Iraq Proposes Record Budget Amidst Severe Financial Crisis and Economic Contraction

Iraq is currently deliberating a draft federal budget for 2027 that, if enacted, would be the largest in the nation's history. However, this ambitious financial plan appears significantly disconnected from the country's current economic realities. The proposed bill, a copy of which has been reviewed, resembles a welfare-state budget designed for stable times rather than an austerity measure for a government grappling with its most severe financial crisis in years.

The total projected public expenditure stands at approximately 217.2 trillion Iraqi dinars ($143.6 billion). The draft anticipates revenues of only 174.2 trillion dinars, with roughly 144 trillion dinars expected from crude oil sales and 30.2 trillion dinars from non-oil sources. This leaves a substantial deficit of about 43 trillion dinars.

According to the draft, this deficit is to be covered by surpluses from increased crude oil export prices or volumes, internal and external borrowing, and carried-over funds. However, recent fiscal performance in Iraq has disproven such optimistic assumptions. Within the proposed spending, welfare initiatives dominate, with allocations for salaries at approximately 64.7 trillion dinars and social welfare at around 33 trillion dinars. Grants, subsidies, and interest payments are budgeted at about 17 trillion dinars, with debt servicing also requiring a similar amount.

Iraq's financial situation has deteriorated sharply since the commencement of the Iran war in late February, which led to the effective closure of the Strait of Hormuz. As Iraq derives over 90 percent of its budget revenue in dollars from oil exports, the majority of which must transit this vital waterway—through which approximately one-third of the world's seaborne oil passes—the impact has been severe. Oil exports plummeted from 3.36 million barrels per day in February to just 131,000 barrels per day in April, resulting in a drastic drop in monthly oil revenue, which had previously hovered around $7 billion.

Data from the Finance Ministry for the period ending in August indicated revenues of only about 45.3 trillion dinars against expenditures of 78.9 trillion dinars. To bridge this gap, Iraq has largely depended on its foreign reserves, which have fallen from approximately $109 billion to $80.6 billion, according to data from the Iraqi Central Bank.

The magnitude of this economic shock compelled Baghdad to seek external assistance for the first time since the 2016 Stand-By Arrangement with the International Monetary Fund (IMF). Iraqi officials have approached the IMF and formally requested a financing program, as confirmed by IMF Managing Director Kristalina Georgieva during the Annual Meetings in Bangkok. Georgieva stated that the IMF intends to provide both financial and policy support to Iraq, expressing confidence in a successful loan program after further collaborative work.

The IMF projects that Iraq's economy will contract by 16 percent in 2026, with a current account deficit of 10.8 percent of GDP for the current year. Against this backdrop, the budget has been formulated with an assumed oil price of $58 per barrel and projected exports of around four million barrels per day, including those from the Kurdistan region, as indicated by a government official.

There are tentative signs of economic recovery. Iraqi oil exports have reportedly rebounded to approximately 3.4 million barrels per day as of early October. Despite the increase in export volumes, the State Organisation for Marketing of Oil (Somo) has encountered pricing challenges and significant discounts, sometimes ranging from $25 to $30 per barrel, attributed to maritime risk premiums. The government anticipates further improvements in the coming weeks, though the full financial benefits are not expected to materialize until later in the year due to a lag of at least two months between export and revenue receipt.

While awaiting IMF support, the government has resorted to internal borrowing to cover payroll expenses and has devalued the Iraqi dinar to inflate its dinar-denominated oil revenues.

Economists have criticized the budget for its detachment from reality. Nabil Al Marsoomi, a Baghdad-based economist, told The National that the state is in severe financial distress, yet the government is increasing expenses instead of implementing austerity measures. He expressed surprise at the large, highly stretched expansionary budget, noting that the Ministry of Finance and Planning appear overly relaxed. Al Marsoomi highlighted the substantial allocations for salaries, social welfare, and debt service, alongside a significant deficit gap.

Al Marsoomi warned that the budget could lead Iraq into further difficulties, particularly given the ongoing uncertainty surrounding the Strait of Hormuz. He described the draft as a political document rather than an economic one, reflecting the behavior of a