meed-logo

line1 line2 line3
SIGN IN / REGISTER

Iraq’s economy faces brewing storm

13 May 2025

 

Policymakers in Baghdad are facing some tough decisions this year. A toxic mixture of external shocks – lower oil prices eroding the country’s earnings and the follow-through from US President Donald Trump’s tariff regime – and self-inflicted problems, notably the expansionary public spending associated with the 2023-25 budget, raise the prospect of recession and a spiralling of the country’s debt to alarming levels.

Prime Minister Mohammed Shia Al-Sudani’s government is going into an election year with a troubling economic inheritance. Put simply, oil prices trading at about $60 a barrel present an existential threat to a state budget for which the breakeven oil price has been set significantly higher. The Washington-based IMF sees Iraq heading into a current account deficit if prices average just $65 a barrel.

Much of this situation is structural in nature, even if the situation has been rendered more acute by the consequences of the government’s high-spending budget of June 2023.

“The most material credit constraint for Iraq remains the longstanding reliance on the hydrocarbons sector of the economy, government finances – more than 90% of government revenue stems from oil – and external accounts, exposing the sovereign to declines in global oil demand and prices,” says Mickael Gondrand, assistant vice president and analyst at Moody’s Investors Service.

Weak public expenditure controls, and a tendency to increase spending in a procyclical manner when oil revenue rises – as observed through the expansionary triennial budget for 2023-25, which hiked current spending by 21.5% – have further amplified this vulnerability to oil price shocks.

Not that the government is panicking just yet. As Gondrand points out, the Central Bank of Iraq's foreign-exchange reserve position, at $84bn or about a third of GDP as of January 2025, provides a degree of resilience against external shocks.

Yet those external shocks are growing more acute as a result of the ripple effects flowing from Trump’s Liberation Day tariff announcement.

Unsupported spending

What makes the situation particularly challenging is that Iraq has entered into a declining oil market on the back of very high fiscal expenditure. Oxford Economics, a consultancy, puts the fiscal breakeven price for the budget this year at $110 a barrel. That is a significant jump from just $68 a barrel in 2022.

“Looking at the oil price going forward, there's no way that they can cover their fiscal deficit. Oxford Economics expects the accumulated funding gap for 2025-27 will reach $230bn, which is the equivalent to around 140% of Iraq's 2023 nominal GDP,” says Tianchen Peng, an economist at Oxford Economics.

This will exert a massive impact on Iraq’s fiscal balance, and will translate into more domestic debt issuance, fuelling concerns about a full-blown foreign exchange liquidity crisis happening in the next couple of years.

There is now a policymaking dilemma facing Iraq’s political leaders, who are under pressure to keep increasing fiscal expenditure in exchange for public support. In this context, the political calculus in Baghdad will be to drive up spending rather than de-escalate. 

“The economic growth methodology is for the government to spend on hiring more people into the public agencies, and making the government become the country’s economic engine. That is leading Iraq into a fiscal trap,” says Peng.

Meanwhile, modelling by Oxford Economics shows that if the government starts to cap the fiscal expenditure now, it could avoid such a crisis. However, if this is only enacted after the election, in the 2026-27 period, it could be too late.

Capital spending risk

The other danger associated with delaying an attempt to address state finances is that, with public sector wages and pensions absorbing upwards of 40% of the country’s budget outlays, there is a squeeze on the amount needed for investment in growth-oriented projects. With salaries and benefits ringfenced, the only route for keeping spending under control would be to lower public investment.

Such expenditure restraints could bring non-operational spending to a halt, notably the logistics corridor plans set out in the Development Road project, a Turkish-backed regional cross-border scheme that positions Iraq as a major geo-economic hub between East and West. With phases one and two of the estimated $17bn-$20bn scheme due for completion in 2028 and 2033, Iraq will need to secure funding for this road, rail and ports project soon.

“The Development Road project is a positive the Iraqi economy, and will contribute to stability. But if Iraq experiences fiscal stress, then it definitely will impact the progress of that project. It may not be the life saver of the Iraq economy that the government hopes,” says Peng.

Alongside the Development Road stands the Basra-based Gas Growth Integrated Project (GGIP), a TotalEnergies-backed scheme that aims to unlock associated gas, eliminate gas flaring and develop 1GW of solar power.

On this front, there may be room for guarded optimism. In April, the government approved two major energy contracts that form part of the GGIP, one of which is to develop the Ratawi gas field, which is also known as the Artawi field.

Building up Iraq’s untapped gas potential is central to the authorities’ ambition to end the expensive and inefficient current method of importing gas and power from Iran, with unreliable access to electricity proving a constraint to growth in the non-oil sector.

