IRAQ ECONOMIC MONITOR Harnessing the Oil Windfall for Sustainable Growth Spring 2022 Iraq Economic Monitor Harnessing the Oil Windfall for Sustainable Growth With a Special Focus COVID-19 and the Human Capital Crisis: Recovering Educational Losses for Future Productivity and Growth Spring 2022 Middle East and North Africa Region © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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TABLE OF CONTENTS Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix ّ ‫مل‬ ‫خص تنفيذي‬ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii 1.  Recent Economic and Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Oil and Gas Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Monetary Policy and Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.  Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Risks and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Special Focus: COVID-19 and the Human Capital Crisis: Recovering Educational Losses for Future Productivity and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 1. Iraq is facing a human capital crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 a. Key human capital outcomes were already low before the COVID-19 pandemic . . . . . . . . . . . . . . . . . . 20 b. Investing in human capital has been low and inefficient in recent years . . . . . . . . . . . . . . . . . . . . . . . . . 21 2. COVID-19 has exacerbated existing gaps in human capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 a. The pandemic took a toll on Iraq’s human capital through both direct and indirect channels . . . . . . . 21 b. School closures negatively impacted students’ learning outcomes and future earnings . . . . . . . . . . . 22 3. Building Forward Better: An education reform path . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 a. Priority education sector reforms are more crucial than ever . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 b. A ‘whole-of-government’ approach is needed to improve human capital across sectors . . . . . . . . . . . 24 Appendix: Summary of Education Reform Priorities for Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 iii References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Selected Recent World Bank Publications on Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 List of Figures Figure 1 The Economy is Gradually Emerging from the Pandemic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 2 Per Capita GDP Contraction Narrowed Though Remained behind Income Peers . . . . . . . . . . . . . .2 Figure 3 The Economic Rebound in 2021 was Driven by Services Sector… . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Figure 4 …and was Despite Negative Contribution from Oil, Agriculture, and Construction . . . . . . . . . . . . . .2 Figure 5 Easing of Pandemic-Related Restrictions and Progress in Vaccination Raised Mobility and Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 6 On the Demand Side, Government Consumption was the Main Driver of GDP Growth in 2021 . . 5 Figure 7 Oil Production and Export Volumes Increased as OPEC+ Cuts Were Gradually Tapered . . . . . . . 6 Figure 8 The Impact of Higher Oil Prices was Even More Significant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Figure 9 Higher Oil Revenues Pushed the Fiscal Balance Into Surplus in 2021 . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 10 Wage Bill and Transfers Continue to Dominate Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 11 Oil Revenue Volatility has Translated to Volatile Public Investment . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Figure 12 Demand Pressures and Currency Devaluation have Spurred Inflationary Pressures . . . . . . . . . . .11 Figure 13 Credit to Private Sector Growth Decelerated in 2021 with CBI Phase out of Pandemic-Related Schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Figure 14 The Economy Operates Predominantly Thorough Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 15 The CAB Returned to Surplus in 2021… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 16 …as Higher Oil Exports and Lower Private Imports Drove Up the Trade Balance . . . . . . . . . . . . . .13 Figure 17 Improved Trade Balance and Financial Account in 2021 Drove Up Reserves . . . . . . . . . . . . . . . . 14 Figure 18 Reserves have Increased to 13 Months of Imports in Line with Better Trade and Financing Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 19 Human Capital Index in Iraq Compared to MENA Countries, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 20 Figure 20 Estimated Impacts for Students Affected by School Closures in Iraq . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 21 Iraq Education Sector Reform Path . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Figure 22 Human Capital Reform Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 List of Boxes Box 1 Iraq’s Food Security and Global Commodity Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Box 2 Fiscal Rules and Sovereign Wealth Funds (SWFs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 List of Tables Table 1 Iraq: Selected Economic and Financial Indicators, 2019–2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 iv IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH ACRONYMS AML/CFT Anti-Money Laundering and Countering ISHM Iraq Security and Humanitarian Monitor Financing of Terrorism LAYS Learning-Adjusted Years of Schooling AQR Asset Quality Reviews LHS Left hand side BOP Balance of Payments M2 Broad Money CAB Current Account Balance mbpd Million barrel per day CBI Central Bank of Iraq MENA Middle East and North Africa CFI Competitive Fund Initiative MMT Million Metric Ton COSIT Central Organization for Statistics and MOED Ministry of Education Information Technology MOHESR Ministry of Higher Education and COVID-19 Coronavirus Disease 2019 Scientific Research EGMA Early Grade Mathematics Assessment MoF Ministry of Finance (Iraq) EGRA Early Grade Reading Assessment MoO Ministry of Oil (Iraq) EMIS Education Management Information MT Metric Ton System NCR Norwegian Refugee Council ER Exchange Rate NRA National Risk Assessment EU European Union NPLs Non-performing Loans FAO Food and Agriculture Organization OPEC (+) Organization of Petroleum Exporting FDI Foreign Direct Investment Countries (plus other non-OPEC partner FINDEX Financial Inclusion Database countries) FSAP Financial Sector Assessment Program PDS Public Distribution System GDP Gross Domestic Product pp Percentage points GoI Government of Iraq RHS Right hand side HCI Human Capital Index SMEs Small and Medium-Sized Enterprises H2 Second Half of the Year SOBs State-owned banks IEM Iraq Economic Monitor SWIFT Rapid Welfare Monitoring Survey IHFPS Iraq High Frequency Phone Survey TIMSS Trends in International Mathematics and IHSES Iraq Household Socio-Economic Survey Science Study ILO International Labour Organization TEIs Tertiary Education Institution (s) IMF International Monetary Fund UN United Nations IOM International Organization for Migration UNCTAD United Nations Conference on Trade IQD Iraqi Dinar and Development v UNESCO United Nations Educational, Scientific USDA United States Department of Agriculture and Cultural Organization WB(G) World Bank (Group) UNICEF United Nations International Children’s WDI World Development Indicators Fund WFP World Food Program UMICs Upper middle-income countries y/y Year-on-year (growth) US United States vi IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH ACKNOWLEDGMENTS T he Iraq Economic Monitor provides an update of Andreas Blom (Practice Manager, HMNED) by a on key economic developments and policies team consisting of Kamel Braham (Program Leader, over the previous six months and presents HMNDR), Igor Kheyfets (Senior Economist, HMNED), findings from recent World Bank work on Iraq, Nathalie Lahire (Senior Economist, HMNED), and placing them in a longer-term and global context and Elisabeth Sedmik (Economist, HMNED). Learning assessing the implications of these developments loss simulation model was provided by Joao Pedro and other changes in policy regarding the outlook Wagner De Azevedo (Lead Economist, HEDGE) for Iraq. Its coverage ranges from the macro- and Yi Ning Wong (Consultant, HEDGE). The team economy to business environment and private sector is grateful for comments received from Naoko Kojo development. It is intended for a wide audience, (Senior Economist, MTI). Special thanks to Muna including policy makers, business leaders, financial Salim (Senior Program Assistant, MTI) for her admin- market participants, and the community of analysts istrative support. and professionals engaged in Iraq. The findings, interpretations, and conclusions The Iraq Economic Monitor is a product of expressed in this Monitor are those of World Bank the Middle East and North Africa (MENA) unit in the staff and do not necessarily reflect the views of the Macroeconomics, Trade & Investment (MTI) Global Executive Board of the World Bank or the governments Practice of the World Bank Group. The report was they represent. For information about the World Bank written by Majid Kazemi (Economist, MTI) and Ashwaq and its activities in Iraq, please visit www.worldbank. Maseeh (Economist, MTI). org/en/country/iraq (English) or www.worldbank. The report was prepared under the direction org/ar/country/iraq (Arabic). For questions and of Saroj Kumar Jha (Country Director, MNC02), comments on the content of this publication, please Eric Le Borgne (Practice Manager, MTI), and Ramzi contact Majid Kazemi (mkazemi@worldbank.org), Neman (Head of Baghdad Office, MNCO2). The first Ashwaq Maseeh (amaseeh@worldbank.org), or Eric chapter includes inputs from Syed Mehdi Hassan Le Borgne (eleborgne@worldbank.org). (Senior Financial Sector Specialist). The Special The data cut-off date for this report was April Focus chapter was prepared under the supervision 24, 2022. vii EXECUTIVE SUMMARY Recent Economic and Policy however, unaccounted arears and contingent liabili- Developments ties remain significant. On the external side, higher oil exports and lower imports pushed the current account Iraq’s economy is gradually emerging from the balance (CAB) into a surplus of 11.4 percent of GDP deep recession caused by the pandemic and the (US$24 billion) in 2021. Notwithstanding a decline in plunge in oil prices in 2020. After contracting by net foreign investments, in part due to heightened more than 11 percent in 2020, real GDP grew by 2.8 political uncertainties, a five-decade record high of percent in 2021, supported by the solid expansion monthly oil exports in March 2022 (US$11 billion) of non-oil output, in particular services, driven by the brought international reserves (excluding gold) to easing of the COVID-19 movement restrictions. Non- over US$61 billion. oil industries and agriculture continued to contract The turnaround in oil markets has sig- in 2021, affected by frequent power cuts, rising nificantly improved Iraq’s economic outlook in input prices, and severe droughts. Oil GDP fell by the medium term. Overall growth in 2022 is now 0.7 percent in 2021, as rising oil prices and easing of forecast at 8.8 percent, driven in part by the end of the production cuts since August 2021 were unable the OPEC+ pandemic-related quotas restrictions. As to compensate for forgone revenue from the OPEC+ a result, Iraq’s production is projected to surpass its production quota early in the year. pre-pandemic level of 4.6 mbpd in the second half Higher oil revenues pushed Iraq’s overall of 2022. Growth in the outer years is projected to fiscal and external balances into a surplus in remain modest, at 4.2 percent on average, as oil pro- 2021. Total government revenues surged by 73 duction moderates. Non-oil GDP growth is projected percent in 2021, spurred by higher oil prices which to converge to its long-term potential growth trend averaged US$68.4 per barrel in 2021 (78 percent in part aided by higher investments that would be increase). Despite persisting budget rigidities, notably financed through the oil windfall. However, the delay the high wage bill share and other transfers, improved in government formation and the ratification of the oil receipts turned the overall fiscal balance to a sur- 2022 budget, if continued, could limit the use of the plus of 4 percent of GDP in 2021. The favorable fiscal fiscal windfalls as the de-facto ceilings from the 2021 outcomes improved the public debt-to-GDP ratio; budget are reached, which could reduce economic ix growth. Moreover, in the absence of an accelerated Government of Iraq (GoI) White Paper remains a bold process of reforms, growth (and sorely missing job blueprint for a comprehensive program of economic creation) will remain constrained by the economy’s reforms towards economic diversification. limited absorptive capacity and other inefficiencies. Iraq’s existing food security challenges Iraq’s economic outlook remains subject have intensified with the recent surge in global to significant risks. The recent geopolitical tensions commodity prices. Even before the recent disrup- related to the war in Ukraine highlight risks for Iraq’s tions in global food supplies, Iraq faced significant food economy both on the upside and downside. While security risks as domestic food production fell short of any further oil price hikes would improve Iraq’s fiscal demand from the country’s rapidly growing popula- balance, rising food prices and disruption to agricul- tion. Agricultural production has suffered from recent ture imports would exacerbate pre-existing poverty severe droughts, record temperatures, soil erosion trends and increase food security risks. The conflict and salination, and rising price of agricultural inputs also poses risks to Iraq’s crude oil production if opera- as well as production disruptions due to episodes of tions of Russian oil companies in Iraq are impacted insecurity and conflict. To plug the food supply gap, by international sanctions on Russia. Crucially, higher Iraq has become increasing reliant on imports for oil prices could hurt the domestic drive for reforms more than half of its food consumption, which has thereby deepening Iraq’s structural economic chal- increased the country’s exposure to global food price lenges. Further intensified climate change effects and and supply shocks. Subsidies and direct transfers, water shortages will decrease agricultural production. including recently new measures announced by GoI, Additionally, COVID-19 vaccination in Iraq remains partly mitigate the impact of rising global prices in the very low, posing risks from the spread of possible new short term. However, achieving food security calls for variants. Other risks include the decline in oil prices, coordinated efforts to improve domestic production and a deterioration of the security situation stemming including through raising the efficiency of irrigation from existing fragilities and structural challenges of water, reducing and rehabilitating soil degradation, the economy including overdependence on oil. improving land management, and implementing Iraq’s fiscal and