loosening have weakened Iraq’s external end-2019 (or 6.7 months of imports), from over US$64 position. Latest available data reveals that the current billion in 2018 (8 months of imports), increasing as account balance has declined to 2.3 percent of GDP such the vulnerability of the country to future external in Q1-19, down from 3.1 percent in Q1-18 (Figure 15). shocks (Figure 18). The deterioration is attributed to two factors. First, to the less favorable terms of trade where Iraq’s average oil export price has fallen so far in 2019 (see para 10 10 Including guarantees. According to CBI data. Net portfolio outflows have risen from 12 11 Which includes legacy external debt, external and guarantees US$6 million in Q1-2018 to US$282 million in Q1-2019. external. 8 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH Figure 15 • CAB declined to an estimated 2.3% of GDP Figure 16 • With less favorable trade balance and Q1 2019 increased import 5 120 70 4 100 60 3 Percent of GDP, % Percent of GDP, % US$ per barrel 80 50 2 40 1 60 0 30 40 -1 20 20 -2 10 -3 0 0 2013-Q1 2015-Q2 2017-Q3 2013-Q2 2013-Q3 2013-Q4 2014-Q1 2014-Q2 2014-Q3 2014-Q4 2015-Q1 2015-Q3 2015-Q4 2016-Q1 2016-Q2 2016-Q3 2016-Q4 2017-Q1 2017-Q2 2017-Q4 2018-Q1 2018-Q2 2018-Q3 2018-Q4 2019-Q1 CAB, % GDP-LHS Oil price Trade balance, % of GDP Exports, % of GDP Imports, % of GDP Sources: CBI, Ministry of Oil; and World Bank staff calculations. Sources: CBI, Ministry of Oil; and World Bank staff calculations. Figure 17 • Increased oil exports volume has managed Figure 18 • But the continuous decline in oil prices so far to keep the reserves at almost US$68 billion and lower prices will dip the reserves at end-2019 90 140 80 12 80 120 10 100 60 Million barrel Months of imports 70 8 US$ billion US$ billion 80 60 40 6 60 50 4 40 20 40 20 2 30 0 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e Dec-12 Dec-13 Dec-14 Dec-18 Dec-15 Dec-16 Dec-17 Aug-12 Apr-13 Aug-13 Apr-14 Aug-14 Apr-15 Aug-15 Apr-16 Aug-16 Apr-17 Aug-17 Apr-18 Aug-18 Apr-19 Aug-19 Foreign Reserves, US$ billion-LHS Official reserves, US$ billion-LHS Coverage Ratio, million of imports-RHS Oil exports volume-million barrel-RHS Sources. CBI; and Ministry of Oil. Sources. CBI; and Ministry of Oil; and World Bank staff calculations. inflation, as measured by the CPI, declines by 0.3 and Monetary Policy and Prices 0.04 percent (y/y) (Figure 19). The observed economic pick-up is also Inflationary pressures remain muted in supported by an increase in broad money, but 2019. Improved security and increased domestic public sector borrowing to finance the deficit demand have put pressure on the prices of services continues to crowd out credit to the private such as recreation (up 9.4 percent), education sector. During the first half of 2019, broad money (up 8.5 percent) and health (up 2.2 percent) in (M2) is estimated to have grown by 6 percent (y/y), the first seven months of 2019 (y/y) (Figure 20). driven by the pickup of overall economic activity Nevertheless, inflationary pressures remain largely (Figure 21). Increased borrowing by the public sector muted in 2019 due to lower oil prices and cheaper to finance the deficit due to expansionary fiscal policy imported consumption goods following a continued continues to crowd out the private sector and this depreciation of both Turkish and Iranian currencies, resulted in a sharp drop in the extension of credit to the two main trading partners for Iraq. Items like food the private sector in the second half of 2018 (Figure prices rose by only 0.9 percent in the first 7 months 22). This continues to be an issue as the government of 2019, while consumer goods like apparels and needs to provide greater access and support to house supplies and appliances prices declined by an the private sector to enable it to play its part in the average of respectively 1.7 and 1.5 percent over the national development. This is also exacerbated by same period. These three items alone constitute on shortcomings in financial architecture, weakness in average 41 percent of total household consumption credit information and legal procedures. basket. Such easing in prices is have therefore a The banking sector is showing signs of favorable impact on Iraqi consumer welfare especially improvement. To address the citizens trust deficit that of the poor. Overall both core and headline RECENT ECONOMIC AND POLICY DEVELOPMENTS 9 Figure 19 • Deflationary pressures are observed Figure 20 • Despite rising prices in non-tradeable services 8% 50% 7% 40% 6% In percent, % In percent, % 30% 5% 4% 20% 3% 10% 2% 0% 1% Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 0% -10% -1% -20% -2% -30% Food Clothing & footwear Housing & utilities Health Headline inflation Core inflation Transport Communications Education Recreation Sources: COSIT and World Bank Staff Calculations. Sources: COSIT and World Bank Staff Calculations. Figure 21 • Broad money picked up due to increased Figure 22 • Credit to private sector is decreasing economic activity 20 20 15 Percentage growth, y/y change, % 15 10 Percentage growth, y/y 5 10 0 change, % 5 -5 -10 0 Nov-14 Nov-15 Nov-16 Nov-17 Aug-15 Aug-17 Aug-18 Nov-18 Aug-14 Aug-16 May-14 May-16 Feb-17 May-17 Feb-15 May-15 Feb-16 Feb-18 May-18 Feb-19 May-19 -15 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Sep-14 Sep-18 Dec-14 Mar-15 Sep-15 Dec-15 Mar-16 Sep-16 Dec-16 Mar-17 Sep-17 Dec-17 Mar-18 Dec-18 Mar-19 -5 Source. CBI. Source. CBI. payment of public salaries which has reportedly and to increase confidence in the banking system, CBI reached 21.2 percent of the entire civil service in May established the Iraqi Deposit Insurance Company in 201915. July 2019. Additionally, the CBI also announced in July Iraq continues to largely be a cash-based 2019 an initiative to stimulate credit to the economy by economy. Account ownership data indicates unmet raising the limits of loans granted to small-and medium demand for financial services. The fact that only 23 sized enterprises (SMEs) to one billion dinars, to percent of adults have a bank account suggests that support the “One trillion dinars’ initiative” announced there is a substantial unmet demand for financial in January this year. These measures have increased services (increased from 11 percent in 2014). Iraq has Iraqi confidence in the banking system and have led the lowest share of the population with an account at a to higher levels of deposits (Figure 23). Total deposits formal financial institution among peers in the MENA of the banking sector are estimated to have increased region (20 percent)16. Moreover, only 11 percent of by almost 15 percent during H1- 2019 (y/y), to an adults use an electronic payments instrument, which average exceeds ID75 trillion. Increased confidence includes a debit or a credit card, sending/receiving in the banking sector is also leading to an increase remittances through an account, or paying for utilities on the total assets, following a sharp drop in assets in (Figure 25). At the first Digital Mashreq Forum held in end-201713. Assets stood at an estimated ID129 trillion Amman in June 2019, Iraq committed to advancing in June 2019 (Figure 24), about 13 percent increase the digital economy and establishing a conducive (y/y)14. There is also continued progress on electronic regulatory and policy framework for digital payments, investing in an interoperable infrastructure, and 13 Due to some accounting adjustments carried out by State- Owned Banks. striving towards universal financial access17. 14 Accounting adjustments was made for the total assets of com- 15 Iraq ICR 2019 using CBI data mercial banks following International Accounting Standards (IAS) 16 World Bank, Global FINDEX Database 2017. as of January 2012. 17 Alexandre Laure, and Marolla Haddad, Note on Digital Transfor- 10 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH Figure 23 • Increased confidence in the banking sector Figure 25 • Account ownership is the lowest is leading to higher total deposit compared to peers 100% 94% 93% 80 88% 87% 90% 83% 83% 78 80% 80% 80% 73% 73% 72% 72% 76 70% In percent, % 74 60% 72 ID trillion 52% 48% 47% 70 50% 45% 45% 68 40% 33% 30% 27% 66 30% 24% 23% 20% 18% 64 20% 13% 12% 11% 62 10% 60 0% Jun-14 Jun-15 Jun-16 Sep-16 Jun-17 Sep-17 Jun-18 Jun-19 Sep-14 Sep-15 Dec-13 Mar-14 Mar-15 Dec-14 Dec-15 Mar-16 Dec-16 Mar-17 Sep-18 Dec-17 Mar-18 Dec-18 Mar-19 UMI MENA UAE Iran Saudi Bahrain Kuwait Lebanon Iraq Arabia % adults with an account % adults using an electronic payment instrument % adults with an account at a financial institution Source. CBI. Source. World Bank Global FINDEX Database 2017. Figure 24 • Figure 24. And to higher total assets projects. It is estimated that fewer than 5 percent of SMEs in the formal sector have received bank loans. 