The danger of the financial crisis in Iraq lies not only in the high exchange rate of the dollar or the rise in commodity prices, but in the possibility that the state will face difficulty in fulfilling its financial obligations on time. Iraq relies heavily on oil revenues and faces complex economic challenges that include government expenditures that are difficult to reduce quickly and growing social needs, alongside an economy heavily affected by any disruption in oil markets or export routes.
These fears are exacerbated by fluctuations in the exchange market and the potential escalation of regional tensions, as well as the effects that disruptions to navigation in the Strait of Hormuz could have on oil exports and trade.
Under these circumstances, the most crucial question becomes not only whether prices will rise, but whether the Iraqi government possesses sufficient liquidity and resources to cover salaries, services, projects, and other obligations without the repeated need for borrowing or delaying payments.
The adjustment of the official exchange rate from 1,320 to 1,520 dinars per dollar represents one of the most prominent indicators of the financial and monetary pressures facing the Iraqi economy. Purchasing one dollar according to these two rates requires approximately 15.2% in additional dinars. This does not mean that all goods will rise by the same percentage, but the effect of the exchange rate change will gradually reflect on the prices of foodstuffs, medicines, construction supplies, and other imported goods. The likely result is a decline in the purchasing power of households, especially low-income earners and those on fixed salaries.
A rise in the dollar might seem beneficial to the treasury because dollar oil revenues are converted into a larger number of dinars, but this benefit is not guaranteed. If exported oil quantities drop or export routes are disrupted, the state could lose part of its revenues while import costs rise and pressure on citizens increases. Therefore, the financial situation must be evaluated based on the actual volume of exports, realized revenues, and the government’s financial needs all together.
Estimates for the 2027 draft budget acquire particular importance in this context, as figures are circulating for expenditures reaching approximately 217 trillion dinars, with a deficit exceeding 40 trillion dinars. However, these figures should be treated as expectations linked to the draft and the assumptions upon which it was built, rather than final results. What matters is how the deficit will be funded, the realism of expected revenues, and the government’s ability to continue spending if oil revenues decline.
Several trajectories for the crisis can be envisioned based on current data. If oil markets stabilize and exports continue normally, the government may be able to manage the pressure by improving revenues and controlling expenditures. However, if price increases persist and purchasing power weakens, the living crisis may worsen despite the regular payment of salaries. If government liquidity declines, the state may be forced to delay certain obligations or cut investment spending, which will negatively impact projects, job opportunities, and economic activity. As for the most difficult scenario, it involves a drop in exports alongside exchange market turmoil and rising expenditures, which could turn financial pressures into a larger social and political crisis.
The impact of these possibilities will not be limited to the Iraqi governorates only, but will extend to the Kurdistan Region, whose financial situation relies heavily on its financial relationship with the central government. The Region’s share of the budget is considered one of the most sensitive issues between Baghdad and Erbil. Prior to conducting the population census, a figure of 12.6% was proposed to determine the Region’s share, while the Region demands its percentage based on the population census, which stands at 14.14%, and refuses for its share to fall below that. The sensitivity of this file grows larger when looking at what the Region used to receive previously, as estimates indicate that the funds transferred to it amounted to only about 5%, which sparked repeated objections regarding fair distribution and the fulfillment of financial obligations.
The core of the dispute is not related to numbers alone, but to the method of calculating the share, the extent of compliance with agreements and financial rights, and clear transfer mechanisms. Therefore, any serious discussion regarding the share of the Kurdistan Region must be based on the results of the population census, legal and constitutional frameworks, and actual financial data, rather than relying on temporary decisions that change with every political or financial crisis. Furthermore, theoretical percentages should not be confused with actually transferred amounts, as the difference between them reflects a fundamental aspect of the nature of the financial dispute between the two parties.
Any delay in transfers or dispute over the implementation of obligations could negatively affect salary payments, service funding, and project continuity. Additionally, rising prices will also impact citizens in the Region even if no direct change occurs in the volume of federal transfers. If entitlements become a subject of continuous political dispute, distrust between Baghdad and Erbil could deepen at a time when all parties need to coordinate to confront economic pressures.
These risks cannot be addressed through short-term measures alone. Iraq needs to review spending priorities, reduce waste and corruption, and develop non-oil revenues in a manner that does not overburden citizens, alongside strengthening the agricultural, industrial, and investment sectors. Moreover, improving resource management and increasing oil export outlets wherever economically and technically feasible will help reduce vulnerability to external shocks. The Kurdistan Region also needs to enhance its local resources and diversify its economic activities while preserving its financial rights in accordance with legal and constitutional frameworks.
In the final analysis, it appears that the future of Iraq’s financial situation depends not solely on the rise of the dollar or the fall of oil prices in isolation, but also on the state’s capacity to handle the potential occurrence of multiple crises simultaneously. If high expenditures, heavy reliance on oil, and weak alternative revenues persist, any external disruption could expose internal imbalances that have accumulated over many years. However, if this phase is utilized to review financial policies, enhance transparency, and foster understanding between Baghdad and Erbil, the potential crisis could transform into an opportunity to rebuild a more stable relationship between the state’s resources, its obligations, and the needs of its citizens.
Note: This text is translated from the original Arabic version… Read the Arabic version:Click here
