As Iraq appears to be descending into all-out sectarian war, the implications for the oil-dependent economy are huge. Iraq is Opec’s second-largest crude exporter, so markets are already feeling a little jittery, sending crude oil to its highest since September on Friday. Here are five charts showing how Iraq’s economy has developed since the 2003 US-led invasion of Iraq and where its vulnerabilities lie.
1. Oil production
Oil output has recovered to levels not seen since the first Gulf war at more than 3m barrels per day, though expectations were for a higher level. In February, it jumped to 3.62m b/d, the most in 35 years. Although the main northern export pipeline between Kirkuk and Ceyhan, in Turkey, has been out of action since it was bombed in March, the violence has so far failed to dent Iraq’s production levels. If extremists capture oil fields in the oil rich south, or Iraq is carved up into sectarian parts, oil output and exports would come under threat.
2. Economic growth
Following a post-war spurt, gross domestic product has been reasonably steady, if not stunning, with 2013 data showing 4.2 per cent growth. In its most recent meeting with Iraqi ministers in March, the International Monetary Fund noted that non-oil sectors such as retail trade and construction had helped growth in 2013 by increasing 7 per cent, helping to counter slower-than-expected oil production for that year. However, growth in these sectors would have been much stronger if the security situation on the ground had not been deteriorating. Civilian casualties reached nearly 8,000 last year, the most since 2007, and are on track to outstrip this in 2014. While the Fund estimated in March growth this year of around 6 per cent with oil production of 3.2m b/d and exports of 2.6m b/d, out-and-out war would play havoc with these estimates.
Consumer price rises from earlier in the last decade appear to have been controlled thanks to stable fuel and food prices, according to the IMF. But there are reports of food prices already rising as people start hoarding amid the violence.
4. Current account balance
Despite recovering production levels, the oil exporter failed to post a current account surplus last year. It hopes to this year, but is vulnerable to the insurgency and not only in the oil sector. Earlier this month, the trade minister said that it expected to harvest enough wheat and barley to cover domestic demand and scale back imports of the grains, a move that would help reduce downward pressure on the deficit. However, there have been recent on-the-ground reports of Isis setting fire to large areas of agricultural land and this could get worse.
5. Fiscal balances
Iraq relies on crude exports for more than 90 per cent of government revenues. Should Isis gain control of key oil fields and export infrastructure, or should the country fragment under sectarian divisions, the fiscal balance will likely further deteriorate, and make it harder for Baghdad to fund its already-weak military.
In its report, the IMF underlined the increased spending pressures on the government last year amid the already deteriorating security situation in the country. This caused the budget deficit to reach 6 per cent of GDP last year, more than halving funds in the Development Fund for Iraq to $6.5bn from $18bn. If the current insurgency hostilities continue, the cost of security is likely to weigh on this year’s fiscal balance as well.
The IMF said in March: “The draft 2014 budget envisages large spending outlays reflecting new commitments for security, social assistance and pensions, and transfers to the provinces. To preserve macroeconomic stability, planned expenditure commitments should be scaled down, while preserving key social spending. In the longer run, Iraq should strive to manage well its large, and rising, oil revenues by containing current spending and building up fiscal and external buffers.”