socio-economic fragilities climate change adaptation and mitigation measures underscore the urgency of wide-ranging struc- including the adoption of climate-smart agriculture. tural reforms by the new government. Reorienting fiscal resources for growth-enhancing programs in human and physical capital will be key for diversifica- COVID-19 and the Human Capital tion and job creation. To this end, key priority reform Crisis: Recovering Educational Losses areas include rightsizing the wage bill and improving for Future Productivity and Growth spending efficiency. Efforts are needed to strengthen public financial management, reduce inefficient Iraq is facing a human capital crisis. Important energy subsidies, and minimize fiscal risks arising health and education outcomes have been low and from off-budget expenditures and government guar- declining in recent years. According to the 2020 antees. These measures need to be complemented Human Capital Index (HCI), a child born in Iraq just with integrated social assistance programs that before the COVID-19 pandemic could expect to be facilitate targeted transfers to the most vulnerable only 41 percent as productive by age 18 as she could households. Accelerating state-owned banks reforms be with complete education and full health. Despite by enhancing their efficiency and governance would the country’s oil wealth, investment in human capital bolster the financial sector and increase private sec- has accounted for a relatively low share of the public tor’s access to finance. Embedding climate-related budget—about 10 percent for education and 4 percent policies at the heart of Iraq’s development plan will for health. Multiple inefficiencies in public spending also be essential for raising revenues, inducing have prevented these investments from translating growth and job creation in the medium term. The into better human capital outcomes. x IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH COVID-19 has exacerbated existing gaps A recent World Bank report Building in human capital and led to substantial learning Forward Better to Ensure Learning for All losses. The pandemic took a toll on Iraq’s human Children in Iraq lays out an education reform capital by negatively affecting the health and eco- path for better learning and skills development nomic well-being of today’s workers, as well as by to improve human capital outcomes. The main reducing the potential productivity of Iraq’s future education reform priorities include: (i) Crisis response: generation. Prolonged school closures have had mitigating immediate learning loss and preventing devastating effects on children’s learning. Before further dropouts; (ii) Improving foundational skills to the pandemic, an average child in Iraq could expect set a trajectory for learning through improved learning to complete 6.9 years of schooling; however, when materials and strengthened teacher practices that taking into account the amount of learning that actu- support learning for all children; (iii) Focusing on most ally takes place, this child would achieve only 4.0 urgently needed investments, while ensuring better learning-adjusted years of schooling (LAYS) by age utilization of resources; (iv) Improving governance of 18. As a result of the school closures, the World Bank the education sector and evidence-based decision- estimates this indicator to decrease to between 2.6 making; (v) Adopting the National Education Strategy and 3.0 LAYS—a decline of 1.0 to 1.4 years of learning. (2022–2030) that focuses on learning and “building This would translate into lifetime earnings for the forward better”; and (vi) Aligning skills with labor market affected students to be reduced by between 8.4 and needs through vocational education and training (VET) 11.2 percent (approximately US$ 20,000 to 28,000 programs and higher education offerings that impart lost per future worker) and economywide losses of market-relevant skills. With the recovery in global oil US$47.1 to US$63.1 billion over the course of their prices, channeling additional public revenues into working lives—equivalent to more than one-third of human capital investments is an urgent priority that is Iraq’s total gross domestic product in 2020. essential for Iraq’s future productivity and growth. Executive Summary xi ‫ملخّص تنفيذي‬ ‫املتزايد‪ ،‬حققت صادرات النفط الشهرية يف مارس ‪ 2022‬رقامً‬ ‫التطورات االقتصادية والسياسية األخرية‬ ‫قياسياً مقارنة بالعقود الخمسة املاصية (‪ 11‬مليار دوالر أمرييك)‪،‬‬ ‫ما دفع االحتياطيات الدولية (باستثناء الذهب) إىل أكرث من ‪61‬‬ ‫ببت‬ ‫يخرج اقتصاد العراق تدريجياً من الركود العميق الذي تس ّ‬ ‫مليار دوالر أمرييك‪.‬‬ ‫به جائحة كوفيد‪ 91-‬والرتاجع الحاد يف أسعار النفط يف عام‬ ‫ول يف أسواق النفط عىل نحو ملحوظ آفاق‬ ‫ّ‬ ‫التح‬ ‫حسن‬‫ّ‬ ‫‪ .2020‬فبعد التقلّص بأكرث من ‪ 11‬باملئة يف عام ‪ ،2020‬ارتفع‬ ‫االقتصاد العراقي عىل املدى املتوسط‪ .‬فمن املتوقع أن يصل‬ ‫إجاميل الناتج املحيل الحقيقي بـ‪ 2,8‬باملئة يف ‪ ،2021‬مدعوماً‬ ‫النمو اإلجاميل اىل نسبة ‪ 8,8‬باملئة يف عام ‪ ،2022‬مدفوعاً جزئياً‬ ‫ينة‪ ،‬وبتخفيف‬ ‫بتوسع املخرجات غري النفطية يف خدمات مع ّ‬ ‫ّ‬ ‫بانتهاء قيود حصص «أوبك بالس» املرتبطة بالجائحة‪ .‬ونتيج ً‬ ‫ة‬ ‫القيود املفروضة عىل التنقل نتيجة كوفيد‪ .19-‬أما بالنسبة إىل‬ ‫لذلك‪ ،‬يُتوقع أن يتجاوز اإلنتاج العراقي مستواه ما قبل الجائحة‬ ‫الصناعات غري النفطية والزراعة‪ ،‬فاستمرت يف التقلّص يف عام‬ ‫البالغ ‪ 4,6‬مليون برميل يف اليوم يف النصف الثاين من ‪.2022‬‬ ‫رر وارتفاع أسعار املدخالت‬ ‫‪ ،2021‬بفعل انقطاع الكهرباء املتك ّ‬ ‫أما بالنسبة إىل النمو يف السنوات الالحقة‪ ،‬فمن املتوقع أن‬ ‫وموجات الجفاف الحادة‪ .‬وقد تراجع إجاميل الناتج املحيل يف‬ ‫يبقى متواضعاً‪ ،‬مبعدل ‪ 4‬باملئة يف املتوسط‪ ،‬مع االعتدال يف‬ ‫ن ارتفاع أسعار النفط‬ ‫قطاع النفط بـ‪ 0,7‬باملئة يف ‪ ،2021‬إذ أ ّ‬ ‫إنتاج النفط‪ .‬ومن املتوقع أن يعود منو إجاميل الناتج املحيل‬ ‫والتخفيف من تخفيضات اإلنتاج منذ أغسطس ‪ 2021‬مل يتمكنا‬ ‫غري النفطي إىل اتجاه منوه املحتمل عىل املدى الطويل‪ ،‬جزئياً‬ ‫من التعويض عن اإليرادات الضائعة جراء حصص إنتاج «أوبك‬ ‫بفضل ارتفاع االستثامرات التي ميكن متويلها من مكاسب النفط‬ ‫بالس» يف وقت مبكر من العام‪.‬‬ ‫املفاجئة‪ .‬وعىل الرغم من ذلك‪ ،‬ميكن للتأخري يف تشكيل الحكومة‬ ‫أدى االرتفاع يف إيرادات النفط إىل تحقيق فائض يف عام‬ ‫د من استخدام‬ ‫وإقرار موازنة عام ‪ ،2022‬إذا استمر‪ ،‬أن يح ّ‬ ‫‪ 2021‬يف األرصدة املالية والخارجية الكلّية يف العراق‪ .‬فارتفع‬ ‫املكاسب املالية املفاجئة مبا أنه قد تم بلوغ السقوف الفعلية‬ ‫إجاميل اإليرادات الحكومية بـ‪ 37‬باملئة يف عام ‪ 2021‬بفضل‬ ‫ملوازنة ‪ ،2021‬ما قد يخفّض النمو االقتصادي‪ .‬باإلضافة إىل ذلك‪،‬‬ ‫ارتفاع أسعار النفط التي بلغت يف املتوسط ‪ 68,4‬دوالرا ً أمريكياً‬ ‫يف ظل غياب إجراءات متسارعة لتطبيق اإلصالحات‪ ،‬سيبقى‬ ‫لكل برميل يف ‪( 2021‬زيادة بنسبة ‪ 87‬باملئة)‪ .‬وعىل الرغم من‬ ‫يدا ً بالقدرة االستيعابية‬‫النمو (وغياب خلق فرص العمل) مق ّ‬ ‫استمرار أوجه الجمود يف املوازنة‪ ،‬ال سيام مع حصة األجور‬ ‫املحدودة لالقتصاد فضالً عن أمور أخرى تتّسم بعدم الفعالية‪.‬‬ ‫نة‬‫ولت عائدات النفط املحس ّ‬ ‫املرتفعة وتحويالت أخرى‪ ،‬ح ّ‬ ‫تبقى آفاق العراق االقتصادية عرضة ملخاطر كبرية‪.‬‬ ‫الرصيد املايل العام إىل فائض بنسبة ‪ 4‬باملئة من إجاميل الناتج‬ ‫فالتوترات الجيوسياسية املتعلقة بالحرب يف أوكرانيا تسلّط‬ ‫وحسنت النواتج املالية املؤاتية نسبة الدين‬ ‫املحيل يف عام ‪ّ .2021‬‬ ‫الضوء عىل املخاطر التي يواجهها االقتصاد العراقي يف املنحيني‬ ‫العام إىل الناتج املحيل اإلجاميل‪ .‬ومع ذلك‪ ،‬تبقى املتأخرات غري‬ ‫ن أي ارتفاع كبري يف أسعار‬ ‫اإليجايب والسلبي عىل حد سواء‪ .‬مع أ ّ‬ ‫املحصلة والخصوم الطارئة كبرية‪ .‬وعىل الصعيد الخارجي‪ ،‬دفعت‬ ‫ّ‬ ‫ن ارتفاع أسعار املواد‬ ‫يحسن رصيد العراق املايل‪ ،‬فإ ّ‬‫النفط قد ّ‬ ‫صادرات النفط املرتفعة والواردات املنخفضة الحساب الجاري‬ ‫الغذائية واالضطراب يف الواردات الزراعية قد يفاقام اتجاهات‬ ‫إىل فائض بنسبة ‪ 11,4‬باملئة من إجاميل الناتج املحيل (‪ 42‬مليار‬ ‫ة عىل‬‫الفقر الراهنة ويزيدا من املخاطر عىل األمن الغذايئ‪ .‬عالو ً‬ ‫دوالر أمرييك) يف عام ‪ .2021‬وبرصف النظر عن الرتاجع يف صايف‬ ‫ذلك‪ ،‬يفرض الرصاع أيضاً مخاطر عىل إنتاج العراق للنفط الخام‬ ‫االستثامرات األجنبية‪ ،‬الذي يعود جزئياً إىل عدم اليقني السيايس‬ ‫‪xiii‬‬ ‫وتخفيف انحالل الرتبة وإعادة تأهيلها‪ ،‬وتحسني إدارة األرايض‪،‬‬ ‫إذا تأثرت عمليات رشكات النفط الروسية يف العراق بالعقوبات‬ ‫يف مع ّ‬ ‫تغي املناخ والتخفيف من آثاره مبا يف‬ ‫وتطبيق تدابري التك ّ‬ ‫ن ارتفاع أسعار‬ ‫الدولية عىل روسيا‪ .‬ومن املهم للغاية اإلشارة إىل أ ّ‬ ‫ذلك اعتامد الزراعة الذكية مناخياً‪.‬‬ ‫النفط ميكن أن يؤثر سلباً عىل الجهد املحيل نحو اإلصالحات‪ ،‬ما‬ ‫مق بالتايل التحديات االقتصادية البنيوية التي يواجهها العراق‪.‬‬ ‫يع ّ‬ ‫وشح املياه ستخفّض من‬ ‫لتغي املناخ ّ‬ ‫ن التأثريات الحادة ّ‬ ‫كذلك‪ ،‬إ ّ‬ ‫كوفيد‪ 19-‬وأزمة رأس املال البرشي‪ :‬تعويض الخسائر التعليمية‬ ‫ن التلقيح املضاد لكوفيد‪ 19-‬ال‬ ‫اإلنتاج الزراعي‪ .‬أضف إىل ذلك أ ّ‬ ‫من أجل اإلنتاجية والنمو يف املستقبل‬ ‫يزال منخفضاً جدا ً يف العراق‪ ،‬ما يطرح مخاطر انتشار محتمل‬ ‫ملتحورات جديدة‪ .‬وتشمل مخاطر أخرى تراجع أسعار النفط‪،‬‬ ‫يواجه العراق أزمة رأسامل برشي‪ .‬فحصائل الصحة والتعليم‬ ‫وتدهور الوضع األمني الناجم عن أوجه الهشاشة القامئة أصالً‬ ‫منخفضة ومرتاجعة يف األعوام األخرية‪ .‬فوفقاً ملؤرش رأس املال‬ ‫وتحديات اقتصادية بنيوية تتضمن االعتامد املفرط عىل النفط‪.‬‬ ‫البرشي للعام ‪ ،2020‬الطفل املولود يف العراق قبيل جائحة‬ ‫نطراً للهشاشة املالية واالجتامعية واالقتصادية للعراق‬ ‫يته عند بلوغه سن الـ‪ 18‬نسبة ‪ 41‬باملئة‬ ‫كوفيد‪ 19-‬قد تبلغ إنتاج ّ‬ ‫حة إىل إصالحات بنيوية واسعة النطاق يجب‬ ‫تربز حاجة مل ّ‬ ‫فقط مام كانت ستكون عليه لو كان يتمتع بتعليم كامل وصحة‬ ‫بقها الحكومة الجديدة‪ .‬فإعادة توجيه املوارد املالية من‬ ‫أن تط ّ‬ ‫تامة‪ .‬وعىل الرغم من ثروة البالد النفطية‪ ،‬يشكل االستثامر يف‬ ‫ززة للنمو يف رأس املال البرشي واملادي ستكون‬ ‫أجل برامج مع ّ‬ ‫رأس املال البرشي حصة قليلة نسبياً من املوازنة العامة – حواىل‬ ‫جوهرية من أجل التنويع وخلق فرص العمل‪ .‬لتحقيق هذه‬ ‫ن العديد‬ ‫‪ 10‬باملئة للتعليم و‪ 4‬باملئة للصحة‪ .‬تجدر اإلشارة إىل أ ّ‬ ‫الغاية‪ ،‬تتضمن مجاالت اإلصالح ذات األولوية الرئيسية تصحيح‬ ‫من أوجه القصور قد حال دون ترجمة هذه االستثامرات إىل‬ ‫تكلفة األجور وتحسني فعالية اإلنفاق‪ .‬لذا يجب بذل الجهود‬ ‫حصائل فضىل يف رأس املال البرشي‪.‬‬ ‫من أجل تعزيز اإلدارة املالية العامة‪ ،‬وتقليص دعم الطاقة غري‬ ‫فاقمت جائحة كوفيد‪ 19-‬الثغرات املوجودة يف رأس‬ ‫عال‪ ،‬وتقليل املخاطر املالية الناتجة عن النفقات من خارج‬ ‫الف ّ‬ ‫املال البرشي وأدت إىل خسائر كبرية يف التعلّم‪ .‬فقد أث ّرت‬ ‫املوازنة والضامنات الحكومية‪ .‬ويجب أن تتكامل هذه التدابري‬ ‫الجائحة يف رأس املال البرشي العراقي من خالل التأثري سلبياً‬ ‫مع برامج متكاملة للمساعدة االجتامعية لتسهيل التحويالت‬ ‫عىل صحة العاملني اليوم ورفاههم االقتصادي‪ ،‬كام من خالل‬ ‫التي تستهدف األُرس األكرث ضعفاً‪ .‬باإلضافة إىل ذلك‪ ،‬ميكن‬ ‫تخفيض اإلنتاجية املحتملة لجيل املستقبل يف العراق‪ .‬فكان‬ ‫لترسيع اإلصالحات الخاصة باملصارف اململوكة من الدولة من‬ ‫مرة عىل تعلّم األطفال‪.‬‬ ‫إلغالق املدارس لفرتات طويلة تأثريات مد ّ‬ ‫وي القطاع املايل ويزيد‬ ‫خالل تعزيز فعاليتها وحوكمتها أن يق ّ‬ ‫قبل الجائحة‪ ،‬كان ميكن للطفل العادي يف العراق توقّع إمتام‬ ‫وصول القطاع الخاص إىل التمويل‪ .‬كام ينغي أيضاً تضمني‬ ‫‪ 6,9‬سنوات دراسة؛ مع ذلك‪ ،‬حني يؤخذ بعني االعتبار مقدار‬ ‫سياسات متعلقة باملناخ يف صلب خطة التنمية العراقية من أجل‬ ‫التعلّم الحاصل بالفعل‪ ،‬يحصل هذا الطفل عىل ‪ 0.4‬من سنوات‬ ‫زيادة اإليرادات والحث عىل النمو وخلق فرص العمل عىل املدى‬ ‫الدراسة بحسب مقدار التعلّم الفعيل قبل بلوغه سن الـ‪.81‬‬ ‫املتوسط‪ .‬وتبقى الورقة البيضاء للحكومة العراقية منوذجاً جريئاً‬ ‫در البنك الدويل أن يرتاجع هذا‬ ‫ونتيجة إلغالق املدارس‪ ،‬يق ّ‬ ‫لوضع برنامج إصالحات اقتصادية شامل نحو التنويع االقتصادي‪.‬‬ ‫دلة بحسب مقدار‬ ‫املؤرش إىل ما بني ‪ 2,6‬و‪ 3,0‬سنوات دراسة مع ّ‬ ‫اشتدت التحديات املتعلقة باألمن الغذايئ القامئة يف‬ ‫جم‬‫التعلّم – أي تراجع يرتاوح ما بني ‪ 1,0‬و‪ 1,4‬يف التعلّم‪ .‬وقد يرت َ‬ ‫العراق مع االرتفاع الحاد األخري يف أسعار السلع العاملية‪ .‬حتى‬ ‫هذا إىل انخفاض أرباح عىل امتداد عمر الطالب املتأثرين بنسبة‬ ‫قبل االضطرابات األخرية يف اإلمدادات الغذائية العاملية‪ ،‬كان‬ ‫ترتاوح بني ‪ 8,4‬و‪ 11,2‬باملئة (خسارة حواىل ‪ 20‬ألف دوالر أمرييك‬ ‫العراق يواجه مخاطر هامة عىل األمن الغذايئ مبا أ ّ‬ ‫ن إنتاج الغذاء‬ ‫إىل ‪ 28‬ألف دوالر أمرييك لكل عامل يف املستقبل) وخسائر عىل‬ ‫املحيل فشل يف تلبية الطلب الناجم عن النمو السكاين الرسيع‪.‬‬ ‫نطاق االقتصاد ترتاوح ما بني ‪ 47,1‬مليار دوالر أمرييك و‪63,1‬‬ ‫فاإلنتاج الزراعي قد عاىن مؤخرا ً موجات جفاف حادة‪ ،‬وارتفاعاً‬ ‫مليار دوالر أمرييك عىل مدار حياتهم العملية – ما يوازي أكرث من‬ ‫قياسياً يف درجات الحرارة‪ ،‬وتآكل الرتبة ومتلّحها‪ ،‬وارتفاع أسعار‬ ‫ثلث إجاميل الناتج املحيل يف العراق يف ‪.2020‬‬ ‫املدخالت الزراعية‪ ،‬فضالً عن االضطرابات يف اإلنتاج الناجمة عن‬ ‫رسم تقرير حديث للبنك الدويل «البناء إىل األمام‬ ‫فرتات انعدام األمن والنزاعات‪ .‬لذلك وبهدف سد ثغرة اإلمدادات‬ ‫بشكل أفضل لضامن التعلّم لجميع األطفال يف العراق» مساراً‬ ‫الغذائية‪ ،‬أصبح العراق معتمدا ً بصورة متزايدة عىل الواردات‬ ‫إلصالح التعليم من أجل تحسني التعلّم وتنمية املهارات بهدف‬ ‫التي تشكل أكرث من نصف ما يستهلكه من غذاء‪ ،‬ما زاد من‬ ‫تحسني حصائل رأس املال البرشي‪ .‬وتتضمن أولويات إصالح‬ ‫رض البالد اىل صدمات أسعار الغذاء واإلمداد العاملية‪ .‬تجدر‬ ‫تع ّ‬ ‫التعيلم الرئيسية ‪ )i( :‬االستجابة لألزمة‪ :‬تخفيف خسائر التعلّم‬ ‫ن اإلعانات والتحويالت املبارشة‪ ،‬مبا يف ذلك التدابري‬ ‫اإلشارة إىل أ ّ‬ ‫رسبني؛ (‪ )ii‬تحسني مهارات‬ ‫الفورية والحؤول دون املزيد من املت ّ‬ ‫الجديدة املتخذة مؤخرا ً والتي أعلنت عنها الحكومة العراقية‪،‬‬ ‫محسنة‬ ‫َّ‬ ‫تعليمية‬ ‫مواد‬ ‫عرب‬ ‫أساسية من أجل تحديد مسار للتعلّم‬ ‫تخفف جزئياً من تأثري ارتفاع األسعار العاملية عىل املدى القصري‪.‬‬ ‫ززة للمعلِّمني تدعم تعلّم األطفال كافة؛ (‪)iii‬‬ ‫ومامرسات مع َ‬ ‫مع ذلك‪ ،‬يتطلّب تحقيق األمن الغذايئ تنسيق الجهود لتحسني‬ ‫الرتكيز عىل االستثامرات األكرث إلحاحاً‪ ،‬مع ضامن استخدام أفضل‬ ‫اإلنتاج املحيل مبا يف ذلك من خالل زيادة فعالية مياه الري‪،‬‬ ‫‪xiv‬‬ ‫‪IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH‬‬ ‫والتدريب املهني وعروض التعليم العايل التي تنقل مهارات ذات‬ ‫للموارد؛ (‪ )iv‬تحسني حوكمة قطاع التعليم واتخاذ القرارات‬ ‫صلة بالسوق‪ .‬ومع تعايف أسعار النفط العاملية‪ ،‬يُعترب تحويل‬ ‫القامئة عىل األدلة؛ (‪ )v‬اعتامد االسرتاتيجية الوطنية للتعليم‬ ‫ايرادات عامة إضافية إىل استثامرات يف رأس املال البرشي أولوية‬ ‫(‪ )2022–2030‬التي تركز عىل التعلّم و»البناء إىل األمام»؛ و(‪)vi‬‬ ‫ملحة ورضورية من أجل إنتاجية العراق ومنوه يف املستقبل‪.‬‬ ‫اتّساق املهارات مع حاجات سوق العمل من خالل برامج التعليم‬ ‫ملخّص تنفيذي‬ ‫‪xv‬‬ 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS Output and Demand (mainly imported) and frequent energy blackouts, hard hit the construction sub-sector. A sharp drop in Iraq’s economy is gradually emerging from the agricultural value-added, of 18 percent, also weighed deep recession caused by the pandemic and heavily on growth in 2021 (Figure 4). A combination the oil price collapse of 2020. Iraq’s real Gross of harsh droughts and rising temperatures severely domestic Product (GDP) edged up by 2.8 percent in crippled Iraq’s food production, including wheat and 2021, after a sharp contraction of over 11 percent in barley, the two most important staples in Iraq, high- 2020 (Figure 1). The recovery was driven primarily by lighting growing threats of climate change to food the strong rebound of non-oil output, in particular the security.1 Though Iraq increased its wheat planted service sector, which grew by almost 15 percent, on area in 2021/22 by 10.4 percent compared to the account of the gradual relaxation of the containment previous season (USDA, 2022), the harvested area measures and the vaccination rollout. In contrast, the was much lower, due to reduced water availability, oil sector contracted by 0.7 percent, as output levels which reached as low as 25 percent in the hardest hit were lowered in line with OPEC+ production quota governorate (Nineveh).2 Food production constraints, early in the year (Figure 3). GDP per capita grew by due to the recent severe droughts and higher global 0.4 percent, lagging average growth of the upper- price of inputs, could have significant implications on middle income countries (UMICs) (Figure 2). Services growth was driven by a strong recovery in high contact sectors. The easing of 1 Around 37 percent of Iraqi wheat farmers and 30 percent the pandemic-related restrictions allowed transport, of barely farmers are reported to have experienced accommodation and retail, and government-related crop failure of at least 90 percent of expected harvest following a bumper harvest in 2019-20 (Norwegian services to rebound strongly by nearly 23, 25, and Refugee Council (NRC), December 2021). 