The story: Iraq is grappling with a looming financial crisis as global oil prices hover around 60 USD per barrel, driven by US President Donald Trump’s ongoing tariff campaign. With approximately 90% of state revenue dependent on oil exports, observers warn that Baghdad will struggle to fund its hefty public sector salary and pension obligations. Iraq’s current budget, based on seemingly optimistic projections, now appears unsustainable and could threaten the fragile economic and political stability the country is experiencing.

The coverage: With oil prices sinking to their lowest since 2021, Shafaq News has warned of an “existential threat” to Iraq’s economy and ruling political system, citing concern that the state has struggled to meet budgetary obligations even at higher crude prices.

  • Compounding the issue, global oil cartel OPEC+ in early April made the unexpected move of increasing crude production by 411,000 barrels of oil per day—three times the anticipated amount. The grouping brings together OPEC members with 11 non-OPEC oil producers, including Russia.
  • Taking aim at the move, Iraqi economic analyst Yahya Alaqabi argued in a post on Twitter/X that OPEC+ decision makers have “not taken into account Iraq’s need for reconstruction and infrastructure development.”

Seemingly recognizing an emerging crisis, Iraqi Prime Minister Muhammad Shia’ Al-Sudani in an Apr. 7 speech to domestic bankers acknowledged “serious financial and banking challenges.”

  • Suggesting anxiety at the top level of politics, Hikmah Movement leader Ammar Al-Hakim is reported to have told his followers that Iraq “faces economic challenges as a result of the fluctuation in oil prices,” and called for “moving to a diversified economy.”

Iraqi journalist Shadha Al-Amili charged in the London-based Independent Arabia that the crisis exposes endemic corruption and mismanagement in Iraq’s public finances. Amili further emphasized that despite several years of high oil revenues, successive governments have failed to prepare for market volatility. 

  • Conversely, government economic advisor Mazhar Muhammed Salih has downplayed the crisis, saying that Iraq’s 2023–2025 budget “accounts for fluctuations in the oil market,” further charging that the “current global situation” can be considered a “temporary crisis.”

The context/analysis: Heightened anxiety over the sustainability of Iraq’s oil-dependent budget was kicked into high gear following Washington’s introduction of sweeping trade tariffs on countries worldwide, which sent global stock markets into turmoil.

  • The simultaneous decision by OPEC+ to boost production was reportedly driven by Saudi Arabia’s frustration with fellow members Iraq and Kazakhstan for exceeding production quotas set last year.

This is not the first time Iraq has faced an economic crisis brought on by hydrocarbon market fluctuations, underscoring the fragility caused by its heavy reliance on oil export revenues.

  • Successive Iraqi administrations since the US-led invasion in 2003 have continuously expanded public sector employment in the interest of maintaining social stability and support for the government.

However, observers have suggested that these policies have often had the opposite effect. Notably, the 2020 collapse in oil prices brought on by the Covid-19 pandemic and a Russian- Saudi oil price war—leading crude to sink to 30 USD per barrel—saw Iraq teeter on the brink of fiscal collapse.

  • Amid the crisis back then, public sector workers were left languishing without pay for months in many cases. The World Bank later estimated that the broader crisis pushed 5.5M Iraqis into poverty.

Despite warnings from international financial institutions, the Sudani administration has added a reported 500,000 public sector jobs since taking office, likely in a bid to shore up its popularity. 

  • Public salaries and pensions consume approximately 40% of Iraq’s budget, leaving limited room for investment or diversification—and threatening a repeat of 2020.

The current budget—passed as a three-year document in 2023—was built on projections that oil prices would hover around 70 USD per barrel. However, according to a recent report by the International Monetary Fund, Iraq needs crude prices to stay above 92 USD per barrel to avoid deficit spending.

  • With foreign exchange reserves estimated at 100B USD—relatively modest compared to other major oil exporters, and much of it held in US bonds—Baghdad likely faces difficult choices: borrowing heavily, cutting salaries or risking inflation by printing money.

The future: In the short term, Baghdad may tap into its foreign exchange reserves to help plug deficits or delay infrastructure projects to cover immediate salary payments. However, such measures will only kick the fiscal can down the road.

  • Ultimately, temporary solutions do not address Iraq’s underlying fiscal imbalance. If oil prices remain low through 2025, delays in payments of pensions and salaries could become unavoidable. Such a reality could potentially trigger widespread popular protests similar to those seen in 2019, when economic and political grievances fueled anti-establishment demonstrations across Iraq.
  • Long-term solutions will require structural reforms aimed at diversifying Iraq’s economy away from heavy dependence on oil export revenues. While there is growing recognition among policymakers of the need for change, entrenched political interests and systemic corruption will likely stymie meaningful progress.
  • For now, Iraq’s economic stability hinges on a recovery in global oil prices—a factor largely beyond Baghdad’s control—and its ability to navigate an increasingly precarious regional trade and energy landscape. Adding further layers of complexity, the latter must take shape without alienating the public via spending cuts, or fracturing fragile political alliances.