160 150 140 Business Environment and Private Sector Development ID trillion 130 120 110 Iraq’s business environment compares 100 unfavorably with the world. The country ranks Jun-14 Jun-15 Jun-17 Sep-14 Sep-15 Jun-16 Jun-18 Sep-18 Jun-19 Dec-13 Mar-14 Dec-14 Mar-15 Mar-16 Sep-16 Mar-17 Sep-17 Dec-15 Dec-16 Dec-17 Mar-18 Dec-18 Mar-19 171 out of 190 countries in the World Bank’s 2019 Doing Business rankings, one of the lowest ranking Source. CBI. economies in the MENA region (Figure 26). Iraq fares particularly poorly in getting credit (186), trading Despite reform progress, the financial across borders (181), resolving insolvency (168), sector has limited ability to support the starting a business (155), enforcing contracts (143), significant national reconstruction needs and to paying taxes (129), and getting electricity (126). Some finance the private sector. This is due to a banking progress has been observed though in electricity system dominated by under-capitalized and under- access, with improved production, and in starting provisioned state-owned banks (SOBs) primarily used a business as some streamlining of procedures for quasi fiscal operations (NPLs stand at an estimated occurred. Nevertheless, the regulatory framework 37+ percent and credit to private sector at 7 percent remains unfavorable for business and for fostering of GDP - one of the lowest indicators in MENA); lack both domestic and international investment. of trust in the financial system characterized by a Moreover, structural problems are at the largely cash based banking system with low deposits core of private sector development. These include: and under-utilization of the electronic payments • Weak governance and widespread infrastructure; and a non-banking financial sector at corruption. Iraq is persistently ranked below an early stage of development with underdeveloped the tenth percentile globally on the World Bank capital markets and microfinance sector. Additionally, Worldwide Governance Indicators in the 1996- banks in Iraq have little experience in lending to 2018 period, specifically in areas of government small, and medium-sized enterprises (SMEs), thus effectiveness, rule of law, and control of limiting financial intermediation. Many banks do not corruption18. This discourages domestic have the necessary skills to analyze credit risk or to and international investors from expanding carry out cash flow analysis. Financing for SMEs is businesses and offers lower quality services to not well developed even though the CBI has put in consumers. place a US$5 billion line of credit extended to SOBs for on-lending to SME’s, agriculture and infrastructure 18 Iraq scored 18 out of 100 in the latest Transparency International Corruption Perception Index 2018, much lower than the MENA mation, World Bank, September 2019. average (39). RECENT ECONOMIC AND POLICY DEVELOPMENTS 11 Figure 26 • Iraq ranks unfavorably on all doing • Figure 27 • Jobs are dominant by the public sector business indicators ranking compared to MENA Starting a Business 1,200,000 Number of employees 200 1,000,000 Dealing with Resolving Insolvency 150 Construction Permits 800,000 100 600,000 Enforcing Contracts Getting Electricity 400,000 50 0 200,000 Trading Across 0 Registering Property Borders Paying Taxes Getting Credit Protecting Minority Investors MENA Iraq Ranking ranges from 1-190, where 0 represents the frontier and 190 the worst Private Public Source. Iraq Doing Business 2019. Source. Iraq Household Socio-Economic Survey, 2012. Figure 28 • Key constraints identified by firms, by size Figure 29 • Logistics quality has deteriorated with conflict 35% LPI Score 30% 3.4 27% 3.2 25% Timeliness 3 Customs Percent of firms, % 20% 2.8 19% 20% 2.6 17% 2.4 15% 2.2 2 10% 9% 8% Tracking & tracing Infrastructure 5% 0% Finance Physical Business Service Transport Loss of damage and services interruptions problems customers and Logistics competence International shipments insecurity problems suppliers All firms Small Medium Upper middle income MENA Iraq Source. Bringing Back Business in Iraq, World Bank 2019. Source. World Bank Logistics Performance Index (LPI) 2018. • The dominance of the public sector in • The deterioration of infrastructure and commercial activity through its 160+ SOEs logistics quality. Conflict and lack of (Figure 27). Such dominance has significantly investments has resulted in a deteriorating contributed to low firm entry rates. The annual quality of logistics, raising pressure on service number of new firm entrants fell from 5,293 delivery and operational costs for businesses firms in 2008 to 2,020 in 2016.19 Moreover, lack and making it harder for firms to benefit from of entrepreneurship endeavors, especially in businesses opportunities in both Iraq’s lucrative the formal economy, reduces the pool of young domestic markets and regional trade (Figure 29). firms. These have been identified as the engine A comprehensive reform strategy of job creation in many other countries. In Iraq emphasizing investment climate, rethinking the small firms stay small, failing to compete with the role of the state in the economy and engaging few large firms that are mainly SOEs, and do not in digital infrastructure is needed to tackle these create enough high-quality jobs20. constraints. Iraq is a market for 40 million consumers • Limited ability to access finance. Twenty with huge untapped entrepreneurship potential. As seven percent of firms identified access to such, it offers plenty of opportunities for the private finance as a major impediment to develop their sector to flourish. To do so, the regulatory and operations. For small firms, this was in effect the structural impediments mentioned previously need top constraint (Figure 28). Access to finance to be addressed. A comprehensive reform strategy remains an issue given the poor depth of the could focus i) on boosting the investment climate banking system and the underdevelopment through regulatory reforms for business operation, of non-banking financial institutions especially investment policies and Public Private Partnership micro-credit and other schemes. (PPP); ii) developing the digital economy especially 19 Bring Back Business in Iraq, Analytical note, World Bank, September 2019. in terms of affordable access to high-speed internet, 20 Ibid. 12 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH cashless payments, digital government services of domestic treasury bills, signal that Iraq’s gross and data access, and scaling up entrepreneurship financing needs will be high in the coming years ecosystem; iii) engage on corporatization of SOEs and reaching over US$45 billion (about 18 percent of restructuring markets in which SOEs operate to foster GDP) over 2020-202121. Over-reliance on the local more competition. The GoI has set the development markets for financing increases cost of debt service of private sector as a development priority and have and repayment risks, given that domestic debt is more started addressing some these reforms with support expensive and mostly short-term, and could crow-out for the donor community. private sector credit. Lower oil prices and increased imports will keep the current account balance in deficit, Outlook and Risks projected at an average of 4 percent of GDP over 2020-2021. This is expected to be financed partially Outlook by past international reserve accumulation. As a result, CBI’s foreign reserves are projected to drop to In the absence of structural reforms and an estimated US$51 billion (or 5.7 months of imports) accelerated reconstruction, growth recovery by 2021. in Iraq may be short-lived. Growth is projected to continue its positive trajectory and peak at 5.1 percent Risks and challenges in 2020, coming from a low base and benefiting from recovery following years of conflict and continued Iraq’s macroeconomic outlook faces fiscal loosening. However, growth is expected to several risks related to the fragile political decelerate to 2.7 percent in 2021. This is mostly due to environment and to structural factors related an unfavorable international oil markets outlook where to economic dependence on oil revenues. The both prices and exports are expected to weaken given country remains in a fragile situation coming out of lower global demand and the uncertainty surrounding a conflict despite improved humanitarian and social the OPEC++ agreement renewal. Non-oil growth is conditions. However, reconstruction and structural expected to remain positive on the back of improved reforms to de-risk the private sector have yet to pick security conditions and higher investment to rebuild up in full steam. These delays constitute upside risks the country’s damaged infrastructure. Nonetheless it to growth, which is expected to remain subdued over is likely to remain far short of needs given absorptive the medium term in the absence of reforms. Moreover, capacity. Indeed, in the absence of domestic structural downstream risks are linked to the volatility of oil reforms, Iraq’s potential growth will remain sluggish prices and uncertainty over future agreements on as it underutilizes its factors of production, especially oil quotas (see Box 3). Indeed, lack of diversification on the non-oil side (see Box 2 and Annex). Such no- and budget rigidities linked with increased spending reform scenario could therefore entail significant on non-discretionary budget items such as the wage costs at both economic and social levels. bill reduces Iraq’s financial buffers and increases its Higher spending together with lower oil vulnerability to external shocks. It also threatens to prices will result in a fiscal deficit projected at 3.3 outdo the recent positive