Subchapters:
- Basic data
- Public finances and the state budget
- Banking system
- Tax system
Basic data
Due to Iraq’s continued dependence on oil (over the last decade, oil revenues accounted for 42% of Iraq’s GDP, 85% of the government budget and 99% of the country’s exports), the Iraqi economy was positively affected by rising oil prices in the second half of 2021, as well as export growth in within OPEC. This development has the potential to turn the initially deficit budget (UDS 89.65 billion, USD 19.79 billion deficit) into a balanced or even profitable one. The increase in oil prices also resulted in an increase in gross domestic reserves to USD 64 billion in Q1 2021, as well as GDP growth (0.9% in the first half of 2021), which should reach pre-pandemic levels in late 2022 or during in 2023 (after a 16% drop in 2020). Together with the rise in oil prices and the easing of anti-pandemic measures, unemployment is also decreasing (before the pandemic 12.7%, as a result of anti-pandemic measures by more than 10% higher), especially in the private sector in services. At the same time, tax and customs reforms, which increase non-oil government revenues, are gradually taking effect. Check ebizdir for economical facts of Iraq.
The main problems of the Iraqi economy are mostly long-term factors, mainly an overgrown state sector dependent on oil, a weak private sector and corruption. The financial, economic and institutional reforms proposed in the government’s October 2020 White Paper, which has no timetable, have so far been implemented only gradually. The dominance of state-owned banks, their bloated bureaucracy and low trust in their services leads to the strengthening of the informal economy and corruption on the one hand, and to a weak private sector on the other. Outdated, disjointed and inefficient customs administration reduces the government’s revenue from customs collection.
With the state paying an average of half its budget on civil servant salaries and other significant sums on pensions and services, there is no budget space for investment and it depends on oil export profits. Unstable investments have an impact on neglected infrastructure, especially in the area of the power grid and healthcare. The problem for the economic development of the country in the future also means the deteriorating climatic and ecological situation in the country. The year 2021 was the driest in the last 40 years and therefore the government banned the use of half of the agricultural land for the winter of 2021/22 due to the lack of water.
| Pointer | 2019 | 2020 | 2021 | 2022 | 2023 |
| GDP growth (%) | 4.4 | -11.2 | 2.8 | 5.1 | 3.4 |
| GDP/population (USD/PPP) | 11,362.60 | 9,503.80 | 9,820.00 | 10,170.00 | 10,230.0 |
| Inflation (%) | -0.2 | 0.6 | 6 | 5.4 | 3.2 |
| Unemployment (%) | 12.9 | 14.1 | ON | ON | ON |
| Export of goods (billion USD) | 81.6 | 40.1 | 78.6 | 111.5 | 101.5 |
| Import of goods (billion USD) | 49.4 | 41 | 49.5 | 60.4 | 63.4 |
| Trade Balance (Billion USD) | 32.2 | 5.9 | 35.2 | 54.6 | 40.2 |
| Industrial production (% change) | 3.8 | -11.3 | -0.6 | 9.5 | 4.4 |
| Population (millions) | 39.3 | 40.2 | 40 | 40.6 | 41.8 |
| Competitiveness | ON | ON | ON | ON | ON |
| OECD export risk | 07.VII | 07.VII | 07.VII | ON | ON |
Source: EIU, OECD, IMD
Public finance and state budget
| Public finance | 2021 |
| State budget balance (% of GDP) | 2.1 |
| Public debt (% of GDP) | ON |
| Current account balance (billion USD) | 21.1 |
| Taxes | 2022 |
| AFTER | ON |
| F.O | ON |
| VAT | ON |
The country’s high dependence on oil revenues combined with built-in budgetary rigidities (e.g. increasing incomes of civil servants, increasing employment in the public sector, lower retirement age) have a negative fiscal impact. The non-diversified economy and the large presence of the state in economic and commercial activities make it difficult to create the necessary jobs in the private sector for the predominantly young population.
