Shafaq News

For the second consecutive year, Iraq is operating under the so-called “1/12 financial management rule,” a stopgap mechanism that allows the government to spend only one-twelfth of the previous year’s operational expenditures each month. While the arrangement ensures the continued payment of salaries and pensions, it leaves the country without a general budget that sets spending priorities, funds investment projects, allocates provincial shares, or supports development across key sectors.

The budget vacuum comes at a time of sharp volatility in global oil prices —swinging in response to regional political developments— alongside a growing liquidity crunch inside Iraq. Together, these pressures have reduced the state’s financial system to what economists increasingly describe as little more than a mechanism for paying public-sector wages, with virtually no capacity to stimulate broader economic activity.

Economic specialists interviewed by Shafaq News warn that the situation amounts to a “major crisis” with wide-ranging consequences. While they acknowledge that declining revenues prevented the submission of a budget last year, they argue that the same conditions are now pushing the next government toward a similar deadlock.

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Operational spending —covering salaries, fuel, food rations, and basic ministry expenses— traditionally consumed the bulk of Iraq’s budget, while investment allocations have usually accounted for less than 30 percent. From that perspective, economist Nabil Jabbar al-Ali argues, Iraq has long functioned in practice under a 1/12-style system, even when budgets were formally approved.

Speaking to Shafaq News, al-Ali said the incoming government is likely to continue relying on the 1/12 rule because it guarantees operational spending at a time when oil revenues are insufficient to finance major projects. He added that the same revenue shortfall was behind the government’s failure to pass a budget last year.

Even if a budget is eventually submitted next year, al-Ali expects its primary focus to be clearing accumulated debts —particularly payments owed to contractors and companies— rather than launching new investment initiatives.

Under Iraq’s amended Financial Management Law of 2019, spending in the absence of an approved budget is capped at one-twelfth or less of the previous year’s actual current expenditures, excluding non-recurring expenses. This mechanism remains in force until the federal budget law is ratified. The law also stipulates that if a budget is not approved for a given fiscal year, the previous year’s final accounts become the basis for the new year’s financial data and must be submitted to parliament for approval.

Iraq has faced similar paralysis before. In 2015, the government did not submit the schedules of its planned three-year budget, reportedly to avoid political exploitation during an election period. More recently, the outgoing government approved a record-high three-year budget for 2023, 2024, and 2025, each exceeding 200 trillion Iraqi dinars (about $152.7 billion), with projected deficits of roughly 60 trillion dinars per year.

For economist Ali Karim Ithheib, the absence of a budget is far from a technical inconvenience. He warned that it effectively freezes the country, halting projects, public hiring, and development plans at a time when Iraq is already grappling with a financial and liquidity crisis.

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

Ithheib said Iraq’s near-total dependence on oil revenues leaves it vulnerable to what he described as “financial chaos” whenever prices fall, exposing the absence of long-term fiscal planning. The consequences are felt directly by citizens through fewer job opportunities and deteriorating services, while investors, both local and foreign, are discouraged by the lack of a stable financial vision, threatening broader macroeconomic stability.

While the 1/12 rule may keep the state functioning at a basic level, Ithheib stressed that it is “a temporary lifeline, not a fiscal policy suitable for running a country the size of Iraq.”

Under this system, spending is effectively confined to salaries and routine operational costs, leaving no room to launch new projects or complete stalled ones. Contractors and companies are among the hardest hit, as delayed payments force some to suspend work or withdraw entirely, fueling unemployment and weakening the local market. Prolonged reliance on the 1/12 rule, Ithheib added, erodes confidence in Iraq’s economic environment and deepens investor hesitation.

Despite parliamentary elections held in October 2025, a new government has yet to form. Lawmakers remain locked in disputes over electing a president, who would then nominate a prime ministerial candidate from the largest bloc. Negotiations among political forces continue, but expectations are growing that the crisis could drag on, given constitutional timelines that allow a prime minister-designate up to 30 days to present a cabinet and seek parliamentary confidence.

Economist Mustafa al-Faraj painted an even bleaker picture, saying several companies and contractors have already declared bankruptcy and begun liquidating assets due to unpaid government dues stemming from the absence of a budget. The halt in public hiring and the slowdown in private-sector activity, he warned, are compounding unemployment and economic strain.

Based on current indicators, al-Faraj said, a new government is unlikely to be formed before mid-year, making it almost impossible to pass a budget for the current fiscal year and pushing the problem into the next one.

“No country can function without a budget and rely solely on operational spending…This approach shuts down projects, freezes promotions, and ultimately harms both citizens and public employees.”

As Iraq drifts deeper into another year without a comprehensive budget, the economists agree on one point: the 1/12 rule may keep salaries flowing, but it cannot substitute for a coherent fiscal strategy, nor can it sustain an economy already strained by oil dependence, political deadlock, and eroding confidence.

Written and edited by Shafaq News staff.