Regarding the size of the city, the Baghdad of modern times is not the same as the Baghdad of the Abbasids. The Mongols razed the city in 1258. Thereafter, the (rebuilt) city would at best play the role of a provincial capital or the capital of modern Iraq.

Also, I am skeptical that is a photo of Baghdad. It seems almost certainly too small and there is no bridge across the Tigris. Baghdad has many landmarks that don't seem to be present in that photo.

/u/Bardizbeh is correct, this is not Baghdad. The mosque in the center is the al-Askari Shrine, and as a result this is Samarra about 80 miles north and is considerably smaller. In 1917 it was about 5,000 people while in 1947 it was approximately 30,000.

edit: after looking it up in the Encyclopaedia of Islam, also worth noting is that the walls in this case only date to 1834.

Was it a common occurrence of leaving empty ground around fortresses in Middle-East, when in Europe cities sprawled around smaller fortified castles.

I'm not entirely sure it's possible to generalize here, although this kind of question isn't exactly my area of expertise, but for instance in the case of the walled cities of Fatimid Cairo and in the "round city" of Baghdad it's my understanding that construction inside the walls was highly restricted, and as a result you had a good deal of sprawl/settlements outside.

In contrast, when Suleiman the Magnificent built the walls of the Old City of Jerusalem, it's my understanding that these would have basically encompassed the vast majority of the population, though with farms/smaller settlements in the immediate vicinity.