government reform efforts percent of GDP in 2020 and remain in a similar especially in the electricity and agriculture sectors. range in 2021. Persistent fiscal deficits are projected Social unrest over lack of jobs, corruption, to push public debt to over 48 percent of GDP by and poor service delivery remains one of the more 2021. Unless there is a significant reorientation in important risks to growth and fiscal sustainability. the fiscal policy for the next 2020 budget to tackle Iraqis have taken the streets in October 2019 to spending rigidities and domestic revenue mobilization, protest lack of jobs, ramping corruption, and poor there will be limited fiscal space to sustain post-war quality of services. The demonstrators were mostly recovery, investment in human capital and long- young, between the ages of 18 to 30, and were term development. High fiscal deficits coupled with mobilized by social demands. The events have turned amortization of existing debt, especially the rollover 21 IMF, Debt Sustainability Analysis (DSA), July 2019. RECENT ECONOMIC AND POLICY DEVELOPMENTS 13 Box 2 • Potential GDP Estimation for Iraq Productivity contributed negatively to economic growth in Iraq and under a no reform scenario potential growth will remain sluggish. Figure B2 summarizes Potential GDP and its decomposition into input factors for the 2012-2014 period and 2015-2018 (see Box 4 for technical details). TFP contributed negatively to growth in both periods and more so in the second period while also the contribution of capital to growth declined mostly driven by the drop-in oil prices which slashed overall investment. This model suggests that under a baseline no-reform scenario Iraq will continue to have sluggish growth on the non-oil sector (Figure B3) (see annex 1 for technical details). Details on growth decomposition and performance will be discussed in the forthcoming World Bank report “Iraq Country Economic Memorandum”. Figure B2 • Potential GDP Decomposition Figure B3 • GDP and Potential GDP Growth Path 10.0% 3.5% 20 8.0% 3.0% 2.5% 15 6.0% 2.0% 4.0% In percent, % In percent, % 1.5% 10 2.0% 1.0% 0.0% 0.5% 5 0.0% -2.0% -0.5% 0 -4.0% -1.0% -6.0% -1.5% -5 -8.0% 2012-2014 2015-2018 -2.0% -10 TFP Structural Employment Capital Potential GDP Total GDP Total Potential GDP Source: WB staff calculations Source: WB staff calculations violent claiming the lives of more than 100 individuals with thousands of injured and a nationwide internet blackout. These demonstrations exposed the fragility of the system and adds to the downside risks for growth. Social unrest is expected to be met through more short-term fiscal stimulus - cash transfers, public hiring, and housing schemes - to appease demonstrators. However, results might not be satisfactory as creating jobs and fighting corruption will require longer term reforms. Creating the adequate fiscal space for growth-enhancing programs in human and physical capital will be key for diversification and job creation. In case this does not materialize, increases in oil production will mean little for most Iraqis. With IDPs returning to their homes and with latest demonstrations winding down, there will be an increasing need to open economic opportunities and maintain flexible social assistance in these parts of the country. Concrete measures to boost non-oil revenues and fiscal consolidation measures are needed to reduce macroeconomic risks in the medium term. 14 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH Box 3 • Global and Regional Economic Outlook Global Economy. Global economic activity continued to soften at the start of 2019, with trade and manufacturing showing signs of marked weakness. Global growth in 2019 has been downgraded to 2.6 percent—0.3 percentage point below previous projections—reflecting the broad-based weakness observed during the first half of the year, including a further deceleration in investment amid rising trade tensions (Figure B4). As recent softness abates, global growth is projected to edge up to 2.7 percent in 2020 and to 2.8 percent in 2021. Activity in major advanced economies—particularly in the Euro Area—as well as in some large emerging market and developing economies (EMDEs) has been weaker than previously expected. In Emerging Market and Developing Economies (EMDEs), growth is projected to pick up from a four-year low of 4 percent in 2019—0.3 percentage point below previous projections—to 4.6 percent in 2020-21. Slower- than-expected mining and oil production, combined with domestic policy uncertainties, has delayed the recovery in activity in some of the largest commodity exporters in Sub-Saharan Africa. Downside risks to growth predominate, including rising trade barriers, a build-up of government debt, and deeper-than expected slowdowns in several major economies MENA Regional Economy. Growth in the region is estimated to remain subdued in 2019, at 1.3 percent. Activity in oil exporters has slowed due to weak oil sector output and the effects of intensified U.S. sanctions on Iran, despite an easing of the fiscal stance and positive prospects for non-oil sectors in some countries (Figure B5). Oil exporters’ growth has remained subdued. Oil production cuts implemented by OPEC and some non-OPEC members (OPEC+) to rebalance global oil markets have constrained oil sector growth in the Gulf Cooperation Council (GCC) economies; however, as suggested by rising Purchasing Managers’ Indexes, non-oil activity in large GCC economies is picking up amid easier fiscal stances and higher government spending. Uncertainty about oil prices may also dampen oil exporters’ investment and social programs. Many oil importers continue to benefit from business climate reforms and resilient tourism activity. Regional growth is projected to pick up to around 3 percent in 2020-21, supported by capital investment and policy reforms. Risks to the outlook are tilted to the downside, including geopolitical tensions, reform setbacks, and a further escalation of global trade tensions. Figure B4 • Global growth in 2019 has been Figure B5 • Growth in MENA region is estimated to downgraded to 2.6 percent, reflecting broad-based remain subdued at 1.3 percent, due to weak oil weakness sector and sanctions on Iran 6 6 5 5 4 4 Percent, % Percent, % 3 3 2 2 1 1 0 0 2014 2015 2016 2017 2018 2019e 2014 2015 2016 2017 2018 2019e MENA Developing oil exporters excl. Iran World Advanced economies Emerging and developing economies Developing oil importers Source: World Bank, Global Economic Prospects (GEP), June 2019. Note: The World Bank’s MENA aggregate includes 16 economies, and is grouped into three sub regions: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE comprise the Gulf Cooperation Council (GCC); all are oil exporters. Other oil exporters in the region are Algeria, the Iran, and Iraq. Oil importers in the region are Djibouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank and Gaza. Syria Yemen, and, as of this publication of Global Economic Prospects, Libya, are excluded from regional growth aggregates due to data limitations. RECENT ECONOMIC AND POLICY DEVELOPMENTS 15 TABLE 1• Iraq. Selected Economic and Financial Indicators, 2014-2021 2014 2015 2016 2017 2018 2019e 2020p 2021p Economic growth and prices Real GDP (percentage change) 0.7 2.5 15.2 -2.5 -0.6 4.8 5.1 2.7 Non-oil real GDP (percentage change) -3.9 -14.6 1.6 -0.6 1.2 5.6 4.4 4.4 GDP per capita (US$) 6,517 5,047 4,843 5,263 5,882 5,746 6,204 6,535 GDP (in ID trillion) 273.6 207.2 206.7 231.0 265.0 277.8 299.9 316.0 Non-oil GDP (in ID trillion) 149.5 137.3 138.3 140.8 145.6 165.9 181.9 197.8 GDP (in US$ billion) 234.7 177.7 175.2 195.5 224.2 235.0 253.7 267.3 Oil production (mbpd) 3.1 3.7 4.6 4.5 4.4 4.6 4.8 4.9 Oil exports (mbpd) 2.6 3.4 3.8 3.8 3.9 4.0 4.3 4.3 Iraq oil export prices (US$ pb) 92.1 44.7 36.0 49.1 65.5 61.7 55.8 54.9 Consumer price inflation (percentage change; average) 2.2 1.4 0.5 0.1 0.4 0.0 2.0 2.0 )In percent of GDP, unless otherwise indicated( Public Finance Government revenue and grants 38.2 30.6 26.8 33.0 39.8 36.4 37.7 36.0 Government oil revenue 36.0 27.8 22.9 28.9 36.7 33.7 34.6 32.8 Government non-oil revenue 2.1 2.8 4.0 4.2 3.1 2.6 3.2 3.2 Expenditure, of which: 43.8 43.4 40.7 34.6 32.0 40.9 41.0 39.1 Current expenditure 25.5 27.8 29.3 26.4 26.7 36.0 33.0 32.0 Wages and salaries 11.6 16.0 15.6 14.5 14.2 15.6 16.6 16.6 Goods and Service 3.6 2.3 2.4 3.3 3.0 3.2 1.6 1.5 Interest payment 0.3 0.6 0.7 1.0 1.4 0.9 1.6 1.6 Other 10.1 8.9 10.5 7.6 8.0 16.3 13.2 12.2 Investment Expenditure 18.2 15.6 11.5 8.3 5.3 4.9 8.0 7.2 oil related investment 8.7 9.2 7.1 5.5 3.9 3.7 5.2 5.0 non-oil related investment 9.5 6.4 4.4 2.9 1.4 1.2 2.9 2.2 Non-oil primary fiscal balance, cash basis (percent of non-oil GDP) -55.3 -43.2 -42.4 -42.4 -43.7 -56.3 -49.6 -46.8 Primary fiscal balance, cash basis (percent of GDP) -5.4 -12.2 -13.2 3.8 13.9 -3.6 -2.2 -2.1 Non-oil budget balance Budget balance -5.6 -12.8 -13.9 -1.6 7.9 -4.6 -3.3 -3.1 Public Debt Total government debt (percent of GDP) 32.9 56.2 64.2 58.9 49.3 49.7 48.6 48.6 Total government debt (US$ billion) 77.1 99.9 112.5 115.2 110.4 115.3 121.9 128.5 External government debt (percent of GDP) 24.8 37.2 37.1 35.6 30.6 32.2 31.5 30.5 External government debt (US$ billion) 