Fitch Ratings revised its outlook on Iraq’s sovereign debt from negative to stable and maintained the country's "B-" credit rating.
The agency cited higher oil prices and a smaller-than-expected decline in foreign reserves after the recent devaluation of the Iraqi dinar.
“We forecast a budget deficit equal to about 5 per cent of gross domestic product in 2021, shrinking from an estimated 16.5 per cent of GDP in 2020,” Fitch said on Wednesday.
“In 2022, we forecast a similar deficit as higher oil exports offset an oil price decline, while spending increases only marginally after strong growth in 2021.”
Iraq, Opec’s second-largest producer, depends on oil revenue to meet 90 per cent of government expenditure.
Oil export revenue is expected to rise by 75 per cent as prices and crude exports increase.
Fitch expects average oil production to grow to 4.4 million barrels per day in 2022, from 4.1 million bpd this year, while federal oil exports are expected to hit 3.3 million bpd, from 3 million bpd this year.
“Iraq’s budget revenue sensitivity to oil prices and volume is significant," said Fitch.
It said a $5 rise in oil prices per barrel would boost government revenue by an amount equal to a 3 per cent increase in GDP, or about 250,000 barrels per day of exports.
Oil prices are on an upward trend as Opec and its allies, including Russia, cut production to stabilise markets.
Iraq devalued its currency by about 23 per cent against the US dollar in December to support its economy. International reserves remain substantial, at $54 billion, despite falling by $14bn last year.
The credit rating agency said reserves could stabilise this year as stronger oil prices and the devaluation narrow its current account deficit from last year's 12.5 per cent of GDP to 1.5 per cent.
Non-oil revenue is also expected to grow as a result of “progressive payroll tax reform, a 10 per cent flat tax on pensions and new excise and sales tax on alcohol, tobacco and vehicle sales”.
However, spending is expected to rise by 28 per cent to 113 trillion dinars ($77.4bn) this year as salary and pension costs increase, it said.
“Failure to curb government spending would raise the risk of further devaluation of the currency over time or erosion of foreign reserves, depending on the course of oil prices," the credit rating agency said.