Iraq's credit profile reflects weak institutions and governance framework, Moody's says

The country is exposed to 'significant carbon transition risks' due to its excessive reliance on the hydrocarbon sector

The IMF expects inflation in Iraq to average 5.6 per cent in 2023. EPA

The credit profile of Iraq reflects the weakness of the country’s institutions and the governance framework in Opec’s second-largest producer that has affected the government’s ability to respond to domestic and external shocks, a report has suggested.

The institutional weakness has also affected policy effectiveness and the competitiveness of the country’s economy, Moody’s Investors Service said in its latest report on Iraq’s credit fundamentals.

“Iraq is also heavily exposed to significant carbon transition risks because of its economic, fiscal and external reliance on the hydrocarbon sector,” Moody’s analysts said.

The deep-rooted political fragmentation in the country, as well as its “susceptibility to geopolitical tensions” and high youth unemployment rates “also expose Iraq to political event risk”, they added.

Iraq, which relies heavily on hydrocarbons for revenue to fuel its economy, is facing economic headwinds despite higher oil prices, as consumer prices continue to soar.

After expanding 8.1 per cent last year, the pace of economic growth is expected to soften to 3.7 per cent this year, International Monetary Fund data indicated.

The Washington-based fund said the country’s real non-oil economy contracted by 9 per cent on an annual basis in the last quarter of 2022, “negating” the growth momentum gained during the previous three quarters.

The country requires fiscal discipline and wide-ranging structural reform to reduce its economic vulnerabilities as foreign exchange market volatility and a drop in crude production continue to weaken its economic resilience.

Iraq’s fiscal expansion plans also pose risks and could stoke inflation further. Inflation in the country, which hit 7 per cent in January, is projected to average 5.6 per cent this year, the IMF said in June.

Higher oil prices have driven a significant recovery in the Central Bank of Iraq's foreign-exchange reserve position and the economy’s outlook remains is stable, Moody's said.

The rise in crude prices have also driven a significant turnaround in Iraq's fiscal and current accounts, after the large twin deficit recorded in 2020, it added.

“However, the current upswing in oil prices, as well as the fractured political system, will limit momentum on reforms that would reduce the vulnerability of the public finances to future oil price declines,” Moody's said.