ERBIL, Kurdistan Region - The International Monetary Fund forecasts gross domestic product in Iraq to contract by a massive 2.7 per cent this year, down from 4.2 per cent growth last year, according to the latest regional outlook for the Middle East and North Africa released on Monday. The IMF does not produce a separate forecast for the Kurdistan Region of Iraq. But it did note the severe economic implications of this summer’s attacks by Islamic State militants on areas controlled by the Kurdistan Regional Government (KRG). “The [Iraqi] government budget is under pressure from security spending and the humanitarian crisis while oil revenues are subdued,” the report said. “However, foreign exchange markets have remained stable despite reports of some deposit withdrawals.” Kurdish growth could fall by as much as 5 percentage points this year, the World Bank said last week, suggesting a drop to 3 per cent GDP growth based on unofficial forecasts. Baghdad owes the KRG millions of dollars in budget revenues, which it has withheld in a dispute over independent Kurdish oil exports. With Baghdad’s coffers emptying fast, following massive corruption under the previous Iraqi government, the KRG’s economic outlook was highly uncertain. Iraqi Kurdish public investment and spending have already been cut sharply. The IMF said overall growth in the Middle East and North Africa would be lacklustre for the fourth consecutive year and forecast to grow by 2.6 per cent this year. Next year’s growth forecast of 3.8 per cent was significantly revised down from the IMF’s earlier forecasts. These figures excluded Syria, which has endured more than three years of civil war. The report, officially presented in Dubai today, was the IMF’s regular, semi-annual economic outlook for Middle East exporters and importers, Pakistan and Afghanistan. Iraqi trade has been severely disrupted by ISIS, with the jihadis controlling border crossings in the west of the country, while a recent sharp decline in international oil prices threatens stability as 95 per cent of Iraqi revenues come from oil exports. Conflict has already stopped the expansion of Iraq’s oil production, which was likely to fall to 2.9 million barrels per day, while exports of 2.4 million barrels per day should remain close to last year’s level, the IMF said. Non-oil GDP growth was likely to move into “negative” territory, compared with growth of more than 7 per cent in 2013. Overall GDP growth was seen at 1.5 per cent next year. The Iraqi Kurdish economy had enjoyed an investment boom in recent years, particularly in the oil sector. But advances by ISIS earlier this year led to many expat workers fleeing the region and the economy to shrink. Although the oil sector has returned to pre-ISIS activity, this is not enough to compensate for shocks to other sectors, such as real estate, say analysts. “The perception of having suddenly gone from an impressive economic boom to a deep recession is felt among the whole population,” said Roger Guiu, a research fellow at the Middle East Research Institute in Erbil. “Without recovering confidence in economic prospects, and this is linked to political achievements, consumption and investment are to remain downwards.” “All sources of economic growth for Kurdistan have been somewhat affected by the current conflict,” said Guiu. “The violent conflict has also cut the main trade routes with the rest of the Middle East and supply chains require time to adapt to the new situation. The displacement of population means that there is now a large pool of population dependent on already-constrained social and public services. He disagreed with the IMF’s forecast that Iraq could return to high growth levels as early as 2016. He believed the conflict with ISIS and the attendant humanitarian crisis, with more than 1.8 million people displaced in Iraq, was unlikely to be resolved that soon. “They base this growth on the stabilisation of the political situation as well as of oil market prices,” he said. “In my opinion, that is a too optimistic approach.” He believed the need for economic diversification was the most pertinent point made by the IMF when it came to Kurdistan and Iraq. “They are basically pointing out how vulnerable economic growth is for a country so dependent on oil exports, especially if the government has not done its homework, for example, creating a financial buffer and having a sovereign wealth fund,” he said. “Other oil producers with a more diversified economy have done a better job in keeping growth steady.”
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