17 percent in 2021, respectively (Figure 3). Non-oil 2 Nineveh, the largest cereal producer in the country, was industries, on the other hand, contracted by 5.6 severely affected by drought. Its entire barley area is rain percent, as higher price of construction materials fed and failed almost completely due to lack of rainfall. 1 FIGURE 1 • The Economy is Gradually Emerging FIGURE 2 • Per Capita GDP Contraction Narrowed from the Pandemic Though Remained behind Income Peers 20 15 GDP per capita growth, percent 10 Y/Y growth, percent 10 5 0 0 –5 –10 –10 –20 –15 2014 2015 2016 2017 2018 2019 2020 2021 2014 2015 2016 2017 2018 2019 2020 2021e Non-oil GDP GDP MENA (2021 est.) UMIC Iraq MENA Source: Iraqi Central Organization for Statistics and Information Technology (COSIT), Source: COSIT, WDI and World Bank staff calculations. World Development Indicators (WDI) and World Bank staff calculations. FIGURE 3 • The Economic Rebound in FIGURE 4 • …and was Despite Negative 2021 was driven by Contribution from Oil, Agriculture, services Sector… and Construction 120 20 Y/Y contribution to growth, percent/pp 15 80 10 Y/Y growth, percent 40 5 0 0 –5 –40 –10 –15 –80 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Agriculture Oil Non-oil industry Agriculture Oil Non-oil industry Services, other Public sector services GDP Services, other Public sector services GDP Source: COSIT, WDI and World Bank staff calculations. Source: COSIT, WDI and World Bank staff calculations. food security, especially in rural areas (see Box 1 on also grew robustly by almost 6 percent on the back Iraq’s food security challenges). of higher oil receipts. Primary government spending On the demand side, GDP growth in 2021 (i.e., expenditures excluding interest payments) rose was driven by consumption. Google Mobility indica- by 26 percent in 2021, including a 2 percent increase tors show that mobility flows in Iraq started to increase in social welfare expenditures. in the second quarter of 2021 (Q2–21), following the easing of the movement restrictions and the gradual pick-up in the vaccination coverage.3 The COVID-19 3 However, COVID-19 vaccination in Iraq remains very low Stringency Index declined from the peak of 84 in among the lowest in the region and well below the global February 2020 to 46 by end-March 2022 (Figure 6). rate. It remains low even among the most vulnerable group, As a result, private consumption growth accelerated the elderly, and among those with high risk of exposure to to 4.5 percent in 2021 (Figure 5). Public consumption the virus – poorer households and informal workers. 2 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH BOX 1  IRAQ’S FOOD SECURITY AND GLOBAL COMMODITY PRICES Iraq confronts significant food security challenges. Domestic FIGURE B1.1 • Wheat Consumption and Bread food production faces a multitude of challenges including Price water shortage, soil erosion and salination, and rising price of agricultural inputs. Record high temperatures and severe droughts have reduced agricultural production, making Iraq more reliant on 1500 TUN imports as commodity prices rise. The country experienced the DZA MAR driest rainfall seasons in the past 40 years. According to Food IRN Kcal/capita/day of wheat EGY IRQ and Agriculture Organization (FAO), extreme temperature and MLT 1000 JOR insufficient precipitation reduced Iraq wheat production by an SAU DJI estimated 70 percent in 2021 and brought barley production KWE ARE to negligible levels. These climate challenges have significant OMN implications for food security and poverty, especially in rural areas. 500 Food consumption in Iraq has been growing rapidly in line with its young and fast-growing population but also due to subsidies that have encouraged over-consumption and wastage. Iraq’s Public 0 Distribution System (PDS) accounts for a large percentage of Iraqi 50 100 150 200 250 300 wheat consumption, requiring an estimated 5 million Metric Ton Bread price (world=100) (MMT) of wheat annually. The Iraqi government only procured 3.4 MMT of local wheat in 2021 for the PDS program, short of Source: Massimiliano Cali, World Bank, 2022. the 5 MMT collected the previous year.a Figure B1.1 shows that Note: Data for 2017. Iraq’s subsidized wheat and bread through the PDS, as in other countries in MENA region, leads to over consumption. To plug the supply gap, Iraq sources almost half of its food consumption through imports. Total food imports account for around 20 percent of the import bill with 9 percent accounting for cereal imports. This import reliance exposes the food security of the country to exchange rate and global commodity price shocks. Following the currency devaluation announced in December 2020, food prices rose by 5 percent in 2021, led by large increase in dairy (12%), vegetable oil (8.3%), and fish and meat (7%). In Q1-22 food prices also saw a significant increase of over 8 percent (y/y) (Figure B1.2). A recent report FIGURE B1.2 • Food Inflation has Increased published by the World Food Program (WFP) reveals that during in Line with Global Food the first two weeks of March, average, wheat flour price increased Commodity Prices by 9 percent at national level. Comparing the prices of the first two weeks of March 2022 with November 2020 (i.e., before the devaluation of Iraqi dinar) show significant increase observed in 80 20 the prices of the main food staples (Figure B1.3). The ongoing war 70 in Ukraine (with Russia and Ukraine accounting for one-third of 60 15 global wheat supply) is exacerbating Iraq’s fragile food security, 50 through disruptions to the availability of global food supplies and 40 10 the resulting higher food prices. These food price shocks put Percent Percent pressures on the Public Distribution System (PDS) which provides 30 a level of broad food security. 20 5 The government has taken measures to mitigate the impact of the 10 food shortage, notably that related to wheat supply, and the price hike. 0 0 Wheat supply measures: –10 –20 –5 • In January-March 2022, the government bought 150,000 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 ton and 100,000 ton of wheat from Australia and Germany, respectively. • Iraq plans to allocate US$100 million to purchase wheat and Meat (LHS) Fish (LHS) Fruits (LHS) create a strategic stock by importing 3 million tons of the grain.b Yogurt, cheese Oils and fats Global agriculture and eggs (LHS) (LHS) price (RHS) • In March 2022, the cabinet approved increase the price of Vegetables (LHS) Food (RHS) government-purchased locally grown wheat for the current season to support local food subsidies program.c Source: COSIT; and World Bank staff calculations. (continued on next page) Recent Economic and Policy Developments 3 BOX 1  IRAQ’S FOOD SECURITY AND GLOBAL COMMODITY PRICES (continued) • In March 26, Iraqi parliament conducted the first reading of a FIGURE B1.3 • Food Staples Prices Were proposed bill called the “Emergency Support for Food Security Significantly Higher in the First and Development” which is yet to be approved by the cabinet. The 2-Weeks of March Compared to bill will support the creation of a special account that authorizes Prior to the Dinar Devaluation the government to support food security and reduce poverty. Price measures: 120 114 The Iraqi cabinet agreed on several measures in March 2022, in response to protests in Central and Southern Iraq over the rise in food prices. These include: 100 • A monthly allowance of about US$70 for low-income civil servants and pensioners and the doubling of food rations. 80 • Three-months suspension of custom duties on food products, basic consumer goods and construction materials. Percent 60 • Providing bakeries with free fuel and gas to help control the 47 price of bread. 40 PDS reforms: In June 2021, GoI introduced several PDS reforms 30 28 to exempt the following populations from receiving PDS rations.d 17 17 • Single family members with an income exceeding IQD1.5 20 million/month (US$1,027.40/month) 8 • Company owners registered in the official corporate 0 registration service Salt Bulgar Rice Lentils Sugar Wheat Vegetable flour oil • Individuals registered in the Chamber of Commerce associations up to second class, business unions, as well as Source: World Food Program (WFP), March 2022. doctors, dentists and pharmacists’ unions • Individuals with a tax accountability over IQD18 million/year (US$12,328.77/year) • Travelers outside Iraq for more than 3 months until their return is proven • Iraqi permanent residents in other countries and who have citizenship in other countries • Central prison inmates (until released), deceased inside prisons, belonging to terrorist organizations, and fleeing justice • Arabs, foreigners, and refugees (except Palestinian families) Achieving food security calls for coordinated efforts to improve domestic production including raising the efficiency of irrigation water, reducing and rehabilitating soil degradation, improving land management practices, and implementing climate change adaptation and mitigation measures including the adoption of climate-smart agriculture. a United States Department of Agriculture (USDA), Foreign Agricultural Service, April 15, 2022. b Nasdaq, Reuters, March 7, 2022. c The Arab Weekly, March 2022. d United States Department of Agriculture USDA, Foreign Agricultural Service, April 15, 2022. Overall investment also aided the economic with higher oil prices allowed overall public invest- rebound in 2021 in line with higher oil revenues. ment to pick up from only 1.5 percent of GDP in 2020 The Government of Iraq (GoI) made noticeable to 4.4 percent of GDP in 2021 though it remained well strides to develop a more friendly-investment environ- below the pre-pandemic rate of 8.8 percent of GDP in ment. These included the devising of a new online 2019. However, business-friendly legislation remains single-window platform for business registration and insufficient to attract foreign investment due to Iraq’s facilitating access to international arbitration for com- volatile security environment, high corruption, and mercial conflict resolution. These measures coupled administrative inefficiencies. 4 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH FIGURE 5 • Easing of Pandemic-Related FIGURE 6 • On the Demand Side, Restrictions and Progress in Government consumption Vaccination Raised Mobility and was the main Driver of GDP Consumption Growth in 2021 200 30 400 Percent change from baseline 300 20 Stringency Index 100 200 10 Growth rate, percent 100 0 0 0 –10 –100 –200 –100 –20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 –30 Parks (LHS) Transit stations Workplaces (LHS) –40 (LHS) 2014 2015 2016 2017 2018 2019 2020 2021e Grocery and Covid-19 Stringency pharmacy (LHS) Index (RHS) Public consumption Private consumption Source: Coronavirus Government Response Tracker, University of Oxford. Source: COSIT and World Bank staff calculations. Oil and Gas Developments Since the second half of 2021 (H2-21), higher oil export prices and increased production Oil production steadily grew since mid-2021 as volumes have led to an oil windfall—providing a OPEC+ production quotas were eased. In July breathing space to Iraq’s economy. Oil exports 2021, OPEC+ members agreed to increase crude rose to 3.1 mbpd in H2-21 (a 14 percent growth y/y) in production by 400,000 barrels per day (b/d) each line with higher production quotas. Meanwhile, Iraq’s month starting in August 2021. This agreement, average oil export prices recovered to US$68.4 per which came against the backdrop of higher global barrel (pb) in 2021 from an average of only US$38.4 oil demand, led Iraq’s crude oil production to reach pb in 2020, a 78 percent increase (Figure 8). As a an average of 4.11 million barrel per day (mbpd) in result, crude oil export receipts surged to US$76 August–December 2021, 11 percent higher compared billion in 2021, registering an 81 percent increase with the same period in 2020 (Figure 7).4 In December compared to 2020. This trend continued in Q1-22 2021, oil production reached 4.23 mbpd, the highest as export prices and volumes increased by a further level since the production cuts were introduced in 40 percent and 6.2 percent from end-2021, respec- June 2020. Oil output in 2021 averaged 4 mbpd, tively. While higher global oil prices sustain Iraq’s which was 24,100 bpd lower than 2020. Since the economic recovery in the short run, it highlights the beginning of 2022, Iraq’s crude production has magnitude of macroeconomic volatility, and the pos- been disrupted owing to a combination of protests, sibility of a strong negative impact should oil prices maintenance, and field outage.5 Oil output dipped by 81,000 bpd on average during January–March 2022, to 4.24 mbpd, which was 2 percent short of Iraq’s 4 The new OPEC+ agreement, is allocating higher output OPEC+ quota for these months. The opportunity cost quotas to five member countries, increasing Iraq’s quota of such disruptions was especially high at a time of for September 2022 by 150 kbpd. soaring oil prices and highlights risks to the ambitious 5 Protests erupted in the southern Dhi Qar province Dhi plan of expanding oil production. Qar province over demand for jobs. Recent Economic and Policy Developments 5 FIGURE 7 • Oil Production and Export Volumes FIGURE 8 • The Impact of Higher Oil Increased as OPEC+ Cuts Were Prices was even Gradually Tapered more Significant 6 12 110 10 5 90 8 US$, billion US$/bbl 70 6 Mbpd 4 50 4 3 30 2 10 0 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Se p-21 Dec-21 Mar-22 2 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Average Iraq export price (LHS) Crude oil, Brent (LHS) Oil production Oil export Budgeted price (LHS) Crude oil exports value (RHS) Source: Iraq’s Ministry of Oil (MoO), and World Bank Staff calculations. Source: MoO, Iraq’s Ministry of Finance (MoF); and World Bank Staff calculations. fall again—as witnessed during the pandemic-related the currency devaluation of December 2020, which downturn in global oil markets. significantly increased oil revenue in dinar terms. Iraq is pursuing an ambitious plan in Despite persisting budget rigidities, notably the high upgrading and expanding its energy industry. The wage bill share and other transfers, improved oil Government has announced plans to boost the oil receipts turned the overall fiscal balance to a surplus production to 8 mbpd by 2027. To this end, the country of 4 percent of GDP (cash basis) in 2021, from a deficit has signed a series of investment contracts to develop of 5.8 percent in 2020 (Figure 9). Due to significant its energy infrastructure in a wide range of areas unaccounted domestic and external arears Iraq’s fiscal including associated gas capture, development of accounts, when expressed on an accrual basis, would oilfields solar energy production, and further regional be less favorable.8 Overall fiscal policy in 2020–21 integration of the electricity grid.6 These efforts aim to remained procyclical as plummeting oil revenues in tackle the widespread power cuts (and resulting public 2020 translated to reductions in discretionary spending grievances), reduce reliance on gas and electricity imports,7 and recover foregone income from flaring 6 GoI signed a sizeable US$27 billion deal with associated gas in the crude oil extraction process. TotalEnergies in September 2021 to develop its energy However, the successful implementation of these sector over 25 years. The agreement includes four projects and achieving the desired outcomes hinges projects: (i) develop Ratawi oilfield in the southern on strong institutional and governance arrangements province of Basra to raise production capacity from that can foster improved efficiency and accountability. 