Security has been on a downward trend since 2012 and insecurity increased in the run-up to the elections. Violence seems to be sectarian in nature, with the governorate of Baghdad the worst-affected. Iraq also faces the spillover effects of the conflict in Syria, and is hosting a growing number of Syrian refugees, particularly in the predominantly Kurdish region of northern Iraq.
Iraq’s economy suffers from structural weaknesses. The public sector is very large even by regional standards, government and state-owned enterprises employ approximately half of the labor force, but the quality of public services has been weak. The non-oil sector represents only 46% of the economy and services.Construction, transport, and a small agricultural sector are highly dependent on government spending and thus on oil revenues. Unemployment is high, officially estimated at 11% in 2011, a rate which conceals extremely high levels of non-participation in the workforce. Demographic pressure is strong, with 41% of the population under 15 years. The labor force lacks basic skills. The business environment is weak. Poor governance, an inefficient and easily co-opted judiciary system, inconsistent regulations, and security issues keep Iraq at the bottom of global rankings for doing business.
Nevertheless, the oil sector has delivered solid growth. Iraq's real GDP growth is projected to increase by 6.3% in 2014. However, high economic growth based on rising production and revenue windfalls is not sufficient to ensure shared prosperity. The lack of economic diversification makes Iraq’s economic growth highly vulnerable to oil sector developments. Economic diversification is, therefore, a challenge for the Iraqi government—both to create jobs and to promote income-creating opportunities for the majority of the Iraqi population.
Growth has not been broad-based enough to make major inroads on poverty and exclusion. Preliminary estimates from the 2012 Household Survey indicate that Iraq’s headcount poverty was reduced by about 4 percentage points during 2007-12, and national poverty fell from 23.6% in 2007, to 19.8% in 2012. Moreover, poverty reduction has been spatially uneven. In Baghdad, by far the most populous governorate in the nation, poverty did not change significantly, while in the Kurdistan Regional Government (KRG), poverty declined, albeit at a small rate. In contrast, the rest of Iraq, comprising 14 other governorates, registered a 5% decline in headcount rates, while rural poverty rose faster than urban poverty.
Furthermore, the large numbers of Syrian refugees crossing into Iraq raised the fear of the humanitarian crisis in the region worsening. According to the UNHCR, by February 2014, a total of 222,574 Syrian refugees were registered in Iraq, with 97% of them concentrated in the three northern governorates of the KRG, causing social, economic, and security challenges. Internal displacement has also risen due to the turmoil in Anbar province. The overall legacy of 35 years of conflict is a society facing high levels of physical, sectarian, and political fragmentation, in which crisis management impedes strategic focus of policymakers.
As of February 2014, the World Bank’s portfolio for Iraq consisted of 12 projects valued at US$866 million focusing on infrastructure, private sector development, youth employment, consultative service delivery programs, and capacity and institution building. Nearly all projects are implemented by government authorities with support from the World Bank. Existing investment lending and technical assistance projects are funded by the International Bank for Reconstruction and Development (IBRD), the multi-donor Iraq Trust Fund, concessional assistance from the International Development Association (IDA), the Private Sector Development, and other trust funds administered by the World Bank.
The first World Bank Group Country Partnership Strategy (CPS) for Iraq covering Fiscal Years 2013-16 (FY13-16) was presented to the World Bank’s Board of Executive Directors in December 2012. It aims to support government efforts to implement the National Development Strategy and is organized around three pillars: improving governance, supporting economic diversification for broadly shared prosperity, and improving social inclusion and reducing poverty.
International Finance Corporation (IFC): The IFC’s investment program in Iraq has grown significantly in the last several years. In FY13, the IFC committed US$112 million in three projects in cement manufacturing, warehousing and logistics, and the financial markets. IFC investments and mobilization have totaled around US$700 million in eight projects. In addition, the IFC’s donor-financed Iraq Business Assistance Facility (IBAF) is providing Advisory Services to support Iraq’s economic and social development and stimulate private sector-led growth. The IBAF is providing Advisory Services in capacity building, training and support to small and medium enterprise banking and private Iraqi commercial banks, investment climate reforms, corporate governance, and public private partnerships. In FY13, the IFC approved its first banking and joint investment and advisory project in Iraq to build the institutional capacity of United Bank for Investments. A Memorandum of Understanding (MOU) was signed with the KRG in March 2013 to identify and prioritize Possible Pilot Projects (PPPs) and assess their suitability to be procured through high level technical and financial analysis. The IFC is working with the federal government to sign a similar MOU. Its FY14 pipeline includes investments in manufacturing and services, as well as in beverages and infrastructure, with a focus on the power sector.
