What Awaits Iraq in 2024?

The Iraqi government led by Prime Minister Mohammed Shiaa Al-Sudani is striving to achieve significant accomplishments and critical projects aimed at pulling the country out of chaos and addressing the delays in projects that persisted over the past two decades.
This government faces various challenges, including tackling the housing crisis amid rising population growth, addressing desertification and drought, diversifying the Iraqi economy beyond oil, attracting foreign investments, and keeping Iraq neutral in international conflicts amid regional tensions.
Al-Sudani stated that his government focuses on service delivery, placing a significant responsibility on them to work towards achieving these goals.
However, the recent devaluation of the Iraqi dinar against the US dollar in the past months posed a significant embarrassment for Al-Sudani, despite his advice to Iraqis to purchase the dinar.
The suspension of oil exports from Kurdistan also presented a significant challenge to the stability of his government and maintaining an alliance with the Kurds to ensure its continuity.
The Gaza war added a new burden to Al-Sudani, who had to ensure the security of diplomatic missions, preventing them from armed attacks and keeping Iraq from turning into a conflict zone amidst missile attacks on several US military bases.
Iraq’s commitment as an oil-producing state to its obligations to reduce production under the OPEC+ agreement adds further pressure to the Iraqi economy amid the global economic slowdown and prevailing uncertainty affecting its various sectors.
This report highlights several challenges that could either present significant opportunities for the Iraqi economy in 2024 or act as real obstacles to its development and diversification of income sources, including:

Exchange Rate Control

In 2023, there was a noticeable decline in the value of the Iraqi dinar against the dollar, reaching levels near 1700 dinars per dollar before reverting to lower levels. This followed the US Treasury’s prohibition of several Iraqi banks from trading the dollar.
This led to a recession in Iraqi markets, especially after the Central Bank of Iraq implemented the Electronic Compliance Platform’s standards. This platform identifies the ultimate beneficiary of imported goods and requires precise procedures, causing many traders to refrain from using it.
The Central Bank of Iraq, in collaboration with the US Treasury, attempted to introduce solutions to restore confidence in the Iraqi banking sector and enhance its relationships with international banks.
Measures were implemented to prevent dollar smuggling and to end cash withdrawals in dollars starting from next year.
Agreements with several countries were reached to transact in their local currencies, diversify the currency basket concerning Iraq’s foreign trade, prohibit dealing in dollars in the local market, and implement electronic payment in most markets.
These measures pose a real challenge for the Central Bank of Iraq in curbing the misuse of Iraq’s hard currency reserves for money laundering or Iran’s evasion of sanctions on one hand, and its ability to revitalize the Iraqi market, which has witnessed a noticeable recession.

Transition to the Digital Economy

The Iraqi government aims to increase non-oil revenues and elevate its contribution to the national economy from 10% to 20%. This involves automating customs, border crossings, and tax authorities.
Additionally, plans include implementing an electronic tax system and digital payments to reduce corruption, control data, and minimize tax evasion.
These initiatives present a significant challenge, as the shift to digital processes requires extensive coordination among relevant institutions and ministries, coupled with thorough training for their staff. Providing secure internet networks is crucial for efficient data transfer while ensuring its integrity.
The most critical challenge lies in raising awareness among Iraqis, both in urban and rural areas, about the importance of this transition. Encouraging them, particularly regarding dealings with the banking sector, is vital for building trust, especially in adopting electronic payment methods or engaging with government agencies digitally.
Given that the majority of Iraqis lack credit cards, and only a small portion has bank accounts, reinstating trust in banks is crucial to utilizing the digital economy effectively.
Despite the existence of local electronic payment platforms, Iraqis predominantly rely on cash. Government employees and retirees may use electronic payment cards for withdrawing their monthly salaries, but they prefer cash for daily transactions, saving the remainder at home.
Thus, restoring Iraqis’ confidence in banks, along with ensuring the security of their data, is essential for enhancing the use of the digital economy.