“Imports of Iranian gas remain critical to supporting Iraq’s strained electricity generation capacity, particularly during the annual summer demand surges,” says Moody’s Gondrand.

In March 2025, the US suspended its rolling waiver to Iraq for the import of Iranian electricity, but a waiver for gas imports remains in place. 

“The government has sought alternative supply sources – for example by targeting greater integration into the GCC electric grid – and has also announced several large-scale energy investment projects in recent years. Progress on these projects would help diversify Iraq’s sources of energy, reduce reliance on costly gas imports and allow greater utilisation of gas that would otherwise be flared,” says Gondrand.

However, diversifying energy supplies will take time and require additional infrastructure, while many investment projects are still at an early phase.

Few would want to be in Prime Minister Al-Sudani’s position when he is forced to inflict some necessary pain on the Iraqi public sector in a bid to ensure that a looming fiscal and foreign exchange market crisis can be averted.

https://image.digitalinsightresearch.in/uploads/NewsArticle/13865926/main.png
James Gavin

Register for MEED's guest program now to access this article.

Click here to register
Exclusive from Meed
Related Articles
  • Gulf seizes AI opportunities

    30 May 2025

     

    This package also includes: Data centres churn investments

    Opportunities to build digital infrastructure – mainly data centres – to support the Gulf’s ambitious artificial intelligence (AI) initiatives jumped in value to about $80bn in mid-May, up from around $20bn at the end of April, thanks to the gigawatt-scale AI campuses announced during US President Donald Trump’s Gulf visit.

    These projects provided the final piece of a puzzle relating to the massive power generation capacity buildout in Saudi Arabia and the UAE, which have been overhauling their electricity systems in line with their energy diversification, economic expansion and net-zero targets.

    The planned 5GW AI campus in Abu Dhabi is expected to occupy 26 square kilometres of land when completed. Experts say that in countries with more temperate weather, such a facility would require power equivalent to the consumption of nearly three million homes.

    “This is as much a story about electricity as it is about AI,” Karen Young, senior research scholar at Columbia University’s Centre on Global Energy Policy, tells MEED.

    She adds that the UAE leadership was “extremely prescient” to invest in nuclear power many years ago, perhaps understanding that a surplus of electricity would be key to future growth and industrial policy.

    “But these things are expensive, and are easier to permit and build in the UAE because of the concentration of funding and decision-making,” she says. “It's proving a major advantage in the AI race and construction of data centres.”

    Attractive asset class

    Data centres are often considered part utility assets – similar to delivering gas, electricity, water and telecoms services – and part real estate assets, due to the rents they yield from tenants.

    “Yet a lot of the talk … now concerns how investors look at data centres as assets,” a partner at an international law firm with an office in Riyadh says, “because they are neither utility nor real estate”.

    However they are defined, the gap in digital infrastructure to support AI advancements is driving investments in data centre projects in the Middle East.

    “The opportunity is ripe,” says Sherif Elkholy, partner and head of Middle East and Africa at UK-based private equity and investment firm Actis.

    In addition to the sovereign wealth funds in Saudi Arabia and Abu Dhabi, family offices such as Saudi Arabia’s Vision Invest and international private equity firms are getting their feet wet in the rapidly expanding Gulf data centre market.

    Actis, for example, is looking at credible local partners, with a platform or portfolio of operating as well as greenfield assets. US-based KKR acquired a stake in UAE-based Gulf Data Hub earlier this year.

    “Historically, the region has been an exporter of capital, but today there is a concerted effort to attract foreign direct investments, particularly into Saudi Arabia. The strategy now is how can the region become an importer of value-added capital to support their 2030 visions?” says Elkholy.

    Part of the answer lies in opening the sector to private investors and capital. According to Elkholy, the Middle East has very ambitious energy transition, digital infrastructure, desalination and district cooling projects, and the private sector is now playing a central role in delivering these.

    “The mood of international investors has been to avoid risks due to global uncertainties, such as we have now, but the reality is there is a major infrastructure gap, and addressing this, especially given the 2030 targets, requires private sector participation.”

    Data sovereignty

    Uncertainty over data sovereignty issues across the Gulf states is yet another issue investors have had to grapple with.

    Although the GCC countries have had stringent data localisation laws in place for almost a decade now, that does not seem to have dampened growing investments in data centre projects in the region, according to Nic Roudev, who leads UK-based legal firm Linklaters’ TMT practice in the Middle East.