58.1 66.1 65.0 69.5 68.7 72.2 76.2 77.6 )In percent of GDP, unless otherwise indicated( Monetary indicators Growth in reserve money -13.6 -12.0 9.2 -4.4 6.7 2.5 5.4 4.7 16 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH Growth in broad money 3.9 -9.1 7.0 -25.8 2.7 2.5 6.2 5.4 Policy interest rate (end of period) 6.0 6.0 6.0 4.0 4.0 … … … )In percent of GDP, unless otherwise indicated( External sector Current account 2.6 -6.5 -8.3 1.8 6.9 -4.6 -4.0 -4.0 Trade balance 10.9 -0.1 -1.7 7.6 13.4 5.7 3.1 3.0 Exports of goods 39.6 31.8 28.6 34.8 41.2 37.6 34.4 32.7 Imports of goods -28.7 -31.9 -30.3 -27.1 -27.8 -32.0 -29.6 -28.1 Gross reserves (US$ billion) 66.3 54.1 45.5 49.4 64.7 60.0 56.5 51.5 In months of imports of goods and services 10.8 9.5 7.8 7.3 8.0 6.7 5.9 5.4 Exchange rate (dinar per US$; period average) 1166.0 1167.0 1180.2 1182.0 1182.0 1182.0 1182.0 1182.0 Sources: Iraqi authorities; and World Bank staff estimates and projections. RECENT ECONOMIC AND POLICY DEVELOPMENTS 17 Box 4 • Potential GDP Estimation for Iraq – Technical Annex Productivity contributed negatively to economic growth in Iraq and under a no reform scenario potential growth will remain sluggish. This box models potential GDP for Iraq, especially for the non-oil economy. Economy- wide potential output is described in a simple Cobb-Douglas production function. A standard function includes capital stock, employment, and a residual (growth in GDP unexplained by observed increases in factor inputs, often labeled as total factor productivity (TFP)). This model uses non-oil potential GDP in the calculation of a non-oil output gap in its estimates. We assume that the price dynamics are influenced directly via non-oil factors of production given that most of the oil is exported. Oil enters prices indirectly only in as much as it affects wealth and if government spends oil revenues. Non-oil potential GDP is expressed using TFP, non-oil structural employment and the non-oil capital stock: Where A: trend TFP; N: structural employment or-U_t^*)*LFPR*LF^1564 ); U_t^*is the natural rate of unemployment (usually determined using the equilibrium solution to labor demand and labor supply -estimated to equal 7.7 percent in 2018); LFPR is the labor force participation rate; LF1564working age population; and K is the capital stock (calculated using the perpetual inventory method while the initial capital stock is calculated using WBG (2019, forthcoming). The share of labor ( ) is 0.19 can be obtained by averaging the share of labor compensation in nominal GDP for Iraq, which comes from St. Louis Fed. Alternatively, one can express economy-wide potential GDP as non-oil potential GDP plus oil Gross Value- Added (GVA), where oil GVA is assumed to be produced at its potential: Y_t=Y_(noil,t)+O_t For long-run trends and policies associated with structural change it is useful to decompose potential GDP instead of actual GDP. Using the raw TFP calculations from actual GDP shows significant variations from year to year. This is partly due to noise picked up from not measuring GDP accurately, and missing important variations in the factor inputs (e.g. employment is measured using labor force surveys). Furthermore, policies affect both cyclical and structural variants of output – whereas the focus here is on the long-run. Figure B2 summarizes Potential GDP and its decomposition into input factors for the 2012-2014 period and 2015- 2018. TFP contributed negatively to growth in both periods and more so in the second period while also the contribution of capital to growth declined mostly driven by the drop-in oil prices which slashed overall investment. Finally, this model suggests that under a baseline no-reform scenario Iraq will continue to have sluggish growth on the non-oil sector (Figure B3). Details on growth decomposition and performance will be discussed in the forthcoming World Bank report “Iraq Country Economic Memorandum”. Figure B2: Potential GDP Decomposition Figure B3: GDP and Potential GDP Growth Path 10.0% 3.5% 20 8.0% 3.0% 2.5% 15 6.0% 2.0% 4.0% In percent, % In percent, % 1.5% 10 2.0% 1.0% 0.0% 0.5% 5 0.0% -2.0% -0.5% 0 -4.0% -1.0% -6.0% -1.5% -5 -8.0% 2012-2014 2015-2018 -2.0% -10 TFP Structural Employment Capital Potential GDP Total GDP Total Potential GDP Source: WB staff calculations Source: WB staff calculations 18 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH 2 SPECIAL FOCUS: TRANSFORMING AGRICULTURE FOR ECONOMIC DIVERSIFICATION AND JOB CREATION The need to revive Iraq’s Agriculture issue in Iraq where 2.4 million people across the Sector country require food security assistance (FAO, 2016). The reduced production per capita in recent years Strong agriculture sector development has led to a significant degree of malnutrition in rural is a critical element of Iraq’s vision of a more population, particularly among children (28 percent of diversified economy less dependent on oil, the population is undernourished, and almost a quarter generating employment and driven by the private of children under 5 are stunted). In addition, human sector. While the agriculture sector contributes to development and other development indicators are only 5 percent of Iraq’s GDP, it is the largest source also much lower in rural areas compared to urban of employment (approximately 20 percent) and is areas in Iraq. Hence, the Government is focusing on dominated by private sector producers and market the agriculture sector as part of its priority plans for the agents. A third of the population resides in rural areas country’s economy recovery efforts, poverty reduction where the poverty rate is double that of urban areas and shared prosperity. (31 versus 15 percent). Food security is an important Agriculture is a particularly important SPECIAL FOCUS: TRANSFORMING AGRICULTURE FOR ECONOMIC DIVERSIFICATION AND JOB CREATION 19 Box 5 • Why invest in Iraq’s agriculture and food system? The crucial role of agriculture in economic development is widely recognized and there are numerous success stories on how the agriculture sector served for development. This is the case of countries such as China, India, Vietnam, Morocco and Sub-Saharan Africa since 1995 where agriculture has been a lead sector for growth; a source of livelihoods for rural households contributing to reducing poverty and rural-urban income disparities; and a source of environmental services helping to mitigate climate change and conserve water. In India, the sector helped to move millions out of hunger during the Green Revolution and in China it contributed to raise 350 million rural people out of poverty in 20 years. Cross country analysis has shown that growth originating in agriculture is 2-3 times more effective for the poor than growth originating in non-agriculture. The sector is also labor-intensive. Jobs are not only created on-farm, but also in upstream (input supply and primary production), midstream (handling and processing), and downstream (distribution and marketing) sectors. As other sectors of Iraq’s economy, agriculture has not fully modernized following three decades of conflict and isolation. Public policy has focused on the short-term challenges of food security while deep market inefficiencies remained unaddressed. As a result, sector performance is well below potential and food imports make up 30% (or US$9.38 billion in 2018) of the total imports. In the current fragile post-conflict context of Iraq, with appropriate policy reforms and targeted investments, the agri-food sector can make a significant contribution to employment, economic diversification, social stability, and contribute to climate resilience. Already, the sector is the largest source of private jobs and employs 20 percent of Iraq’s workforce. Women make up over 50% of agricultural work force compared to just 9% across all sectors—highlighting the sector’s importance for social inclusion. The sector has a strong multiplier effect on others economic activities, including services and transport. A 1% increase in Agriculture GDP growth would lead to 1.2 percent increase in total employment (compared to just 0.35 percent for the industrial sector). Improving the country’s economic outlook depends on the agri-food sector. pathway for overall job creation in Iraq – one of place. In the long term, macroeconomic stability, a the highest priority issues facing the country. In significantly improved investment climate, reformed the aftermath of decades of conflict and violence, institutions and strong governance will be necessary Iraq is facing a jobs crisis. After Yemen and Syria, Iraq to catalyze job creation in diversified economic has the third highest number of Internally Displaced sectors at scale, and particularly in agriculture and Persons (IDPs). More than one third of Iraq’s youth and agribusiness (see Box 5). close to 30 percent of women are unemployed—a rate Agriculture production has large headroom that is nearly twice as high as the national average. An for expansion: it occupies only a limited fraction of estimated 1.8 million Iraqis remain internally displaced Iraq’s cultivable area; it is practiced predominantly while over 4 million Iraqis have returned to their places by small farmers well below their potential. Of the