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IRAQ ECONOMIC MONITOR Protecting Vulnerable Iraqis in the Time of a Pandemic, the Case for Urgent Stimulus and Economic Reforms

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IRAQ ECONOMIC MONITOR Protecting Vulnerable Iraqis in the Time of a Pandemic, the Case for Urgent Stimulus and Economic Reforms IRAQ ECONOMIC MONITOR Protecting Vulnerable Iraqis in the Time of a Pandemic, the Case for Urgent Stimulus and Economic Reforms Fall 2020 Middle East and North Africa Region Iraq Economic Monitor Protecting Vulnerable Iraqis in the Time of a Pandemic, the Case For Urgent Stimulus and Economic Reforms With a Special Focus on Impacts of COVID-19 and weak oil prices on household poverty in Iraq Fall 2020 Middle East and North Africa Region TABLE OF CONTENTS Acronyms . vii Acknowledgments . ix Executive Summary . xi xiii . الملخص التنفيذي 1 . Recent Economic and Policy Developments . 1 Introduction . 1 Output and Demand . .2 Oil and Gas Developments . 5 Public Finance . .6 External Sector . 9 Monetary Policy and Prices . 10 2 . Outlook and Risks . .13 Outlook . .13 Risks and Opportunities . 14 Special Focus: Impacts of COVID-19 and Weak Oil Prices on Household Poverty in Iraq . .19 Introduction . 19 Pre-COVID-19 Pandemic Welfare Conditions in Iraq . .19 Impacts of the Twin Crises (COVID-19 and Oil Prices) on Household Poverty . 22 Discussion and Conclusions . 26. References . 29. Selected Topics from Recent Iraq Economic Monitors . .31 Selected Recent World Bank Publications on Iraq . .33 iii List of Figures Figure 1 Confirmed COVID-19 Cases and Deaths have Steadily Risen . .2 Figure 2 The Positive 2019 GDP Growth Was Reversed in H1-20… . 3 Figure 3 … Adding to the Challenge of Economic Convergence with Regional and Income Peers . 3 Figure 4 The H1-20 Contraction Was Broad Based … . 4 Figure 5 …but Was Partly Mitigated by a Strong Agriculture Growth . 4 Figure 6 COVID-19 Impacted the Recent Consumption Driven Growth Trend… . .4 Figure 7 … Leading to Containment Measures to Become More Growth-Oriented Since Mid-2020 . .4 Figure 8 Oil Production and Exports Plummeted Following Weaker Global Demand and OPEC+ Cuts… . .5 Figure 9 …leading to Oil Prices to Recover but Remain Below the Budgeted Amount . 5 Figure 10 Oil Income, the Major Source of Revenues, Has Been Hit Hard… . .6 Figure 11 … but Existing Rigidities in Expenditures Including High Wage Bill Remain in Place . .6 Figure 12 Realization Rates of Budget Target Deteriorated Further as the Economy Deteriorated . 7 Figure 13 The Majority of the Stock of Debt and Guarantees are from External Sources . 7 Figure 14 The Decline in Oil Prices Pulled the H1-20 CAB Into Deficit… . 9 Figure 15 … while Imports Grew (y/y) . 9 Figure 16 Iraq’s Exchange Rate Has Appreciated Relative to its Main Trading Partners… . 10 Figure 17 …which Combined with Lower Oil Exports Led to Pressures on CBI Reserves… . 10 Figure 18 …bringing Usable Reserves Down to 8 Months of Imports . .11 Figure 19 Inflation Has Remained Low Due to Cheaper Imports and Weaker Demand . 11 Figure 20 Lockdowns and Restrictions have Increased Prices of Health and Education Services . 11 Figure 21 Monetary Policy Has Boosted Credit to Private Sector and Money Supply . .11 Figure 22 National and Regional Poverty and Near-Poverty Rates . 20. Figure 23 Food Deprivation . 21 Figure 24 Multidimensional Vulnerability . .21 Figure 25 Share of Food Expenditure in Total Expenditure . 21 Figure 26 Type of Employment . .21 Figure 27 Combined Impact of Labor Income and Food Price Changes under the Moderate-Low Baseline scenario (percentage Point Increases) . 22 Figure 28 Combined Impact of Labor Income and Food Price Changes under the Moderate-High Baseline scenario (percentage point increases) . 24 Figure 29 Combined Impact of Labor Income and Food Price Changes under Moderate-Low Baseline low scenario (percentage point increases) . .24 Figure 30 Combined Impact of Labor Income and Food Price Changes under Moderate-High Baseline Low Scenario (percentage point increases) . 25. Figure 31 Number of New Poor Individuals under the Moderate-Low Scenario . 25 Figure 32 Spatial Concentration of the New Poor under the Moderate-Low Scenario . 25. Figure 33 Number of New Poor Individuals under the Moderate-High Scenario . 26 Figure 34 Spatial Concentration of the New Poor under the Moderate-High Scenario . 26 Figure 35 Characteristics of the “New-Poor” under Moderate-Low Baseline (Full-Curfew) Scenario . .27 Figure 36 Composition of Social Protection Responses to COVID-19 by Region and Income Level . 28 List of Boxes Box 1 1. GoI Has Announced an Ambitious Economic Reform Plan – The “White Paper” . .3 Box 1 .2 The Human Capital Index in Iraq . 8 Box 1 .3 Key Challenges of the Financial Sector and Major Policy Reformsa . 12 iv IRAQ ECONOMIC MONITOR: PROTECTING VULNERABLE IRAQIS IN THE TIME OF A PANDEMIC Box 1 .4 Potential Gains of “Breaking out of Fragility” . 15 Box 2 1. Microsimulation Methodology, Assumptions and Scenarios . 