    “While data localisation requirements prevent the most efficient operational configurations, where data centres capacity is deployed in one country to service demand across the entire region, it also presents hyperscalers with opportunities to build out robust operations in each of the major GCC countries,” says Roudev.

    This allows firms to take advantage of incentives for local presence, such as access to government procurement contracts and financing opportunities.

    “Demonstrating commitment to the particular country’s economy by establishing and growing local operations also allows data centre investors to build durable strategic partnership relations with regulatory and government authorities, which can lead to a decrease in long-term regulatory and business uncertainty,” the executive says.

    The heat and climate effects will continue to be a thorn for future Gulf data centre development and investments
    Karen Young, Columbia University’s Centre on Global Energy Policy

    Improving regulations

    It's not all perfect, though, Young suggests, citing that the heat and climate effects will continue to be a thorn for future Gulf data centre development and investments.

    “There is also the rather poor track record of exporting, trading and sharing electricity within the UAE and the GCC, and thinking about export to third countries… so that makes the idea of data centres and even data traffic via cables a little more complicated,” she explains.

    From a regulatory viewpoint, Roudev says the main unique risk factors that data centre investors in the GCC typically have to wrestle with stem mostly from the usually non-transparent and frequently hard to predict legislative and regulatory rule-making and enforcement.

    However, Roudev also notes that “in recent years there has been a marked trend in both the UAE and Saudi Arabia for increasing transparency by opening draft laws and regulations to public consultations and actively soliciting input from key industry stakeholders.”

    A good example of this in Saudi Arabia has been the development of one of the key regulatory instruments for cloud computing services, which went through “a series of sudden and significant revisions, and the data protection law, which underwent unexpected but considerable revisions after remaining suspended for a year”.

    Regulatory enforcement actions in the GCC, which have traditionally not been publicised, have also shifted, with an evident attempt in recent years to increase transparency and predictability of enforcement by authorities in both countries, concludes Roudev.

     Data centres churn investments

    https://image.digitalinsightresearch.in/uploads/NewsArticle/13939315/main.jpg
    Jennifer Aguinaldo
  • Meraas awards Madinat Jumeirah construction deal

    30 May 2025

    Dubai-based real estate developer Meraas Holding, part of Dubai Holding, has awarded a AED300m ($82m) contract for the main construction works on Elara, which is Phase 7 of the Madinat Jumeirah Living masterplan in Dubai.

    The contract was awarded to the local firm Al-Sahel Contracting Company.

    Elara will feature three residential towers offering 234 apartments.

    Construction is expected to start immediately, and the project is scheduled for completion by the end of 2026.

    Earlier this month, Meeras awarded Bhatia General Contracting a contract to construct the fourth phase of the Nad Al-Sheba Gardens community in Dubai, worth AED690m ($188m).

    The scope of the contract covers the construction of 92 townhouses, 96 villas and two pool houses.

    In March, Meraas awarded Abu Dhabi-based Arabian Construction Company an estimated AED2bn contract ($544m) to build its Design Quarter residential project in Dubai Design District.

    The development will comprise three buildings offering over 558 residential apartments. Construction is expected to be completed in 2027.

    The UAE’s heightened real estate activity is in line with UK analytics firm GlobalData’s forecast that the construction industry in the country will register annual growth of 3.9% in 2025-27, supported by investments in infrastructure, renewable energy, oil and gas, housing, industrial and tourism projects. 

    The residential construction sector is expected to record an annual average growth rate of 2.7% in 2025-28, supported by private investments in the residential housing sector, along with government initiatives to meet rising housing demand.

    MEED’s May 2025 report on the UAE includes:

    > COMMENT: UAE is poised to weather the storm
    > GOVERNMENT & ECONOMY: UAE looks to economic longevity
    > BANKING: UAE banks dig in for new era
    > UPSTREAM: Adnoc in cruise control with oil and gas targets
    > DOWNSTREAM: Abu Dhabi chemicals sector sees relentless growth
    > POWER: AI accelerates UAE power generation projects sector
    > CONSTRUCTION: Dubai construction continues to lead region
    > TRANSPORT: UAE accelerates its $60bn transport push
    > DATABANK: UAE growth prospects head north

    https://image.digitalinsightresearch.in/uploads/NewsArticle/13981791/main.png
    Yasir Iqbal
  • Hydrogen’s future may not be so green

    29 May 2025

    Commentary
    Jennifer Aguinaldo
    Energy & technology editor

    Much has changed in the region’s hydrogen landscape since the first projects were launched in a flurry of excitement.