Resumption of Kurdistan’s Oil Exports via Turkey

Since March 25th, Turkey has refrained from exporting 450,000 barrels per day of oil from the Kurdistan Region through its ports, citing damage to the oil pipeline due to earthquakes in those areas.
This decision followed a ruling by the International Chamber of Commerce’s court in Paris, requiring Turkey to pay $1.5 billion in compensation for the unauthorized export of Kurdistan’s oil through Turkish territory without the Iraqi government’s consent between 2014-2018.
Iraq’s losses due to the halt in Kurdistan’s oil exports exceeded $9 billion, exerting significant pressure on the region’s ability to bear various expenses.
Attempts to resolve the crisis resulted in agreements between Baghdad and Erbil, leading to an understanding that involved selling the region’s oil through the State Oil Marketing Organization (SOMO), with revenues deposited into an account under Iraqi government supervision.
Despite repeated meetings between officials from Turkey, Iraq, and representatives of foreign oil companies operating in the region, no decision has been made to allow Kurdistan’s oil exports to pass through Turkish territory.
The exports of the region are crucial in the federal budget law for the period 2023-2025, with a substantial portion relying on its revenues. These revenues are essential for the region to meet its obligations to foreign oil companies operating within it or to develop its oil fields.
The issue of amending the federal budget, as mentioned by Iraqi Prime Minister Mohammed Shiaa Al-Sudani, becomes crucial for Baghdad to fulfill its commitments to foreign oil companies operating in the region.
The cost of production, set at $8 per barrel in the budget, compared to $21 per barrel in the Kurdistan Region, also highlights the need for budget adjustments.
The Financial Committee in the Iraqi Parliament attempts to find solutions to these problems, but the most significant challenge lies in reaching a consensus between Baghdad and Erbil on the Oil and Gas Law, regulating cooperation between the two parties or the work of oil companies.
Additionally, dealing with countries through which Iraqi oil is exported, including Turkey, is a critical aspect of resolving these issues.”

Increasing Oil Production and Maintaining OPEC+ Agreement

During the recent OPEC+ meeting, Iraq announced a voluntary reduction in oil production by 220,000 barrels per day, starting in January and continuing until the end of March.
This aligns with OPEC+ members’ efforts to balance the market, serving both producers and consumers.
Despite the production cut commitment, Iraq continues to invest in its oil sector. In January, it will release an addendum to the fifth and sixth licensing rounds, comprising 30 oil and gas projects.
The fifth licensing round increased Iraq’s oil reserves by 6 billion barrels and added 32 billion standard cubic feet of gas.
Iraq aims to increase its oil production by 7 million barrels per day by 2027. However, market dynamics and Iraq’s commitment to production cuts may delay achieving this goal.

Self-Sufficiency in Oil Products

Despite being the second-largest oil producer in OPEC, Iraq imports around 300,000 barrels per day of oil products. The Ministry of Oil is working on operating refining units and establishing new refineries.
Iraq consumes approximately 800,000 barrels per day of gasoline, diesel, and gas oil, while its current production is around 550,000 barrels per day.
The real challenge is achieving self-sufficiency in oil products by next year, reducing import costs, and saving the Iraqi budget at least $3 billion annually over the past two decades.

Utilizing Associated Gas from Oil Production

Iraq aims to increase its natural gas production by 4.25 billion standard cubic feet and reduce gas flaring from 1,100 million standard cubic feet per day to lower levels, ensuring a sufficient supply of free gas in the long term.
To achieve this, Iraq plans to invest in three new projects in 2024; Halfaya (300 million standard cubic feet), Nasiriyah (200 million standard cubic feet) in addition to Basra NGL2 (200 million standard cubic feet), where these projects will be able to invest 70% of the flared gas.
Emission reduction is a critical issue in Iraq, causing health problems for residents near oil and gas fields. Iraq has committed to achieving zero emissions by 2028, necessitating additional measures for environmental preservation while continuing to develop oil and gas fields.

Efficiency of Electrical Interconnection with the GCC Grid

Iraq faces a severe electricity problem, resulting in summer protests. With a production of around 24,000 megawatts and a need for 37,000 megawatts, the gap is filled by importing electricity from Iran or using Iranian gas to run power stations.
To diversify energy sources, the electrical interconnection project between Iraq and Gulf Arab countries is expected to be completed by the end of 2024, providing Iraq with 600 megawatts initially.
The direct Saudi-Iraqi electrical interconnection project is projected to add 1,000 megawatts in its initial capacity.
In September of this year, Iraq completed the electrical interconnection project with Jordan, providing 150 megawatts initially, followed by 500 megawatts in the second phase and 900 megawatts in the third phase.
The real challenge lies in efficient electricity transmission, utilization, and activating an effective billing system.
This system ensures revenue generation, allowing Iraq to transform the electricity sector from a loss-making sector burdened with high costs for the state into a profitable sector encouraging investment.