85,000 to 210,000 bpd; (ii) develop a gas processing plant at Ratawi with a capacity of 600 million cubic feet a day; (iii) a seawater supply facility project with a capacity of 7.7 mbpd to maintain production levels; and Public Finance (iv) develop a 1GW solar power plant. 7 Iraq is heavily reliant on gas and electricity imports from Higher oil revenues pushed Iraq’s overall fiscal Iran to meet domestic demand, however, these flows balance into a surplus in 2021, while overall fiscal have been volatile due to Iraq’s arrears on payments policy remained procyclical. Total government to Iran and Iran’s declining spare capacity, especially during peak consumption periods. revenues surged by 73 percent in 2021, spurred 8 Most of the domestic arrears are owed to domestic by higher oil prices. These budgetary gains were banks and the Central Bank of Iraq, and external arrears additionally boosted by the measures to mobilize relate to those owed to international oil companies and non-oil domestic revenues mainly from customs and to Iran for energy imports. 6 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH FIGURE 9 • Higher Oil Revenues Pushed the FIGURE 10 • Wage Bill and Transfers Continue to Fiscal Balance Into Surplus in 2021 Dominate Expenditures 60 15 40 35 40 10 30 20 Percent of GDP Percent of GDP 5 Percent of GDP 25 0 0 20 15 –20 –5 10 –40 –10 5 –60 –15 0 2014 2015 2016 2017 2018 2019 2020 2021 2014 2015 2016 2017 2018 2019 2020 2021 Oil revenues (LHS) Non-oil revenues (LHS) Wage bill Recurrent Non-oil investment Transfers (including pensions) expenditures (LHS) expenditures (LHS) Investment expenditures Oil investment Fiscal balance (RHS) Goods and services expenditures (LHS) Interest payments Source: MoF and World Bank staff calculations. Source: MoF and World Bank staff calculations. and accumulation of arears, while the situation reversed Government spending remained beset by towards end-2021 (72 percent y/y growth in Q4-21 rigid recurrent expenditures, particularly those of expenditures) in line with the recovery in oil prices. wages and transfers. In 2021, recurrent spending Despite some progress in raising non- accounted for over 86 percent of total budget (or oil domestic revenues, budgetary revenues 28 percent of GDP), largely associate with wage remained dominated by oil receipts. The country and transfer components. While the wage bill rose has undertaken steps towards strengthening the by a more moderate rate of 6 percent compared to capacity to increase the effectiveness of non-oil pre-pandemic period (2018–19), it still accounted for revenue collection as outlined in the 2021 budget.9 14 percent of GDP in 2021 (Figure 10).10 Social trans- These efforts contributed to a 58 percent increase fers were the other main component of the recurrent in non-oil budgetary revenues in 2021. Despite this progress, the budget remains heavily dependent on oil receipts, accounting for over 87 percent of total 9 In May 2021, Iraq signed a contract with the United government revenues in 2021, which makes the Nations Conference on Trade and Development budget vulnerable to oil price volatility. At less than 5 (UNCTAD) to automate its customs procedures and percent of GDP, Iraq’s non-oil revenue are small rela- custom data to eliminate corruption, and reform tive to not only UMICs but also MENA oil exporters, customs clearance process. According to Iraq’s General Customs Commission, customs’ revenues increased by whose non-oil revenues exceed 18 and 8 percent 15 percent in 2021, generating just over IQD1 trillion of GDP, respectively. In addition, Iraq’s tax revenue (US$690 million) by pursuing reform through automating collection performs poorly at less than 2 percent of customs clearance process by pursuing reform through GDP, which is constrained by limited administrative automating customs clearance process (Iraq Security capacity and inefficient tax policy such as widespread and Humanitarian Monitor (ISHM), January 6, 2022). exemptions and low tax compliance. Implementation 10 In November 2020, Iraq’s Cabinet approved a draft pension and social security law that expands the public of systematic reforms to further diversify revenues pension benefits to the private sector, but without providing away from oil, as outlined in the White Paper, will help equivalent adjustment of contribution rates to cover the Iraq shift away from volatile oil revenues and reduce cost. If ratified by the legislature, the proposal could further the procyclicality of fiscal policy. increase budget rigidities if the decision is converted to law. Recent Economic and Policy Developments 7 FIGURE 11 • Oil Revenue Volatility has Translated for non-oil investment, due to the limited absorptive to Volatile Public Investment capacity and other public investment management inefficiencies. In 2021, oil-related investment reached 140 128.8 77 percent of the budget target, while the execution 120 105.8 113.3 rate was less than 20 percent for non-oil investment Budget excution rate, percent 100 91.6 (Figure 11). A large share of investment is dedi- 80.3 79.6 77.0 80 70.6 74.8 cated to the oil economy at the expense of non-oil 61.0 60 investment. This lopsided investment allocation has negative implications on service delivery, closing the 40 30.4 29.7 19.6 infrastructure gap, and progress in the reconstruction 20 13.0 2.0 program, putting a drag on long-term growth. Even at 0 Oil Non-oil Current Oil Non-oil existing levels, public investment continues to suffer revenues revenues expenditures investment investment from significant inefficiencies due to a lack of com- 2019 2020 2021 prehensive strategy, corruption, and cumbersome bureaucracy. Source: MoF and World Bank staff calculations. The favorable fiscal outcomes reduced the public debt-to-GDP ratio; however, signifi- cant contingent liabilities remain. The improved expenditures, which accounted for over 6 percent fiscal situation in tandem with the base effect of GDP due to budgetary pension payments of over of high nominal GDP growth (37 percent y/y) is 4 percent of GDP. In addition, the fuel and electricity estimated to have reduced the debt-to-GDP ratio subsidies represent a big drain on government to 53.2 percent in 2021, down from 64.7 percent resources, accounting for about 6 percent of GDP in 2020. The domestic debt stock is estimated at in 2021.11 Despite being an oil exporter, Iraq imports US$53 billion (26 percent of GDP) in 2021. The refined petroleum products (US$3.7 billion imported in external debt stock structure remains favorable 2021), which means that the size of energy subsidies due to significant legacy debt to Non-Paris Club also increase with higher oil prices and overconsump- countries acquired prior to 1990. Almost two-thirds tion. These budget rigidities limit fiscal space, thereby of the latter debt is long-term and relatively conces- undermining the ability to buffer the impact of external sional. In January 2022, Iraq also paid-off the final shocks. The COVID-19 pandemic shock underlined instalment of the US$52.4 billion UN-mandated these pre-existing vulnerabilities, including the need compensation for the 1990 invasion of Kuwait. for rightsizing the wage bill and energy subsidies. However, fiscal risks remain significant, which relate Additional efforts are needed to increase fiscal space to significant arrears,12 electricity sector guarantees to meet the increased challenges posed by climate (estimated at over 20 percent of GDP in 2017-IMF, change and the prospective decline in global demand 2020) and contingent liabilities related to Iraq’s for fossil fuels. largest state-owned banks (SOBs). The adoption of Despite some improvement in 2021, public a medium-term debt management strategy would investment remained low considering the surge in oil revenues and despite the collapse experi- enced in 2020. In 2021, total investment increased 11 This amount only includes explicit energy subsidies to 4.4 percent of GDP, out of which less than half (IMF Energy Subsidy Template – September 2021, was non-oil related investment (Figure 9). Despite https://www.imf.org/en/Topics/climate-change/ their collapse in 2020, this investment in 2021 was energy-subsidies). 12 According to the 2021 budget law, arrears for electricity substantially below that of the pre-pandemic rate of and gas imports, and for independent power producers almost 9 percent of GDP in 2019. Public investment amounted to IQD2.3 trillion (1 percent of GDP). This is has acted as a residual item in budget allocations and added to the wage and pensions arrears estimated at suffered from low budget execution rates, especially IQD 11.9 trillion (6 percent of GDP) in 2020. 8 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH reduce these risks through a structured clearance to Kuwait, which were directly paid from Iraq’s oil of arrears, maintaining cash or reserve buffers, and revenues, frees up fiscal space by 1 percent of GDP mitigate other macro-fiscal risks. (equivalent to 3 percent of total oil proceeds paid in The fiscal space created from the recent 2021). The magnitude of these revenues highlights oil windfall and the previously ear-marked oil the need for effective fiscal management to safeguard revenues call for measures to safeguard Iraq’s macroeconomic stability, prepare for external shocks, oil wealth. Iraq’s monthly oil export revenues rose to and save the national wealth for future generations a five-decade high of US$11 billion in March 2022. (see Box 2 on fiscal rules and sovereign wealth Furthermore, the end of payment to legacy debt funds). Such measures will help avoid procyclical BOX 2  FISCAL RULES AND SOVEREIGN WEALTH FUNDS (SWFs)a Like many resource-rich economies, high dependence on oil, procyclical fiscal policy and the absence of an oil revenue management mechanisms has left Iraq vulnerable to volatility and exogenous commodity price shocks. Low savings rates and boom-bust cycles have plagued economic development in resource-rich Iraq. This condition was strongly illustrated in the aftermath of the 2014 commodity price shock and the recent COVID-19 crisis. The large loss in oil revenues forced important budget cuts notably in social and capital expenditures with impact on economic growth, human capital accumulation, and service delivery. Iraq could establish fiscal rules that leverage the depleting oil wealth to build buffers and promote sustainable economic development.b These rules can help foster commitment to fiscal discipline, such as a ceiling on the current primary spending of the central government and constrain spending on salaries and subsidies while creating space for investment. They can also help correct inefficiencies in fiscal policy such as procyclicality, and curb overspending (World Bank 2020). During the past decades, a growing number of countries across the world have adopted rules-based fiscal frameworks. As of end-2021, about 105 economies have adopted at least one fiscal rule (IMF, 2022).c Carneiro and Kouame (2019) argue that the use of fiscal rules in resource-rich countries has been associated with better fiscal/debt outcomes and lower procyclical bias in fiscal policy.d However, international experience highlights several lessons for the successful implementation of rules in resource-rich countries, these include: • Political commitment • A clear and stable link between the numerical target and the ultimate objective, such as fiscal balance rule and annual borrowing to achieve debt sustainability • Sufficient flexibility to respond to shocks that allows for course correction with clearly defined escape clauses in times of economic shocks • Supporting institutions that enhance fiscal transparency and accountability—such as fiscal councils, which act as public watchdogs to evaluate fiscal policy. Having fiscal rules in place, two mechanisms can be established in the short and medium to long term: The short-term view: Oil revenue stabilization fund. Many oil exporting countries established a so-called oil revenue stabilization funds to mitigate the impact of the volatility of oil revenues on the budget. These funds act as a commitment device that accumulate reserves when oil revenues are high and allow the government to draw down from it when oil revenues fall. It helps to mitigate the adverse macroeconomic effects associated with oil price volatility such as the recent crises brought by COVID-19. Saudi Arabia, Norway, and Chile are examples for using the buffers from these funds to stabilize expenditure by adopting countercyclical fiscal policies. However, an oil revenue mechanism alone is not enough to bolster strong, sustainable, and balanced growth for a country like Iraq. This is particularly true in the event of extreme price shocks such as those illustrated by the COVID-19 crisis. Prudent fiscal management as well as increased economic diversification remain key elements to face crises of this magnitude. The medium-long term: Sovereign wealth funds (SWFs). Advanced and developing countries alike, particularly resource-rich ones, have established SWFs that channel windfalls during commodity booms and accumulate national savings. These saving funds are important tools to address risks posed by the depletion of oil by transforming the income generated from this commodity into permanent wealth in the form of a portfolio of financial assets and its investment income. They also serve as precautionary buffers to face the challenges from the shifts in the global energy landscape from fossil oil to renewables. SWFs could develop their green investment capacity through various structures and