When US invasion forces arrived in Baghdad in 2003, they found the central bank was cleaned out, and just two of government-owned Rafidain Bank’s branches were open for business. Iraq’s private sector had been hollowed out, state-owned enterprises were mothballed and there was little productive activity as the oil industry – the bedrock of Iraq’s economy – ground to a halt. Iraq’s per capita GDP had sunk to just $1,300, more akin to an emerging economy than a major oil producer.

Oil production rises have delivered a five-fold increase in GDP per capita in the past 10 years

In 2014, the picture is transformed, even if Iraq’s full economic potential is still far from being fully tapped. Despite the recent upsurge in violence, improvements in security since 2007 have provided investors with more confidence to commit to projects in areas such as energy, construction and retail. Oil production rises have delivered a five-fold increase in GDP per capita in the past 10 years, reaching about $7,000 today.

The economic fruits of growth have filtered down to the poorest Iraqis. According to the World Bank’s poverty rate – a measure of the proportion of the population living on less than $1.25 a day – this has more than halved, from 54 per cent to 23 per cent over the past 10 years.

Foreign investment is starting to make a mark, and is not just concentrated in the Kurdistan region. According to UN Conference on Trade & Development figures, foreign direct investment (FDI) inflows nearly doubled in the two years between 2010 and 2012, reaching $2.55bn that year. The total stock of FDI now stands at $12.6bn, which is only just below Kuwait in the regional rankings. International blue-chip firms such as Citigroup of the US and Lebanese financial institutions have announced plans in the past year to establish branches in Iraq.

The maintenance of a fixed exchange rate has provided an anchor for the tackling of inflation, which declined from 6 per cent at the end of 2011 to just 2.7 per cent in November 2013. Real GDP growth accelerated from 5.9 per cent in 2010 to more than 8.4 per cent in 2012, and the Washington-based IMF estimates 2013 growth to have averaged 9 per cent.

The improved economic performance reflects the increase in oil sales, with crude oil export revenues estimated at $117.9bn in 2013, compared with just $59.9bn in 2010. Oil production has increased from an average of 1.8 million barrels a day (b/d) to 3 million b/d in 2013, boosted by multibillion-dollar investments from oil majors such as the UK’s BP, ExxonMobil of the US and UK/Dutch Shell Group. Crude exports by the end of 2013 had reached 2.4 million b/d.

Rising oil earnings have furnished a dividend for Iraq’s finances, with the Central Bank of Iraq’s international reserves rising from $61bn at the end of 2011 to an estimated $91bn at the end of 2013. Meanwhile, Iraq’s external debts, which were once as high as $127bn, have been more than halved after a series of renegotiations. 

Although oil exports remain the font of Iraq’s wealth, there is evidence of economic diversification, with the relative contribution of oil to total GDP decreasing from 70 per cent in 2004 to 43 per cent in 2012 as other sectors grew more rapidly.

However, there remain numerous other challenges confronting Iraq’s economy, from a weak business environment – bound by red tape, poor governance standards and inconsistent regulations – to persistent violence and insecurity. Fiscal discipline has weakened in the past couple of years, warned the IMF in its July 2013 assessment of the Iraq economy, with poor budget planning and execution, large off-budget spending, low investment execution rates and serious deficiencies in fiscal reporting.

Iraq’s economy remains excessively dependent on the state, with non-oil activity reliant on government spending. About 40 per cent of the Iraqi workforce is employed in the public sector.

More needs to be done to strengthen the private sector and make it the engine of job creation. The financial sector needs an overhaul, with total banking assets at 77 per cent of GDP compared with a Middle East and North Africa average of 13 per cent. The state-owned banks Rafidain and Rasheed still hold more than two thirds of the system’s deposits. With a rapid increase in oil revenues expected in the next few years, the government must ensure that the looming windfall is put to productive use.

Harnessing the country’s oil wealth would allow for sustained high growth and, in turn, facilitate an enhanced role for the private sector. With the massive oil field spend under way, ancillary businesses are creating opportunities for oil field services, equipment supply and maintenance. Catering, construction, engineering and logistics provide ample scope for Iraqi and foreign firms to contribute more actively to an economy that, for all its challenges, offers enormous growth potential.