The Impact of Oil Price Changes, Economic Growth, Financial Development and Trade on Iraq’s Economy A VAR-VECM Approach

Abstract

This research article investigates the profound and multifaceted impact of oil price volatility on Iraq’s economy. As a nation heavily reliant on oil exports, Iraq’s economic stability is intricately tied to fluctuations in global oil prices. This study employs VAR-VECM approaches using annual time series data from 1969 to 2020. According to the findings, changes in oil prices have a positive impact on economic growth but the volatility adversely affect it. Further findings revealed that improvements in Iraq’s financial development and trade have positive effects on economic growth. It was further revealed that GDP recovers from oil shocks in the 1st lag and from trade in the 3rd lag while GDP does not recover from financial development shocks. However, no causality was found between oil prices, economic growth, financial development and trade. The study concludes that when oil prices are high and stable, Iraq experiences robust economic growth due to increased government revenue and investment in infrastructure and public services. The study findings suggests that the Iraq government should strengthen regulatory frameworks and institutions, modernize banking systems, develop capital markets and promote financial inclusion to stir significant improvements in economic growth from its financial development initiatives. The government should also implement trade policy reforms, trade facilitation and streamlining procedures and diversify export markets so as to boost the positive benefits of trade leading to substantial improvements in economic growth. To mitigate the negative impact of oil price volatility, Iraq must diversify its economy and reduce its reliance on oil exports.