of origin to resume their lives and livelihoods after total land mass area of 43.7 million hectares, about years in displacement. To a large extent their decision 22 percent, i.e., 9.5 million hectares, is suitable for to return has been tied to their ability to earn a living agriculture. But, only about 5 million hectares have – which for the rural returnees (47 percent) is linked been under crop production traditionally with large to the recovery of the agriculture sector. Today, Iraq variations between the years due to climatic and/ needs 2.5 million new jobs, and future demand for or economic reasons, and overall decrease recently jobs by the youth is rapidly rising, with a projected 70 due to the conflict (estimated at 2-4 million hectares percent between 2015 and 2030. In the absence of being cultivated). There exist roughly three different a vibrant private sector, the current and future new agriculture zones in Iraq. Grains, primarily wheat and labor market entrants cannot be absorbed. However, barley, are Iraq’s main crops in the north and center- pre-conditions for job-intensive growth are not yet in north rainfed areas. In central and southern Iraq, 20 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH where agriculture depends mainly on irrigation from most extensive. Rapid rehabilitation of irrigation and the Tigris and Euphrates rivers, mixed farming systems drainage systems can contribute to rapidly raise are predominant. Dates are a major cash and food agriculture productivity levels in the country and crop with fruit trees interplanted in date palm orchards reduce food imports and would have very high social (over 300,000 ha are permanently in tree crops – and economic returns. mostly dates but also some olives, grapes, oranges, Iraq is heavily dependent on food imports; apples, and other fruit orchards). Vegetables, mainly agriculture can expand to respond to the growing tomatoes and potatoes, are important irrigated crops. domestic and regional and international export Crop yields have increased somewhat over the past demand. There has been a steady increased decade but are low by any comparative standards dependence on imports in order to meet domestic (e.g., cereals 2.75 tons per ha vs. 4.1 tons world food needs which has made Iraq a major importer of average).22 Livestock raising is extensively practiced agricultural products. Increasing dependence on food and inland fisheries and backyard poultry raising are imports rose from US$ 2 billion in 1985 (or 19 percent valuable as a source of protein and income for the of the total merchandize imports) to almost US$11 rural population. Iraq raises a significant amount of billion in 2017 (or 21 percent of the total merchandize livestock including sheep and goats, cattle, camels, imports) in nominal terms. The top food imports are and buffaloes. Before the first Gulf war, livestock wheat, cattle and chicken meat, rice, oils and fats, production represented 30-40 percent of the total milk, tea, and sugar. Currently, about 60-70 percent value of agricultural production and contributed of vegetables consumption is supplied by imports significantly to household nutrition. Performance of from neighboring countries. FAO estimated the Import small ruminants’ sector, namely sheep and goats were Dependency Ratio (IDR) for cereals at 52 percent in severely damaged during the last two decades, due 2016. to massive selling outside the Iraqi borders, loss of Domestic production has significant genetic potential and reduction in herd size. The small scope to grow given the rapidly rising domestic ruminant sector in Iraq also suffers from the lack of food demand and Iraq’s potential comparative any kind of organization among the producers (FAO, advantage to develop some agri-food exports. 2017). Given the paucity of recent data on agricultural Irrigation, once it is rehabilitated, has the productivity, the deep economic distortions, and the potential to greatly increase yields. The total difficulty of extrapolating past trends into the future managed irrigated area is estimated at two thirds of in a post-war context, it is not clear to what extent the total cultivated area, all of it equipped for full or Iraq has a comparative advantage in the production partial control irrigation. The agriculture sector is the of staple crops. High input subsidies—in the case of main consumer of water with 85 percent of the total, wheat and barley seed, they reach 70 percent of the yet water efficiency is low due to the weakness of cost of production—do not translate into increase in water management institutions, weak monitoring and productivity and promote inefficient use of scarce regulatory capacity. Following years of destruction inputs such as land and water. The situation is during the conflict, the irrigation system is in serious different in the case of Iraq’s vegetable production disrepair. Currently, only 20 percent of farmers have (box 6), livestock and fruit orchards. The livestock access to full irrigation compared to 65 percent before and vegetable sub-sectors are both characterized by the conflict. As a consequence of the poor state of minimal government intervention in the commodity repair of irrigation and drainage schemes, salinization markets; a more level playing field for private sector of Iraq’s agricultural lands has become a severe activity; a proven ability to compete with imports; issue. Around 60 percent of cultivated land has been and the need for less expensive, more scale-neutral seriously affected by salinity, causing yield losses of investments. Such investments are less risky, and 30 to 60 percent. The situation is especially severe in as a consequence, are more accessible to lower central and southern Iraq where irrigation has been income farmers; the fruit/vegetables sector benefits 22 Agriculture and Rural Development Indicators, World Bank Data from wide participation by women; and has an ample (2018). scope for adding value through processing and SPECIAL FOCUS: TRANSFORMING AGRICULTURE FOR ECONOMIC DIVERSIFICATION AND JOB CREATION 21 Box 6 • Vegetable production in Iraq Vegetable production is increasing particularly near urban centers where relatively modern farming techniques are applied. However, achieving and maintaining quality standards has been a major challenge for producers and processers in this value chain. Currently, about 60-70 percent of vegetables consumption is supplied by imports from neighboring countries. The vegetable value chain presents the potential for further improvement. The latter should not only be sought at the level of the production, among others by means of protected cultivation and training to improve product quality, but also should add to the ability of farmers to create stronger connections with markets. Tomatoes are the most important crop for the domestic market. Potato growing is a promising commodity and is labor intensive. It has seen significant growth over the last few years due to involvement of Dutch potato seed suppliers. Most potatoes are produced in the Kurdistan Region, though there are potential in other regions; for instance, in Mosul and north-west of Baghdad, an important potato producing region in Iraq in the recent past. marketing. There is also an extensive range of readily for creating both on- and off-farm jobs in Iraq due to transferrable, modern technologies that could be their strong backward and forward linkages. used to advantage in both sub-sectors. Catalyzing food production for domestic markets and export of The Challenges for Iraq’s Agriculture products in which Iraq can solidify its comparative advantage on regional markets is a promising Development development pathway in the short term, if macro- economic, regulatory and institutional limitations to the After years of war and social unrest, Iraq’s growth of private sector jobs in agri-related business agriculture is facing a number of challenges are circumvented and a sound incentive framework to common to all sectors of the economy but attract private investment is established. more pronounced in the agriculture sector. The In the longer term, repurposing subsidies challenges faced by agriculture relate to the problems towards productivity enhancing public caused by the war, the social unrest, and institutional expenditures in R&D and innovation, infrastructure and economic issues, essentially on three fronts: and marketing would yield major benefits in (i) state-driven policies that have distorted markets terms of increasing competitiveness of the agri- and provided insufficient or perverse incentives for food sector, more efficient use of land and water, private sector development, (ii) sector institutions that and job growth. However, a significant shift in that have been allowed to deteriorate and are unable to direction requires deep structural reforms which are provide the required services; and (iii) disrepair of difficult to implement and will take time and potentially the rural economic infrastructure, prominently roads result in more unemployment during the transition and irrigation networks. As a result, the sector’s period. In the short term, investment in infrastructure contribution to GDP has declined from 9 percent in