## 1. A Growth Accounting Exercise for Iraq

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---

### A. Overview: Current Growth Performance
- Non-oil medium term growth is expected to remain subdued, at 3-4 percent — mostly driven by demographics.
- A comprehensive reform package could improve growth by an additional 4 percent over the medium-term.
- Since 2018, on average growth has been almost flat, at 0.3 percent.
- Non-oil GDP grew on average only at 1.3 percent between 2018 and 2023.
- Iraq's non-oil GDP per capita was USD 2,700 in 2022; the overall MENA average was USD 9,500.

### B. Labor Market and Demographics: Social Pressures and Employment
- Labor market outcomes and social indicators:
  - Unemployment rate: 16.6 percent (2021).
  - Young people neither working nor in education or training (NEET): around 74 percent (2022).
  - NEET regional comparators: MENA excl. GCC = 31 percent; rest of the world = under 20 percent.
  - Women not in the labor force: around 88 percent (2022); comparators: MENA excl. GCC = 80 percent; rest of the world = 45 percent.
- Demographic pressures:
  - Working-age population growing at 3.5 percent annually; more than 780,000 new entrants expected in the labor market each year (IMF, 2024).
  - Over 9 million new young Iraqis expected to reach working age by 2033.
  - To reduce unemployment to single digits by 2033 (for instance, halving the current rate to 8.2 percent), IMF staff estimate a required growth rate of no less than 5.5 percent annually over the next ten years (assuming an employment elasticity of growth of 0.7).

### C. Growth Accounting: Drivers of Past Growth
- Methodology:
  - Cobb-Douglas framework decomposing per-capita output growth into TFP growth, capital deepening (α times change in capital per worker), and employment ratio changes.
  - Annual data for 2000-2023; capital stock from Penn Tables (extended with COSIT investment data for 2020-2022).
  - Sectoral decomposition approximated using shares of investment and employment (oil sector employment share point estimate 0.7 percent in 2021).
- Key past contributions:
  - Capital deepening contribution fell to 0.5pp in 2020-23, from 1.8pp in 2008-19.
  - Investment share of GDP fell from a peak of 26 percent in 2015 to around 10 percent on average over 2020-2023.
  - Employment growth contribution averaged 1.25 percent of overall growth since 2001 — muted given strong demographics.
  - Labor productivity (real GDP per employed worker) growth has been close to zero over the last two decades, versus an average of 2.3 percent in MENA excl. GCC.

### D. Sectoral Productivity and TFP
- Sectoral patterns (2014-2021):
  - Subdued productivity growth, or declines, across most sectors; manufacturing is an exception with relative buoyancy.
  - Manufacturing accounted for "1.5 of the total value added" and 3.5 percent of non-oil value added in 2021 (as reported).
  - Service sector productivity broadly flat over the last decade; services are the major component of non-oil activity.
- TFP dynamics:
  - TFP has been low across sectors; oil price fluctuations induce large TFP swings in the oil sector.
  - Non-oil TFP rose by 60 percent between 2004 and 2014, but has faltered thereafter.
  - Capital misallocation contributes to weak TFP: less productive services (real estate and electricity) account for around half of total non-oil investment.

### E. Medium-term Outlook and Baseline Scenario
- Demographic contribution:
  - Active population growth projected to average 3 percent in 2024-2028 and 2.3 percent in 2029-2034.
  - Working-age share increase will continue to be a main driver of potential growth.
- Baseline (passive policy) estimate:
  - Non-oil output potential growth expected around 3-4 percent, with a median estimate of 3.5 percent.
  - Baseline assumptions include:
    - Labor productivity growth in line with historical trend of 0.5-1 percent.
    - Labor growing at 3 percent (UN population estimates).
    - No major labor market reforms and limited catch-up in TFP.

