World Bank Expresses Concerns Over Decline of Iraqi Economy, Oil Dependence, and Shrinking Cash Reserves

Shafaq News/ The World Bank has voiced its apprehensions regarding the Iraqi economy, which relies heavily on oil exports, while cautioning about the declining cash reserves in the nation.

According to a report released by the World Bank, the Iraqi economy continues to recover, driven by the surge in oil prices, after being severely impacted by the COVID-19 pandemic in 2020. However, the non-oil sectors are still grappling with recessionary pressures.

Despite achieving record oil revenues and obtaining the much-awaited approval of the new fiscal budget, Iraq is at risk of missing a critical opportunity to undertake urgent and long-awaited reforms essential for boosting private sector growth and generating millions of jobs over the next decade, the World Bank stated.

According to a report of the World Bank's Iraq Economic Monitor, for the spring and summer of 2023, the real GDP growth had surged significantly to 7% in 2022, driven by the booming oil sector. Subsequently, it declined to 2.6% annually in the first quarter of 2023. In early 2023, consumer price inflation also rose due to the depreciation of the Iraqi dinar in the parallel market.

The favorable oil market dynamics in the initial nine months of 2022 had elevated total reserves, excluding gold, to an unprecedented $89 billion. However, this trend slowed down in early 2023.

The report emphasized that Iraq's development model, primarily reliant on oil, would face severe challenges without the implementation of structural reforms. It predicted an overall GDP contraction of 1.1% in 2023, mainly driven by an expected 4.4% contraction in oil GDP, following the OPEC+ production quotas agreed for this year.

Jean-Christophe Carret, the World Bank Country Director for the Middle East Department (Iran, Iraq, Jordan, Lebanon, and Syria), stated, "Iraq is witnessing a strong recovery after many years of turmoil. However, it cannot solely rely on oil windfalls for short-term recovery." He further emphasized that in the absence of high-level political commitment to the necessary reforms, Iraq faces the risk of depleting its reserves at an accelerated pace and regressing to square one in a short period.

He called for urgent measures to expedite the diversification of economic activity and address existing fragility factors while tackling pressing climate-related challenges to secure the long-term well-being of the Iraqi people.

This particular chapter of the report focuses on the Iraqi financial sector. It concludes that the lack of capital in dominant state-owned banks and the weakness of the private commercial banking sector are significant impediments to economic diversification.

The report emphasizes the importance of banking sector reforms and the promotion of digital financial services to enhance financial intermediation activities and foster financial inclusion, transforming the financial sector into a catalyst for economic diversification.