How Iraq Can Move Beyond the Oil Sector

Dr Carole Nakhle

Iraq is a textbook example of the problems of high dependence on a single sector – that is, hydrocarbons. In fact, the Iraqi economy is one of the most oil dependent in the world. In 2020, the oil sector provided more than 90 percent of government revenues, 96 percent of export revenues, and 32 percent of GDP. These figures would had been higher if it wasn’t for the coronavirus pandemic that crashed oil prices last year. In 2019, for example, the oil sector accounted for more than 43 percent of GDP and in 2018 it accounted for nearly 100 percent of export earnings. 

It is therefore not hard to comprehend the substantial impact of oil prices on the Iraqi economy: when prices are high, the economy obviously benefits and government spending increases. Equally, like passengers on a roller-coaster that they do not control, when prices collapse, the economy suffers, and government spending is significantly curtailed. When oil prices declined by 35 percent in 2020, Iraq’s GDP growth fell by nearly 16 percentage points. A healthy economy, however, requires stable growth instead of this kind of spasmodic growth, while a diversified economy is typically more resilient to price volatility in one sector.

For the world’s fifth largest oil producer and proven oil reserves’ holder, it is time to translate those riches into robust economic growth and sustainable development. For long, Iraq has been resource rich but economically poor. Should it successfully pursue a healthy economic diversification strategy, however, Iraq has the potential to be both resource rich and economically sound, even when oil gradually falls out of favour in the rest of the world.

The article is published by the Istituto Per Gli Studi Di Politica Internazionale (ISPI). To read more, click here.

The article is part of the dossier Governance in Iraq: Pathways to Prosperity from Baghdad to Erbil, jointly published by ISPI and the Iraq Policy Group.

The dossier examines Iraq’s political and economic dynamics — together with its foreign relations — to provide forward-looking analysis and policy recommendations that elucidate the country’s prospects of achieving stability and good governance and the role international actors can play to stabilise the country.

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