Iraq's Oil Gamble: Budget on the brink amid global price collapse

Shafaq News

23-04-2025

Shafaq News/ Iraq stands at a perilous fiscal crossroads. The dramatic decline in global oil prices is not just a fluctuation in commodity markets—it is a seismic shift threatening to undermine Iraq's economic foundation, disrupt state operations, and jeopardize long-term national stability.
As one of the world's most oil-dependent economies, Iraq is finding itself once again exposed to the raw volatility of energy markets, just as it hoped to implement its first three-year federal budget under Law No. 13 of 2023.
This budget, hailed at its passage as a pragmatic framework for medium-term fiscal planning, now appears increasingly outdated. Its projections and assumptions were anchored in oil optimism—a $70-per-barrel benchmark and an export rate of 3.4 million barrels per day. But Brent crude has since dipped below that target, trading around $60–$65 amid a mix of global economic slowdown, geopolitical tensions, and trade disputes. The implications for Iraq are severe.
Budget Built on Shaky Foundations
Government financial adviser Mudhhir Mohammed Saleh has consistently defended the 2023–2025 budget's 'flexibility,' noting that it set upper and lower expenditure thresholds: a maximum of 200 trillion Iraqi dinars (approximately $153 billion) and a lower limit of 156 trillion dinars (about $122 billion). The built-in deficit—estimated at 64 trillion dinars (about $49 billion)—was supposed to provide a cushion against external shocks.
However, the cushion is wearing thin. With prices dipping below the planned benchmark, Iraq is now operating near the lower threshold of the spending envelope. Borrowing has been limited to about 20% of the projected deficit, a move intended to preserve fiscal discipline. Yet even this careful calibration cannot mask the deeper issues embedded in Iraq's financial model.
Former Central Bank Director Mahmoud Dagher pointed to a dual source of pressure: "Falling oil prices and rising expenditures in the budget.' While salaries remain secure, operational costs tied to production, maintenance, and investment are becoming increasingly difficult to sustain.
The government recently approved the issuance of 5 trillion dinars (approximately $3.4 billion) in domestic bonds to finance essential capital projects—a clear signal that liquidity stress is mounting.
Structural Flaws Exposed
Beyond the temporary measures, economists warn of more entrenched problems. International economics professor Nawwar Al-Saadi criticized the budget's foundational assumptions as 'detached from reality.' He stressed that Iraq's persistent reliance on oil—accounting for over 90% of government income and virtually all export revenues—leaves the country at the mercy of global fluctuations.
'Every fluctuation in oil prices translates immediately into instability in financial planning,' Al-Saadi said, likening Iraq's economic posture to 'walking a tightrope amid global economic storms.'
Oil expert Hamza Al-Jawahiri has also sounded the alarm over deep-seated inefficiencies and corruption, criticizing the proliferation of "phantom projects" that serve as vehicles for embezzlement. Without immediate audits and accountability measures, he warned, the fiscal deficit—now estimated to exceed 84 trillion dinars (around $64 billion)—could spiral further out of control, draining state liquidity and crowding out private sector credit.
If unaddressed, this dynamic could trigger a rise in borrowing costs, a drop in investor confidence, and the kind of austerity measures Iraq has long tried to avoid: cuts to infrastructure spending, education, and healthcare.
Public Sector Burden
Another layer of fragility stems from Iraq's bloated public sector. Around 8 million Iraqis are on government payrolls, and when dependents are factored in, government support touches over 40 million people. This massive base of beneficiaries consumes more than 60% of the federal budget.
While this system provides a social safety net, it also restricts fiscal maneuverability and entrenches a politically driven patronage economy. Public employment has often been used to buy political loyalty rather than improve governance outcomes. In the current climate, such spending patterns are unsustainable.
'Budget allocations are increasingly consumed by salaries, pensions, and subsidies,' Saleh acknowledged. This leaves little room for productive investments or development projects, further perpetuating Iraq's economic stagnation.
Revenue System in Disrepair
