Previous Quarterly Editions
Expropriation Risk: 63 66 66 67 ►Political Violence Risk:60 60 59 57 ▼Terrorism Risk:43 40 40 38 ►Exchange Transfer and Trade Sanction Risk: 63 63 63 63 ►Sovereign Default Risk:65 65 73 73 ►
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Protest intensity to date* 2022 2023 Low MediumUnrest risk in 2024**Cost of living: HighAnti-austerity: Medium
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
2020; however, the economy’s non-oil sectors have stagnated, and growth constraints have reemerged. Despite a record oil windfall and a long-awaited new budget, Iraq still has not pursued reforms that are critical to boost private sector growth and create the millions of jobs needed in the next decade. The World Bank forecasts that Iraq’s overall GDP will contract by 1.1% in 2023, driven by a projected 4.4% contraction of oil GDP given the agreed OPEC+ production quotas for the year.
Iraq’s national debt is expected to increase continuously in 2023 to 2028 by US$94.5 billion (plus 81.63%). The national debt is estimated to amount to US$210.3 billion in 2028. The economy is heavily burdened with debt. Mostly, this is a legacy of the embargo imposed by the international community following Iraq’s invasion of Kuwait in 1990.
The 2023 budget’s unprecedented spending plan at 199 trillion Iraqi dinars (US$153 billion), with the same allocated for 2024 and 2025, will likely perpetuate the structural imbalances between current and investment expenditures that characterize previous budgets, especially following periods of high oil prices. Further domestic borrowing
means that the stock of domestic debt could be larger by 70% to 80% by year end 2024 than at year end 2022 and larger by a total of 140% to 160% by year end 2025 than at year end 2022 — depending on actual deficits in 2024 and 2025 and on investment spending execution rates in these years.
The government’s oversized economic role means its expenditures — public sector payroll, social welfare, subsidies, goods and services, and even underspent investment spending — transmit oil revenues into the real economy. As such, the budget’s proposed expenditures, even with a small fraction of its investment spending plans, will result in significant liquidity injections into
the non-oil economy over the next 18 to 24 months. These will fuel economic growth.
Still, the debt burden has exacerbated Iraq’s overreliance on oil by forcing successive governments to focus on repayments rather than creating a more diverse economy. Due to decades of conflict and sanctions, Iraq is dependent on imports from Iran for a lot of its gas needs. U.S. sanctions on Iranian oil and gas, however, have hampered Iraq's payments for imports, putting it in heavy arrears and leading Iran to retaliate by cutting gas flows regularly. Washington has insisted that Iraq, the OPEC group's second-largest producer, move toward self-sufficiency as a condition for its exemption to import Iranian
energy, yet Baghdad has struggled here; however, in June 2023, Washington issued a sanctions waiver, and Iraq agreed to pay around US$2.76 billion in gas and electricity debt to Iran.
Regarding the Kurdistan Region of Iraq (KRI), the suspension of oil exports, after Iraq won an arbitration case which it said Turkey had violated by allowing Kurdistan to export oil without Baghdad’s consent, has halted repayments via crude cargoes of more than US$6 billion owed to energy traders. The suspension means Kurdistan cannot repay debts with oil supplies, and alternative schemes have yet to be enacted.
Though Iraq has nationalized foreign stakes in joint venture companies during the post-colonial era, the country has a good record of honoring contract sanctity and actively seeks foreign investors’ trust. Iraq’s risk-intolerant bureaucrats are hesitant to hazard an arbitration with international companies.
Even though faced by significant payment challenges, Iraq continues to pay international oil company investors as regularly as possible, and it has cleared its arrears to its foreign operators. The desire to keep paying oil firms is strong enough that successive governments have risked invoking Parliament’s ire by seeking foreign debt capital to pay energy sector contractors and by bending constitutional limits on foreign ownership of Iraqi oil by paying operators in crude.
In international pipeline projects, Iraq is sensitive to enforcing contracts strictly. While Iraq and Turkey may be able to manage the economic fallout from the halt in Kurdish oil exports, the brunt of this is being borne by the KRI, which relies on oil exports for 80% of its budget. The associated pipeline is an essential artery for Iraqi Kurdistan's oil industry, which normally provides global markets with nearly 500,000 barrels per day of crude from both Kurdistan and federal Iraq. Compounded by Iraqi officials’ refusal to allocate the KRI’s share of the federal budget, the region’s economic challenges may worsen, potentially leading to increased instability.
