Iraq

( ) Indicates change in rating.                                       * Indicates forecast of a new regime.

Integrity of Iraqi State in Jeopardy
Now more than a decade on from the overthrow of Saddam Hussein, Iraq remains deeply troubled by dangerous ethnic and sectarian divisions, woeful security conditions, and chronic political instability in Baghdad that has undermined the central government’s efforts to firmly establish its authority throughout the country. Those weaknesses have long prevented Iraq from realizing the potential of its massive oil reserves, and more recently have exposed the country to an existential threat in the form of ISIL, a Sunni jihadist movement that over several weeks in June and July managed to gain effective control over something close to one-third of Iraq’s territory.
The Iraqi armed forces, Shiite militias, and the Kurdish military (peshmerga) have managed to halt the advance of ISIL, helped greatly by air support from the US and other international military forces, but pushing ISIL out of the areas it currently controls will be no easy task. The militants completely overwhelmed the undisciplined Iraqi soldiers, in the process gaining access to arms, ammunition, advanced weaponry, and vehicles, all donated by the US, that were abandoned by retreating Iraqi troops.
Any hope of pushing the group back and restoring government control over captured territory will, at a minimum, require the formation of a stable, inclusive administration in Baghdad. The task of pulling together a coalition that includes Shiite, Sunni, and Kurdish factions was handed to Haider al-Abadi. A political moderate and former exile, Abadi’s chief political asset is the fact that, unlike his predecessor, Nouri al-Maliki, he has not alienated the non-Shiite groups on whose support political stability will depend.
The new government, which was formed in haste against a backdrop of crisis, meets the basic criteria for inclusiveness that is essential to creating even the possibility of stability. However, it is one thing to form a unity government, but quite another to hold it together. The jihadist incursion has further heightened sectarian tensions, with many Shiites openly voicing suspicions that their Sunni compatriots are only too willing to collaborate with ISIL. Likewise, the assignment of the Defense and Interior portfolios, a perennial source of conflict between the Shiite and Sunni blocs, has not yet been determined.
At the same time, the occupation of the disputed city of Kirkuk by Kurdish military forces at the height of the jihadist incursion in June clouds the outlook for sustained political cooperation between Kurds and Sunnis. There is also the still-unresolved issue of oil contracts issued by the KRG without the approval of the Ministry of Oil, and a related controversy over the KAR’s direct exports of oil produced in the Kurdish region. Abadi has devised a roadmap to resolve the main issues concerning Kurdish oil investments and territorial disputes, but the Kurds are demanding action within three months, a time frame that would be logistically difficult and politically dangerous even under stable conditions.
Economic Opportunities at Risk of Being Squandered
Iraq’s oil and gas resources create the potential for a flourishing economy, but only if the government establishes a secure environment and a solid legal framework for investment. The long-stalled hydrocarbons law is widely acknowledged as essential to the country’s economic health, which hinges on the participation of foreign firms in the exploitation of the country’s natural resources. However, it is doubtful that the new government will make progress on that front, as the threat posed by ISIL means that Abadi can ill-afford to pursue controversial initiatives that could trigger the breakup of his coalition.
With the timetable for boosting oil production having been thrown into even greater uncertainty as a result of recent security-related disruptions, and weakening global demand contributing to downward pressure on oil prices, there are no assurances that the government will be able to finance its expansionary fiscal program. In any case, poor budget execution will limit the stimulus effect of robust state spending.
Widespread administrative corruption, deficient infrastructure, and shortages of educated and skilled workers resulting from a conflict-driven “brain drain” will be long-term impediments to realizing the country’s full economic potential. On balance, real GDP growth will average 6.5% per year through 2019.

Economic Forecasts for the Three Alternative Regimes

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