    Initially, in anticipation of demand for low-carbon fuel arising from Asia and Europe by the early 2030s, aspiring green hubs such as Egypt, Morocco, Abu Dhabi and Saudi Arabia announced batches of large-scale green hydrogen and ammonia projects.

    Two or three of these have progressed. At Neom, the world’s largest and most ambitious green hydrogen and ammonia production plant is under construction. The $8.4bn project reached financial close in May 2023, achieved a 60% completion rate in December, and appears on track to meet the company’s 2026 target commercial operation date.

    In Oman, meanwhile, where the sultanate’s third hydrogen block land auction is ongoing, developers and downstream companies are expected to submit bids sometime this year.

    However, across the Middle East and North Africa region, most of the projects announced in the past few years remain in the concept or preliminary design stages, while the rest have not moved beyond signing the memorandums of understanding.

    With the exception of Oman, there have been few announcements on new green hydrogen projects in the region over the past 12 months.

    Shareholders have even revolted over clean hydrogen plans. Seifi Ghasemi, former CEO of Air Products, which co-owns the Neom Green Hydrogen Company, along with Saudi utility developer Acwa Power and gigaproject developer Neom, was removed from the firm’s board earlier this year, with sources citing the company shareholders’ opposition to the firm’s green hydrogen plans.

    In addition to being a co-owner, Air Products is also the main offtaker, contractor and systems integrator of the Neom green hydrogen project.

    Cost issue

    The main issue for these projects remains the cost of production, according to Michael Liebreich, managing partner at UK firm EcoPragma Capita.

    “If green ammonia is going to work anywhere, it should be [in] Oman and the GCC,” he explains. However, the London-based executive and entrepreneur has doubts about green hydrogen’s economics.

    Earlier this year, his conversations with “a number of participants in green hydrogen and ammonia projects” indicate that the costs they are able to achieve today come to around $6 a kilogram (kg), and potentially $4/kg in five years for projects coming online in the early 2030s.

    “They talk about $3/kg or $2.5/kg, but you could only get there by offering incentives such as subsidies, concessionary finance, free land, free infrastructure and offtake guarantees,” notes Liebreich.

    While the region has very cheap solar power, a $15 a megawatt-hour (MWh) solar tariff does not necessarily lead to cheap hydrogen because it is only available roughly 25% of the time. To get to 24/7, one needs batteries, and in jurisdictions like Abu Dhabi, this will take the price to roughly $50/MWh.

    Adds Liebreich: “And since you need 50kWh of power per kilogram of hydrogen, assuming an 80% efficiency, that means you have $2.50/kg just of electricity cost. No capex, no maintenance, no compression, no pipelines, nothing. So $4/kg looks like being a floor price for a long time; $3/kg would be the outside edge of achievable.”

    Meanwhile, fossil gas at around $1-1.50/kg creates an extra cost of $2.50/kg, which means that anyone producing a million tonnes of green hydrogen a year has to cover the extra cost of $2.5bn a year and find at least 15 years of guaranteed offtake to get the project built.

    “You need to secure 15 years of support to close the cost gap of $37.5bn. You need it guaranteed upfront by someone with a bullet-proof balance sheet – so that’s either a government or sovereign wealth fund.”

    The near-impossibility of exporting liquid hydrogen to Europe due to prohibitive costs and inefficiency of liquefying the hydrogen should also be considered.

    In comparison, a more feasible option could be putting ammonia on a ship to Europe, where it could benefit from a Carbon Border Adjustment Mechanism (CBAM) at the same price as a tonne of carbon under EU-ETS.

    According to Liebreich, under this scenario, each kilogram of green hydrogen reduces emissions by around 9kg, and the EU-ETS price today is €72 ($81)/tonne.

    “So each kilogram of green hydrogen will avoid a carbon price of $0.009 x 81, which is equal to $0.72. That closes your gap, so a tonne of green ammonia is now only $320 more than a tonne of grey, or only double the price,” Liebreich explains.

    “Look at it another way, if you want to export 1 million tonnes of hydrogen as ammonia a year into Europe, you are still looking at an annual cost gap of $1.8bn after taking the EU-ETS CBAM into account. And you need a 15-year deal, so that’s $27bn,” he notes, under the assumption one can get the hydrogen price down to $4/kg.

    Far from being rosy, Liebreich concludes that green hydrogen-wise, the region could be heading down a blind alley. “There will be almost no import market for green hydrogen or its derivatives because, in the best scenario, they will remain too expensive.”

    Bright side

    Liebreich’s dour forecast collides with the vision of most regional stakeholders that net zero by 2050 will not be possible without low-carbon, and particularly green, hydrogen and its derivatives, including green ammonia, methanol and sustainable aviation fuel.

