Iraq plans to slash its budget deficit by two-thirds in the next three years by raising oil production and allowing more private sector involvement in the state-dominated economy, Finance Minister Rafie Al Essawi said on Saturday.

Speaking on the sidelines of the World Economic Forum in the Dead Sea, Al Essawi told Reuters in an interview that he expects the deficit to fall to 5 trillion dinars from 16.6 trillion ($14.2 billion) forecast for this year.

"There will also be unrealised spending that will end up plugging the budget gap, so the deficit is not worrying," Al Essawi told Reuters in an interview.

The minister did not say how much the deficit would be as a per centage of GDP, but official figures set the budget for 2011 at $82.6 billion, giving a deficit of around 17 per cent of revenue.

Al Essawi said he hoped economic growth would rise slightly to around 5 per cent this year and to 9 per cent in the next three years as Iraq begins to end a legacy of reliance on the state for economic activity and buck a general slowdown in the region.

He said extra spending on salary hikes and on security personnel, purchases of F-16 military planes and a surge in the commodities import bill would raise spending by another 8 trillion Iraqi dinars in 2012.

But this would be offset by a projected revenue rise to around 95 trillion dinars next year as more oil comes on stream and privatisation reduces the pressure on government finances, Al Essawi said.

The country is currently producing about 2.7 million barrels per day (bpd) and is trying to ramp up output capacity to 12 million bpd in 2017.

Iraq's 2011 budget is calculated based on an average oil price of $85 per barrel and 2.2 million barrels per day in crude exports, and the 2012 budget is based on 2.6 million barrels per day at this year's average oil price estimate of $85.

Budget shortfalls are challenging Iraq's ability to rebuild.

The country has announced massive projects to build hundreds of thousands of new homes and to boost electricity generation, which has been plagued by severe shortages after war and sanctions over the last two decades.

"Today the main challenge is the destroyed infrastructure which requires more capital investment, and this means openness towards the private sector," Al Essawi said.

The government was planning to accelerate privatisation of state industries and now offer investors land free of charge to encourage investment, Al Essawi said.

"We have a conviction that part of the solution is in the hands of the private sector," Al Essawi said.

The major challenge facing the Iraqi economy remained diversifying away from oil to spur growth, Al Essawi added.

"Diversification is minimal with the economy dependent on oil. This is what is restricting growth and investments," he added.

Eight years after the U.S. invasion toppled Saddam Hussein, Iraq's economy is still largely disconnected from the global financial system and is dominated by oil, with exports from some of the world's largest reserves accounting for more than 95 per cent of state revenue.

Oil prices cushion budget

Al Essawi said current oil prices that have hovered above government estimates have helped cushion government finances.

"The oil price is still around $100 or more and this makes us on the safe side," he said.

The 2012 budget was still not finally fixed but higher state revenues projected next year will help lead to more capital investment, he added.      Violence and corruption deprived Iraq of investment during the years of conflict triggered by the 2003 US-led invasion to topple Saddam Hussein and the process of rebuilding has been slow.

"The challenge is the damaged infrastructure in a transitional phase. This doesn't just need financing but also time. Even if you had funds this would not solve the problem without more time," Al Essawi added. – Reuters