Iraq

Ambitious projects, but oil production is still limited

In 2024, the contraction in economic activity is expected to continue as a result of OPEC+ capping oil production and a halt in Kurdistan's oil exports to Turkey since March 2023. In June 2024, this group announced the extension of restrictions for member countries, leading to a further fall in Iraqi oil production, which it had previously only partially complied with. This situation is being exacerbated by stagnant global demand, which is weighing on prices. However, the quotas should start to be phased out between September 2024 and December 2025, allowing for a gradual increase in production.

In 2025, growth is expected to pick up again as oil production increases despite durably sluggish global demand for hydrocarbons. The government will also continue to encourage investment in the oil and gas sector. In July 2024, the government signed a trilateral investment agreement worth USD 27 billion over 25 years between Basrah Oil Company (30%), TotalEnergies (45%) and QatarEnergies (25%). The agreement provides for increased production a from the Ratawi oil field in Basra. It also aims to improve the country's electricity supply by recovering flared gas from three oil fields to power stations, which will help reduce Iraq's import bill. In addition, TotalEnergies has announced the development of a 1 GW solar power plant to supply the Basra electricity grid.

As part of the budget for 2023-2025, the largest to date, allocating spending of USD 152 billion per year, the federal parliament passed an exceptional spending increase for 2024 to USD 162 billion. This increase includes increased spending on local investment, such as improving infrastructure and access to healthcare, electricity and education services. Another objective is to increase hiring and salaries in the public sector, which could stimulate private consumption. The government hopes to win popular support ahead of the elections in 2025. In addition, the effect of the increase in the key interest rate from 4% to 7.5% by the Central Bank of Iraq (CBI) in June 2023 is likely to be small, given the informality and marginal role of credit. Inflation trends are linked above all to world price trends, due to the country's dependence on imported consumer and capital goods, as well as to pressure from household consumption, itself linked to trends in public spending.

Deterioration in the current and public balances

The current account is expected to deteriorate further into the red in 2024 before stabilising in 2025 due to the impact of OPEC+ quotas on oil exports and the increase in imports fueled by rising domestic demand. The public deficit is expected to widen in 2024 as a result of increased spending. This spending will increase by 3.8% of GDP (almost entirely due to increases in wages and pensions). Lower revenues from oil exports will also contribute to the increase in the public deficit.

The deficits will be financed by foreign exchange reserves (equivalent to 11.4 months of imports at the end of 2023), foreign direct investment and domestic debt, with indirect loans from the CBI in the form of purchases of government securities by public banks that will be immediately sold to CBI on the secondary market. At the end of 2023, the CBI's total claims on central government represented more than half of domestic public debt. However, public debt (of which 52 % is external and 56% denominated in foreign currencies) is considered to be sustainable, especially as the dinar is the dinar is pegged to the dollar.

In addition, since 2023, Iraq has banned 22 local commercial banks from carrying out transactions in US dollars, suspecting their involvement in currency smuggling with Iran. This situation could compromise the Central Bank of Iraq's (CBI) access to the country's foreign exchange reserves, which are held by the US Federal Reserve (Fed). This tightening of the supply of US dollars has led to a depreciation of the exchange rate on the Iraqi parallel market in 2023, which is expected to remain volatile.

Legislative elections in 2025 amid regional geopolitical turbulence

Parliamentary elections will be held in 2025. A new electoral law that was introduced in 2023 has reduced the number of constituencies, potentially favouring the major parties, particularly those in the government coalition led by Prime Minister Shia al-Sudani, the Iranian-backed Shia Coordination Framework (CF), but also Sunni and Kurdish parties, to the detriment of smaller parties and independent candidates. The provincial elections of December 2023 that were organised under this new system gave many seats to parties aligned with the CF, indicating that their success could be repeated at national level in 2025. This risks upsetting a section of the population who may feel under-represented, even though the political situation is surprisingly and relatively calm.

Iraq faces a multitude of dangers: the risk of a resurgence of the Islamic State whose members are present in the desert shared with Syria and Jordan, the presence of armed militias, some of which are close to Iran and are likely to destabilise both civil society and the economy, and Kurdish separatism. The authorities are therefore endeavoring to maintain good relations with all parties involved, despite their rivalries and conflicts, which have recently been helped by the rapprochement between Iran and the Gulf States. The confrontation between Israel and Hamas in Gaza, from October 2023 onwards, prompted Iraqi militia, some of which are aligned with Iran and close to CF parties, to attack several American military bases in Iraq, Syria and Jordan. Negotiations began in January 2024 on the withdrawal of US troops from Iraq. In May 2024, the UN Security Council extended the mandate of the United Nations Assistance Mission for Iraq (UNAMI) until 31 December 2025. In addition, when they met in April 2024 for the first time since 2011, Turkish President Recep Tayyip Erdogan and Iraqi Prime Minister Mohammed Shia al-Sudani discussed water management in the Tigris and Euphrates rivers, which are shared between Turkey, Syria and Iraq. Iraq has suffered from water shortages partly due to the construction of dams and intensive irrigation in Turkey. A ten-year framework agreement has been signed to cooperate on water management, guaranteeing Iraq its fair share, although no concrete solution has yet been put in place. The development of a multimodal corridor linking the Gulf and Turkey and the reactivation of the oil pipeline between Kirkuk and Ceyhan were also on the agenda, as was the agreement with the Kurdistan Workers' Party (PKK), a Kurdish armed political organisation mainly active in Turkey and Iraq that uses the semi-autonomous region of Iraqi Kurdistan as a rear base. The Turkish army is present in Iraqi Kurdistan, where it operates against the PKK without much reaction from either the central Iraqi government or the regional government, which is beset by tensions between rival factions (the dominant Kurdistan Democratic Party being accused by the Patriotic Union of Kurdistan of supporting Turkey) that are being exacerbated by the forthcoming regional elections.

Since signing the "Oil for Reconstruction" agreement in 2019, China has strengthened its presence in Iraq. This agreement enables it to finance the reconstruction of infrastructures while investing in the country's oil and gas industry in exchange for oil. As a result, China has become the main importer of Iraqi crude oil (accounting for 1/3 of exports), making Iraq China's third-largest oil supplier.

Last updated: July 2024