rehabilitation, including the repair of Iraq’s rural 2005 to about 5 percent in 2017 (FAOSTAT). The transportation infrastructure and irrigation schemes security situation and rural poverty have contributed through public works, and the growth of agriculture to this decline with an outflow of people from the and agribusiness are considered the two most feasible countryside to the urban areas seeking employment paths for job creation at the scale needed and with and economic opportunities for displaced families. the urgency that the country is facing.23 Public works The declining importance of agricultural relative to and private investment in the agri-food sector, at all manufacturing and service sectors is to be expected levels of the supply chains -- including, production, in the type of structural transformation required for processing and marketing -- is an important pathway Iraq. In the short term, it leaves limited but attractive 23 World Bank, Vision 2030 – Jobs in Iraq, 2017. opportunities for private investment-led growth 22 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH until the time the required reforms in the inputs and (2019) reveals weak policy and regulatory framework commodities markets are undertaken, and agriculture in key agricultural markets in Iraq relative to other support services and rural infrastructure can undergo countries. a more profound structural transformation. There are shortcomings in terms of the For decades, GOI has subsidized farm institutional capacity of public agencies in charge inputs and controlled the price of strategic crops; of advisory and technical services, notably the this has distorted markets with consequent Ministry of Agriculture (MoA) and the Ministry negative impact on agriculture development. of Water Resources (MoWR). MoA’s and MoWR’s Government policies in the agricultural sector institutional capacity has deteriorated over the have been characterized by central top-down state past two decades. The weak public institutional determination characterized by high levels of inputs support has translated into a drastic reduction of subsidies and extensive commodity price controls. the performance and coverage of the research The main subsidized inputs have been fertilizers, and extension services, animal health and artificial seeds, insecticides, and farm equipment and insemination centers, plant quarantine and disease machinery. Similarly, subsidized grain production control mainly due to lack of staff incentives and has been emphasized. The highly subsidized “food physical infrastructure. In addition, there are significant basket” provided by GOI, with heavy support to sector specific “gaps” in statistical information, which staples, has been an essential policy measure to hinder GOI from effectively developing agricultural ensure food security. But subsidized food rationing policies and implementing agricultural interventions. on a national scale, together with imported food, There is no functional agricultural statistical system has had a negative impact on the local grain market for producing accurate and timely statistics on crop, with consequent depressing effects on producer livestock and agro–industry production on a regular prices and on agricultural sector investments. Iraq basis with standard statistical methodology. There is stands out relative to other MENA region countries also limited analytical capacity for agricultural strategy in terms of the magnitude of food subsidies. The and investment planning within ministries, research high prices paid by Government for some domestic institutes and universities. The agricultural information commodities have distorted the market, thus limiting system needs restructuring and modernization to private sector investments and innovations. The support GOI and the private sector for business sub-sector’s dependency on government subsidies planning, investment and development. limits the development of a competitive private Water quality and management, due to the agriculture sector, transparent markets and diversified disrepair of irrigation networks, and consequent smallholder farming systems. salinization are a key constraint to irrigated crops. The current incentive framework needs to By MENA regional standards, Iraq is relatively well- be more conducive to private sector investment endowed with water resources. Per capita average in agriculture and food production. In the current water availability in Iraq is twice as high at 2,200 cubic context of the country, there are limited incentives meters per capita per year, compared with half that to invest in agricultural value chains and related amount in MENA on average. Unfortunately, the state processing industries. Problems include unclear of irrigation network has been allowed to deteriorate. requirements for registering and closing businesses, The problem ranges from widespread deterioration license requirements, limited communications and of irrigation infrastructure to poor operation and transport infrastructure, difficult access to finance maintenance of the systems, inefficient water use, and a non–competitive business environment that soil salinity, weak institutional support, and the lack lacks transparent and clear legal frameworks for of a regulatory framework for the efficient use and rules–based market competition. The country ranks pricing of irrigation water. Water losses in irrigation 147th out of 160 countries on the 2018th Logistic schemes, all over Iraq, are substantial. By and large, Performance Index; among the lowest rankings in the water is conveyed to farmers’ fields through very MENA region (see Figure 29). Similarly, the last World poorly maintained distribution systems made of earth Bank Enabling Business of Agriculture Assessment canals and ditches which suffer significant water SPECIAL FOCUS: TRANSFORMING AGRICULTURE FOR ECONOMIC DIVERSIFICATION AND JOB CREATION 23 losses because of infiltration, seepage or leakage. Based on historical trends and considering Finally, irrigated areas are confronted with salinization Iraq’s significant land potential, large current problems which significantly depress yields. As unemployed and/or underemployed labor force, water shortages are projected to worsen with climate and expansion of markets on which Iraq can change, salinization problems will worsen even more gain a comparative advantage, it is possible to without deliberate strategies to adapt. FAO estimates identify value chains or sub–sectors promising that approximately 60% of cultivated land is negatively for short– and medium-term expansion. This is the affected by salinity, and 20-30% has been abandoned. case for import substitution on the domestic market If this is not corrected, salinization is bound to lead to and expansion of exports on the regional markets in land degradation phenomena in central and southern the short term, as is happening with the production of Iraq and will continue to result in sluggish productivity dates. In the long term, Iraq can successfully target growth in agriculture. more sophisticated markets (Europe, Central Asia) where it is currently poorly positioned to compete, as it is yet to integrate into global agri-value chains. Iraq’s Iraq’s Large Agriculture Growth participation in these value chains is limited by the Opportunities difficulty meeting necessary food safety standards and product quality regulations, as well as the poor state Iraq’s agriculture and agribusiness have of the processing, cold storage, and transportation large opportunities for development, in the short infrastructure. to medium-term through import substitution and Iraq’s domestic market offers an immediate export on regional markets, and, in the long consumer base to sustain expansion of term, by integrating into global agri-business production of grain, fresh fruits and vegetables, value chains. Before the first Gulf war, Iraq was as well as dairy products and meat, considering a breadbasket in the Middle East and once the that it has comparative advantage in a number of infrastructure damaged by years of conflict is back in those products. Iraq is currently heavily dependent service and key irrigation schemes are operational, on imports for meeting its domestic food demand Iraq’s agri-food sector can take off again. Very large both for grains and other commodities (Figure 30). yield gaps in Iraq relative to productivity in countries There is ample room for growth through reliance on with a comparable climate and natural resources, and the domestic market which is expanding rapidly given relative to the simulated potential yields in the region, the high increase in the population (from 28 million mean that there is significant room for improvement in 2007 to 39.8 million in 2018). The increase in and scope to attain productivity gains. Iraq’s rich population together with income per capita increase human capital endowment, with a large and growing are combining to create a sizeable consumer base youth population, means that there is also sufficient with new middle- class tastes. This promises not available labor. Productivity gains in agriculture only greater consumption of staple grains, but also would translate into pro-poor growth, create a