Iraq's Economic Imbalance: How Oil Dependency Threatens Fiscal Stability in 2025

Oil-dependent economies face mounting pressure when commodity prices soften, and Iraq provides a textbook example of this vulnerability. According to Fitch’s latest assessment, the nation’s fiscal position is deteriorating significantly, with the deficit projected to reach 9.7 percent of GDP in 2025—a dramatic spike from the 2.7 percent recorded in 2024.

The Oil Price Problem and Revenue Collapse

The deterioration stems primarily from one factor: plummeting oil revenues in the face of weaker crude prices. Since oil generates roughly 90 percent of government revenue and comprises 40 percent of overall GDP, price fluctuations directly translate into fiscal crises. Adding pressure to the revenue side, government expenditure is expected to rise substantially as policymakers increase spending leading up to parliamentary elections, a cyclical pattern common across politically-sensitive periods.

Financing the Gap: Central Bank and Cash Reserves

Iraq faces a significant financing challenge as deficits widen. Fitch’s report indicates that most new government borrowing will flow through the Central Bank of Iraq via indirect securities purchases. The government can also tap its substantial cash reserves—which stood at 17 percent of GDP as of end-2024—though these buffers are finite resources. Without a structural shift in revenue sources, continued reliance on Central Bank financing risks inflationary pressures.

Medium-Term Outlook: Deficits to Persist

The fiscal imbalance is not expected to be temporary. Assuming Brent crude averages $65 per barrel, Fitch forecasts the deficit will average 8.8 percent of GDP during 2026-2027. More concerning, the debt-to-GDP ratio is projected to climb to 54.1 percent by end-2025 and reach 62.5 percent by 2027—a trajectory that underscores the unsustainability of current fiscal paths.

Oil Production: Recovery on the Horizon

However, there is a potential bright spot. Oil production contracted 6 percent in 2024, falling to 3.8 million barrels per day, largely due to Opec+ production discipline aimed at rebalancing earlier overproduction. Fitch anticipates a rebound, with output expected to grow around 6 percent annually, reaching an average of 4.3 million barrels per day over the 2025-2027 window as Opec+ voluntary cuts wind down and Kurdish regional exports ramp up.

Investment Bets on Expansion

Iraq has secured strategic partnerships to boost production capacity. Major international oil companies—including Chevron and ExxonMobil from the United States, BP from the UK, and TotalEnergies from France (which inked a $27 billion multi-energy deal in 2023)—are mobilizing capital to unlock additional reserves. These long-term commitments suggest international confidence in Iraq’s production potential, though execution risks remain.

The Ratings Paradox

Despite mounting fiscal pressures, governance challenges, and Iraq’s singular dependence on oil exports, Fitch maintained its long-term foreign-currency issuer default rating at “B-”—a decision that reflects a measured assessment of the country’s ability to service external obligations over time. Still, the structural vulnerabilities remain stark: Iraq’s economy lacks diversification, political risks persist, and fiscal rigidities limit adjustment mechanisms.

The fundamental challenge is clear: Iraq’s fiscal stability depends almost entirely on oil price dynamics and production volumes. Without meaningful economic diversification or spending discipline, GDP growth alone may struggle to absorb rising debt levels.