Without oil: Iraq's economic future hanging in the balance

Shafaq News/ While the idea of Iraq completely halting oil exports seems implausible, concerns over economic sustainability persist. The country’s heavy reliance on this sector, coupled with a rapidly growing population and a lack of alternative income sources, raises alarms about its financial future. Experts warn that such overdependence could spell disaster if prices plunge, underscoring the urgency of diversifying the economy before external shocks undermine national stability.

Fragile Fortune

Iraq’s economy is heavily dependent on oil, with over 90% of government revenues coming from crude exports. As the second-largest oil producer in OPEC+, Iraq produces around 4.4 million barrels per day (bpd), though exports fluctuate between 3.3 and 3.7 million bpd due to production agreements, infrastructure limitations, and geopolitical factors. While oil has generated substantial revenues—such as the record $115 billion in 2022—it also exposes the country to financial instability, as seen during the 2020 oil price crash, when revenues collapsed and the government was forced to take emergency measures to ensure public sector salaries were paid.

Kovend Sherwani, an energy expert, highlights Iraq’s vulnerability, “Iraq’s rentier economy depends almost entirely on oil, which leaves it highly susceptible to price shocks. With production around four million barrels per day, any major price drop could cripple the state’s finances.”

Global oil prices are notoriously volatile, influenced by fluctuating demand, geopolitical crises, and OPEC+ decisions. A sharp decline below $50 per barrel could send Iraq into a severe budget crisis, as the country needs oil prices between $70 and $80 per barrel to balance its budget. A disruption in oil prices threatens not only government finances but also essential public services and infrastructure projects.

Economist Mustafa Faraj warns, “If Iraq were to lose its oil revenue, the country would face a severe economic crisis. Such a scenario would be catastrophic, as the government would struggle to pay salaries, fund public services, or sustain infrastructure projects.”

This fragility is compounded by Iraq’s state-dominated economy, with more than 60% of the workforce employed by the government. A drop in oil revenues would leave a large portion of the population without income, intensifying social unrest.

Iraq’s budget structure further exacerbates this vulnerability. With expansionary fiscal policies that increase public spending when oil prices are high, the government often bases its budget on optimistic oil revenue projections. For instance, the 2023 budget of $152 billion relied on projected revenues that could quickly become unsustainable if prices fall.

Public sector salaries and pensions alone account for over $50 billion annually, so any disruption in oil revenue could lead to immediate financial turmoil.

The country’s overreliance on oil has also stifled the growth of its private sector, which contributes less than 8% of GDP.

Businesses struggle due to poor infrastructure, bureaucratic inefficiencies, and competition from imports. Economist Ahmed Abdul-Rahman points out, “Oil revenues are already struggling to meet the demands of a rapidly growing population. The government must act now to create alternative revenue streams.”

With Iraq’s population set to reach 50 million by 2030, the pressure on oil and electricity demands will only increase.

Energy demand further deepens Iraq’s vulnerabilities. Despite having some of the largest natural gas reserves globally, the country faces a daily power deficit of up to 10 gigawatts, leading to frequent blackouts, especially in urban centers like Baghdad. Residents often rely on costly private generators to meet their energy needs. This energy deficit highlights the fragility of Iraq’s economic stability, as the government depends on oil revenues to fund electricity production.

Sherwani emphasizes the urgency, “With the population growing so rapidly, the need for consistent electricity becomes more critical. Any disruption in oil revenues, which fund electricity projects, could severely hinder efforts to meet growing demand, leaving millions without reliable power.”

The situation worsens during the summer months, when temperatures often exceed 40°C (104°F), making air conditioning and other cooling systems essential for public health. Without steady oil revenue, the government may struggle to invest in necessary infrastructure upgrades, worsening the energy crisis and triggering deeper social unrest.

Financial Freefall

The loss of oil revenue threatens not only Iraq’s economic stability but also its social fabric and long-term development. Oil earnings form the backbone of Iraq’s budget, supporting public services, infrastructure, and social programs. In 2024, Iraq’s oil exports generated approximately $72 billion, yet government expenditures consistently surpass this income.

In 2023, oil revenue accounted for 93% of the federal budget, making any disruption potentially catastrophic for funding health, education, and security. A severe shortfall could cripple government operations, particularly the payment of public sector salaries. With around 3 million employees on the state payroll, any delays or cuts could spark widespread discontent, as witnessed in the 2016 protests over unpaid wages.

Beyond its economic consequences, the loss of oil revenue would deepen social inequalities. Despite its vast oil wealth, Iraq has a poverty rate of around 20%, with many regions heavily dependent on government subsidies. The private sector remains underdeveloped, and informal employment makes up over 60% of the workforce, leaving millions of Iraqis without stable job opportunities. The lack of oil revenue would further strain the economy, pushing more young Iraqis into an already burdened public sector and intensifying financial pressures. Political instability would likely follow, as tensions between Baghdad and the Kurdistan Regional Government over revenue-sharing agreements could escalate into deeper disputes.

Inflation would be another inevitable consequence. Many oil-exporting nations peg their currencies to the US dollar, and without steady oil revenue, Iraq might be forced to print more money, leading to a rapid depreciation of the dinar.

Similar economic instability unfolded in Venezuela, where an oil revenue collapse caused the bolivar to lose over 99% of its value between 2013 and 2020. A comparable situation in Iraq would send the cost of living soaring, disproportionately harming low-income families and fuelling social unrest.

