Shafaq News

Iraq’s heavy reliance on oil revenues is putting growing pressure on its federal budget, with price volatility exposing long-standing weaknesses in an economy dependent on crude exports for most state income. As global oil markets fluctuate under regional geopolitical tensions and domestic political uncertainty, Baghdad seems to face widening deficits and shrinking room to finance development projects.

While the problem itself is longstanding, its impact is becoming more severe. Delays in budget disbursement, rising operational costs, and prolonged political transitions are converging at a moment when oil prices remain below the levels assumed in fiscal planning.

Financial and economic analysts, who spoke to Shafaq News, say Iraq’s public finances are increasingly constrained by a growing mismatch between projected oil revenues and actual spending requirements. Dependence on oil for more than 90% of the state’s income leaves the budget highly exposed to even modest declines in global prices.

Former parliamentary finance committee member Moeen Al-Kadhimi said the three-year budget approved in 2023 faltered in execution rather than design. “The triennial budget was not disbursed to provinces in accordance with the law,” he told Shafaq News, describing the government’s failure to transfer allocations as a “clear violation” of budget legislation. Provincial funding, he stressed, is a legal entitlement based on population ratios, not a discretionary expense.

Al-Kadhimi said persistent underfunding throughout 2023, 2024, and 2025 has stalled projects nationwide. Now in 2026, with the formation of a new government expected to extend until late February, he warned that delays in submitting the next budget could further deepen liquidity pressures on ministries and local administrations.

Oil revenue projections highlight the scale of the challenge. Al-Kadhimi estimates that if oil prices average $60 per barrel and exports remain near 3.5 million barrels per day, Iraq’s oil income in 2026 would reach about $70 billion, equivalent to roughly 100 trillion Iraqi dinars. By contrast, total spending requirements —including operational costs, investment allocations, and regional development projects— would exceed 150 trillion dinars ($105B).

“This leaves a financing gap that cannot be ignored,” he said, estimating a deficit of around 30 trillion dinars ($21B) even after spending reductions. While the next government may seek to raise non-oil revenues and cut unnecessary operational expenses, including high-level government salaries, Al-Kadhimi cautioned that austerity measures alone will not be sufficient to bridge the gap.

The strain is already evident in the investment budget as financial expert Diaa Mohsen explained that fiscal deficits tend to hit capital spending first, particularly in economies where non-oil revenues remain limited.

“The general budget consists of operational and investment components,” Mohsen told Shafaq News. “The investment side is more complex, because projects are based on future returns that materialize only after completion, unlike operational spending, which is non-recoverable and represents the largest burden.”

He criticized the inclusion of large-scale projects without adequate safeguards, such as conservative oil price assumptions or financial buffers to absorb market downturns. With oil prices slipping below $60 per barrel amid global oversupply, authorities have suspended or canceled several projects, redirecting available funds toward those closest to completion.

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

In turn, oil expert Hamza Al-Jawahiri suggested that Iraq’s outlook remains closely tied not only to domestic fiscal policy, but also to regional developments, saying that crude prices have fallen by about $5 per barrel in recent weeks, partly due to escalating tensions between Iran and the United States.

“Oil prices are no longer determined solely by supply and demand … They are increasingly shaped by political dynamics and geopolitical interventions.”

Al-Jawahiri warned that the region is “on the edge of a wider conflict,” a scenario that could drive prices sharply higher or cause severe disruptions. Any closure of the Strait of Hormuz, he said, would amount to an economic catastrophe not only for Iraq but for global markets, underscoring the vulnerability of Baghdad’s oil-dependent revenue model.

That vulnerability was echoed by Furat Al-Moussawi, head of the Iraq Energy Center, who described oil price fluctuations as “direct economic shocks” to the Iraqi state. Each one-dollar change in oil prices, he noted, translates into billions of dollars gained or lost annually, leaving budget planning hostage to external forces.

Al-Moussawi illustrated the contrast starkly: at $80 per barrel and exports of around four million barrels per day, Iraq could generate more than $115 billion a year. At $50, revenues would fall to roughly $72 billion, a loss of about $43 billion in a single year. Such swings, he said, directly threaten the government’s ability to pay salaries, maintain services, and sustain development spending.

Despite differing emphases, analysts converge on a single conclusion: Iraq’s fiscal fragility is rooted in its failure to diversify. Continued reliance on oil leaves the budget exposed to decisions by major producers, shifts in global demand, and regional crises beyond Baghdad’s control.

Meaningful reform, experts argue, must prioritize expanding non-oil revenue streams, investing in associated gas capture, and developing renewable energy projects to reduce pressure on crude exports. Without such steps, the budget will remain reactive rather than strategic, reshaped each year by market shocks instead of long-term planning.

Written and edited by Shafaq News staff.