Highlights:

Iraq’s economy continued its recovery after the sharp, pandemic-induced recession in 2020 but growth constraints in the oil sector have reemerged.

After moderating in 2022, consumer price inflation ticked up in early 2023, fueled by the depreciation of the Iraqi dinar in the parallel market. The June 2022 emergency law for urgent needs for food security and energy imports helped curb headline and core inflation to 5.0 and 4.3 percent in 2022, respectively.

Fiscal and external account balances benefitted from the oil windfall in 2022 but this trend significantly moderated in early 2023.

The new budget is excessively expansionary, and lacks the structural reforms that Iraq needs to develop a vibrant and sustainable economy.

Iraq’s economic outlook in the medium term continues to hinge on oil sector development.

The economic outlook remains subject to significant risks, largely due to deep structural challenges. Heightened climate change vulnerabilities and further commodity price volatility associated with the Russian invasion of Ukraine would intensify existing poverty trends and raise food insecurity.

Urgent implementation of financial sector reforms and modernization of its banking sector architecture, currently major barriers to economic diversification, are a critical condition to bolster the private sector and unlock much-needed job creation.