### F. Structural Constraints and Reform Priorities
- Main structural impediments:
  - Almost two decades of conflict and political unrest.
  - Poor energy and transportation infrastructure.
  - Bureaucratic hurdles, lack of regulatory clarity, high corruption.
  - Overemployment in the public sector, with hiring often functioning as a social transfer rather than based on economic needs.
  - Small private sector and high informality due to regulatory and administrative burdens.
- Reform priorities identified:
  - Improve governance and intensify the fight against corruption.
  - Streamline labor market and business regulations.
  - Strengthen the banking sector.
  - Reduce bureaucratic and administrative costs for starting and operating businesses.
- Regional evidence:
  - Countries in MENA that implemented more ambitious structural reforms in the decade prior to the pandemic enjoyed stronger productivity growth.
  - Iraq lags regional frontiers on regulatory quality and labor/business regulation indicators.

### Quantified implications and calibrated medium-term gains from structural reforms
- Empirical and calibration findings:
  - Governance-improving reforms can deliver a growth payout of 6 percent after 5 years.
  - Regulatory improvements can increase GDP by about 4 percent after 5 years.
  - Reforms in credit markets can lead to a 2.5 percent increase in output over five years.
  - Labor market reforms can enhance labor productivity and yield 2.5 percent employment growth 5 years after the reform.
- Calibrated medium-term gains from closing structural gaps (halving Iraq’s gap from MENA excl. GCC; reference period 2019-2020):
  - Halving the governance gap can deliver medium-term output gains of about 2.4 percent of GDP annually (5 years after reform).
  - Regulatory quality reforms can lead to a 0.3 percent annually increase in output after 5 years.
  - Improving credit market regulation can deliver around a 1.8 percent output gain after 5 years.
  - A labor market reform is expected to increase overall employment by about 1.5 percent after 5 years.
  - Assuming no growth synergies among different reforms, a combination of reforms in governance, regulatory quality and credit markets can increase Iraq’s growth rate by 4.5 percent annually after 5 years.
- Aggregate conclusion:
  - A balanced reform effort addressing institutional and regulatory weaknesses, fighting corruption, improving labor market legislation, and developing the financial sector is required to shift the economy toward a more diversified, private sector-driven model.
  - A balanced reform effort in these areas could improve Iraq’s growth rate by 4.5 percent over the medium term.

### Policy recommendations and reform priorities (detailed)
- Strengthen governance and fight corruption:
  - Align the asset declaration system with international best practices.
  - Maintain the integrity and independence of the Integrity Commission (IC).
  - Improve transparency and integrity of the public procurement system.
- Restructure state-owned banks (SOBs) and deepen financial sector reform:
  - Finalize and implement the reform strategy for the two largest SOBs.
  - Release draft by-laws concerning SOB corporate governance.
  - Establish robust supervision, regulation, and governance under the CBI.
  - Create an Ownership Policy to define objectives of government ownership in financial institutions.
  - Accelerate implementation of modern Core Banking System solutions.
- Implement comprehensive labor market reforms:
  - Create equal opportunities for public and private sector employees.
  - Enhance Technical and Vocational Education and Training (TVET) curricula to better align with labor market needs.
  - Prioritize passage of a new civil service law.
  - Streamline and simplify labor regulations, enforce business registration, review fees and tax procedures, and reduce bureaucratic obstacles.

*Source: IMF staff analysis in “1. A Growth Accounting Exercise for Iraq” and IMF — sipea2025115, “15. Fragmented and burdensome labor market regulations contribute to limited economic dynamism.”*

### 1. A Growth Accounting Exercise for Iraq ______________________________________________ 5

### 1. A Growth Accounting Exercise for Iraq

### A. Overview: Current Growth Performance
- Non-oil medium term growth is expected to remain subdued, at 3-4 percent — mostly driven by demographics.
- A comprehensive reform package could improve growth by an additional 4 percent over the medium-term.
- Since 2018, on average growth has been almost flat, at 0.3 percent.
- Non-oil GDP grew on average only at 1.3 percent between 2018 and 2023.
- Iraq's non-oil GDP per capita was USD 2,700 in 2022; the overall MENA average was USD 9,500.