collaborations, including public-private partnerships, private-private partnerships, and joint investments in climate-friendly projects with multilateral development banks (World Bank 2017).e (continued on next page) Recent Economic and Policy Developments 9 BOX 2  FISCAL RULES AND SOVEREIGN WEALTH FUNDS (SWFs)a (continued) Function Investment objectives Strategic asset allocation Saving Inter-generational equity, national endowment, meeting long- Long term investment horizon, diversification with moderate to high term liabilities or contingent liabilities (pensions) risk tolerance, and low liquidity requirement in short medium run Precautionary Stabilize spending in the face of short-term and medium-term Liquidity, safety (capital preservation), short to medium term volatility in resource income investment horizon “Buffer” Hold committed funds to pace disbursements in line with Safety (capital preservation), liquidity, short to medium term absorptive capacity constraints investment horizon Source: Sovereign Wealth Funds and Long-Term Development Finance, Risks and Opportunities, WB, WPS6776, February 2014. Given the relative size of Iraq’s public spending, it is critical that spending allocations get effectively translated into productive assets. A sovereign wealth fund coupled with economic diversification can reduce the costs of external shocks and decouples the economy from oil dependence in the long run. Meanwhile, if well designed, adequately structured, managed following best international practices, and adhering to strict regulatory framework, the SWF could help the Iraqi government invest in longer-term stability. The SWFs are becoming important game changers in green investment. For example, by using oil revenues, Norway built the largest SWF in the world (more than US$1.3 trillion); this is also implemented in other countries such as the GCC. According to S&P Global, oil-rich countries such as Qatar, the UAE, and Saudi Arabia are directing state funds towards renewable energy and carbon capture, use, and storage (CCUS). The Singapore and UAE funds have invested in solar power projects in India in the last two years. The recent discussions of the Iraqi Cabinet to establish a sovereign wealth fund to divert one percent of oil sales to finance renewable energy projects and build up a cash reserve for future generations, if implemented, would be a step in the right direction.f It is important to note that fiscal rules and SWFs are not a panacea for achieving macroeconomic sustainability. For example, if the institutional pre-requisites are not in place, SWFs could be used for off-budget expenditures, which could be inconsistent with the government’s fiscal and monetary policies. Moreover, following the large global macroeconomic volatilities seen over the last decade, many countries (e.g., Malaysia) have resorted to suspending fiscal rules through emergency clauses, demonstrating the limitations of fiscal rules.g Country and SWF(s) US$ billion Norges Bank Investment (Norway) 1,332 China Investment Corporation (China) 1,222 Abu Dhabi Investment Authority (Abu Dhabi) 829 State Administration of Foreign Exchange (China) 817 Government of Singapore Investment Corporation (Singapore) 744 Kuwait Investment Authority (Kuwait) 693 Hong Kong Monetary Authority (Hong Kong SAR) 520 Public Investment Fund (Saudi Arabia) 480 National Council for Social Security Fund (China) 452 Qatar Investment Authority (Qatar) 366 Investment Corporation of Dubai (Dubai) 302 Temasek (Singapore) 283 Mubadala (Abu Dhabi) 243 Korea Investment Corporation (Korea) 201 National Wealth Fund (Russia) 185 Source: Statista, January 2022. (continued on next page) 10 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH BOX 2  FISCAL RULES AND SOVEREIGN WEALTH FUNDS (SWFs)a (continued) a Box 2 is adapted from the Iraq Country Climate Development Report, World Bank (forthcoming). b Fiscal rules are institutional mechanisms that impose numerical limits on budgetary aggregates such as expenditure, revenue, the budget balance, and debt to ensure fiscal discipline and credibility. c IMF, Fiscal Rules and Fiscal Councils Recent Trends and Performance during the COVID-19 Pandemic, WP/22/11. d Brookings, Procyclicality trap in resource-rich countries and how to escape from it, February 7, 2020. e World Bank Blog, Sovereign wealth funds: the catalyst for climate finance? March 16, 2017. f Iraq oil report, January 2022. g See, Natural Resource Governance Institute (2018), How did fiscal rules hold up in the commodity price crash? spending and direct any additional spending toward FIGURE 12 • Demand Pressures and Currency human capital and mitigation and adaptation to cli- Devaluation have Spurred Inflationary Pressures mate change in line with the absorptive capacity of the economy. 60 10 50 8 40 6 Monetary Policy and Prices 30 4 Percent 20 2 Inflation accelerated in 2021 driven by rising 10 0 demand pressures, the dinar’s devaluation, and 0 –2 lower agriculture output. A combination of higher –10 –4 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 domestic demand, the pass-through effect of the 23 percent devaluation of Iraqi dinar in December 2020, and lower crop yields (impacted by the Food (LHS) Health (LHS) drought), placed upward pressure on consumer Transport (LHS) Communication (LHS) Recreation, culture Headline inflation (RHS) prices. Headline and core inflation edged up to an & restaurants (LHS) Core inflation (RHS) average of 6 and 6.6 percent in 2021, respectively (Figure 12). Food inflation rose to 5 percent and Source: Central Bank of Iraq (CBI) and World Bank staff calculations. was driven by a steep increase in the price of diary (11.5 percent), cooking oils (8.1 percent), and meat and fish (7 percent). The increase in (See Box 1 on Iraq’s food security challenges). the price of imported refined products and the Nonetheless, the continued depreciation of the demand on health services also pushed the prices Turkish and Iranian currencies, Iraq’s main import of transportation and health care to 13.6 and 12.2 partners, partially mitigated inflationary pressures. percent, respectively. In addition, the rebound in In response to inflationary pressures, the electricity consumption due to increased reliance on CBI phased out some of the policy interventions private electricity generation pushed the electricity introduced in 2020, which led credit to private and water supply prices up by 13.3 percent. The sector growth to slow in 2021. At the outset of the decline in inflation in Q1-22 was significantly less pandemic, the Central Bank of Iraq (CBI) introduced than what would have been expected once the measures to increase liquidity and support firms, effect of the devaluation dropped off, which in part which accelerated the credit growth to the private was related to the global upward trend in inflation. sector by 20 percent in Q4-2020 (y/y).13 In 2021, the In Q1-22, food prices rose by over 8 percent (y/y) that followed the recent disruption to the supply 13 Key measures included lending to households, lowering of key agricultural commodities, including wheat the reserve requirement and extend repayments on and barley, the two most important staples in Iraq directed lending initiatives. Recent Economic and Policy Developments 11 FIGURE 13 • Credit to Private Sector Growth FIGURE 14 • The Economy Operates Decelerated in 2021 with CBI Phase Predominantly Thorough Cash out of Pandemic-Related Schemes 160.000 80% 25 120.000 IQD, million 20 60% Y/Y change, percent Percent 15 80.000 40% 10 40.000 5 0 20% Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Jul-17 Apr-1 8 Jan-19 Oct-19 Jul-20 Ap r-21 Jan-22 0 –5 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Broad money (LHS) Currency in circulation to M2 ratio (RHS) Credit to private sector Broad money Deposits to M2 ratio (RHS) Source: CBI and World Bank staff calculations. Source: CBI and World Bank staff calculations. CBI scaled back some of these stimulus measures This could also partially reflect more drawdown of to contain inflation which contributed to deceler- dollar savings triggered by the dinar devaluation. ating credit growth to the private sector to almost Data reveal that the currency in circulation to broad 15 percent in Q4-2021 (y/y), and further to less than money rose from 39 percent in 2013 to over 51 per- 13 percent (y/y) in January-2022 (Figure 13). At less cent by December-2021, while the share of deposits than 10 percent of GDP, private sector credit in Iraq declined from 61 percent to less than 49 percent is one of the lowest in the MENA region (32 percent same period (Figure 14). This situation reflects a lack average), reflecting the shallow financial depth, of confidence in the banking system and low banking credit infrastructure shortfalls, and weak banking inclusion. In 2017, only 23 percent of Iraqis held a sector that tend to cater primarily to large and inef- bank account compared to 48 percent in MENA.16 ficient state-owned enterprises (SOEs). This has The CBI is making important efforts to modernize the crowded out the private sector, deterred prospective payment systems and encourage the greater use of private investors, and held back financial sector digital financial services and financial technologies development. Broad money (M2) grew by 20 percent (see below). in Q4-2021(y/y), driven by the pick-up in non-oil eco- Iraq is making steady progress in devel- nomic activity and abundance of cash held outside oping its financial sector in line with the reforms banks, which contributed to inflationary pressures. visualized in the GoI White Paper. The CBI is Latest available data also shows the non-performing implementing key reforms and initiatives to trans- loans (NPLs) at SOBs14 have increased to 18 percent form its banking system and financial industry. The in 2020, from 10 percent in 2019.15 Similarly, NPLs Iraqi authorities have made considerable progress at private banks are reported as high as 37 percent in strengthening their Anti-Money Laundering and in 2020. Countering Financing of Terrorism (AML/CFT) Iraq’s economy remains predominantly a cash economy. Iraq’s banking system remains highly liquid with cash being the key medium of 14 Iraqi banking sector is dominated by under-capitalized exchange for payment. The currency in circulation and under-provisioned state-owned banks primarily used for quasi-fiscal operations. makes up the vast majority of the broad money (52 15 NPLs at SOBs are likely understated, as they do not percent in 2021). In 2021, along with the recovery in reflect loans to public entities with uncalled government non-oil economy, additional liquidity was converted guarantees. into cash, while the banking deposits declined further. 16 World Bank Financial Inclusion database (FINDEX). 12 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH FIGURE 15 • The CAB Returned to Surplus in FIGURE 16 • …as Higher Oil Exports and Lower 2021… Private Imports Drove Up the Trade Balance 6 120 100 25 6 Percent of GDP 4 Percent of GDP 20 US$, billion 80 4 2 15 60 2 10 0 40 0 5 –2 20 –2 0 Q1-18 Q2-18 Q3-18 Q4-1 8 Q1-19 Q2-19 Q3-19 Q4-1 9 Q1-20 Q2-20 Q3-20 Q4-20 Q1-2 1 Q2-21 Q3-21 Q4-21 Q1-18 Q2-18 Q3-18 Q4-1 8 Q1-19 Q2-19 Q3-19 Q4-1 9 Q1-20 Q2-20 Q3-20 Q4-20 Q1-2 1 Q2-21 Q3-21 Q4-21 CAB (LHS) Trade balance (LHS) Oil price, US$/bbl (RHS) Exports (RHS) Oil export volume, mbpm (RHS) Imports (RHS) Source: CBI, MoO and World Bank staff calculations. Source: CBI and World Bank staff calculations. regulatory framework, which resulted in delisting External Sector of Iraq from the European Union (EU) “Grey List” in December 2021.17 This major development has also Higher oil prices and exports improved Iraq’s eased de-risking pressures on the Iraqi banks’ corre- external accounts. After registering a deficit of 4.8 spondent banking lines and facilitated remittance and percent of GDP in 2020, higher oil prices and exports trade transactions.18 Additionally, a joint World Bank/ pushed the current account balance (CAB) into a IMF team recently completed Iraq’s first ever Financial surplus of 11.4 percent of GDP (US$24 billion) in 2021 Sector Assessment Program (FSAP) Development (Figure 15). Exports, almost entirely consisting of crude Module and has presented its final report incorpo- oil, surged by almost 56 percent in 2021, expanding rating a set of key recommendations to the authorities the country’s goods trade balance to over 18 percent of to reform the financial sector. Standard and Poor GDP (US$37 billion). (Figure 16). This sharp increase (S&P) has maintained Iraq’s sovereign rating at “B–“, in exports was driven by rising oil prices (78 percent with stable outlook based on increasing oil revenues increase), as oil export volumes remained close to the and much improved foreign exchange reserves which 2020 level. The CAB improvement was also aided by have reached over US$67 billion by March-2022. the significant decline in imports, 16 percent in 2021, In line with the directions to abide by the decisions of the Paris Climate Conference, the CBI issued regulations in January 2022, for 17 The is with the technical assistance of the WB to funding renewable energy power generation undertake a National Risk Assessment (NRA) of AML/ systems, with its climate change initiative through CFT risks and also supporting the authorities during their evaluation by the European Union. banks to shift to clean energy. Meanwhile, it has 18 The move is also expected to pave the way for a greater stepped up efforts to increase funds for small and degree of trade and investment exchange between Iraq medium projects one trillion dinars to become two and European countries. trillion dinars. The said initiative has contributed to 19 The delays in government formation have slowed the creating job opportunities and financing nearly three pace and implementation of some of the financial sector thousand housing units throughout Iraq, according reforms. These include critical measures to reform the under-capitalized and under-provisioned SOBs such to the CBI. Despite some ongoing challenges,19 as the proposed Corporate Governance bylaws for the these developments highlight a part of wide range two largest SOB’s Rafidain and Rasheed Banks. The of reforms outlined in the White Paper to help the initiation of the Asset Quality Reviews (AQR) are also financial system fulfills its full potential. awaiting endorsement by the new government. Recent Economic and Policy Developments 13 FIGURE 17 • Improved Trade Balance and FIGURE 18 • Reserves have Increased to 13 Financial Account in 2021 Drove Up Months of Imports in Line with Reserves Better Trade and Financing Conditions 12 8 80 16 US$, billion 4 Months of imports 60 12 0 US$, billion –4 40 8 –8 –12 20 4 Q1-1 8 Q2-1 8 Q3-1 8 Q4-1 8 Q1-1 9 Q2-1 9 Q3-1 9 Q4-1 9 Q1-2 0 Q2-2 0 Q3-2 0 Q4-2 0 Q1-2 1 Q2-2 1 Q3-2 1 Q4-2 1 0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 Curent account Capital and financial account (excl. reserves) Foreign reserves (excl. gold) (LHS) Change in reserve assets Coverage ratio (RHS) Source: CBI; and World Bank staff calculations. Source: CBI; and World Bank