By Nicholas Larsen, International Banker
According to an economic assessment issued in July by the Fitch Solutions company BMI, Iraq’s real gross domestic product (GDP) for the full year 2024 will reach 1.8 percent, which is higher than the firm’s previous forecast of 1.6 percent and a major turnaround from last year’s 2.3-percent contraction. BMI has also forecasted growth accelerating to 3.1 percent in 2025, underlining the solid upward trajectory on which Iraq’s economy is expected to embark. With the country increasingly looking to the East to liberate the non-oil sectors of its economy, Iraq is following in the footsteps of its Arab neighbours by playing a delicate balancing act between East and West to drive economic growth and development over the coming years.
BMI noted that 2024’s positive growth forecast primarily reflected stronger oil production than was previously anticipated, with Iraq producing beyond its allocated OPEC (Organization of the Petroleum Exporting Countries) quota. “Our Oil & Gas team now forecasts that Iraq’s oil output will fall by 1.9% in 2024, compared to previous expectations for a more severe decline of 5.3%,” the analytics firm wrote in its July 3 report. “This will reduce the pressure on economic growth, given that the oil sector accounts for around half of Iraqi GDP and 95 percent of exports. Our core view remains that growth will accelerate to 3.1 percent in 2025 as the anticipated phasing out of some OPEC+ oil supply cuts from Q4 2024 drives a recovery in exports.”
Iraq’s growth prospects still largely depend on the oil sector, which accounts for the overwhelming majority of the country’s exports as well as a whopping 90 percent of state revenues. As such, BMI’s growth estimates could be scuppered by falling oil prices in 2025—a trend that is increasingly expected following repeated OPEC forecasts of declining global oil-demand growth for this year and next, which follows a long-term downward drift in prices from June 2022, when Brent Crude was trading at US$120 per barrel.
“Risks to our growth outlook remain skewed to the downside. Most significantly, there is a risk that oil output comes in lower in H2 2024 as OPEC+ further extend[s] the supply restrictions and/or if Iraq abides by the OPEC+ quote,” BMI also warned. “The government has pledged to compensate for its overproduction with volunteer supply cuts over the coming months, and though it has historically not delivered on such pledges, this remains a threat to our short-term forecasts.”
Iraq’s budget has priced in $70 per barrel for 2024, which is around $5 lower than what is expected to be the average price this year. “We don’t anticipate major problems in 2024, but we need stricter financial discipline for 2025,” Mudher Saleh, economic adviser to Prime Minister Mohammed Shia al-Sudani, told Reuters in a September 9 interview. To bolster finances, Saleh added, the government is seeking to boost non-oil revenues through improved tax collection, with Iraq estimated to be losing $10 billion annually due to tax evasion and customs-related problems.
Over a longer time horizon, however, Iraq’s commitment to becoming energy self-sufficient by 2030 will prove crucial in boosting economic stability within the country. This is primarily being done by achieving self-reliance in gas—an endeavour that the United States is supporting as it seeks to curtail Iraq’s imports of gas and electricity from neighbouring Iran.
According to S&P Global, Prime Minister Mohammed Shia al-Sudani has visited the US twice this year to pen deals with US energy companies GE Vernova and Baker Hughes to increase domestic gas production. “We have a project of about 200 MMcf in Basra, the same in Nasiriyah, and 150 [MMcf] in the Nahr Bin Omar field, in addition to developing an integrated gas project and referring it to Total, which will collect gas from five important fields in the south, with a capacity of 600 MMcf in two phases, each phase 300 million,” according to Iraq’s deputy minister of oil for extraction affairs, Basem Mohammed Khudair.
Heightened security concerns remain in Iraq, however. The ongoing war in Gaza and Middle East tensions continue to pose risks to the country’s economic activity, BMI also wrote, with Iraqi-based militant groups stepping up actions against Israel. “Moreover, a number of recent attacks on US-linked businesses in Baghdad—again thought to be led by militant groups—hint at rising domestic social risks that could weigh on consumer and investment sentiment,” BMI confirmed, whilst also identifying renewed volatility and weakness in the Iraqi dinar’s parallel-market rate, possibly as a result of “a deterioration in the security environment”, as potentially weighing on Iraq’s private consumption.