large a significant dietary transition into more high-value number of jobs given high labor intensity of Iraq’s foods, including poultry, as well as more animal feeds agri-food sector, at twice the rate of labor intensity such as corn and soy products. The country has a for the economy on average, and deliver especially significant agricultural land potential (over 9 million ha high benefits for Iraq’s women.24 At the same time, suitable for agriculture with only a fraction currently the scope for job creation in sectors other than agri- used) which would allow for production expansion for food and construction at the scale needed is currently grain (wheat), fresh fruits and vegetables, as well as limited. livestock. Since 1961, Iraq’s population grew at around twice the rate of agricultural output, with food imports 24 Al-Haboby, Ashr, Clemens Breisinger, Dario Debowicz, Abdul increasing dramatically to make up for the shortfall Hussein El-Hakim, Jenna Ferguson, Roberto Telleria, and Teunis Van Rheenen (2016). “The Role of Agriculture for Economic De- in production (estimated at $9.38 billion in 2018). It velopment and Gender in Iraq: a Computable General Equilibrium is clear that, to the extent that productivity gains are Model Approach.” The Journal of Developing Areas. Vol. 50. No. 2. Pp. 431-451. achieved, domestic production can substitute a large 24 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH Figure 30 • The rising food demand and imports in Figure 31 • Agriculture production of selected Iraq (const. US$ billion)* commodities (1000 MT) Source. World Bank staff calculations. Source. World Bank staff calculations. * Source: Gross, Steven (2018). “The WOW Factor: Wheat, Oil and War in Iraq.” Unpublished World Bank estimates. share of imports of both rainfed cereals, notably fruits and vegetables which can serve as a raw wheat from the northern part of the country, and material to produce a wide array of processed other commodities such as vegetables and fruits products. As already demonstrated in many that are grown under irrigation in the southern part countries, the agri-food sector can be a powerful of the country and in the production of which Iraqi source of growth, job creation and poverty alleviation. farmers have a comparative advantage over regional The development of this sector typically accelerates neighbors. and accompanies broader economic development. As Iraq rebuilds key irrigation and transport Rising demand—especially for fruits and vegetables, infrastructure, it can gain a significant part of that livestock and dairy products, poultry and eggs, and market share. Figure 31 shows that, besides dates other goods with relatively high-income elasticity— and cereals, there are several fruits and vegetables stimulates product and process innovations and with significant volume of production and that exports the development of stronger backward and forward are already taking place (Dates - Box 7) – meaning linkages within the agri-food system and the local that the base for improvement exists. Iraqi farmers economy. This occurs when investments are made have a comparative advantage in production of inter alia to improve productivity and quality, reduce irrigated fruits and vegetables, and irrigation is readily product losses, and utilize by-products as inputs into available in the southern part of the country. Iraq is agriculture or other industries. Domestic and export also strategically positioned to derive a competitive systems then become mutually supportive and each advantage through trade. With road and other stimulate the development of a range of ancillary logistics investments, in the short-to-medium term, services which further improve competitiveness. the country has the potential to export to markets in Employment expands throughout the agri-food close geographic proximity. In the longer term, it could system and eventually overtakes employment directly even develop the capacity to export to other markets engaged in agriculture. Currently, Iraq’s agribusiness that are out of reach at present (South and Central value chains are under-developed with a low ratio Asia, and Europe). More needs to be done, clearly, to of food processing to primary agriculture. Hence, exploit Iraqi agribusiness opportunities, particularly in Iraq’s agro-processing sector has a large untapped terms of facilitating policies and regulations and their potential for development following the above pathway enforcement, building capacity to meet quality and and become competitive with imported processed phytosanitary standards, overcoming the country’s products. logistics, and improving its national cold chain More broadly, deliberate and strategic infrastructure. interventions on the part of the Government The agriculture sector offers value added should play a key role in fostering the short- and opportunities through processing; notably, fresh long-term technological and institutional change SPECIAL FOCUS: TRANSFORMING AGRICULTURE FOR ECONOMIC DIVERSIFICATION AND JOB CREATION 25 Box 7 • Production of dates, a key export product Date is a key product for which Iraq has maintained comparative advantage on international markets in spite of all difficulties encountered by the agriculture sector during the periods of conflict. Iraq is once again the world’s biggest date exporter, with 24 percent of the world market. In terms of value, dates are the top non- oil export product, accounting for 70% of the value of the country’s agri exports. This value has more than doubled in the past 10 years - over US$123 million per year (average 2012 – 2018) vs. US$45 million (2006 – 2011). As the global demand is increasing, the ongoing initiatives in Iraq on improvement quality should be continued (US$80 million plan). Ninety percent of Iraq’s production is made of one variety of date, the Zehdi. The ministry is expanding the list of cultivars to include the Hillawi, Khadrawi, Sayer, Maktoom, Derrie, Ashrasi and Barhee varieties, more aligned with market demand. The improved cultivar list will enable the country to increase its current low export price (US$360/ton compared to a world average of US$760/ton). Almost half of Iraq’s dates are exported in bulk to UAE, fetching an average price of just US$310/ton. They are then packed and re-exported at a higher price. Farmers have now returned to the areas liberated from ISIS and are starting to get their orchards back into production. Large numbers of trees planted during 2013-17 will start producing, with overall average yields set to rise rapidly over the next five years. Iraq has an unprecedented area of date palms, more than twice the previous high point reached in 1996. Date palm inventory could go up to 40 million trees in 10 years with introduction of more marketable varieties. This should provide significant opportunities to increase exports and value-added provided work on improved varieties is continued and strengthened, knowledge is adequately disseminated to small producers, and investment is post-harvest management and technology is increased. for agro-processing development. Development Towards an Agriculture Transformation of food processing industries does not take place Agenda spontaneously and in Iraq it is constrained by several factors such as the weak overall macroeconomic To address the above challenges and maximize environment, volatility and cumbersome business the economic, social and environment contributions regulations (see Section III below). Hence, deliberate of the agriculture sector, GOI should consider multi-sector strategic interventions, with a territorial focusing on four Policy and Action Pillars at the core development focus, would need to play a key of its agriculture transformation agenda (Figure 32). role in moving forward this critical agenda. Those Pillar One: Building Institutional Capacity. interventions would need to include defining the The sustainable management of modern agriculture “Rules of the Game” for market competition and systems to integrate the domestic and global trade cooperation, compensating for market failures, requires an efficient public support system well- and fostering investment in physical infrastructure coordinated with strong private sector institutions and human capital. Attracting international food and universities. A wide range of interfaces are companies to produce locally can also help to create needed with other sectors and areas: water jobs and raise living standards. management, environment, trade, land administration, education, transport, social protection, health, and displacement. Defining the Government’s policy 26 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH Figure 32 • Achieving agriculture transformation in Iraq: The four pillars pillar 1: pillar 2: Building Institutional Improving Capacity competitiveness and fostering market access Achioving Agriculture Transformation in Iraq: The 4 Pillars pillar 3: pillar 4: Investment in high Knowledge value production Technology and systems Digital Solutions Source. World Bank. mandate in the agriculture sector, ensuring effective degradation and to the low productivity and complementarities and synergies with other sector slow growth of the agricultural