23 List of Tables Table 1 Iraq: Selected Economic and Financial Indicators, 2017–2022 . .16 TABLE OF CONTENTS v ACRONYMS ALMPs Active labor market policies KYC Know Your Customer Bbl Barrel of oil LHS Left hand side BeneMark Beneficiary Market Perspectives Survey MBPD Million Barrel Per Day CAB Current Account Balance MENA Middle East and North Africa CBI Central Bank of Iraq MFI Microfinance institutions COSIT Central Organization for Statistics and MoF Ministry of Finance (Iraq) Information Technology MoH Ministry of Health (Iraq) COVID-19 Coronavirus Disease 2019 MOLSA Ministry of Social Affairs (Iraq) DE Digital economy MoO Ministry of Oil (Iraq) DFS Digital Financial Services MSME Micro-, small and medium-sized EFPM Enhanced Frequency Price Monitoring enterprises EIA US Energy Information Administration MVI Multidimensional vulnerability index EITI Extractive Industries Transparency NGO Non-Governmental Organization Initiative OPEC(+) Organization of Petroleum Exporting FDI Foreign Direct Investment Countries (plus other non-OPEC partner FSAP Financial Sector Assessment Program countries) GCC Gulf Cooperation Council PDS Public Distribution System GDP Gross Domestic Product Pp Percentage points GEP World Bank Global Economic Prospects R&D Research and Development GoI Government of Iraq RHS Right hand side HCI Human Capital Index SOBs State-owned banks IDPs Internally Displaced Persons SOEs State-Owned Enterprises IEM Iraq Economic Monitor SSNs Social Safety Nets IFRS International Financial Reporting SWIFT Rapid Welfare Monitoring Survey Standards UCT Universal Cash Transfer Program ILO International Labor Organization UMI Upper middle-income countries IMF International Monetary Fund UN United Nations IQD Iraqi Dinar UNHCR United Nations High Commissioner for ISIS Islamic State Refugees vii UNICEF United Nations International Children’s WDI World Development Indicators Emergency Fund WFP World Food Program US United States WHO World Health Organization WB(G) World Bank (Group) y/y year-on-year (growth) viii IRAQ ECONOMIC MONITOR: PROTECTING VULNERABLE IRAQIS IN THE TIME OF A PANDEMIC ACKNOWLEDGMENTS he Iraq Economic Monitor provides an update Eric Le Borgne (Practice Manager, MTI), Johannes on key economic developments and policies G . Hoogeveen (Practice Manager, POV), Ramzi T over the previous six months and presents Neman (Head of Baghdad Office, MNCO2), Christos findings from recent World Bank work on Iraq, Kostopoulos (Lead Economist, MTI) . Several offered placing them in a longer-term and global context and helpful inputs, comments and advice . These included assessing the implications of these developments Syed Mehdi Hassan (Senior Financial Sector and other changes in policy regarding the outlook Specialist, EMNF2), Igor Kheyfets (Senior Economist, for Iraq . Its coverage ranges from the macro- HMNED), Rene Leon Solano (Practice Leader, economy to business environment and private sector HSADR) and Haleem Hassan Kashkol Al-Kazali development . It is intended for a wide audience, (Social Protection Economist, HMNSP) . Special including policy makers, business leaders, financial thanks to Muna Salim (Senior Program Assistant, market participants, and the community of analysts MTI) for her administrative 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 in the World Bank Group . The report was led they represent . For information about the World Bank by Wael Mansour (Senior Economist, MTI) and Majid and its activities in Iraq, please visit www .worldbank . Kazemi (Economist, MTI) with contributions from org/en/country/iraq (English) or www .worldbank . Ashwaq Maseeh (Economist, MTI) . The Special Focus org/ar/country/iraq (Arabic) . For questions and chapter was authored by Lokendra Phadera (Economist, comments on the content of this publication, please POV) and Matthew Wai-Poi (Senior Economist, POV) . contact Wael Mansour (wmansour@worldbank .org), The report was prepared under the direction Majid Kazemi (mkazemi@worldbank .org), or Eric Le of Saroj Kumar Jha (Country Director, MNC02), Borgne (eleborgne@worldbank .org) . ix EXECUTIVE SUMMARY Recent Economic and Policy growth trend over the previous two years . Depressed Developments global energy demand and the OPEC+ production cut led Iraq’s oil GDP to contract by 10 .4 percent Decades of political, economic and security (y/y) in Q2-20 . Since then, oil production declined to shocks have shaped major structural imbalances reach a five-year low of 3 .58 mbpd in August 2020 . in Iraq’s economy, reinforcing Iraq’s current Lower economic activity was most pronounced fragility trap. Iraq remains as one of the most oil- in the services sector, which contracted by 20 .7 dependent countries in the world . Oil accounted for percent (y/y) in Q2-20, following the introduction of over 96 percent of exports, 92 percent of government lockdowns and curfews in March 2020 . This sharp budget revenues and 43 percent of gross domestic contraction led non-oil GDP to decline by 9 .2 percent product (GDP) in 2019 . Overdependence on oil has (y/y) in H1-20 . As of September 2020, geo-mobility also increased economic volatility and discouraged data showed activity in workplace areas to have investment in other sectors .
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