‘Improved oil prices, devaluation could help Iraq’s financial stability’

24 January, 2021 12:00 AM printer

BAGHDAD: Iraq’s economy shrank by 11.2 per cent last year – the country’s worst performance since 2003 – as it dealt with the twin shocks of low oil prices and the Covid-19 pandemic, according to the Institute of International Finance.

These two factors, combined with ongoing political instability in the country, led to Iraq’s budget deficit swelling to 15.6 per cent of gross domestic product in 2020 and a sharp decline in its official reserves, a report from the institute’s chief Mena economist Garbis Iradian said, report agencies.

However, a modest oil price recovery and the recent devaluation of the Iraqi dinar could put the country finances on a more sustainable footing, it added.

“We expect the fiscal deficit to narrow from 16 per cent of GDP in 2020 to 8 per cent in 2021 if oil prices average $47 per barrel and under 1 per cent if oil prices average $57 per barrel in 2021,” the IIF report said. “The devaluation alone would improve the fiscal balance by 5 per cent of GDP due to much higher oil revenues in Iraqi dinars.”

Iraq, a major oil producer, devalued its currency by about 23 per cent against the US dollar on December 20. The Central Bank of Iraq set the exchange rate at 1,450 dinars per dollar, from a peg of 1,182 dinars, for sales to the finance ministry. The dinar is being sold to the public at 1,470 and to other banks at 1,460.

As the economy improves, spending is also projected to increase 10 per cent in 2021, “driven by the recovery in capital spending, which was cut by half in 2020,” the IIF report said.

More public investment is needed to repair war-damaged infrastructure and enhance the provision of basic public services, including electricity, the institute said.

Current spending also needs to be reoriented to targeted sectors such as health, and less on wages and pensions, which account for 65 per cent of total expenditure, according to the report.