### B. Labor Market and Demographics: Social Pressures and Employment
- Labor market outcomes and social indicators:
  - Unemployment rate: 16.6 percent (2021).
  - Young people neither working nor in education or training (NEET): around 74 percent (2022).
  - NEET regional comparators: MENA excl. GCC = 31 percent; rest of the world = under 20 percent.
  - Women not in the labor force: around 88 percent (2022); comparators: MENA excl. GCC = 80 percent; rest of the world = 45 percent.
- Demographic pressures:
  - Working-age population growing at 3.5 percent annually; more than 780,000 new entrants expected in the labor market each year (IMF, 2024).
  - Over 9 million new young Iraqis expected to reach working age by 2033.
  - To reduce unemployment to single digits by 2033 (for instance, halving the current rate to 8.2 percent), IMF staff estimate a required growth rate of no less than 5.5 percent annually over the next ten years (assuming an employment elasticity of growth of 0.7).

### C. Growth Accounting: Drivers of Past Growth
- Methodology:
  - Cobb-Douglas framework decomposing per-capita output growth into TFP growth, capital deepening (α times change in capital per worker), and employment ratio changes.
  - Annual data for 2000-2023; capital stock from Penn Tables (extended with COSIT investment data for 2020-2022).
  - Sectoral decomposition approximated using shares of investment and employment (oil sector employment share point estimate 0.7 percent in 2021).
- Key past contributions:
  - Capital deepening contribution fell to 0.5pp in 2020-23, from 1.8pp in 2008-19.
  - Investment share of GDP fell from a peak of 26 percent in 2015 to around 10 percent on average over 2020-2023.
  - Employment growth contribution averaged 1.25 percent of overall growth since 2001 — muted given strong demographics.
  - Labor productivity (real GDP per employed worker) growth has been close to zero over the last two decades, versus an average of 2.3 percent in MENA excl. GCC.

### D. Sectoral Productivity and TFP
- Sectoral patterns (2014-2021):
  - Subdued productivity growth, or declines, across most sectors; manufacturing is an exception with relative buoyancy.
  - Manufacturing accounted for "1.5 of the total value added" and 3.5 percent of non-oil value added in 2021 (as reported).
  - Service sector productivity broadly flat over the last decade; services are the major component of non-oil activity.
- TFP dynamics:
  - TFP has been low across sectors; oil price fluctuations induce large TFP swings in the oil sector.
  - Non-oil TFP rose by 60 percent between 2004 and 2014, but has faltered thereafter.
  - Capital misallocation contributes to weak TFP: less productive services (real estate and electricity) account for around half of total non-oil investment.

### E. Medium-term Outlook and Baseline Scenario
- Demographic contribution:
  - Active population growth projected to average 3 percent in 2024-2028 and 2.3 percent in 2029-2034.
  - Working-age share increase will continue to be a main driver of potential growth.
- Baseline (passive policy) estimate:
  - Non-oil output potential growth expected around 3-4 percent, with a median estimate of 3.5 percent.
  - Baseline assumptions include:
    - Labor productivity growth in line with historical trend of 0.5-1 percent.
    - Labor growing at 3 percent (UN population estimates).
    - No major labor market reforms and limited catch-up in TFP.

### F. Structural Constraints and Reform Priorities
- Main structural impediments:
  - Almost two decades of conflict and political unrest.
  - Poor energy and transportation infrastructure.
  - Bureaucratic hurdles, lack of regulatory clarity, high corruption.
  - Overemployment in the public sector, with hiring often functioning as a social transfer rather than based on economic needs.
  - Small private sector and high informality due to regulatory and administrative burdens.
- Reform priorities identified:
  - Improve governance and intensify the fight against corruption.
  - Streamline labor market and business regulations.
  - Strengthen the banking sector.
  - Reduce bureaucratic and administrative costs for starting and operating businesses.
- Regional evidence:
  - Countries in MENA that implemented more ambitious structural reforms in the decade prior to the pandemic enjoyed stronger productivity growth.
  - Iraq lags regional frontiers on regulatory quality and labor/business regulation indicators.

