Iraq’s economy is likely to shrink 2.7 percent this year, the first contraction since the US-led invasion in 2003, after Islamic State militants occupied swathes of the major oil exporter, the International Monetary Fund said on Monday.
The current economic downturn comes after a 4.2 percent gross domestic product growth in 2013, which was the weakest rate since 2007, the IMF’s regional economic outlook shows, according to a Reuters report.
It still pales, however, in comparison with a 41.4 percent output plunge in 2003 when the US-led coalition invaded the country to topple the government of its former strongman Saddam Hussein.
Islamic State swept through northern Iraq in the summer, facing little resistance from government troops. The al Qaeda offshoot then declared a caliphate in parts of Syria and Iraq and threatened to take Baghdad, deepening sectarian bloodshed.
The conflict has halted the expansion of Iraq’s oil production, which is expected to decline slightly to 2.9 million barrels a day, while exports of 2.4 mbd should remain close to last year’s level, the IMF said.
“Non-oil GDP growth will also likely move to negative territory, compared to growth of over 7 percent in 2013, as fighting undermines confidence, disrupts the supply of fuel and electricity, increases trade and distribution costs, and depresses investment,” it said.
However, growth should pick up again to a modest 1.5 percent in 2015 mainly driven by a rise in oil output, the IMF expects, although it cut its longer-term crude output projection to 4.4 million barrels per day in 2019 from 5.6 mbd seen in May.
“The near-term impact of the conflict on oil production and exports appears for the moment contained,” the Fund said.
“However, the deterioration of security will harm the technical and administrative ability to expand oil production and exports over the medium term,” it said.
Budget Under Pressure
The IMF said the government’s budget was coming under pressure from rising security spending and relieving the humanitarian crisis.
The Fund estimates a budget break-even oil price of $111.2 per barrel in 2014, up from $106.1 last year. Brent crude oil fell towards $85 a barrel on Monday amid abundant supply and global economic growth concerns.
However, the IMF expects higher oil output of 3.0 million bpd in 2015 verses 2.9 million in 2014, and forecasts a fiscal gap of just 0.6 percent of GDP in 2015.
If the fighting was to engulf Baghdad and the south, Iraq’s oil exports could fall by half, roughly 1.5 percent of global consumption, from current levels, with only half of that offset by higher production from global spare capacity, the IMF warned.
