OVERVIEW
Iraq continues to face significant challenges in the path towards a sustainable economic recovery and durable solutions for displacement. As of December 2023, IOM estimated about 1.1 million internally displaced persons (IDPs) and 4.9 million returnees (IOM, 2023a). Despite years of progress, many IDPs and returnees continue to live in substandard conditions and face important barriers to livelihood access. A recent assessment in Salah al-Din Governorate, for instance, found that 74 per cent of IDPs and 42 per cent of returnees lack a stable source of income (IOM, 2023b). Across the country, and particularly in the south of Iraq, these challenges are compounded by declining water availability and increasing salinization due to climate change. Environmental degradation has reduced farming productivity and undermined rural households’ core means of income generation, pushing many to migrate to urban areas (IOM, 2023c). Conflict and climatic shocks have contributed to an increasing poverty rate over the past decade, reaching 25 per cent in 2022 (IMF, 2023a).
The country’s economy, heavily reliant on the oil sector, experienced 7 per cent gross domestic product (GDP) growth in 2022, driven by increased oil prices and production adjustments (World Bank, 2023a). However, the non-oil sectors, particularly agriculture, have stagnated partly because of growing water shortages linked to climate change and chronic gaps in access to finance, infrastructure and public services that undermine business competitiveness. Small and medium enterprises are responsible for most private sector employment and represent one of the most dynamic sectors of the economy but face important barriers in accessing the financial resources necessary to expand.
Global and regional instability linked to the war in Ukraine and the Israel-Gaza crisis are poised to impact Iraq’s economic and commercial landscape significantly. These conflicts have led to significant fluctuations in international oil and food prices (FRED, 2023; Trade Economics, 2023). Research shows that geopolitical risk increases oil prices and negatively affects investment and employment in the places directly involved in the conflict and in neighbouring countries (Chi- Wei Su et al., 2019; Caldara and Iacoviello, 2022). Regional conflict also tends to negatively affect bilateral trade, even in countries not directly involved in hostilities (Saeed, 2013). These findings suggest that continued regional instability will have an important effect on Iraq’s economy, potentially increasing oil revenues but further depressing non-oil sectors. Business confidence is likely to be undermined by increasing uncertainty.
Growing tension at regional level threatens Iraq’s stability and its path to economic resurgence. Empirical evidence underscores the importance of macroeconomic stability as instrumental in reducing the likelihood of conflict re-emerging (Bazzi and Blattman, 2013). Post-conflict nations with sluggish growth rates are at a doubled risk of falling back into conflict compared to those experiencing robust growth rates (UNDP, 2008). Economically vulnerable segments of society, including communities affected by conflict displacement and environmental degradation, are particularly exposed to the impact of negative economic shocks. Buffering these shocks is therefore paramount to prevent a setback in the country’s recovery.
In the short term, policy efforts should be aimed at buffering the impact of regional instability on private sector recovery in Iraq, with a focus on areas where livelihoods have been disrupted by past conflict and ongoing environmental degradation. Continued international support is vital in supporting the Government of Iraq’s efforts in this direction. In terms of long-term strategies, Iraq should strive for economic resilience. These efforts involve reducing oil dependency by diversifying the economy and encouraging the development of various sectors including technology, climate-resilient agriculture and manufacturing. For a robust private sector, creating a favourable business environment with more incentives for investment is critical. In agriculture, investing in sustainable practices is crucial in combating land degradation, which can be achieved through water conservation techniques, reforestation and renewable energy sources. Strong institutions and governance structures are essential for long-term stability, including transparent systems for managing Iraq’s natural resources and policies that foster sustainable economic growth and an equitable distribution of wealth.