- High levels of poverty, unemployment and poor infrastructure, as well as over-dependence on the oil sector, has left Iraq highly vulnerable to economic shocks as it progresses into a post-conflict economy.
- Oil prices crashed earlier this year and have not yet stabilised, cutting off a vital source of government revenue. The Covid-19 pandemic has also put significant strain on Iraq’s economy.
- Incomes for most Iraqis have fallen, plunging many into poverty. Access to food has fallen as a result.
- Falling revenue has forced the government to rethink its high levels of spending. It is highly likely that public salaries and pensions will fall in the future. The country’s successful, but expensive, food security programmes are also at risk.
After years of conflict and economic disruption, Iraq is highly vulnerable to further shocks. Poverty levels are high, especially in rural areas, and millions are in need of humanitarian assistance. The country faces significant development challenges, high unemployment and poor basic services and infrastructure. Agriculture, which is one of the biggest drivers of poverty reduction in developing countries, is plagued by low productivity and low incomes.
The Iraqi economy is highly dependent on its oil sector. Economic conditions worsened significantly after oil prices fell to unprecedented lows earlier this year. Although prices have somewhat recovered, it has created a major shortfall in government revenue. As a result, it is unclear how the government will be able to finance the generous budget it released last year, or how it will fund its wide-ranging food security programmes in the future.
The Covid-19 pandemic has also had consequences for food security. Many Iraqis have lost employment or experienced lower incomes since the pandemic began, a situation that threatens to plunge many of them into permanent poverty. Negative food coping strategies have increased, especially among Internally Displaced People (IDPs). Movement restrictions have prevented aid from reaching vulnerable populations and limited access to markets.
Iraq is once again facing a complex series of economic shocks that it is under-equipped to deal with. Those shocks include the economic fallout from the Covid-19 pandemic, as well as the collapse of oil prices earlier this year. According to the World Bank, Iraq’s economy is expected to contract by 9.7% in 2020, the country’s worst economic performance since the fall of Saddam Hussein in 2003. Iraq’s economic precariousness places the country’s estimated 38 million people at risk of increased poverty, and by extension, worsening food security.
Poverty and the Economy: A Snapshot
While Iraq made promising progress in improving several human development indicators prior to 2020, it struggled to make any significant progress in improving food security. Poverty is among the main drivers of food and nutrition insecurity and recurring economic, social and security problems in Iraq have contributed to high levels of poverty. Even before the multiple crises of 2020, Iraq’s poverty levels were high at 22.5%. In rural areas, where poverty is generally higher, rates can reach more than 70 per cent. Overall, poverty in rural areas was double that of urban areas in 2019 (31 per cent compared to 15 per cent). Within Iraq, there are around 1.4 million IDPs and 4.1 million people in need of humanitarian assistance. Furthermore, 42 per cent of the population is classed as highly vulnerable to falling into poverty as a result of the pandemic and the deteriorating economic conditions that it has created.
Since its victory in the war against the Islamic State in 2018, the Iraqi Government has started to reform and rebuild the economy. Despite some progress, however, severe development challenges remain. After years of conflict and economic hardship, Iraq has been left with high unemployment, poor basic services, high levels of poverty and an economy that is almost entirely dependent on the oil industry. Together these factors have left Iraq woefully unequipped to weather economic shocks, which poses a risk to Iraq’s fragile stability.
Agriculture is among the most important drivers of poverty reduction in developing countries. Although agriculture only contributes around five per cent of GDP in Iraq, it employs around 20 per cent of the population, making it the largest source of employment in the country. As with other parts of the Iraqi economy, agriculture has experienced only limited modernisation, which is partly responsible for low productivity and, by extension, low incomes in the agricultural sector.
The sector faces other challenges as well. Rural infrastructure, especially roads and irrigation networks are in disrepair. Environmental pressures have also threatened agricultural production, with droughts becoming more frequent and intense, especially in the hot central and southern regions. Iraq is also plagued by water scarcity, which is not only worsened by drought but also poor water governance and out-dated infrastructure. Irrigation systems are generally poorly maintained and irrigators continue to mainly use flood irrigation methods. Flood irrigation not only uses significantly more water than modern methods, but also increases soil salinity, posing another problem for Iraqi farmers. On the Shatt al-Arab, a river located in Basra province in southern Iraq, water levels are often alarmingly low and salinity has become so high that its waters have become unsuitable for human consumption or agriculture.