    Mohammad Abdelqader El-Ramahi, chief green hydrogen officer at Abu Dhabi Future Energy Company (Masdar), for instance, told MEED in October that green hydrogen is the most important driver and enabler of net zero and decarbonisation. “Very few people know that electrification alone can address no more than 30% of our decarbonisation [needs], even if we install all sorts of renewable sources,” he said.

    Abu Dhabi intends to replicate its success in the energy sector’s previous four waves – oil and gas in the 1960s, liquefied natural gas and anti-flaring in the 1970s, renewable energy in the 2000s and nuclear energy in the 2020s – in the sector’s fifth low-carbon hydrogen wave.   

    The list of Masdar’s potential green hydrogen partners includes Ireland-headquartered Linde; France’s TotalEnergies; the UK’s BP; Austria’s Verbund; and Japan’s Mitsui, Osaka Gas, Mitsubishi Chemical, Inpex and Toyo Gas.

    Despite the slow progress and major reality check, hope proverbially springs. “Green hydrogen is the inevitable future fuel,” El-Ramahi asserted.

     

    https://image.digitalinsightresearch.in/uploads/NewsArticle/13956351/main.gif
    Jennifer Aguinaldo
  • Wood wins Iraq oil and gas contracts

    29 May 2025

    The UK-based engineering company Wood has been awarded a series of decarbonisation contracts with a total value of about $100m for flare gas reduction and carbon efficiency project solutions across Iraq’s largest oil fields. 

    Under the terms of the contracts, Wood will deliver brownfield engineering, procurement and construction (EPC) and modifications solutions to “enhance operational efficiency and minimise environmental impacts”, according to statement released by the company.

    In its statement, Wood said that the projects would support Iraq’s commitment to reduce gas flaring by 78% by the end of 2025. 

    Wood has already provided decarbonisation solutions for major operators in Iraq and has implemented the country’s largest flare gas reduction programme to date.

    Ellis Renforth, Wood’s president of operations for Europe, Middle East and Africa, said: “We are working in partnership with our clients to achieve Iraq’s energy ambitions and deliver a sustainable energy future for the country. 

    “Wood Iraq has extensive knowledge of our clients’ infrastructure, operations and goals, enabling them to improve operational efficiency and reduce the impact of gas flaring while maintaining critical production.” 

    The reimbursable contracts will be delivered by Wood’s team in Iraq and the UAE.

    The company said it would recruit 60 new employees to support the successful delivery of these projects. 

    Money problems

    Earlier this month, Wood announced that its chairman, Roy Franklin, would step down from the board.

    The move comes amid ongoing financial problems at the engineering company, which is working on projects worth tens of billions of dollars across the Middle East and North Africa region.

    At the end of April, Wood Group’s shares were suspended on the London Stock Exchange because the company did not publish its accounts for 2024 on time.

    Wood employs over 4,000 people in the Middle East, having increased its headcount by 500 in 2024.

    MEED’s June 2025 report on Iraq includes:

    > COMMENT: Iraq maintains its pace, for now
    > ECONOMY: Iraq’s economy faces brewing storm
    > OIL & GAS: Iraqi energy project value hits decade-high level
    > PIPELINES: Revival of Syrian oil export route could benefit Iraq
    > POWER: Iraq power sector turns a page
    > CONSTRUCTION: Iraq pours billions into housing and infrastructure projects
    > DATABANK: Iraq forecast dips on lower oil prices

    https://image.digitalinsightresearch.in/uploads/NewsArticle/13974910/main.png
    Wil Crisp
  • BP considers Algeria lubricants plant project

    29 May 2025

     

    The UK-based oil and gas company BP is considering developing a facility in Algeria to produce products for its Castrol lubricants business, according to industry sources.

    BP has been considering developing the facility for some time, but has yet to make a final decision on whether to proceed with the project.

    One source said: “BP is continuing to evaluate the business case for developing the facility.”

    BP’s upstream business exited Algeria with the sale of its assets to Italy’s Eni in a deal announced in September 2022.

    That deal included selling its interests in the gas-producing In Amenas and In Salah concessions.

    BP’s Castrol brand serves consumers in more than 150 countries in various sectors, including automotive, marine and industrial.

    Its passenger car engine oils include Edge, Magnatec and GTX.

    Its products also include commercial vehicle engine oils, transmission fluids, metalworking and machining fluids, production fluids, and specialist greases and lubricants.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/13974906/main.jpg
    Wil Crisp