Iraq’s fiscal deficit to widen as oil revenue falls

Iraq’s fiscal deficit is set to deteriorate sharply this year as falling oil prices weigh on government revenue, Fitch has said in a new report.

The fiscal balance will fall to 9.7 percent of GDP in 2025, compared to 2.7 percent in 2024, due to lower revenue as a result of lower oil prices, the ratings agency said.

Government spending is likely to rise, with increased spending ahead of parliamentary elections.

Despite the country’s “high dependence on commodities, weak governance, high political risk and fiscal rigidities”, Fitch affirmed the country’s long-term foreign-currency issuer default rating at “B-”.

The fiscal deficit is forecast to average 8.8 percent of GDP in 2026-2027, based on Brent crude prices of $65 per barrel.

Fitch expects Iraq’s debt levels to rise, projecting that the debt to GDP ratio will increase to 54.1 percent at the end of 2025 and to 62.5 percent in 2027.

“We expect most financing to come from the Central Bank of Iraq through indirect purchases of government securities. A smaller portion is likely to be drawn from the government’s large cash deposits, which were equivalent to 17 percent of GDP at end-2024,” the report said.

Oil remains the backbone of Iraq’s economy, making up around 40 percent of GDP, 90 percent of government revenue and nearly all exports.

Oil production fell 6 percent in 2024 to 3.8 million barrels per day due to cuts aimed at offsetting earlier overproduction, the report said.

Fitch expects output to recover, rising by about 6 percent annually and averaging 4.3 million barrels per day over 2025-2027 as Opec+ voluntary cuts end and exports from Kurdistan increase.

The government has already signed deals with Chevron and ExxonMobil from the US, and the UK’s BP, to boost output, following the $27 billion multi-energy agreement with France’s TotalEnergies launched in 2023.

Further reading:

• BP begins work at Iraqi oilfields
• Iraq and Turkey to resume Kurdistan oil exports
• China advances into Iraq’s oil industry as US retreats