Oil Price Collapse
A series of protests over the last several years prompted the government to announce a costly and unsustainable economic stimulus package in October 2019. It included provisions to lower the retirement age, increase public sector employment and provide cash transfers. The budget was designed with the assumption that oil prices would remain above US$56 a barrel. As 90 per cent of government revenue comes from the sale of crude oil, any shift in oil prices would have a significant effect on government finances. In reality, oil prices collapsed earlier in 2020, due to a combination of oversupply, the start of Covid-19 lockdown measures and a price war between Saudi Arabia and Russia. Oil prices have recovered somewhat since April, but ongoing pressures, such as new spikes in Covid-19, mean it is likely that oil prices will struggle to increase to much more than US$40 a barrel. Following the oil price crash, Iraq also agreed to pump less oil, at one million barrels a day, which is roughly 20 per cent of its overall production capacity.
Low oil prices have had serious consequences in much of the Middle East, but has been felt especially acutely in Iraq thanks to its already fragile economy and its over-reliance on the oil sector. In April, revenue from oil exports fell to US$1.4 billion ($1.94 billion) from US$6.1 billion ($8.46 billion) in January. As a result, Iraq was left with a US$4.1 billion budgetary shortfall in April, a deficit that Iraq has increasingly been unable to address.
By the end of July, Iraq had recorded over 110,000 cases of Covid-19 and over 4,000 deaths. Cases have been reported in all provinces. In response to the pandemic the Iraqi Government introduced strict lockdown measures, which helped to control the outbreak until they were loosened in late-April. The pandemic and the containment measures have resulted in disruption to trade, transport, banking and finance and have negatively affected employment.
According to the Office for the Coordination of Humanitarian Affairs, the most commonly reported consequence of the pandemic in Iraq has been job and income losses, which have led to a decrease in income and purchasing power. As of mid-June, only 23 per cent of the population was working as normal and even among those who are still employed, incomes have fallen by an average of 40 per cent. Those who have experienced temporary job losses are likely to see their unemployment become permanent as the crisis continues, potentially trapping many in long-term poverty.
Over 15 per cent of the population used negative food coping strategies in July, most commonly by purchasing cheaper food. Movement restrictions have also prevented access to markets for around 31 per cent of Iraqis. The effects of the pandemic have been especially acute among IDPs, most of whom already employed negative coping strategies and rely on humanitarian aid. There have been disruptions to humanitarian aid around the world, and groups in Iraq have reported difficulties in accessing IDP camps, partly because of movement restrictions. In the first quarter of 2020, humanitarian aid access was severely impeded, especially in northern and central Iraq and a number of programmes have been put on hold.
As a result of these crises, there have been delays to salary payments and the Iraqi Government has drafted a proposal that will lessen spending. The draft includes provisions to reduce public sector salaries (the public sector is Iraq’s largest source of employment) and pensions (which the government is already struggling to pay on time). Those proposals have not only generated anger among public sector employees, but have also raised concerns of a recession as lowered purchasing power is likely to reduce spending.
Crisis and the Future of Iraqi Food Security
Increasing poverty is not the only threat to Iraqi food security. The government is highly involved in the food distribution system and the country’s Public Distribution System (PDS) is among the largest in the world. The system provides food rations to most Iraqi households at a negligible cost. It provides around 70 per cent of calories to the poorest 40 per cent of the population and even the rich receive a significant amount of food from the PDS. World Bank simulations have found that removing the system without measures to mitigate the loss would have disastrous consequences for poverty and inequality, with the Food and Agriculture Organization suggesting that the PDS may have helped to avert famine. In 2019, the programme cost US$1.43 billion ($1.99 billion), which even before the oil price crash, represented an unsustainable expense for the Iraqi state. There have been delays to the distribution of PDS goods, including basic supplies such as wheat and sugar, as the government has struggled to allocate funds to the programme. The government has also struggled to finance the US$1.25 billion ($1.74 billion) Wheat and Barley Purchase Programme, which buys wheat from farmers at double the international price.
Projections for the Iraqi economy are not optimistic. According to some forecasts, Iraq’s net income will drop by 65 per cent in 2020 compared to 2019 and earlier forecasts have been downgraded by all institutions. As incomes reduce and food prices increase, there have been reports that poverty could double, to over 40 per cent of the population.
The current budgetary crisis is almost certain to continue into 2021. Even if the Iraqi Government identifies new sources of revenue, it will still have to significantly cut back on much-needed public spending. At this stage it is uncertain what actions will be taken in the future as the Iraqi Government is still preparing its budget for 2021, but reducing spending is likely to be politically difficult and may lead to further protests.
Covid-19 has created economic turmoil around the world and Iraq is by no means unique in this sense, but when combined with lower oil prices and public spending that was already difficult to sustain, Iraq’s economic future is precarious. The expected decline in the country’s economic fortunes is likely to weaken food security and potentially further inflame public dissatisfaction.