Will Iraq be the the fastest growing economy on earth?

Iraq need to improve its financial and legal infrastructure to attract investment, especially the financial services sector

The Wall Street bank's data shows that among all the major economies it tracks, Iraq will be the only country that will post double-digit-growth in 2012 - clocking a 10.5% improvement in GDP this year.

China will emerge as the world's second fastest-growing economy this year, with 7.7% GDP growth. Meanwhile, the ten most important emerging markets will only grow at 5.5% this year, weighed down by problems in OECD economies, BAML data shows.

Iraq will post a slightly lower but still impressive 8.2% growth in 2013, beating China once again (which is forecast to grow 8.2% next year), to emerge as the fastest growing economy again, according to BAML calculations.

The Economist Intelligence Unit (EIU) has a slightly lower forecast for Iraq of 8.5% in 2012 and 8.2% in 2013, but expects even greater growth over the next few years.

"We expect Iraq's economy to grow by a robust 9% on average during 2013-17, driven primarily by rising oil production," says the EIU. "Bouts of violence, especially in central areas around Baghdad, will continue to disrupt the economy, but improvements overall in the security situation should aid economic activity in some of Iraq's more ethnically and religiously homogenous southern and western provinces, leading to increased wholesale and retail trade."

The private sector is also expected to chip in with oil companies driving growth and boosting infrastructure development, housing, transportation and communications.

The pace of Iraq's revival in the coming decades depends very heavily on the oil sector: how quickly production and export are increased and how the resulting revenues are managed and spent, says the International Energy Agency.

"By mid-2012, oil output was above 3 million barrels per day (million bpd), of which around 2.4 million bpd was exported. Iraq's improving stability, its huge resource base and contracts concluded with international companies to develop the country's major fields provide the foundation for a rapid increase in oil production in the coming years," says the IEA, which believes that Iraq will lead OPEC oil production growth over the next two decades.

NO SMOOTH SAILING:

However, Iraq will need to overcome a set of challenges relating to investment in infrastructure, institutional reform and the legal framework for the hydrocarbons sector, enhance human capacity and consolidate political stability and security, said the IEA.

Much will depend on the stability in and around the country. With regional conflicts in Iran, Syria, Palestine escalating, there is a danger Iraq may get caught up in the ensuing tensions.

Iraq has its own domestic political problems to contend with.

"The continued weakness of central authority and the security services may allow militia and insurgent groups to re-establish themselves in some areas, although violence is unlikely to return to 2006-07 levels," notes the EIU.

"The government of national unity, which brings together the four largest political groups, will continue to be weak and divided, and some blocs may pull out to join the parliamentary opposition."

The federal government in Iraq is trying to resolve a long-standing dispute with the autonomous Kurdistan Regional Government, which is emboldened by the interest of foreign oil companies in its oil-rich deposits.

Indeed, U.S. oil giant ExxonMobil has decided to exit Iraq's West Qurna-1 oil field, to focus on its projects in Kurdistan. Baghdad was furious when ExxonMobil decided to invest in KRG region without securing the federal government's approval.

Analysts are hoping that the government will finalise the hydrocarbon's law and resolve its dispute with KRG to offer greater clarity to foreign oil investors who are key to funding Iraq's growth.

The country will also need to improve its financial and legal infrastructure to attract investment, especially the financial services sector.

"Reinforcing central banking operations includes rebuilding the capacity of the central bank to conduct monetary and exchange rate policies, supervise banks, and manage the country's foreign exchange reserves," says the International Monetary Fund. "The financial restructuring of the two main state-owned banks is an important step to help establish the conditions for the banking system to extend credit to the private sector."

Equally crucial is the issue of corruption, which is said to be rampant in the country.

Despite the challenges on many fronts, the economy is enjoying a revival which could raise the standard of living many Iraqis and bring them into middle class, which would secure domestic growth, rather than depending on oil exports. 

"After experiencing inflation rates of 70% in 2007, the Central Bank of Iraq was successful in reducing inflation to the single digits, where it has remained since," says the IMF. 

"The economy is growing with the revival of the oil sector and the improvement in the security situation. And with the support of the international community, debt levels have been brought down to sustainable levels."