staff calculations. which pushed up the trade balance by almost US$7 enhanced Iraq’s external position and strength- billion (3 percent of GDP) compared to 2020 during ened CBI’s international reserves. While the trade the peak of the pandemic. balance improved, net FDI flows declined by 8.6 per- The decline in imports, especially that of cent in 2021 (y/y) and remained low at 1.3 percent private imports, followed the exchange rate devalu- of GDP, reflecting political and social instability, ation. Public imports increased by 40 percent in 2021, opaque regulatory environment that put downward mainly due to an 82 percent increase in consumption risk on prospective FDI inflows. However, the recov- goods and refined oil products—imports which Iraq ery in trade credits has resulted in a marked out- heavily relies on. The government also increased come in net official investment which registered a imports of capital goods (71 percent growth) to meet total of US$8.5 billion in 2021, pushing up the finan- the need for the energy sector’s expansion. However, cial account (Figure 17). This outcome along with private sector imports (73 percent of total imports) fell stronger trade balance aided by the devaluation has by 26 percent owing to the adjustments following dinar’s pushed the readily usable component of reserves devaluation which made imports more expensive in (i.e., reserves excluding gold) to over US$58 billion dinar terms. Capital goods constituted a large share of (covering 13.6 months of imports), up from US$48 private sector imports (75 percent), thus, their decline billion in 2020 (covering 10 months of imports) reduced total capital imports by over 23 percent. (Figure 18). These reserves further rose to over Notwithstanding the decline in net for- US$61 billion in March 2022 as oil prices climbed eign investment, stronger trade balance has to US$110 pb. 14 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH 2 OUTLOOK AND RISKS Outlook significantly through both price and volume chan- nels. In the absence of a fiscal rule, part of the The turnaround in oil markets has significantly new fiscal space is likely to be absorbed by higher improved Iraq’s economic outlook in the medium investment expenditures along with other procyclical term. Overall growth in 2022 is now forecast at 8.8 discretionary spending. The delay in government percent, driven in part by the end of the OPEC+ formation and the ratification of the 2022 budget, if pandemic-related quotas restrictions. As a result, Iraq’s continued, could limit the use of the fiscal windfalls production is projected to surpass its pre-pandemic as the de-facto ceilings from the 2021 budget are level of 4.6 mbpd in the second half of 2022. Growth reached which could constrain economic growth. in the outer years is projected to moderate to 3.7 Furthermore, structural budget rigidities including percent per year on average, largely as oil production an oversized wage and pension bill are projected to growth eases in line with a gradual increase in oil offset a significant part of the revenue increases. As production capacity. Non-oil GDP growth is projected such, Iraq’s overall fiscal surplus is projected to mod- to converge to its long-term potential growth trend erate from an initial high of 13 percent of GDP in 2022 in part aided by higher investments that would be to 6.4 percent of GDP in 2024, while the debt-to-GDP financed through the oil windfall. However, in the ratio gradually improves to an annual average of 35 absence of an accelerated process of reforms, growth percent in 2022–24. The windfall from rising oil prices (and sorely missing job creation) is forecast to remain provides the government with enough resources to constrained by the economy’s limited absorptive continue service its domestic and external debt. capacity and other inefficiencies. Stronger oil exports will continue to drive Higher oil prices, projected during a current account surplus, thereby strengthening 2022–2024, are forecast to significantly improve foreign exchange reserves. At an average oil price Iraq’s fiscal outlook. Due to their high dependence of over US$90 pb in 2022–24, oil exports are forecast on oil, government revenues are projected to grow to rise to an average of 46 percent of GDP annually, 15 accounting for over 96 percent of goods exports. current high oil prices to fast-track the diversification Imports are forecast to grow over the outlook, in line and energy transition agenda, which would cement with the gradual recovery in domestic consumption macroeconomic stability and pave the way for more and the upward trajectory in global commodity prices inclusive growth. but remain below exports. This trade trajectory is Iraq also faces a pressing set of climate forecast to keep the current account balance in a change challenges that, if left unaddressed, significant surplus in 2022–24. This strong current would impact the country’s economic and social account position is expected to result in sustained prosperity.21 Climate change risks are expected to accumulation of gross CBI foreign currency reserves prominently shape Iraq’s development path through (Table 1). impacting its growth and potential for economic diversification. Record high temperatures and severe droughts are severely impacting agricultural produc- Risks and Opportunities tion, making Iraq more reliant on food imports, with implications for food security and poverty, especially Iraq’s economic outlook remains subject to in rural areas. These challenges exacerbate existing significant risks. The recent geopolitical tensions inequalities and social grievances, further straining related to the war in Ukraine highlight risks for Iraq the country’s fragile social contract. Additional efforts economy both on the upside and downside. While are needed to tackle the increased risks posed by any further oil price hikes would improve Iraq’s climate change and an expected long-term decline fiscal balance, rising food prices and disruption in global demand for fossil fuels. These measures to agriculture imports will exacerbate pre-existing include a rethinking of the fiscal policy management poverty trends and increase food security risks. The framework in Iraq including the role of fiscal rules conflict also poses risks to Iraq’s crude oil production and sovereign wealth funds especially as the current if operations of Russian oil companies in Iraq are global transition away from carbon intensive sources impacted by international sanctions on Russia.20 of energy progresses. Crucially, higher oil prices could hurt the domestic Iraq’s fiscal and socio-economic fragilities drive for reforms thereby deepening Iraq’s structural underscore the urgency of wide-ranging structural economic challenges. reforms by the new government. Reorienting gov- The legacy of previous policies and struc- ernment expenditure to growth-enhancing programs tural features of government finances raise fiscal in human and physical capital will be key for diversifi- risks. The very heavy dependence of government cation and job creation. To this end, key priority reform revenues on oil exposes Iraq’s fiscal finances to inter- areas include rightsizing the wage bill and improving national oil market volatility, which further complicates spending efficiency. Efforts are needed to strengthen fiscal management and weakens fiscal discipline. In public financial management, reduce inefficient the absence of revenue management mechanisms, energy subsidies, and minimize fiscal risks arising such as fiscal rules, Iraq is vulnerable to volatility and from off-budget expenditures and government guaran- exogenous commodity price shocks. With an oil price tees. These measures need to be complemented with assumption of US$100 per barrel and an oil export integrated social assistance programs that enhance volume of 3.5 mbpd, a US$1 pb oil price decline would directly reduce government revenues by 0.5 percent of GDP (or US$1.3 billion) per year. Public spending 20 Three prominent Russian firms, Lukoil, Gazprom also is dominated by non-discretionary spending that Neft and Rosneft are among the major oil companies operating in Iraq. often leaves limited fiscal space for public investment 21 The World Bank’s forthcoming Iraq Country Climate in non-oil sectors. Other fiscal risks also relate to the Development Report (CCDR) takes stock of the accumulation of unaccounted arrears to domestic magnitude of Iraq’s climate challenges and lays out banks and the energy sector. Iraq could seize steps towards climate change mitigation and adaptation. 16 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH targeting of transfers to the most vulnerable house- Iraq’s development plan will also be essential for holds. Accelerating SOBs reforms by enhancing their raising revenues, inducing growth and job creation in efficiency and governance would bolster the financial the medium term. The GoI White Paper remains a bold sector and increase private sector’s access to finance. blueprint for a comprehensive program of economic Embedding climate-related policies at the heart of reforms towards economic diversification. TABLE 1 • Iraq: Selected Economic and Financial Indicators, 2019–2024 2019 2020 2021 2022e 2023p 2024p Economic growth and prices Real GDP (percentage change) 5.5 –11.3 2.8 8.8 4.5 3.0 Non-oil real GDP (percentage change) 7.9 –9.4 7.8 2.5 3.0 3.0 GDP per capita (US$) 5,943 3,768 5,048 6,196 6,185 5,934 GDP (in IQD trillion) 276.2 219.8 301.4 378.8 387.1 380.2 Non-oil GDP (in IQD trillion) 161.8 156.4 163.8 193.0 206.7 218.7 GDP (in US$ billion) 233.6 151.6 207.9 261.2 267.0 262.2 Oil production (mbpd) 4.74 4.00 3.97 4.51 4.76 4.90 Oil exports (mbpd) 3.54 2.99 3.02 3.48 3.70 3.81 Iraq oil export prices (US$ pb) 61.1 38.4 68.4 100.0 92.0 80.00 Consumer price inflation (percentage change; average) –0.2 0.6 6.0 5.3 4.0 2.7 In percent of GDP Public Finance Government revenue and grants 39.0 28.7 36.2 52.4 50.3 46.4 Government oil revenue 35.9 26.0 31.6 48.7 46.6 42.5 Government non-oil revenue 3.0 2.7 4.6 3.7 3.8 4.0 Expenditures 37.7 34.6 32.2 39.3 40.1 40.0 Current expenditure 28.8 33.1 27.8 27.6 30.1 31.5 Wages and salaries 14.7 18.2 14.1 14.0 15.8 16.5 Goods and Service 3.2 2.9 2.3 2.3 2.3 2.4 Interest payment 1.1 1.0 0.5 0.7 0.8 1.0 Other 9.8 11.0 10.9 10.6 11.1 11.6 Investment Expenditure 8.8 1.5 4.4 11.7 10.0 8.5 Oil investment 6.9 0.1 2.6 8.0 7.0 6.0 Non-oil investment 2.0 1.3 1.9 3.7 3.0 2.5 Primary fiscal balance, cash basis 2.4 –4.8 4.5 13.8 11.1 7.4 Budget balance 1.3 –5.8 4.0 13.1 10.3 6.4 Gross budget financing needs –1.5 –8.3 2.1 9.4 6.7 2.8 In percent of GDP, unless otherwise indicated Public Debt Total government debt (percent of GDP) 44.7 64.7 53.2 39.8 33.9 32.0 Total government debt (US$ billion) 104.4 98.1 110.5 104.0 90.4 84.0 External government debt (percent of GDP) 23.1 33.5 27.5 20.6 17.5 16.6 External government debt (US$ billion) 54.0 50.7 57.1 53.7 46.7 43.4 (continued on next page) Outlook and Risks 17 TABLE 1 • Iraq: Selected Economic and Financial Indicators, 2019–2024 (continued) 2019 2020 2021 2022e 2023p 2024p Monetary indicators Growth in broad money 8.4 15.9 16.7 n.a n.a n.a Policy interest rate (end of period) 4.0 4.0 4.0 4.0 4.0 4.0 In percent of GDP, unless otherwise indicated External sector Current account 5.8 –4.8 11.4 16.0 12.6 8.4 Trade balance 12.9 3.2 17.9 25.0 21.6 17.4 Exports of goods 34.9 30.9 35.0 50.5 48.3 44.1 Imports of goods 22.0 27.7 17.1 25.4 26.7 26.6 Gross reserves (US$ billion, excl. gold) 62.9 48.1 58.2 86.6 105.9 113.4 In months of imports of goods and services (excl. gold) 10.1 10.3 13.6 11.2 12.9 14.1 Exchange rate (IQD per US$; e.o.p) 1182 1450 1450 n.a n.a n.a Source: Iraqi authorities and World Bank staff estimates and projections. 18 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH SPECIAL FOCUS: COVID-19 AND THE HUMAN CAPITAL CRISIS: RECOVERING EDUCATIONAL LOSSES FOR FUTURE PRODUCTIVITY AND GROWTH H uman capital consists of the knowledge, poverty reduction.23 Governments can make investing skills, and health that people accumulate in people a priority by ensuring that individuals have over their lives. While people’s health and the opportunity to develop their human capital at all education have undeniable intrinsic value, human stages of life, especially during the early years when capital accumulation also enables individuals to realize human capital investments are most crucial. their potential as productive members of society. More The levels of human capital in Iraq, already human capital is associated with higher earnings for in decline before the COVID-19 pandemic, have people, higher income for countries, and stronger been negatively affected by recent shocks. cohesion in societies.22 The link between human capital Prolonged school closures have had devastating and economic growth has been well-documented in the academic literature, demonstrating that human 22 World Bank (2020). capital is a central driver of sustainable growth and 23 Smith (1776); Becker (1962); Flabbi and Gatti (2018). 19 Human Capital Index in Iraq FIGURE 19 •  rates, an average Iraqi child can expect to complete Compared to MENA Countries, 2020 only 6.9 years of schooling. However, when taking into account the amount of learning that actually takes place, 0.75 Middle East & North Africa Israel this child will achieve only 4.0 learning-adjusted years of 0.70 Malta schooling (LAYS) by age 18.24 As a result, 40 percent of Human capital index, 2020 0.65 Iran, Bahrain the (already low) time spent in school fails to translate into West Bank Islamic Rep. Oman Qatar 0.60 and Gaza productive skills when this child enters the workforce. Tunisia 0.55 Kuwait Years of conflict and structural inefficien- Algeria 0.50 Morocco Lebanon cies have resulted in an education system that is Egypt, not adequately conveying foundational skills—the 0.45 Arab Rep. basis for future learning and skills development. 0.40 Iraq The most recent learning assessments for Iraq—the Yemen, Rep. 0.35 2012 Early Grade Reading Assessment (EGRA) and 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 Early Grade Mathematics Assessment (EGMA)—high- Natural logarithm of GDP per capita 2020 light large learning gaps in the foundational years.25 By Source: World Bank Human Capital Project. grade 3, over 90 percent of students in Iraq were not able to read with comprehension. Twenty-nine percent effects on children’s learning. Without effective reme- of grade 3 students could not answer a single question diation, this “lost year” (or more) of learning will have correctly after reading an age-appropriate text (EGRA), important lifelong impacts on the affected students’ and 41 percent were unable to answer a single subtrac- earning capacity, leading to sizable losses for the Iraqi tion problem question correctly (EGMA). These results economy in the decades to come. The impacts will be highlight the large proportions of poor performing stu- especially severe for children from more vulnerable dents who are at the highest risk of being left behind groups. Reforms of the education sector are urgently and dropping out of the education system. needed to recover learning losses, align education The low levels of human capital develop- with labor market needs, and prepare future workers ment, coupled with limited opportunities to gain for higher skilled jobs—a key prerequisite for the diver- job-relevant skills, have translated into worsening sification of the Iraqi economy. economic and social outcomes. A key theme of the nationwide protests that took place in Iraq before the pandemic (October 2019) was the high unemploy- Iraq is facing a human capital crisis 1.  