Shafaq News

On February 28, US-Israeli military operations against Iran forced a de facto closure of the Strait of Hormuz, cutting Iraq's oil export volumes to below 800,000 barrels per day and costing the country an estimated $128 million daily, according to the Eco Iraq Observatory. For an economy that depends on oil for between 90 and 95 percent of state revenues, the shock was severe in that it arrived while Iraq was operating without an approved budget made it structural.

Six months into 2026, and the government of Prime Minister Ali Al-Zaidi continues administering a $280 billion economy through emergency spending provisions designed for temporary shortfalls rather than sustained disruption. Oil income had already fallen 16 percent in 2025, against a break-even price of $84 per barrel and a market rate hovering near $67. Parliament has failed to pass a budget on schedule for the fourth time since 2003, leaving the government with no fiscal instrument to absorb the pressure, and, as of February, no margin to absorb the shock.

The International Monetary Fund, in a warning issued last week, ranked Iraq among the economies most exposed to regional disruptions in 2026, flagging serious repercussions for inflation, external accounts, and public finances. What amplifies the damage is that Iraq arrived at this moment already weakened. The three-year budget framework covering 2023, 2024, and 2025, the government's last comprehensive financial roadmap, expired at the end of last year. Parliament has not approved a 2026 spending plan, and indications now suggest it will not. The government is instead operating under Article 13 of the Federal Financial Management Law No. 6 of 2019, which authorizes monthly expenditures equivalent to one-twelfth of the previous year's approved budget.

Read more: Recession alert: 2025 budget deadlock threatens Iraq

Mudhhir Mohammed Saleh, the financial adviser to the prime minister, described the mechanism to Shafaq News as a safeguard for continuity, one that protects salaries, wages, pensions, and social welfare payments while enabling financing of essential investment expenditures based on the implementation rates and available liquidity. But this framing omits what the one-twelfth rule cannot do: it cannot launch new projects, respond to changing priorities, or provide the fiscal flexibility that economic management in a crisis requires.

Iraq has now spent roughly 16 months without approved budget schedules. More than 4,500 projects across the country have already stalled —some for years, according to parliamentary data— and specialists warn that continued budget paralysis will add further initiatives to that list.

Economic expert Dhiaa Al-Mohsen, speaking to Shafaq News, argued that the budget is not merely a financial instrument but the central mechanism through which the state manages its economic and investment activity.

"The ministries and provincial administrations will gradually lose their medium- and long-term planning capacity," Al-Mohsen warned, adding that reduced government spending weakens economic momentum across construction, manufacturing, transportation, and services. "The state can be managed, but development cannot."

Economic researcher Ahmed Eid explained to Shafaq News that the one-twelfth rule deepens financial uncertainty and restricts the government's ability to execute economic plans efficiently. It also “undermines confidence among state contractors and investors, domestic and foreign, who cannot plan around a future that has not been legislated.”

Read more: Iraq enters 16th month without budget as 4,500 projects stall

The employment dimension compounds the pressure. Government hiring has historically served as the primary channel through which Iraqi graduates enter the labor market. Under temporary spending rules, Al-Mohsen warned that recruitment opportunities will become "extremely limited," with exceptions concentrated in healthcare, education, and security. He cautioned that such restrictions risk intensifying social pressures in a country where youth unemployment already runs at persistently high levels.

According to financial expert Mahmoud Dagher, Iraq's public finances have evolved since 2004 into a "salary economy,” which alone requires approximately nine trillion Iraqi dinars (roughly $6.8 billion) each month, and any disruption to oil exports, however brief, carries the potential to push public finances into paralysis.

"If crises persist for a prolonged period, the government may resort to temporary austerity measures," Dagher told Shafaq News, citing potential steps including improved collection of electricity and water fees, deferrals of payments owed to farmers and contractors, restrictions on non-essential imports, and freezes on allowances, promotions, and bonuses.

“The priority is spending efficiency and expenditure control, preserving foreign currency reserves, which constitute the primary defense of the Iraqi dinar and the financing of imports,” he added.

Dagher identified a technical and legal complication that distinguishes the current episode from previous budget delays. Parliament failed to approve spending and revenue schedules during 2025, meaning the baseline from which the one-twelfth rule calculates monthly allocations carries its own irregularities. That detail, which might appear procedural, carries material implications for how the rule is applied and what counts as an authorized expenditure.

Ahmed Eid warned that the government may be compelled to expand its reliance on domestic financing mechanisms, including taxes, fees, and borrowing from local banks, cautioning that this path raises medium-term financial risks if not accompanied by genuine structural reform.

For now, the Central Bank remains the primary backstop. The government's ability to secure liquidity through deficit financing, including, in extremis, discounting treasury transfers through the Central Bank, is the last line of defense in a scenario where oil revenues fall sharply and do not recover quickly. Dagher described a "zero oil revenue" scenario as one that would confront Iraq with difficult economic and political choices amid rising financial obligations and growing social pressures.

Read more: Iraq’s private banks: Capital Growth and the structural credit gap

Economic expert Safwan Qusay pointed out that the government should pursue alternative financing mechanisms for investment projects outside the traditional budget framework. Continued reliance on the one-twelfth rule, he told Shafaq News, effectively confines expenditures to operational needs, making it necessary to establish a special framework for financing investment through borrowing legislation or public-private partnerships.

He proposed expanding the role of investment portfolios and authorities “by offering infrastructure and service projects to investors in exchange for opportunities in commercial, tourism, and real estate sectors,” thereby sustaining project financing independent of the annual budget cycle.

Into this landscape, the government has pointed to its Iraq 2035 economic vision as a structural response to the underlying vulnerabilities. Saleh described it as a roadmap for fiscal and economic diversification, targeting a rise in non-oil revenues to 46 percent of total state income and an increase in the private sector's contribution to GDP from 37 percent currently to 53 percent by 2035. The Market Development Council, he added, would play a central role in attracting investment and advancing Iraq's transition toward a more diversified and sustainable economy.

What is less clear is the path from the present moment, a state running on emergency provisions, with 4,500 stalled projects, constrained hiring, and an oil revenue base that a regional conflict can halve in weeks, to an economy capable of generating half its income from non-oil sources within a decade.

Iraq's policymakers have produced visions before, but without the legislative and institutional foundations to deliver them. The budget process itself illustrates a gap between parliament, which routinely fails to approve spending plans on time, and its position to enact the structural reforms that economic diversification requires.

Read more: Deficit soars, projects freeze: Iraq heads into 2026 with NO BUDGET

Iraq 2035 may be a sound framework on paper. The institutions responsible for delivering it have spent 16 months unable to pass a budget, and the oil revenues that must finance any meaningful transition remain exposed to the kind of regional disruption that closes a strait before a ministry can convene.

Written and edited by Shafaq News staff.