sector. portfolios, and translating these into an effective iv. Strengthening of intra-governmental implementation structure are all valid concerns for coordination on agricultural policy and any given administration. It is important to ensure strategic cross-cutting issues (horizontal that sector policies do not overlap or leave gaps in coordination). serving their target populations. It is also important Pillar Two: Improving competitiveness and that the interventions are well aligned, in order to fostering market access. Maximizing the agriculture maximize the benefits. In Iraq, there are numerous potential by improving competitiveness and fostering government agencies interfacing directly with the market access, will require first reforms to the current Ministry of Agriculture and the Ministry of Water regulatory environment. The aim of these reforms will Resources. In addition to these, there are clusters be to stimulate sustainable, inclusive and competitive of private (agribusiness, financial institutions), public growth, and expanding on and off farm income (research institutes, schools, universities), and non- diversification and employment. In this regard, it is governmental and international stakeholders that play clear that the subsidy policy has to be reconsidered. key roles in how farmers are served. Attaining the goal of Pillar Two will require also improving access to finance on the part of producers, Key areas of focus may include: and the strengthening/rehabilitation of market i. Enhancing the effectiveness and efficiency facilities and rural road network. of service delivery, facilitating decentralized Policy reforms: Moving forward, GoI should administration (vertical coordination), consider reallocating the public support currently including Water Use Associations, in provided to the agri-food sector through subsidies priority for research and extension services. to productivity enhancing public expenditures in ii. Promoting evidenced-based policy R&D and innovation to promote a diversified agri- planning and programming, by leveraging food sector, promote adaptation to climate change, data and using integrated information and investment in rural infrastructure, agri-logistics technologies to improve current monitoring and marketing. To make the agriculture sector on performance indicators. more productive, resilient and sustainable, global iii. Reforming the land tenure regime as it is experience suggests that it is possible to deliver on a major constraint and contributes to land the desired outcomes of an efficient and competitive SPECIAL FOCUS: TRANSFORMING AGRICULTURE FOR ECONOMIC DIVERSIFICATION AND JOB CREATION 27 Box 8 • Repurposing agricultural subsidies Lessons from international experience show that “repurposing agricultural subsidies” requires an integrated approach. Brazil succeeded in dramatically increasing productivity of grains, while also developing unrivaled agri-export industries through investment in innovation, research, market infrastructure and skills, ultimately becoming a global agriculture powerhouse. Pakistan’s Punjab is currently implementing a shift from extensive subsidies to staples to SMART-Punjab package of investments in public goods, research, incentives for the adoption of more sustainable and higher productivity technologies, and stimulate a more diversified, productive and environmentally sustainable agricultural sector. agriculture sector and improve farmer welfare through comparative advantage of agro-climate, productive a more efficient allocation of public expenditure seasons and its proximity to the Gulf markets, Central without compromising the level of support currently and South Asia, and Europe. Farmers, processors, provided to producers (Box 8). In the case of Iraq, and service providers will need to enhance their such a “repurposing” would entail reallocation productive efficiency, strengthen focus on quality, of direct income support through subsidies to prevent crop post-harvest losses, increase access productivity enhancing public expenditures in R&D to and use of appropriate inputs and technology. and innovation, rural infrastructure and marketing. It Investment should be focused on high value-added would be particularly important to provide incentives agricultural systems and supply chains (horticulture, for agricultural diversification, including the adoption meat and dairy, legumes, poultry and eggs, etc.) at of salt- and heat-tolerant crop varieties and developing production and agro-processing level, including export value chains, processing capacity and domestic ancillary activities (private input, machinery and distribution networks in Iraq. This would pave the way equipment supply systems, storage and handling, for increased performance of agriculture, greater modern irrigation systems, etc.) social inclusion and more sustainable environmental and health outcomes, while curbing input and output Key actions may include: market distortions. Distributional consequences of a. Undertake a comprehensive assessment of alternative approaches to implement a program of value chains and identify opportunities and “repurposing subsidies” need to be carefully evaluated challenges to improved competitiveness as part of a reform program. with value chains having potential. b. Assess which varieties/species, and This can be achieved through the following key attendant production technologies, are measures: likely to maximizes Iraq’s seasonal and i. Facilitating of shifting the role of the geographical comparative advantage. Government from market-actor to market- c. Invest in ways to improve economies of enabler. scale and systems of aggregation. ii. Investing in competitive standards, d. Identify sustainable models for increasing including traceability. unit value through improved on-farm iii. Improving food safety and quality standards practices, post-harvest storage and that can increase the potential of the food handling, agro-processing, and export trade sector. marketing. iv. Improving farmers’ access to finance. e. Support the rehabilitation and expansion of v. Rehabilitating and expanding markets irrigation systems and drainage as required facilities and road network. for key value chains. Pillar Three: Investment in high value production systems. The aim is to maximize Iraq’s 28 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH Pillar Four: Knowledge, Technology and • Import substitution: there is potential to reduce Digital Solutions. With the scarce land and increasing cost of importing food for the large and growing population, and a depleting natural resource domestic market; Iraq’s population is growing base, sustainable agriculture intensification and by an annual rate of 3 percent; agricultural and diversification is not an option for Iraq’s agriculture but processed food imports make 30 percent of the a necessity. Developing a resilient agriculture sector total import bill. will require technologies and practices that build on • Food security and nutrition: Agri-food sector agro-ecological knowledge that enable smallholder could play an important role in better nutrition farmers to counter environmental degradation and security: increasing incomes through agricultural climate variability and change in ways that maintain development and redirecting support to more sustainable agricultural growth. In parallel, digital nutritious agricultural products (such as fruits and technologies can be deployed to improve efficiency vegetables) would enhance nutrition security. and enhance overall competitiveness. • Environmental conservation: Investment in agriculture will help protect Iraq’s natural resource Key actions may include: base by improving water and soil management a. Building partnerships with international and reduce salinity. centers of excellence. b. Exploring the use of knowledge innovation labs. c. Identifying success stories from Iraq and other MENA countries and scaling them up. d. Expanding investment in research in relevant high-performing technologies, such as tissue culture, precision irrigation, and small mechanization. e. Increasing the use of digital platforms, solar powered desalination, and hydroponics. The above transformation agenda is expected to have a major impact in Iraq’s key areas of economic growth, poverty reduction and environmental preservation: • Agriculture GDP Growth: projections indicate that achieving Iraq’s Net Domestic Product (NDP) yield targets for fruits and vegetables, livestock, and cereals would lead to a 27 percent increase in Agriculture GDP in the short to medium term (average annual increase in Agriculture GDP of 4.9 percentage points); this will increase both rural and urban household incomes, even more so for female headed households. • Employment: potential to add over half a million jobs to the economy (in the short-run) and potential to add about 2.5 million jobs (medium- term, 5-10 years). SPECIAL FOCUS: TRANSFORMING AGRICULTURE FOR ECONOMIC DIVERSIFICATION AND JOB CREATION 29 30 IRAQ ECONOMIC MONITOR: TURNING THE CORNER: SUSTAINING GROWTH AND CREATING OPPORTUNITIES FOR IRAQ’S YOUTH REFERENCES Central Bank of Iraq data (CBI). World Bank Group. 2019. 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