The KRI’s commitment to contract sanctity in its oil production-sharing contracts is now being tested. In February 2022, Iraq’s Federal Supreme Court ruled unconstitutional the Kurdistan Region oil and gas law (on which the contracts are based) and began to reach out to Kurdistan investors, oil traders and banks.
Thus far, Kurdistan has supported its investor rights and is now in talks with Iraq’s oil ministry to grandfather in existing Kurdish contracts under the framework of a new Hydrocarbons Law. If this fails, Baghdad can leverage the aforementioned ruling and Iraq-Turkey arbitration decision to force Turkey to support a transfer of marketing and debts to Baghdad.
In October 2023, the Turkish energy minister said the oil pipeline and terminal in Ceyhan was once again operational; however, Baghdad and Erbil have yet to finalize the oil and gas law, and there is no agreeable payment mechanism with international oil companies. According to the Association of the Petroleum Industry of Kurdistan, which includes many of the KRI's producers, the companies do not intend to invest the capital needed to resume full production, let alone put it into the pipeline, without a guarantee of being paid
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Social and political tensions between establishment political parties and youth or tribal protestors have been elevated since 2018, based on long-term economic grievances and new generational dissatisfaction with the aging ruling elite. Deadly crackdowns by the militia wings of establishment political parties are increasingly common since major protests in October 2019.
In late June 2023, over 50 parliamentarians resigned from the local parliament in Iraq’s Kurdish region, protesting a court ruling by the Federal Supreme Court that rejected their decision to delay regional elections. The ruling is yet another sign that Baghdad has largely reigned in the Kurdish region’s autonomy, having also asserted its control over oil revenue and key infrastructure.
In September 2023, Iraq deployed security forces into the northern city of Kirkuk to prevent further violence. The oil-rich province is disputed between the KRI and central government and has been the focus of some of the country’s worst political violence since Islamic State. Arab residents and minority groups, who say they suffered under Kurdish rule, protested the potential return of the most powerful political party, which led to ethnic clashes and casualties.
By Iraqi standards, the country faces by far the weakest insurgency since 2003; the risk of a major near-term Islamic State resurgence is negligible. In northeast Syria, approximately 3,500 Iraqi fighters for Islamic State are being held in facilities of the Kurdish-led Syrian Democratic Forces. Their repatriation to Iraq is ongoing and has led to security concerns. The second class of major terrorism risk is that of Shia militias, the most powerful of which Iran supports. These militias have mostly halted their anti-U.S. campaign; their remaining actions are largely symbolic.
The Iraqi dinar continues to face fluctuations, particularly when Washington imposes actions to curb money laundering and sanction-skirting activities. Over summer 2023, Washington listed 14 private Iraqi banks among those banned from dealing with U.S. dollars due to suspicions of funneling funds to Iran. This led to the dollar market rate jumping from 1,470 dinars per dollar to 1,570 and brought citizen protests against the sharp increase.
In October 2023, a central bank official said Iraq will ban U.S. dollar withdrawals and transactions as of January 2024. This is part of Iraq’s push to curb the misuse of its hard currency reserves in financial crimes and the evasion of U.S. sanctions on Iran. It is also part of a broader push to de-dollarize an economy that has seen the dollar preferred over local notes by Iraqis.
Iraq's central bank is taking steps to reduce the parallel market rate of the dinar to the dollar, and there is no indication that the exchange rate will hit 1,700 dinars per dollar. U.S. dollars deposited in 2024 will only be withdrawn in local currency at the official rate of 1,320. The parallel market rate of the dinar sat at 1,560 in October 2023, around 15% below the official rate.
Washington has signaled that as long as Iraq is seen to pursue energy independence efforts (gas and electricity), it will receive rolling back-to-back extensions to waivers for the purchase of Iranian gas and electricity.
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In January 2023, Fitch held the outlook for Iraq's Long-Term Foreign-Currency Issuer Default Rating at stable and affirmed it at B–. Iraq will seek to gain access to international capital markets and will continue to build its investment profile before undertaking new bond issues.
On the back of sustained high oil prices and political deadlock throughout 2022 (which prevents investment spending), Iraq has strongly rebuilt its sovereign reserves, rising from US$80 billion at the start of the third quarter of 2022 to US$115 billion in February 2023, as noted above. International Monetary Fund financing and bond issues are on hold.