Iraq’s heavy reliance on oil is an unsustainable economic model. Recognizing this, the government launched the 2023 National Development Plan (NDP) to diversify the economy by boosting agriculture, manufacturing, and tourism. However, without oil revenue, these initiatives would likely stall. Any further decline in state investment would make recovery even more difficult.

Evolve or Expire

To secure a sustainable economic future, Iraq must urgently shift away from its heavy reliance on oil and focus on developing its non-oil sectors. Strengthening key sectors like agriculture, industry, tourism, and transportation can help create jobs, stabilize the economy, and reduce imports.

Despite Iraq’s vast agricultural potential—12 million hectares of arable land and two major rivers—the country imports nearly $8 billion worth of agricultural products annually. Decades of war, mismanagement, and water shortages have weakened domestic production. However, with the right investment in modern farming techniques, irrigation, and seed technology, Iraq can reduce imports and revitalize its agricultural sector.

Wheat production, for example, often falls short of demand due to inconsistent policies and climate issues. In 2022, Iraq produced only 3.4 million tons, far less than the 6 million tons needed to meet domestic consumption. Advanced irrigation systems and drought-resistant crops could help bridge this gap and ensure food security. "Iraq needs a long-term agricultural strategy. Without serious investment, food imports will continue draining our economy," notes agricultural economist Salim Jawad.

Iraq's date production has also suffered, declining from 900,000 tons in the 1980s to just 600,000 tons today, causing the country to lose its status as the world's leading data exporter. This decline stems from outdated farming methods, industry neglect, and climate challenges.

A well-structured plan to restore the date palm industry, including research, subsidies, and global marketing strategies, could revive Iraq’s presence in the global market. "Iraq’s dates were once famous worldwide," says trader Ahmed al-Bayati. "With better infrastructure and marketing, we could reclaim our position in the global market."

The industrial sector remains underdeveloped, with many state-owned factories shut down due to decades of conflict and economic mismanagement. As a result, Iraq relies heavily on imports. Rehabilitating its industrial base could create jobs, reduce dependency on foreign goods, and strengthen self-sufficiency. Iraq’s annual cement production is 25 million tons, but demand is expected to exceed 30 million. Expanding modern cement plants could transform Iraq into a regional supplier. "Investing in domestic production will reduce reliance on imports and strengthen Iraq’s economic sovereignty," explains industrial expert Firas Mahmoud.

The long-delayed Basra Petrochemical Complex holds significant potential. If fully operational, it could generate billions in revenue and create thousands of jobs. "Iraq has the raw materials for a thriving petrochemical industry, yet we continue to export crude oil instead of refining it into high-value products," notes energy analyst Haidar Karim. Developing this sector would allow Iraq to retain more of its oil wealth, boosting the economy and generating high-paying jobs. With the global petrochemical market projected to grow at a compound annual growth rate (CAGR) of 5.4%, Iraq has an opportunity to carve out a strong position in this industry.

Meanwhile, Iraq’s vast natural gas reserves, ranked 11th globally with 127 trillion cubic feet, remain underutilized. Over 55% of associated gas is flared due to limited processing infrastructure, wasting valuable resources and contributing to environmental damage.

Capturing and processing this gas could provide Iraq with a significant revenue stream while reducing pollution. The country also imports 40% of its electricity from Iran, costing billions annually. Developing domestic gas resources could curb this dependence and stabilize Iraq’s energy supply. The $10 billion deal signed with TotalEnergies in 2023 to capture flared gas and generate 3 gigawatts of electricity, enough to power 3 million homes, offers a promising step forward.

"If implemented properly, these projects could help Iraq achieve energy independence," says energy consultant Laith Abdul-Rahman.

As the world transitions to renewable energy, Iraq must prepare for a post-oil economy. Despite its vast solar potential, renewables currently contribute less than 1% of Iraq’s energy. The country enjoys one of the highest levels of solar exposure worldwide, with an average of 3,000 hours of sunshine annually, ideal conditions for large-scale solar energy projects. "We have an untapped solar energy goldmine," notes energy researcher Zainab al-Tamimi. "If Iraq prioritizes solar investment, we could power entire cities sustainably." Agreements with companies like Masdar (Turkiye) and PowerChina are already in place, but bureaucratic delays hinder progress.

Iraq’s tax and customs systems, which contribute less than 5% of GDP, also require urgent reform. Proper restructuring could significantly boost revenues for public services such as healthcare and education.

Economist Ahmed Abdul-Rahman emphasizes, "If properly reformed, taxation and customs revenues could significantly contribute to economic stability." Smuggling and corruption cost Iraq over $4 billion annually. A modernized customs system, including digital tax collection and enhanced transparency, could help recover these lost revenues. "Smuggling is bleeding Iraq’s economy," warns financial analyst Yasir Ali. "A modernized customs system could recover billions."

Lastly, Iraq must adopt policies to support its struggling local industries, which face strong competition from cheap imports, especially in textiles, electronics, and household products. Through tariff protections, subsidies, and quality standards, Iraq can revive these industries. The country once had a thriving textile sector, yet today, over 90% of clothing is imported. "Decades ago, Iraqis wore locally made garments. Now, we rely entirely on imports," recalls veteran textile manufacturer Abbas al-Dulaimi.