Iraq

Iraq’s largely state-run economy is dominated by the oil sector which provides more than 90pc of government revenue and 80pc of foreign exchange earnings.

In 2015, Iraq’s oil reserves of 150bn barrels occupied the fifth place in the world, accounting for 8.8pc of the world’s proven reserves. With a GDP per-capita of $16,500 estimated in 2016, on purchasing power parity basis, the $200bn economy is one of the largest and richest amongst the Middle Eastern countries, though a third of its population is living in poverty.

Within a span of two years, the poverty rate has increased dramati­cally from 22pc in 2014 to the cur­rent 30pc in 2016. Poverty is concentrated in the Iraqi rural areas more than in the urban areas.

The Iraqi economy has faced a number of difficulties since 2014: war expenditures, decline in oil revenues and a 20pc unemployment rate.

The ISIS insurgency and the oil price shock have severely impacted the economy and compounded structural vulnerabilities. The twin crises resulted in a sharp deterioration of both fiscal and external accounts and worsened poverty.

Coupled with political instability in 2014, the crisis decelerated private-sector consumption and investment and limited government spending, particularly on investment projects. Armed conflict is hurting the non-oil economy through destruction of infrastructure and assets, disruptions in trade and loss of investor confidence. The impact oil price decline is affecting the budget, the external sector, and medium-term growth potential.

The economy has been hit hard. As a result, the non-oil sector is estimated to have contracted by 9pc in 2015 and 8.8pc in 2014.

In contrast, growth in the oil sector has remained resilient, with output rising 12.9pc in 2015 to a new high of 3.5m barrels per day. Overall, real GDP is estimated to have rebounded to 2.4pc in 2015 after contracting 2.1pc in 2014.

Iraq’s parliament has approved $85bn budget for 2017, based on oil price of $42/barrel and exports of 3.75m bpd with fiscal deficit projected at $26.6bn. The fiscal deficit widened from 5.6pc in 2014 to 20pc of GDP in 2016 due significantly to lower oil revenues and higher humanitarian and security-related expenditure.

The financing of such a deficit will be challenging. The large fiscal deficit in the past has been financed through external borrowings, including loans from the IMF and the World Bank.

The failure to diversify the resources of Iraqi economy could lead to more macroeconomic and social problems.

Kuwait

Kuwait has a wealthy, relatively open economy with crude oil reserves of about 102bn barrels amounting to the world’s seventh largest proven oil reserves.

With 70pc of the total population — around 4.4m are foreigners — poverty is almost non-existent. The country can afford generous state welfare because of its huge oil reserves. At current rates of extraction, its oil will last for another 89years. Gas reserves have a life time of over 100 years.

In periods of high oil prices, Kuwait’s large annual fiscal surpluses climb significantly upwards. Fiscal surpluses equivalent to an annual average of 17.8pc of GDP were recorded in the period 2000-2014.

Oil makes up 95pc of its export revenues and 95pc of government income and accounts for over 60pc of GDP. Net exports provide a positive stimulus to overall growth. Its foreign assets, including a Sovereign Wealth Fund, estimated at $600bn.

The non-oil economy is small. Utilities, services, public administration and defence provide the main impetus to non-oil sector growth. However, the authorities are trying to diversify the economy away from oil and improve fiscal revenue generation. That includes project spending.

Kuwait’s GDP, which contracted by an estimated 1.3pc in 2015 by 1.8 pc in 2016 on the back of a flat real GDP in the oil sector, according to a report released by the National Bank of Kuwait.

However, overall GDP growth is expected to improve to 2.7pc in 2017. Non-oil GDP growth, which remained resilient at 3.5pc is expected to inch forward to four-pc in 2017–2018.

Focus Economics Consensus Forecast panellists expect GDP to increase 1.8pc in 2017, growing further to 2.6pc in 2018.

Growth in the oil sector is expected to resume to around 1.5pc in 2018. The IMF expects economic growth to accelerate modestly over 2017 and 2018, forecasting real GDP growth of 2.7pc and 2.5pc from 1.7pc in 2016.

Meanwhile, Kuwait’s fiscal and external accounts have been adversely affected by the lower oil prices.

However, robust nonoil activity has kept the financial sector sound. Besides, the government has substantial fiscal buffers, including low gross debt and FX reserves over 400pc of GDP including sovereign wealth funds that have enabled Kuwait to finance fiscal deficit without a major deterioration in macroeconomic fundamentals.

Last year Kuwait ran its first deficit in 17 years due to the plunge in oil prices to around $30 a barrel from over $100 two years ago. The fiscal surplus of over 2.4pc of GDP in 2014 swung into a large deficit of 17.5pc of GDP in 2016/17, leading to a need for financing for the first time since 1998.

Kuwait is projecting a deficit of $28.9bn in the current fiscal year which began on April 1. It plans to tap international debt markets through bond issues to finance the deficit as financing needs will remain large in coming years. Fiscal deficit was financed through Kuwait’s sovereign wealth fund last year and the government planned to continue borrowings to underwrite current spending.

The key challenge for policymakers is to implement the government’s comprehensive reform plan which aims at promoting fiscal consolidation and boosting private sector growth, job creation for nationals, restructuring the state budget, diversifying the productive base and activating the financial and economic reforms. The government has promised to cut all subsidies by 2020.

Published in Dawn, Business & Finance weekly, January 30th, 2017