NEW RELEASE: Country Views
Iraq: A new opportunity set
This week we discuss Iraq’s economic outlook and analyse its recently-passed budget. The 2021 budget reflects the government’s drive to reduce its fiscal imbalance through diversification and expenditure cuts. Effective implementation of budgetary items, however, is challenging as shrinking public sector payrolls and pension cuts risk exacerbating social unrest. Baghdad is now relying heavily on the Central Bank of Iraq to finance its deficit spending (as it did in 2014 when oil prices fell sharply). This is mainly due to a lack of overseas borrowing and a vulnerable domestic financial system. The “White Paper” presented by the government to parliament could provide leeway for IMF financing and wider international support, at least once some of its reform options are introduced.
Low oil prices in the global market drove Iraq’s economy to the brink of collapse last year, as it did with other oil-exporting countries in the MENA region. Yet markets have grown more optimistic regarding the outlook for oil demand in the coming months. This, compounded by rising prices, will allow Baghdad to rein in its widening deficit (albeit gradually), and to ease its financing strains.
Political factions have dragged their feet in the face of every reform measure put forward by Prime Minister Mustafa al-Kadhimi’s cabinet. Having spent just over a year in power and with just under six months of his current term left, the prime minister is looking to leave a political legacy. This could perhaps bring him popular support if he decides to run in the upcoming October elections. Mediating talks between Iran and Saudi Arabia is certainly gaining him international favour, but this may not be enough; key grievances remain. These include a failure to clamp down on attacks by Iran-aligned militias. Similar discontent triggered protests in 2019. These militias show no sign of abating and could be emboldened if their political backers gain more seats in the upcoming elections.
The security situation in Iraq is fragile. The region has experienced a general uptick in violence. I am sure you have been following the situation in Palestine and Israel. We are hopeful that a ceasefire will materialise in the coming days; indeed, the US administration, which has given Israel considerable breathing space, has indicated its patience is running out.