Cash outside banks, debt on the rise: Iraq’s fiscal challenge

Shafaq News

Iraq’s banking sector has entered a sensitive phase as liquidity declines and financial commitments expand, raising fears of delayed salary payments in the coming period and placing government institutions under mounting fiscal pressure.

Parliamentary and economic voices warn that the gap between government spending and oil revenues is widening, pushing the country toward a difficult financial environment that directly affects citizens’ daily lives.

This December, salaries for government employees were delayed beyond their usual schedule due to liquidity shortages at state-owned banks. Retirees experienced similar delays as banks struggled to release their payments on time. According to informed sources, banks are finding it increasingly difficult to secure the required cash, forcing several days of postponement and creating concerns that the crisis could repeat in the coming months if liquidity issues are not resolved swiftly.

Salary Delays

Economic expert Durgham Mohammed Ali said the current situation stems from a higher-than-expected budget deficit, as the budget was drafted based on an oil price that did not materialize.

He told Shafaq News that this increased the deficit and placed pressure on treasury transfers sold by the government to banks through domestic borrowing instruments.

Ali explained that this reduced the deposits available for investment in treasury transfers, weakening banks’ ability to lend to the government and pressuring the state’s large operational commitments, especially with oil revenues coming in 25% lower than projected.

He added that the situation has created administrative delays in salary coverage, noting that “other excuses fall outside economic reasoning and into purely administrative causes.”

Teachers and public employees across Iraq have launched widespread protests over delayed salaries, low wages, and stalled allowances, expressing mounting frustration with deteriorating living conditions.

Tensions have risen further as salary payments for some security forces were recently disrupted due to external pressure affecting state banking channels. The crisis has been sharpened by a severe liquidity shortage at Al-Rafidain Bank, which left thousands of retirees without their December pensions. This banking failure has intensified public anger and eroded trust in the government’s ability to safeguard wages.

Financial and banking expert Mahmoud Dagher said, “Salary payments cannot be stopped, even if it requires external borrowing.”

In an Interview with Shafaq News, he said that protecting employees’ rights and ensuring timely salary disbursement remains “an absolute priority,” regardless of financial pressures.

“93T Dinars Frozen”

Economist Mohammed al-Hasani said most of Iraq’s monetary mass—93 trillion Iraqi dinars (Approx B72.5B) out of a total 99 trillion—is stored in private homes rather than in the banking sector.

“This reflects weak public trust in local banks and has pushed vast sums of money out of economic circulation, worsening the liquidity crisis,” he added.

Al-Hasani told Shafaq News that Iraq’s fiscal policy “has entered a state of inability” to regulate local currency supply, secure dinar liquidity, and meet internal obligations such as salaries and operational spending. He described the situation as “an early warning sign of negative effects that could impact the entire national economy.”

He called for urgent measures to restore trust in Iraq’s banking sector, attract household cash deposits into the system, strengthen customs and tax revenues, combat corruption, and reduce expenditures.

Data from the Central Bank of Iraq shows that about 87% of the country’s total cash supply—95 trillion dinars (Approx $72.5B) out of 109 trillion—remains outside the formal banking system.

Roughly 80% of Iraq’s operating budget goes to salaries for more than seven million employees and retirees.

Financing Expenditures

Mudhir Mohammed Saleh, the financial adviser to the caretaker prime minister, said Iraq’s legal framework grants the Ministry of Finance broad flexibility in managing liquidity inside state institutions.

He said this allows the government to rotate cash without undermining the solvency of state-owned banks or the structure of the financial system.

Speaking to Shafaq News, Saleh noted that without an active legislature, the government holds no constitutional or legal authority to conduct sovereign borrowing, either domestically or internationally.

However, he said the law allows the use of short-term treasury advances funded exclusively by state-owned banks as part of liquidity management, and that these do not constitute sovereign borrowing in a legal sense.

He emphasized that these advances are the country’s only legal tool to maintain essential government spending until the legislature regains its constitutional authority to issue financial laws.

Collapse of Rafidain Bank Assets

Under these conditions, a well-informed source revealed that the state-owned Rafidain Bank has faced repeated liquidity crises, the latest of which caused delays in releasing pension payments.

The source told Shafaq News that the situation has raised serious questions about the fate of the bank’s liquidity over recent years, especially given the substantial resources it once held.

He said Rafidain’s assets had previously exceeded 20 trillion dinars but have now dropped to around 1 trillion dinars—or even less—according to his account, though these figures could not be independently verified.

The source added that the responsibility now lies with oversight institutions, including the Integrity Commission and the judiciary, to launch a full investigation into the bank’s financial management, spending, and current asset levels in order to safeguard public funds.

These warnings come amid rising concerns over Iraq’s expanding financial challenges, particularly with the announcement that domestic debt has reached around 90 trillion dinars (nearly $69 billion), the highest level in the country’s history.

Will the Lebanese Scenario Repeat itself in Iraq?

Observers interviewed by Shafaq News note several similarities between Iraq’s current financial landscape and the early stages of Lebanon’s economic collapse.

One indicator is the emerging gap between bank-issued dollar rates and the real prices on the parallel market.

They also point to a precedent from Lebanon: the collapse of a major bank after it was sanctioned by the United States—an event that served as an early alarm before the wider crisis.

In Iraq’s case, there is a fear that the liquidity troubles at Rafidain Bank may represent a comparable warning sign.

Given Iraq’s heavy dependence on oil revenues, some hope that higher global oil prices could ease financial pressures. However, caution persists that such relief would be temporary and cannot provide a sustainable solution.

Written and edited by Shafaq News staff.