A combination of foreign events is undermining Iraq’s fragile economy. On the one hand the Strait of Hormuz Iraq’s main oil export route remains closed cutting off the country’s main source of revenue. On the other hand, the money Baghdad is making from petroleum is being held hostage by the Trump administration that wants the new Prime Minister Ali al-Zaidi to crackdown upon the pro-Iran Resistance. Together this is driving the government towards insolvency.
On May 17 the Central Bank of Iraq reported that the government had withdrawn over $1 billion from its foreign reserves in just one week to cover the budget. On April 23 the Bank held 125.61 trillion dinars/$95.73 billion in foreign currency. By April 30 that had dropped to 123.26 trillion dinars/$93.9 billion a deduction of $1.8 billion. This went to paying the government’s obligations such as public salaries, pensions, welfare and investment.
This was due to Baghdad losing its main source of income which is oil profits. First, the Iran War shut down the Strait of Hormuz cutting off most of the nation’s oil exports. Then the Trump administration stopped transferring what money it was making from petroleum to pressure the new Zaidi government to stop pro-Iran groups getting positions in his cabinet and to push him towards disbanding the Resistance factions. Iraq is the most oil dependent country in the world so these two events together put it in financial crisis.
Iraq was running into massive problems with its budget even before the war started. In mid-February it was reported that the government had withdrawn 20 trillion dinars from the Rafidain Bank and 8 trillion from the Rasheed Bank to cover government salaries. It also pulled another large sum from other banks.
Foreign Minister Fuad Hussein told the media that Baghdad had been running a deficit every month to cover paying its public workers. This was despite Prime Minister Mohammed Sudani claiming there were no problems. That was likely due to the 2025 elections and his failed attempt at a second term. With those pressure the premier was pretending that everything was fine when it wasn’t.
The IMF on the other hand warned that the budget was unsustainable. Sudani passed the largest budgets in the country’s history. This was mostly fueled by a continued explosion in the public workforce which is used by the ruling parties to buy support and deal with unemployment. Civil workers went from 1 million to 4.55 million with another 3 million on pensions. At the same time oil revenues fluctuated up and down with international prices.
In 2025 Baghdad was spending $6.5 billion a month just on salaries, pensions and welfare while only earning $7 billion. For that year the government ran a $9.8 billion deficit. That continued into 2026. In January the government spent 8.876 trillion dinars while only making 8.537 trillion. That led to delays in payments to workers and contractors at the start of 2026.
Government debt has gone up as well. In April it was estimated to be at $8.5-$9.5 billion due to the drop in oil exports from the war. Then in May it was found that $8 billion was borrowed in just the first four months of 2026. That figure is likely to continue to rise dramatically in the coming months.
Iraq is quickly reaching a breaking point. It can draw down its foreign reserves more, float bonds and is reportedly in talks with the International Monetary Fund for a bailout. Still its budget is so large and it is making so little that the situation seems unsustainable. The solutions are also dependent upon two foreign powers Iran and the United States. Can PM Zaidi do enough to appease President Trump so it can gain access to its oil profits again and will Tehran and Washington resolve their conflict? Those are the only things that will bring Iraq out of this crisis.
SOURCES
Iraqi News, “Iraq’s 2026 debt surge matches all of 2025 due to Hormuz disruptions,” 5/11/26
Al Mada, “Domestic Debt Approaches 97 Trillion Dinars: Declining Foreign Reserves Bring Fiscal Deficit to the Forefront,” 5/14/26
Mahmoud, Sinan, “How oil-dependent Iraq can no longer pay the bills,” The National, 4/13/26
Salem, Amr, “Iraq’s financial revenues hit $6.51 billion in January,” Iraqi News, 4/27/26
- “Iraq’s financial revenues hit $11.45 billion in January and February,” Iraqi News, 5/4/26
- “Iraq’s foreign currency reserves decline amid falling oil revenues,” Iraqi News, 5/17/26
Al-Samarraie, Jawad, “Iraq reports 339.5 billion dinar deficit in January 2026 fiscal report,” Iraqi News, 4/27/26
- “Iraq's $9.5B fiscal gap: Government triggers emergency borrowing plan," Iraqi News, 4/20/26
- “Report warns Iraq’s economic crisis has become structural,” Iraqi News, 2/17/26
No comments:
Post a Comment