ment rate. The unemployment rate for youth ages 15 to 24 stands at an alarmingly high of 25 percent (2019 a. Key human capital outcomes were International Labour Organization [ILO] estimates). already low before the COVID-19 This is higher than both the average for its region pandemic (22 percent) and the average for its income group (22 percent) (ILO 2020). These poor labor market Once a leader in the Middle East and North Africa (MENA), Iraq’s human capital outcomes have 24 Learning-adjusted years of schooling (LAYS) is a concept stagnated in recent decades. The World Bank’s 2020 that combines quantity (access) and quality (learning Human Capital Index (HCI) suggests that a child born in outcomes) of schooling into a single easy-to-understand Iraq just before the COVID-19 pandemic could expect to be metric of progress. More information about the LAYS only 41 percent as productive by age 18 as she could be measure can be found here: https://openknowledge. with complete education and full health (Figure 19). This is worldbank.org/handle/10986/30464. 25 The most recent EGRA and EGMA were carried out by substantially lower than the MENA regional average of 57 USAID in 2012 in 54 primary schools in 6 governorates percent and largely due to low educational outcomes of of Iraq (Anbar, Baghdad, Karbala, Missan, Najaf, and Iraqi children and relatively low levels of public investment Wasit). More information can be found here: https:// in health and education. Based on current enrollment earlygradereadingbarometer.org/pdf/Iraq_2012_MAHARAT.pdf. 20 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH outcomes among youth are, among others, the results accumulation in Iraq. According to the Iraqi Ministry of an education system that is not aligned with the of Health, COVID-19 has caused over 25,000 deaths skills demanded by today’s labor market. in the country between March 2020 and March 2022.28 While older people face the highest risk, with Investing in human capital has been b.  adults 60 and older accounting for 61 percent of low and inefficient in recent years COVID-19 deaths in Iraq, COVID-19 has also caused a large number of deaths among adults ages 30 to 59 Iraq’s relatively low human capital outcomes are (accounting for 36 percent of deaths), contributing to partly due to the country’s underinvestment in health a substantial decrease in life expectancy. and education.26 Decades of conflict have resulted Besides the direct impact of illness and in substantial internal displacement and destruction lost lives, the indirect impact of COVID-19 and of the country’s health and education infrastructure. its control measures can be felt across different Despite efforts to address these infrastructure gaps, stages of the life cycle. For young children, the overall public spending on health and education is disruption to the health system significantly impaired low and falling. Iraq spends a lower share of its budget their access to essential health services—such as vac- on these two sectors than the average for MENA and cination programs and maternal health and childcare upper middle-income countries (UMICs). In 2019, only services. The resulting health gaps and malnutrition about 4 percent of Iraq’s federal budget was spent on pose significant risks of human capital setbacks. health (versus around 9 percent for an average MENA For school-age children, COVID-19-related school country and 12 percent on average for UMICs) and closures threaten to undo learning progress, increase only 10 percent of Iraq’s federal budget was spent on dropouts, and lead to substantial learning losses education (versus around 13 percent on average in (discussed below). The effects are likely larger for MENA and 15 percent on average for UMICs). girls and children from disadvantaged families, further Low efficiency of public spending also holds exacerbating existing inequalities. back the improvements in human capital outcomes. The COVID-19 pandemic significantly Iraq achieves lower levels of health and education out- impacted Iraq’s household welfare, dispro- comes than other countries in the region with similar portionately affecting children and vulnerable levels of public spending. This is partly driven by a large households. For the working-age population, job wage bill that crowds out investment and other inputs losses and declines in earnings have affected many critical to quality service-delivery. Governance and Iraqi families. Between March and August 2020, public financial management challenges also hamper the share of households with at least one working the effectiveness and efficiency of social spending. member fell by 16 percentage points, to 62 percent, Political fragility, partial decentralization, and corruption with the decrease being more intense in rural areas in public procurement negatively affect the budget and among the poorest households. More than a third processes that prevent the appropriated funds from of private sector wage workers and the self-employed translating into better social sector outcomes.27 have lost their jobs during these times, especially those that were informal, and some of the unemployed decided to stop looking for jobs altogether.29 World COVID-19 has exacerbated 2.  Bank projections suggest that the poverty rate in existing gaps in human capital Iraq could increase from 20 percent in 2017–2018 to 31.7 percent as a result of the crisis. This translates into a. The pandemic took a toll on Iraq’s 4.5 million additional poor, adding to the 6.9 million human capital through both direct and indirect channels 26 World Bank (2021a). 27 Ibid. The COVID-19 pandemic has exacted a heavy 28 Ministry of Health, Iraq (2022). toll in lost lives and disrupted human capital 29 Krah et al. (2021). SpecialFocus: COVID-19and the Human CapitalCrisis: Recovering EducationalLosses for Future Productivityand Growth 21 already living in poverty before the crisis. Children face capacity, leading to sizable losses for the Iraqi a higher increase in poverty, bringing the projected economy in the decades to come. Based on poverty rate among those under 18 to 37.9 percent.30 the simulated range of learning losses of 1.0–1.4 LAYS, the generation of Iraqi students affected by School closures negatively impacted b.  school closures can expect to see their lifetime earn- students’ learning outcomes and future ings reduced by 8.4–11.2 percent (approximately earnings US$ 20,000–28,000 lost per future worker). This translates to an economywide loss of US$ 47.1–63.1 Between March 2020 and October 2021 schools billion over the course of the working life of these in Iraq were completely or partially closed for students—equivalent to between 23 and 31 percent of approximately 62 weeks—among the longest Iraq’s total gross domestic product in 2021 (Figure 20). such closures in the MENA region—impacting more than 11 million Iraqi students.31,32 Only partially mitigated by limited and unequal remote Building Forward Better: 3.  learning opportunities, which favored those with An Education Reform Path access to technology and limited support to caregivers to assist their children’s learning at home, Priority education sector reforms are a.  the prolonged school closures have had devastating more crucial than ever effects on children’s learning. In addition to forgoing learning that would have occurred had schools been With the recovery in global oil prices, channeling open, many children have also forgotten what they additional public revenues into human capital learned in the months before the pandemic.33 School investments will be essential for Iraq’s future closures also risk further exacerbating student productivity and growth. Addressing infrastructure dropout, especially among the most marginalized needs, closing access gaps, and recovering human students who are less likely to return when schools capital losses caused by the COVID-19 pandemic reopen. require increased public spending to be directed World Bank simulations suggest that school toward the social sectors. Increasing the effectiveness closures can lead, on average, to a loss of at of education and health service delivery, particularly least one full learning-adjusted year of schooling pro-poor, in the short-term will ensure that additional (LAYS) from an already low baseline of 4.0 LAYS funds are spent efficiently for improving human capital in Iraq. Based on a range of scenarios to account outcomes in the medium and long term. for various levels of effectiveness of remote learning While the COVID-19 crisis has further mitigation measures, an average Iraqi student is exacerbated inequities in access to education estimated to have lost between 1.0 and 1.4 LAYS and dampened learning outcomes, systemic during the pandemic (Figure 20). Students from dis- advantaged socioeconomic backgrounds are likely to be closer to the “pessimistic” end of the range due to 30 UNICEF and World Bank (2020). 31 The global average of the duration of total and partial both increased likelihood of dropping out and lower school closures during this period was 38 weeks, while levels of learning resulting from lower access to the the MENA regional average was 45 weeks, according technology required to participate in remote learning, to the global monitoring of school closures by UNESCO and adequate resources to support their learning at (n.d.) home. Meanwhile, students from more advantaged 32 While schools in Iraq (Center) have reopened from backgrounds will find themselves closer to the “opti- November 2021, they remain on a hybrid teaching model with four days of in-person learning per week. mistic” estimate. With limited access to technology and little support to Without effective remediation, this “lost caregivers, further learning losses are likely compared year” (or more) of learning will have important to a fully in-person mode of learning. lifelong impacts on the affected students’ earning 33 Azevedo, et al. (2021). 22 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH FIGURE 20 • Estimated Impacts for Students Affected by School Closures in Iraq Learning-adjusted years of school (LAYS) 4.0 3.0 2.7 2.6 (–1.0) (–1.3) (–1.4) Baseline Optimistic Intermediate Pessimistic Lifetime earnings losses (%) Economy-wide earnings losses (US$ billions) –8.4% –47.1 B –10.3% –57.9 B –11.2% –63.1 B Optimistic Intermediate Pessimistic Optimistic Intermediate Pessimistic Source: World Bank calculations using the methodology described in UNESCO, UNICEF, and World Bank (2021). Notes: a Learning loss simulation results are based on the actual observed length of school closures in Iraq and assumptions about the mitigation effectiveness of remote learning compared to in-person learning of 40, 20, and 10 percent in the “Optimistic”, “Intermediate”, and “Pessimistic” scenarios, respectively. b Earnings loss estimates translate the amount of learning lost (in LAYS) into present-value US dollars using the expected returns to education and labor market earnings data from the ILO and economic forecasts from the World Bank Global Economic Prospects. Results are conditional on the country’s life expectancy, expected work life of a typical adult as well as their human capital utilization, and assume that none of these aspects will be affected by the COVID-19 crisis. The results also assume that the returns to education remain constant at 8% in the long run. shortcomings in the education sector have been alleviation goals. A top national priority of Iraq’s Vision long-standing and need to be addressed. Iraq can 2030 is to “invest in human capital and stop wasting use lessons learned from the current health crisis, it and benefit from the demographic dividend phase turn recovery into opportunity, and “build forward which Iraq is undergoing”—with one of the goals better” to ensure it provides learning opportunities for being a high quality and inclusive education system.34 its poorest and most vulnerable children. Furthermore, the GOI White Paper, published in While more investments in the Iraqi educa- October 2020, acknowledges the need to identify the tion sector are urgently needed, the Government various factors that contribute to learning and skills of Iraq (GOI) recognizes that these investments development, and develop actionable reform plans to need to be accompanied by a comprehensive edu- improve their quality. cation sector reform agenda. This reform agenda The recently published World Bank educa- should address both long-standing inefficiencies in tion sector reform note Building Forward Better the education sector—such as infrastructure deficien- to Ensure Learning for All Children in Iraq builds cies and inadequate teacher deployment—as well on the GOI’s goals and proposes actionable as provide short-term measures to recover learning reforms for key education sector inputs to lead to losses. Accelerating human capital accumulation is at the heart of the GOI’s economic growth and poverty 34 Ministry of Planning, Iraq (2019). SpecialFocus: COVID-19and the Human CapitalCrisis: Recovering EducationalLosses for Future Productivityand Growth 23 Iraq Education Sector Reform Path FIGURE 21 •  Crisis Response: Mitigate Immediate Learning Loss and Preventing Further Dropouts Strengthening Foundational literacy & numeracy skills in the foundational years in primary school. Using innovative approaches could support self-learning for youth in secondary and vocational education. Supporting the most vulnerable children through additional resources, for example through school grants or cash transfer programs. Improve Foundational Skills to Set a Trajectory for Learning-through Improved Learning Materials and Strengthened Teacher Practices that Support Learning for All Children Developing teaching and learning materials for preschool and early grades to build strong and foundational skills. Strengthening adaptive teaching strategies and psychosocial support. Focus on Most Urgently Needed Investments, While Ensuring Better Utilization of Resources Supporting reconstruction and rehabilitation of school infrastructure in the most deprived areas. Enhancing utilization of existing school infrastructure to improve the quality of education under existing budget constraints. Increasing efficiency in teacher allocation and reviewing teacher recruitment practices to improve the quality of education. Improve Governance of the Education Sector and Evidence-Based Decision-Making Improving planning and management capacity and governance of the education sector. Increasing transparency in education financing and link financing to education outcomes. Strengthening autonomy of schools to manage their own funds. Develop an Education Sector Strategy that Focuses on Learning and “Building Forward Better” Developing a National Education and Training Strategy. Developing an assessment strategy that sets out goals for classroom assessments to monitor student’s individual progress, and large-scale assessments to inform education policy. Align Skills with Labor Market Needs Developing school-to-work transition programs to facilitate entry of university graduates into the labor market and to improve their employability. Aligning tertiary education programs and governance with international standards and labor market needs. Source: World Bank (2021b). better learning and skills development.35 Figure 21 government approach. Past experiences of coun- presents a short overview of key reform areas that tries that have successfully managed to implement are crucial for improving quality and governance of such an approach show that several elements are education in Iraq to promote learning and skills, which important. First is the continuity to sustain reform are further described in the Appendix and in the edu- efforts across political cycles. Second is the effec- cation sector reform note. tive coordination of reform implementation across dif- ferent sectors, ministries, and levels of government. A ‘whole-of-government’ approach b.  