International warnings hit Baghdad: Money, oil, mismanagement

Shafaq News

Iraq continues to rely heavily on oil revenues to finance its federal budget, a strategy that international organizations and economic experts say puts the country at serious financial risk amid declining global oil prices.

In its latest assessment, published in April, the International Monetary Fund (IMF) estimated that Iraq would require an average oil price of $92.43 per barrel to balance its 2025 national budget. However, current market prices remain under $65 per barrel, well below the break-even point for the oil-dependent country.

Foreign Reserves As A Defensive Tool

Mudhhir Mohammad Saleh, financial advisor to the Iraqi Prime Minister, described foreign currency reserves as a “critical tool” for maintaining the external value of the national currency.

Speaking to Shafaq News, Saleh emphasized that the Central Bank of Iraq (CBI) uses these reserves to regulate liquidity and stabilize the exchange rate, primarily through a fixed official rate and interventions in the currency market.

Saleh explained that the central bank’s strategies include sacrificing part of the reserves to meet foreign currency demand or employing domestic debt instruments to absorb excess liquidity via interest rate tools.

He also stressed that the monetary authority monitors the efficiency of the reserves through two key metrics: the foreign currency coverage of the money supply — which should not fall below 75% — and the number of import months that reserves can cover, ideally not less than six. “The global standard is three months,” he added.

Reserve Sufficiency, Not Volume, Key To Stability

Former CBI director and financial expert Mahmoud Dagher echoed the sentiment, pointing out that the adequacy of reserves is more important than their total size. “Iraq has what is considered more than one year of reserve adequacy. This is sufficient,” Dagher told Shafaq News.

However, he warned that reserves are affected not only by oil prices but also by spending levels. “Since 2023, government spending has exceeded oil and non-oil revenues, leading to an actual fiscal deficit,” he clarified.

Dagher acknowledged a decline in reserves but refuted reports suggesting they had dropped below $70 billion. He projected that due to high expenditures and low oil prices, reserves could decline to $90 billion by the end of 2025.

In its report, the IMF also noted that Iraq’s non-oil sector has sharply contracted, falling from 18.7% of GDP in 2023 to just 2.5% in 2024 due to reduced public investment.

Experts Call For Structural Reforms

Economic expert Hilal al-Taan explained to Shafaq News that Iraq’s reserves at the CBI are held in foreign currencies such as the US dollar, while gold holdings are largely untouchable under current central bank laws unless in extreme emergencies.

Al-Taan stressed that reforms are needed to reduce unnecessary government spending, advocating eliminating “ghost employees” from public institutions, reducing privileges for senior officials and parliamentarians, and abolishing outdated entitlements such as the “Rafha pensions” and allowances for members of the defunct National Assembly.

He also urged austerity in government purchases, particularly office furniture and luxury vehicles, and proposed downsizing diplomatic missions while promoting local industries and agriculture.

Risk Of Relying Solely On Oil

Economist Dhirgham Mohammad Ali affirmed that the warnings from international organizations reflect long-standing issues that the Iraqi government itself has acknowledged. “The government has already recognized the risks of depending solely on oil and is working on alternatives such as the Development Road project, investment in agriculture and industry, and clean energy.”

He added that such efforts require time, a supportive environment, and international expertise, especially in strengthening Iraq’s banking sector, which he described as the foundation of the broader economy. Ali also highlighted the importance of exchange rate stability to boost confidence in the national currency.