Combatting Drought and Desertification

Iraq is grappling with a rapid decline in water levels due to drought and desertification, leading to the displacement of farmers and the death of numerous livestock. The Tigris and Euphrates rivers could dry up entirely by 2040 if swift measures are not taken.
In the coming year, Iraq plans to construct 35 dams in various regions to maintain high water levels, fostering agriculture and preserving biodiversity.
Failure to build these dams could result in a 20% reduction in Iraq’s water levels over the next three years, posing a significant challenge and a serious test of Iraq’s ability to address this issue in a timely manner.

Achieving Food Security

With a population of 43 million, Iraq needs significant quantities of agricultural crops, including wheat, rice, and barley. Water scarcity and desertification pose significant obstacles to obtaining sufficient quantities.
Iraq loses 100,000 dunams of farmland yearly due to desertification. Therefore, the Iraqi government has turned to cultivating many desert areas using groundwater.
Although successful in producing around 3 million tons in 2022, Iraq’s consumption of 5 million tons of wheat annually necessitates additional imports.
Despite having wheat reserves sufficient until April 2024, the Iraqi government plans to increase production to nearly 6 million tons in 2024. If successful, Iraq will achieve self-sufficiency in wheat, enhancing its food security.
In 2022, Iraq implemented measures to address the global food price crisis resulting from the Russo-Ukrainian war, allocating $17 billion to the Emergency Food Security and Development Support Act. Of this, $3.2 billion was allocated for purchasing wheat domestically and importing it.
Iraq plans to cultivate 5.5 million dunams, with 4 million relying on groundwater and the remainder on surface water. The challenge lies in resisting desertification, providing cultivated areas without depleting water levels, ensuring irrigation methods, and modern agriculture to encourage farmers to stay on their land.

Turning the Housing Crisis into an Investment Opportunity

Iraq faces a real housing crisis, needing three million housing units amid a lack of real projects to accommodate population growth. Prime Minister Mohammed Shiaa Al-Sudani announced that 2024 would be the year of projects completion, outlining a strategic plan to build five new residential cities in Baghdad, Babel, Karbala, Ninawa, and Anbar. Later, ten more residential cities will be announced in other provinces.
The goal is to reach 250-300 thousand housing units for the poor and middle class, with a commitment to stable housing unit prices. This step is crucial for overcoming the housing crisis but requires overcoming bureaucratic hurdles and providing suitable infrastructure for investing companies.
The main challenge lies in attracting competent investors to this sector and transforming it into a real operator for other sectors, such as construction materials, service companies, education, health, and more.

Initiating the Development Road Project

The enhancement of Iraq’s trade relations with global nations marks a pivotal shift in its foreign policies. The Development Road, set to commence, connecting the port of Faw in Basra to the Turkish border, is crucial for increasing trade between Europe and Asia through Turkey.
It not only facilitates the entry of goods into the Iraqi market, reducing costs and delivery times but also strengthens competition for the benefit of Iraqi consumers.
The significance of the Development Road extends beyond goods and passenger transport to include energy lines for oil and gas. It integrates with the $27 billion French-Qatari Iraq Gas Integrated Project (GGIP) in collaboration with Total Energies and Basra Oil Company, transforming Iraq from burning gas to exporting it.
The Development Road also provides a future opportunity to export Qatari gas through Iraq to Turkey and further to Europe, a strategic transformation for Iraq in global energy supply chains.
Turkey, aspiring to become a global energy hub, stands out as a key supporter of the Development Road. Turkish Foreign Minister Hakan Fidan urged Iraq to initiate this project in the coming months.
However, the primary challenge lies in completing the project on time. The first phase of the Faw port is expected to be completed by mid-2025. There are concerns related to archaeological sites, oil pipelines, and bureaucratic issues with various government ministries and institutions that may impede the project.
Moreover, attracting international investments poses a challenge. While several countries expressed interest, Baghdad has not submit any concrete offers or tenders.

Can Iraq overcome these challenges?

Iraq has the potential to turn these challenges into successful investment opportunities, but it requires political cohesion and agreement among different parties and institutions on economic development in 2024.
Iraq stands at a true crossroads, where it must leverage its financial breakthrough to diversify its economy or remain hostage to market fluctuations manipulated by geopolitical tensions, at a time when Iraq seeks to achieve balance in its regional and international relations.
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