In terms of strengthening its security and sovereignty, then, Iraq was given a major boost after finalising agreements with the US-led coalition to end military operations within the country by the end of September 2025 at the latest. “Iraq thanks the Coalition for the backing and support provided to the Iraqi security forces to confront this common threat and secure ISIS’s territorial defeat in Iraq,” a joint Iraq-US statement published on September 27 read. “At the forefront of these countries has been the United States of America, which stood with Iraq in difficult circumstances.”
Prime Minister al-Sudani reportedly began talks with Washington in January to implement the exit of US troops. According to Reuters, the prime minister said that “while he appreciates their help, US troops have become a magnet for instability, frequently targeted and responding with strikes often not coordinated with the Iraqi government”.
It is also clear that Iraq is increasingly looking towards the East as it seeks to embark on a new era of economic development, with China stepping in to escalate much-needed investment in the country in recent years. October 2019 saw a series of “oil-for-reconstruction” agreements approved between Baghdad and Beijing, with China taking the lead in rebuilding Iraq’s destroyed infrastructure from decades of brutal wars—initially through the invasion of the country by the US-led coalition in 2003, followed by several destructive battles with the Islamic State of Iraq and Syria (ISIS). In return, hundreds of thousands of barrels of oil would head daily from Iraq to China.
Although the agreements were shelved following the resignation of then-Prime Minister Adil Abdul-Mahdi, they were resurrected once again by al-Sudani shortly after taking office in 2022. Among the most notable of these agreements is China’s commitment to build 1,000 schools in Iraq. Speaking to the Iraqi News Agency (INA), Iraqi government spokesman Haidar Majeed confirmed that the project remains on course to be completed before the end of the year.
According to the Rudaw Research Center, a Kurdistan-based political research organisation, moreover, Iraq has emerged as China’s top importer and the third-largest exporter among countries in Western Asia. In terms of investment in Iraq, China has now surpassed the Middle East, Arab countries, Türkiye and Iran, investing more than $34.2 billion in various projects and capital ventures in the country by the end of last year. “The surge in trade and heightened Chinese investment in Iraq’s energy and real estate sectors led to significant developments,” Mahmood Baban, a research fellow at Rudaw Research Center, noted in February 2024.
Data from the International Trade Centre (ITC) shows that bilateral trade between China and Iraq reached $49.7 billion last year, with $14.3 billion worth of Chinese goods and services being imported by Iraq and $35.4 billion of Iraq’s being exported to China. Much of this activity has occurred as part of China’s Belt and Road Initiative (BRI), which has been hugely significant for Iraq’s infrastructure development in recent years. “In 2015, China and Iraq signed a cooperation document on the Belt and Road construction, making Iraq a significant partner in this initiative. The two countries have achieved fruitful cooperation in energy, electricity, infrastructure, and telecommunications,” Chinese Ambassador Cui Wei told Shafaq News in June.
Meetings in July between senior representatives from both countries also focused on plans to link the BRI with Iraq’s $17-billion Development Road, a key initiative launched by Baghdad along with Türkiye, Qatar and the United Arab Emirates (UAE) to establish new trade routes linking southern Iraq to Türkiye and then on to Europe. “Beijing is advancing the China-Iraq strategic partnership towards new achievements,” Ambassador Cui Wei also confirmed. “The Chinese side supports Chinese companies in exploring cooperation opportunities with Iraq, focusing on detailed cooperation models, and is keen to discuss linking the Development Road with the Belt and Road Initiative.”
Elsewhere, Iraq’s Islamic-banking sector has been identified as a key growth sector over the coming years, with Fitch observing the sector’s long-term growth potential due to the country’s predominantly Muslim population and low banking penetration rates. “Islamic banking assets have grown strongly in recent years, to a 9.7 percent market share at end-2023 (2022: 8.15 percent) and IQD19.81 trillion total assets ($15.1 billion),” Fitch wrote in an October 16 report. “However, the overall banking sector remains undeveloped, fundamentally weak, exposed to high compliance and foreign-currency risks, and suffers from a lack of depositor confidence. The highly concentrated banking sector is dominated by state-owned banks with opaque finances.”
The World Bank’s figures show Iraq still suffering from low banking penetration rates, with around 81 percent of the adult population not having a bank account in 2021—much higher than the 60 percent average for all Arab world countries. “At end-2023, Iraq’s banking sector loans/GDP ratio was only 20 percent,” Fitch added. “About 21 percent of the surveyed population do not have a bank account because of religious reasons, amongst the highest globally, which present growth prospects for the Islamic banking industry.”