Compounding the problem is Iraq's chronically underperforming non-oil revenue system. Economist Karim Al-Hilu estimated the country could raise over $20 billion annually from taxes and customs alone. But entrenched corruption, political interference, smuggling, and weak enforcement cripple these efforts.
'Customs revenues are dominated by politically connected networks,' Al-Hilu said. Attempts to modernize and digitize the system have stalled, with bureaucratic inertia proving to be a formidable barrier. As a result, Iraq's tax-to-GDP ratio remains among the lowest in the region, even as the private sector remains constrained by outdated regulations, arbitrary licensing, and a lack of legal protections.
Many businesses operate informally or exit the market entirely. The absence of consistent regulatory frameworks and reliable government payments discourages entrepreneurship and investment. Instead of fostering a diversified economy, Iraq is reinforcing its dependence on state jobs and oil income.
A Troubled Past and a Cautious Present
Iraq has weathered financial storms before. Between 2014 and 2017, during the military campaign against ISIS, the country experienced a 60% drop in oil revenue. A second shock came in 2020–2021 amid the COVID-19 pandemic. In both cases, the government managed to maintain core spending despite extraordinary pressure.
Now, however, the challenges are different. While Iraq holds a foreign reserve of $104 billion and nearly 160 tonnes of gold, economists argue that these buffers cannot substitute for meaningful reform.
'Reserves are not a solution—they are a lifeline,' said economist Hilal Al-Taan. 'Iraq needs a full restructuring of its financial priorities to withstand prolonged oil volatility.'
The current downturn has been exacerbated by two recent developments: OPEC+'s decision to raise oil production by over 400,000 barrels per day, and a series of new import tariffs imposed by US President Donald Trump. The latter has triggered retaliatory trade measures from China and renewed fears of a global recession.
Saleh confirmed that the government's economic team is closely monitoring global trends, but acknowledged that Iraq's fiscal room is narrowing. 'If oil prices dip to $60 or below, we face real risks to liquidity,' he warned.
Time for Reform—or More Turmoil Ahead?
Despite these alarms, meaningful structural reform remains elusive. Al-Saadi and Al-Jawahiri both advocate for urgent steps, including enforcing tax laws, eliminating fraudulent spending, reassessing leases of state-owned assets, and investing in productive sectors like agriculture, tourism, and industry.
They agree that cutting politically driven expenditures is essential, as is creating a modern and equitable revenue collection system. 'If we do not reform, we will face a recurring and worsening cycle of economic crisis,' Al-Saadi warned.
Analysts further stress the need to curb corruption, reassess infrastructure projects, and improve fiscal oversight to restore credibility. Otherwise, austerity could become inevitable—and politically destabilizing.
A Global Energy Shift, and Iraq Left Behind
As Iraq grapples with these internal crises, the global energy landscape is shifting away from hydrocarbons. The International Energy Agency's April 2025 report noted an acceleration in the transition to renewables, with major economies investing heavily in solar, wind, and hydrogen technologies. The appetite for heavy crude, while still present, is in gradual decline.
This trend places Iraq in an even more vulnerable position. The country has been slow to diversify its energy sector and has made minimal investments in renewables. Current policies, focused on short-term stabilization, do little to prepare the economy for a post-oil future.
To date, the government has launched only piecemeal efforts: trimming spending, reviewing OPEC+ commitments, and attempting to improve efficiency across ministries. But without a comprehensive roadmap, these steps are insufficient.
A Tipping Point
Iraq is approaching a tipping point. The country's deep reliance on oil is no longer merely a structural weakness—it is becoming a systemic threat. Falling prices, rising deficits, inefficient spending, and institutional inertia have converged to create a perfect storm.
The 2023–2025 budget was intended to offer a buffer against volatility and a blueprint for sustainable growth. Instead, it has exposed just how ill-prepared Iraq is to face a world in transition. Unless bold reforms are initiated now, the country risks deeper economic malaise, social discontent, and a dangerous erosion of its fiscal sovereignty.
In the words of Al-Taan, 'This is no longer a question of balancing numbers. It is a question of national survival.'