Multilateral Investment Guarantee Agency (MIGA): MIGA’s first engagement in Iraq was in FY11 when it signed a water bottling plant in Baghdad. MIGA has also provided a guarantee for another project in the telecom sector in the northern region of Iraq. With these two projects, MIGA’s gross exposure stood at US$8.5 million as of January 2014. It is looking to support other potential investments, including a port logistics project. In FY13, a delegation visited Baghdad, focusing on how MIGA could play a role in attracting foreign technical partners and expertise to the manufacturing, banking, and services sectors.
World Bank-supported projects have financed investments, strengthened government capacity, and provided advisory services and analytic work critical to supporting medium and longer term development efforts. Selected outcomes include:
Investments in Education, Health, Water Resource Management, and Telecommunications: The construction and restoration of schools:; the establishment of a comprehensive, computerized, and coordinated emergency response system for the three governorates of Erbil, Sulaimaniyah, and Dohuk; and training of paramedical personnel, senior physicians and ambulance drivers. In the Marshlands area, refurbishing primary health care facilities and equipping them, as well as establishing four TB clinics and the training of medical staff in primary care protocols, women’s health volunteers in community outreach, and teachers in health education. Improved drinking water has been provided to over 1.1 million people, improved sewer services to 130,000, and the rehabilitation of over 400 km of water networks and pipes and over 100 km of sewers and house connections. Two water treatment plants serving about 300,000 people are to be rehabilitated.
The capacity of the Ministry of Environment has been supported in policy formulation, environmental regulation and enforcement, environmental quality monitoring, and in raising environmental awareness, particularly among school children. A master plan for municipal solid waste for Baghdad, an action plan for health care waste management, and the installation of air quality monitoring stations in major cities has been carried out. A telecommunications network and inter-banking network, which connects the Central Bank of Iraq and commercial banks with high capacity telecommunications capabilities, have been installed. The Community Infrastructure Project provides water users with new or improved irrigation and drainage services, giving 5,400 people in rural areas access to it, creating employment and increasing major crop yields of wheat and barley.
Technical Assistance and Analytic Work: Results have included: policy advice to the Iraqi government on fiscal policy and management issues; organization of workshops reaching participants from various private and public sector entities; the development of the institutional system for the newly established State Pension Fund, and of key functions, regulations, and strategies in the areas of public communications, physical infrastructure, investment management and actuarial analysis.The deployment of the Social Safety Net (SSN) Information System in both Baghdad and to all governorates, allowed for the processing of beneficiary payments using a central data base resulting in savings of over US$30 million to the SSN budget. Also, advice on the completion of the first Extractive Industries Transparency Initiative report for Iraq, reconciled US$41.25 billion in oil revenues. Analytic work supporting the first and second household income and expenditure surveys fed into Iraq’s poverty reduction strategy and its Public Financial Management Action Plan. This increased momentum for state-owned enterprise reform, private sector regulatory reform, public-private dialogue, and public-private partnerships.
Seventeen donors contributed US$494.4 million to the World Bank-administered Iraq Trust Fund. Donors work together through the Iraq Partnership Forum. The World Bank has been cooperating closely with other donors in Iraq, including the United States, Japan, the European Union, and the Swedish Development Cooperation Agency. There has been coordination and consultation with USAID and the European Union on financial management reform, as well as with the United Kingdom Department for International Development and Swedish International Development Agency on the reform and expansion of the private sector, particularly in non-oil based sectors. The World Bank and the Agence Francaise de Developpement have been exploring co-financing possibilities in the water sector, and the Islamic Development Bank has co-financed the transport corridor project.