Iraq’s economy remains heavily dependent on oil revenues, a structural weakness that has limited diversification, weakened capital formation, and increased vulnerability to external shocks. Despite substantial oil export growth—rising from $50 billion in 2020 to $128 billion in 2022—the country has failed to translate windfalls into sustainable development. Public spending has largely financed consumption and nonproductive activities rather than strengthening agriculture, manufacturing, or infrastructure.
The paper argues that Iraq’s economic management since 2003 has prioritized short-term fiscal stabilization and political compromise over long-term structural transformation. As a result, agriculture and manufacturing have prematurely declined, while low-productivity services expanded. This deviation from the traditional development path has contributed to a “middle-income trap,” where rising wages erode competitiveness without corresponding gains in productivity or innovation.
A central concern is maintaining internal and external balance. Internal balance requires full employment and stable inflation; external balance requires a sustainable current account position. Iraq’s reliance on oil exports tightly links GDP growth to export performance, with a strong correlation (0.92) between export growth and economic growth. Under a fixed exchange rate system and high import dependence, growth is constrained by export capacity. Currency devaluation offers limited relief, as it simultaneously fuels inflation and expands dinar-denominated government spending.
Scenario analysis projects significant accumulated balance-of-payments deficits by 2035 under moderate growth assumptions, even with export expansion and austerity measures. Weak non-oil revenue and low net capital formation—often below 5% of national income—further restrict fiscal space.
The study concludes that Iraq urgently needs a politically supported, export-led industrialization strategy centered on manufacturing, supported by public-sector leadership, institutional reform, and investment in innovation. Without deep structural transformation, continued oil dependence risks future balance-of-payments crises and prolonged economic stagnation.
To read the full analysis, please click on the attached PDF file.
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