Iraq economic & strategic outlook GDP & current account
Iraq’s economic growth was lackluster over the period 2000-03. By the end of 2003 real GDP declined sharply by 32.9% reaching a level of ID27bn according to data from Central Bank of Iraq (CBI). World Bank and IMF reported the same declining trend however at different rates. Afterwards, GDP was estimated to have rebounded by 46.5% in 2004, driven mainly by the recovery in oil production. By the end of 2005, GDP continued to grow however at a slower rate of 3.7% in real terms. In 2006, real GDP was estimated to have grown by 3%. Real GDP stood at ID42.2bn in 2006, almost the same level as 2000. As for nominal GDP, World Bank data estimated Iraqi GDP growing by 15.4% for 2006 reaching ID71,188.8bn (US$48.5bn).
Oil revenues continue to be a driving force in determining public and private expenditure due to its sheer contribution to GDP. As a result Iraqi GDP performance shadows the changes in the country’s crude oil production. On average, oil contributed around two thirds of Iraqi GDP for the period 2001-05.
According to World Bank estimates for GDP by major category, oil sector contribution to nominal GDP stood at ID39,409.4bn in 2005. Oil share in Iraqi GDP declined from 83.4% in 2000 reaching 63.9% by the end of 2005. This decline mirrored the decline in Iraqi oil production from 2.81mn b/d in 2000 to less than 2mn b/d in 2005. Following oil contribution, social development contributed 11.9% of 2005 nominal GDP.
In real terms, Central Organization for Statistics and Information Technology (COSIT) data on GDP by economic activity revealed that agriculture and social and personal services contributed the most to non-oil GDP. When combined both sectors accounted for more than 50% of non-oil GDP. On another hand, “Social and Personal Services” accounted for 13.7% of real GDP standing at ID5.8bn. Other major contributors to non-oil GDP were “Manufacturing and Industry”, “Transport, Communication and Storage” and “Whole Sale and Retail Trade”.
According to data from World Bank, consumption expenditure accounted for more than 90% of GDP on average for the period 2004-06. In 2006 private consumption accounted for 42.8% of GDP, almost the same level as 2004, while public consumption stood at 43.8% down from 56.4% reported for 2004. It is important to note that following 2003, gross domestic saving followed an increasing trend reaching 26.5% of GDP in 2006. Despite this increase in saving, gross domestic investment was on the declining trend as it retreated from 26.5% of GDP in 2004 reaching merely 16.2% of GDP in 2006. The decline in investment expenditure mirrored the unstable security situation that hampered reconstruction of the country and investment projects.
Iraq’s medium term economic outlook would be highly dependent on the security situation as well as the implementation of oil projects. Iraq’s oil output is expected to recover to pre-war levels by 2010, and the non-oil sector is projected to expand rapidly as aid and reconstruction spending flows into the economy. Thus IMF estimates Iraqi GDP to continue growing for the near future at a rate of 7% towards 2010. The recovery in economic growth is predicted based on increased oil production to reach 3.5mn b/d by 2010 without undue interruption. In addition oil prices would remain at favorable levels. Such progress also assumes that Iraq’s reconstruction is being undertaken smoothly and security is progressively restored. Similarly, non-oil GDP growth will remain strong supported by high investment levels to implement Iraq reconstruction projects.
Trade statistics from central bank revealed that Iraq’s trade balance continued to decline for the period 2002-05. Trade balance declined by a CAGR of 59% from US$2.4bn in 2002 to reach US$165.4mn by the end of 2005 or 0.4% of GDP. The surplus reported for 2005 was a result of exports growing rapidly at 33.1% as compared with 10.5% growth in imports. On one side, exports (FOB) stood at US$23.7bn, or 56.4% of 2005 GDP. Oil exports accounted for 99.5% of total exports standing at US$23.6bn. Non-oil exports on the other hand grew marginally by 7.7% to stand at US$118.5mn. Imports (CIF), stood at US$23.5bn, or 56% of 2005 GDP.
Generally, public sector controlled the Iraqi economy for decades. On the trade front, public sector accounted for more than 90% of exports and 70% of imports. This could be easily reported to the sheer size of oil contribution to exports. A sector that has been state-controlled for decades. Similarly, imports continued to be controlled by government due to many accords such as oil for food programs, grants and aid programs. In future, private sector is expected to account for more contribution on all fronts as a result of privatization plans as well as latest amendments facilitating private sector imports of petroleum products.
After three consecutive years of deficit, current account reported its first surplus of US$1.9bn in 2005. During the period 2002-05, goods rather than services balance was the main contributor for current account surplus. Goods balance reported a CAGR of 15.4% over the period. Services balance, on the other hand, continued to report high deficit over the same period. By the end of 2005, goods balance rebounded to report a huge surplus of US$3.7bn as compared with US$3.5bn of deficit reported for 2004. Current transfers on another hand continued its growth for the third consecutive year. In 2005 current transfers reached US$3.2bn, or 74% annual growth. The surplus in goods, transfer and income balances surpluses were more than enough to offset the negative contribution of services balance. Reporting a deficit of US$5.7bn, net services contributed negatively to the current account by 299.2% mainly due to increasing payments. In 2005, services payments grew more than five folds to stand at US$6.1bn as compared with US$972.3mn the year before.
Financial account iterated between surplus and deficit over the period 2002-05 mirroring movements in direct and portfolio investments. Financial account declined sharply during 2005 to report US$1.4bn of deficit as compared with previous year surplus of US$4.8bn.
Balance of payment (BOP) reported net surplus for the last two years. In 2005, BOP stood at US$4.2bn reporting a marginal 0.7% decline from 2004 level. It was the impact of current and capital accounts that support BOP to sustain its surplus for the second year. Current account contributed 45.9% of BOP surplus during 2005. While capital account contributed positively for the first time standing at US$3.5bn of surplus. This increase in current and capital accounts’ surpluses were more than enough to offset the 129.6% increase in financial account deficit. As a result, the overall BOP declined but remained positive.
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