*Source: IMF staff analysis in “1. A Growth Accounting Exercise for Iraq.”*

### 15.      Fragmented and burdensome labor market regulations contribute to limited economic

### 15.      Fragmented and burdensome labor market regulations contribute to limited economic dynamism

### Labor market structure, enforcement, and outcomes
- Iraq’s Labor Law includes large provisions for protecting workers’ rights; in certain areas, dismissal rules seem stringent (for instance, on terminating workers contracts in a private company) (IMF, 2024).
- Weak enforcement of the law contributes to high informality, leaving workers unprotected and pushing them to seek jobs in the public sector.
- The Ministry of Labor and Social Affairs (MoLSA) has limited capacity to monitor the labor market; fragmentation of responsibilities and lack of coordination structures between ministries undermine its ability to guarantee application of existing rules (IMF, 2024).
- Comparative indicators suggest Iraq faces an excessive regulatory environment in labor markets relative to regional peers (Figure 12b referenced).

### Governance, corruption, and private sector development
- World Bank Data and Worldwide Governance Indicators indicate Iraq lags the MENA region in quality of public services, capacity of the civil service, and independence from political pressures.
- Corruption in Iraq remains severe and systemic despite steps such as the 2021–24 National Integrity and Anti-Corruption Strategy, representing a serious drag on economic development (Figure 13 referenced).

### Financial sector constraints
- Iraq’s banking system is dominated by 2 state-owned banks (SOBs) which collectively hold the majority of assets and deposits; preparatory work for their restructuring is ongoing.
- Private banks are small in scale and face restricted access to capital, a narrow customer base, and competition from large SOBs.
- Access to credit is ample for public entities (often at subsidized rates) but constrained for private businesses and individuals; Iraq has one of the lowest level private sector credit in the region (Figure 14 referenced).

### Quantified impacts of structural reforms (empirical evidence)
- Governance-improving reforms can deliver a growth payout of 6 percent after 5 years (Figure 15).
- Regulatory improvements can increase GDP by about 4 percent after 5 years.
- Reforms in credit markets can lead to a 2.5 percent increase in output over five years.
- Labor market reforms can enhance labor productivity and yield 2.5 percent employment growth 5 years after the reform.

### Calibrated medium-term gains from closing structural gaps
- Calibration targets halving Iraq’s gap from MENA excluding GCC countries in structural indicators (reference period 2019-2020 for gap calculation).
- An improvement in Iraq’s governance framework quantified as halving the difference with regional peers can deliver medium-term output gains of about 2.4 percent of GDP annually (5 years after reform).
- Regulatory quality reforms can lead to a 0.3 percent annually increase in output after 5 years.
- Improving credit market regulation to reduce the distance between Iraq and the rest of MENA can deliver around a 1.8 percent output gain after 5 years.
- A labor market reform is expected to increase overall employment by about 1.5 percent after 5 years.
- Assuming no growth synergies among different reforms, a combination of reforms in governance, regulatory quality and credit markets can increase Iraq’s growth rate by 4.5 percent annually after 5 years.

### Policy recommendations and reform priorities
- Strengthen governance and fight corruption
  - Align the asset declaration system with international best practices.
  - Maintain the integrity and independence of the Integrity Commission (IC).
  - Improve transparency and integrity of the public procurement system.
- Restructure state-owned banks (SOBs) and deepen financial sector reform
  - Finalize and implement the reform strategy for the two largest SOBs.
  - Release draft by-laws concerning SOB corporate governance.
  - Establish robust supervision, regulation, and governance under the CBI.
  - Create an Ownership Policy to define objectives of government ownership in financial institutions.
  - Accelerate implementation of modern Core Banking System solutions.
- Implement comprehensive labor market reforms
  - Create equal opportunities for public and private sector employees.
  - Enhance Technical and Vocational Education and Training (TVET) curricula to better align with labor market needs.
  - Prioritize passage of a new civil service law.
  - Streamline and simplify labor regulations, enforce business registration, review fees and tax procedures, and reduce bureaucratic obstacles.

### Conclusion — expected aggregate impact
- Addressing institutional and regulatory weaknesses, fighting corruption, improving labor market legislation, and developing the financial sector are required to shift the economy toward a more diversified, private sector-driven model.
- A balanced reform effort in these areas could improve Iraq’s growth rate by 4.5 percent over the medium term.

*Source: IMF — sipea2025115, “15. Fragmented and burdensome labor market regulations contribute to limited economic dynamism.”*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025115.pdf_