Iraqi Official Says War Hurts Economy

December 3, 2014 Updated: December 3, 2014

BAGHDAD—Plunging oil prices and soaring costs from Iraq’s war against the Islamic State group is hurting Iraq’s economy and will prompt government spending cuts, including in defense, the country’s finance minister said Wednesday.

Hoshyar Zebari told The Associated Press that Iraq’s proposed 2015 budget of 155 trillion dinars ($130 billion) forecasts a deficit of 47 trillion dinars ($41 billion). He said he is trying to lower that to no more than 30 trillion dinars ($26 billion) through major spending cuts and economic reforms.

“The war on ISIS, the requirements of defense, of volunteers, of salaries, of the equipment, military contracts — all these are major burdens,” Zebari said, using an alternative acronym for the Islamic State group. “We really need to cut spending and to tighten our belt. But we believe that this will be a temporary thing.”

The budget is based on an oil price of $70 a barrel. At least 22 percent of the budget has been allocated for defense and intelligence spending, he said.

Iraq is facing its biggest security crisis since U.S. troops pulled out of the country in late 2011 after the Islamic State group seized a third of the country. Since then, the price of Brent crude oil has plummeted 39 percent, a major crisis for the oil-producing OPEC country.

Iraq’s economy is forecast to shrink by 2.75 percent in 2014, according to the International Monetary Fund. That’s its first contraction since 2003.

“The drop in oil prices has hurt us a great deal,” Zebari said.

He said the Finance Ministry will implement a number of economic reforms to cut back on spending, including “reforms to raise internal revenues from taxations, a new tax system (and) new custom tariffs.” He added the government is also considering imposing a value-added tax on some sales, as well as issuing government bonds to lower its deficit.

“We are not broke,” he said. “We will manage this economic crisis with some tightening.”

From The Associated Press. AP writer Carlo Piovano in London contributed to this report.