And third is ensuring that the policies and programs is needed to improve human capital are designed in a way that is evidence-based to effec- across sectors tively improve human capital of the population. Coun- To sustainably improve human capital outcomes, countries need to adopt a concerted whole-of- 35 World Bank (2021b). 24 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH FIGURE 22 • Human Capital Reform Process Focus Areas of Education Sector Reforms and Linkages to Other Key Sector Reforms Support for most vulnerable QUALITY AND School-to-work SOCIAL ACCESS RELEVANCY transition PROTECTION Teacher practices, AND JOBS Increase enrollment Internship and completion by Foundational skills Skills provided level of education such as early by Firm: and in urban and reading and math, Apprenticeship rural areas, address Quality ECD Cash transfer for Skills provided by urgent education (Early Childhood General Education, the most vulnerable infrastructure needs Development), TVET and teritiary Skills for youth Education Skills need Skills mismatch, gaps EDUCATION SYSTEM GOVERNANCE, HEALTH AND ACCOUNTABILITY AND EFFICIENCY NUTRITION Education strategy and assessment framework, Programs to Data systems for evidence-based policy making, Student readiness combat malnutrition School-based management, School infrastructure to learn and and Teacher allocation polices, PFM (Public support access to Financial Management) Reform and public basic healthcare expenditure management Source: World Bank (2021b). tries that managed to include all three of these ele- and education system governance, accountability ments in advancing human capital reforms were more and efficiency. In addition, as highlighted in Figure 22, successful in reaping their many lasting social and important linkages to other sectors highlight the need economic benefits.36 for a multisectoral approach to create sustainable Key to boosting human capital is a holistic reforms to boost human capital. These include pro- education sector reform approach that is linked to grams to combat malnutrition and support access reform in other human development sectors—spe- to basic healthcare, cash transfers for the most cifically health and social protection and jobs—to vulnerable, and firm-provided skills programs such as leverage synergies and ensure maximum impact apprenticeships. on development. Successful reforms that can boost human capital through the education sector should address the pillars of access, quality and relevant, 36 World Bank (2019). SpecialFocus: COVID-19and the Human CapitalCrisis: Recovering EducationalLosses for Future Productivityand Growth 25 APPENDIX: SUMMARY OF EDUCATION REFORM PRIORITIES FOR IRAQ F irstly, crisis response needs to focus on Secondly, realigning the education system mitigating immediate learning losses to learning means improving Foundational Skills and preventing further dropout. Mitigating to Set a Trajectory for Learning—through Improved learning loss can be achieved through a community- Learning Materials and Strengthened Teacher based approach to learning, with a focus on the Practices That Support Learning for All Children. most vulnerable students. Especially in remote areas, The current Iraqi curriculum is largely outdated and schools can best reach and coordinate support to is not focused sufficiently on learning, knowledge, students, teachers and caregivers. In addition, using and innovation, or conveying 21st century skills. New a blended approach for online and offline content learning and teaching materials should complement delivery can ensure that the most vulnerable children the ongoing curriculum reform through the reform have access to continued learning. The focus in primary of remaining subjects and the introduction of 21st schools should be on strengthening foundational century skills, such as socioemotional and digital literacy & numeracy skills in the foundational years, skills, promoting knowledge, innovation and skills by providing supplementary reading and numeracy over credentials, and enhancing the curriculum to materials for students, and teaching materials and support themes of inclusion, especially for girls, chil- coaching for teachers. In secondary and vocational dren with disabilities, and marginalized groups. New education, innovative approaches could support self- content can also promote themes of social cohesion, learning for youth by making complementary, quality diversity, and tolerance. Development of teaching and learning content available to students, while also learning materials can focus on preschool and early supporting learning and teaching of relevant skills for grades to build strong foundational skills. At the same life and jobs. time, adaptive teaching strategies for early numeracy 27 and literacy and psychosocial support need to be to education outcomes, can be achieved through developed. operationalization of an Open Data Portal to increase Thirdly, with demand for investments into accountability around the use of financial and nonfi- education far exceeding supply, the GOI needs nancial resource. Thirdly, strengthening the autonomy to focus on most urgently needed interventions, of schools to manage their own funds, has not only while ensuring better utilization of resources. The proven internationally to promote better learning infrastructure need in Iraq represents an additional outcomes, but will also give schools the flexibility to 70 percent of school buildings.36 The resources avail- address the priorities of individual communities and able should focus on the most deprived areas. With to harness knowledge of the local context to identify demand for new school infrastructure far exceeding the most appropriate interventions that can boost supply and current infrastructure developments, a learning. prioritization mechanism on school construction, Fifth, adapting education sector strategies including options to utilize existing infrastructure, that focus on learning. Iraq’ s education sector has needs to be established to address the most imme- so far been lacking a clear vision and strategy toward diate shortages. This also requires the adoption of a the development of human capital. The GOI is nearing school construction policy that includes national plan- the completion of a National Education Strategy ning guidelines and improved designs compatible (2022–2030) that will guide the future development with international standards to help create conducive of the education system that focus on learning and learning environments. In addition, suboptimal teacher supporting resource mobilization. Iraq had so far not allocation—with too many teachers in urban and too participated in any international large-scale assess- few teachers in rural areas—is a pervasive problem ments or institutionalized the use of formative and in Iraq that further exacerbates inequities in access diagnostics assessments. Over the last year however, and learning. The GOI should develop and adopt a Iraq has begun to develop a national assessment teacher allocation policy that focuses on catering strategy, which is nearing completion, and signed up toward teachers, especially in disadvantaged areas, to participate in Trends in Mathematics and Science and consider incentive schemes for teacher reloca- Study (TIMSS) in 2023. tion, especially to remote areas. In addition, the GOI Sixth, aligning skills acquired in school can develop a comprehensive teacher recruitment with labor market needs is imperative for human and teacher professional development strategy that capital driven sustainable economic growth. With is aligned with the goals set forth in the Iraq National the evidence of a large skills mismatch between skills Education Strategy (2022–2030). conferred through education and the labor market, Fourth, education sector reform should effective school- to-work transition programs are focus on improving governance of the educa- needed. MOHESR can take advantage of innovative tion sector and strengthen evidence-based financing mechanisms developed under the recent decision-making. Continuously monitoring student Competitive Fund Initiative (CFI) initiative, which progress and other education indicators is key for establishes tertiary education institutions’ (TEIs) evidence-based policy making towards the objective partnerships with the private sector to deliver joint of improved learning. Firstly, this will require moving training programs and ensure students are equipped toward a comprehensive Education Management with the skills needed to succeed in the labor market. Information System (EMIS) while gradually building the capacity of the Ministry of Education (MOED) to collect, analyze, and use the data. In addition, the 37 In addition, about 50 percent (6,961 school buildings) of the 14,032 school buildings currently in operation need MOED needs to focus on building internal capacity of rehabilitation and additional resources to meet basic key education sector entities to be able to implement safety and hygiene standards, such as sewer systems, capital investment projects. Secondly, increasing and so forth. Information provided by MOED to World transparency in education financing and link financing Bank during consultations in August 2020. 28 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH More broadly, aligning tertiary education programs for additional resource mobilization, (3) implements and governance with international standards, labor a National Qualification Framework, (4) develops a market needs and the national education and training long-term roadmap for international accreditation of strategy, will be imperative to promote better labor university programs, (5) incentivizes partnerships market outcomes. This should include developing between higher education or vocational institutions a roadmap for tertiary education sector reform, that and the private sector, and (6) implements teacher 1) proposes and implements a more agile sector training development programs, that are aligned with governance structure, (2) establishes mechanisms international standards of teaching and research. Appendix: Summary of Education Reform Priorities for Iraq 29 REFERENCES Azevedo, J.P.W., Rogers, F.H., Ahlgren, S.W., Cloutier, iraq-high-frequency -phone-sur vey -ihfps-to- M.-H., Chakroun, B., Chang, G.-C., Mizunoya, monitor-impacts-of-covid-19-results-from-august- S., Reuge, N.J., Brossard, M., Bergmann, J.L. september-and-october-2020-rounds. (2021). The State of the Global Education Crisis: Ministry of Health, Iraq (2022). COVID-19 Dynamic A Path to Recovery. 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World 32 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH SELECTED RECENT WORLD BANK PUBLICATIONS ON IRAQ (For an exhaustive list, visit: https://www.worldbank.org/en/country/iraq) Title Publication Date Document Type Iraq country climate and development report Upcoming Report Iraq economic monitor: The Slippery Road to Economic Recovery, Fall 2021 October 2021 Economic Update Iraq economic monitor: Seizing the opportunity for reforms and managing volatility, Spring 2021 May 2021 Economic Update Iraq Public Expenditure Review for Human Development Sectors May 31, 2021 Public Expenditure Review Iraq-Navigating through COVID-19: A snapshot on how the pandemic affected MSMEs in Iraq February 15, 2021 Report Breaking Out of Fragility: A Country Economic Memorandum for Diversification and Growth in Iraq September 30, 2020 Country Economic Memorandum The Seasonality of Conflict August 31, 2020 Policy Research Working Paper Iraq Economic Monitor: Navigating the Perfect Storm (Redux) May 4, 2020 Economic Update Multidimensional Poverty Assessment of Internally Displaced Persons in Iraq April 6, 2020 Policy Research Working Paper Iraq’s Universal Public Distribution System: Utilization and Impacts During Displacement February 19, 2020 Policy Research Working Paper EITI as an Instrument of Fiscal Transparency and Accountability: A Case Study of Two FCV Countries November 1, 2019 Brief (continued on next page) 33 (continued) Title Publication Date Document Type Doing Business 2020: Comparing Business Regulation in 190 Economies - Economy Profile of Iraq October 24, 2019 Working Paper Iraq Economic Monitor, Fall 2019: Turning the Corner - Sustaining Growth and Creating Opportunities for October 20, 2019 Economic Update Iraq’s Youth EITI as an Instrument of Fiscal Transparency and Accountability in Contexts of Fragility and Violence: August 1, 2019 Brief A Comparative Case Study of Afghanistan and Iraq (Part One) EITI as an Instrument of Fiscal Transparency and Accountability in Contexts of Fragility and Violence: August 1, 2019 Brief A Comparative Case Study of Afghanistan and Iraq (Part Two) Mashreq 2.0: Digital Transformation for Inclusive Growth and Jobs: Executive Summary June 25, 2019 Report Jobs in Iraq: A Primer on Job Creation in the Short-Term February 19, 2019 Working Paper Arrested Development: Conflict, Displacement, and Welfare in Iraq January 1, 2019 Report Bringing Back Business in Iraq: Analytical Note January 1, 2019 Report The Reconstruction of Iraq after 2003: Learning from Its Successes and Failures January 1, 2019 Publication Iraq - Interventions to Urgently Improve the Quantity and Quality of Drinking Water January 1, 2019 Brief Doing Business 2019: Training for Reform – Iraq October 31, 2018 Working paper Iraq Economic Monitor: Toward Reconstruction, Economic Recovery and Fostering Social Cohesion October 1, 2018 Working Paper Advancing the Public Procurement – Governance Nexus – The Case of Iraq (English) October 1, 2018 Brief 34 IRAQ ECONOMIC MONITOR: HARNESSING THE OIL WINDFALL FOR SUSTAINABLE GROWTH 1818 H Street, NW Washington, DC 20433