Prime Minister Kadhimí’s government proceeded with economic reforms when in October 2020 it announced a reform program within the so-called White Paper. However, the pace of implementation of these reforms is gradually slowing down. The public sector also plays a large role in domestic economic and business activities. It is present in most service delivery sectors – education, healthcare, electricity, water – with a dominant position in many service sectors as well, especially in finance and wholesale and trade. Iraq’s public sector is the largest employer, with 23% of the active workforce, and its state-owned banks hold 71% of all deposits in the financial sector. In addition, public finances are undermined by considerable non-transparency and corruption, which thrives in the overgrown Iraqi bureaucracy.
It was not until March 31 that the state budget for 2021 was approved, and the budget for 2022 was still not approved due to the inability to form a new government. Moreover, the current high oil prices do not put any pressure on Iraq in this regard. Budgets are prepared in Iraq based on the expected price of oil in a given year. Due to the rise in oil prices in the second half of 2021, Iraq’s budget, expecting oil prices of $45 per barrel, ended up in the red, and it is estimated that as a result public debt fell from more than 80% of GDP to less than 60% – but here it is likely that high post-covid GDP growth also played a role. On the contrary, the warning for 2022 is the absence of a budget and a false sense of irresponsible security thanks to high oil prices – according to the IMF, income is expected to grow by 73%.
Banking system
The organization of the banking and financial system in Iraq is entrusted to the Central Bank of Iraq – CBI (Central Bank of Iraq), which, on the basis of the adopted Law No. 64 of 1976 (amended on 6 March 2004) on the establishment of the Central Bank, the functioning of the monetary system and the organization of banking services, issues guidelines and measures to fulfill this law. Their goal is to achieve domestic price stability and support a competitive, stable financial system.
However, the efficiency of the banking system is weak in the country, and the digitization of the banking sector is proceeding at an extremely slow pace. A weak banking sector, a large share of the shadow economy and the predominantly cash nature of the official economy will further hinder the CBI from implementing effective monetary policy. Efforts by the authorities to limit black market activities will bring results only gradually. The CBI seeks to manage liquidity in the economy through the interbank market, by setting the base lending rate, by introducing the obligation of banks to establish minimum bank reserves, currency auctions and the government securities market.
Generally, as an indicator of a healthy economy in which banks maintain a balance between savings and investment to finance various economic activities (industrial / commercial / agricultural), it is the case in Iraq that banks do not fundamentally contribute to the improvement of the economy. According to experts, the current situation requires a radical reassessment of the state of Iraqi banks and the services they provide, both in terms of the level of currently provided online services/technology, as well as in terms of low capital that does not allow for the effective provision of credit, investment or other financial transactions.
Tax system
Due to a lack of infrastructure and resources, compliance with tax regulations remains largely a manual process despite efforts to digitize it. The main tax law document in Iraq is the Federal Income Tax Law No. 13 of 22 November 1982, as amended in 2003. The tax authority in federal Iraq is the General Commission for Taxes (GCT). Recently, the Department of Large Taxpayers (LTP) was established, which is also in charge of all foreign companies and their branches. The tax authority in the Kurdistan Region is the Income Tax Directorate (ITD). The tax period in Iraq is the same as the calendar year. Kurdistan’s tax system is slightly different from the rest of the country.
The following tax system applies in Iraq:
Corporate tax. It represents 15% of the profit, and the employer contributes 12% of the gross salary to social insurance. Property transfer tax (depending on the value of the property 0-6%).
Personal income tax . Income up to IQD 250,000: 3%, IQD 250,001 – 500,000: 5%, IQD 500,001 – 1,000,000: 10%, above IQD 1,000,000: 15%. In Kurdistan, it is about 5% across the board.
Other types of taxes. Withholding Tax: Interest paid to non-resident companies is subject to a withholding tax of 15% of the gross payment. There is no withholding tax on interest paid to non-residents or residents. Other types of withholding tax (dividends, royalties, technical service fees are not applicable in Iraq); Sales tax: only for some consumer products (phone cards, tobacco-100%, spirits-200% and services of 5* hotels).
VAT as such does not exist in Iraq.
