The ongoing conflict in Iraq, particularly due to the Iran war, has had devastating economic repercussions. According to financial adviser to the Prime Minister, Mazhar Mohammed Saleh, the costs incurred by Iraq are estimated between $40 billion and $45 billion. These losses are primarily attributed to a significant drop in oil exports and the halting of vital development projects. This situation poses a severe threat to Iraq’s economy, which is heavily reliant on oil revenue for public expenditures.
The Economic Impact of Reduced Oil Exports
Before the conflict escalated, Iraq was exporting approximately 3.3 million barrels of crude oil daily, which earned the nation around $88 billion each year. However, following the onset of hostilities, oil exports plummeted to less than 10% of prewar levels. The disruption of supply routes has been a significant contributing factor to this decline. The government is feeling the financial strain, needing billions each month to cover salaries and essential services.
Saleh highlighted that certain critical payments, including those for public-sector salaries, pensions, and social welfare programs, must be maintained. Monthly obligations total around 8 trillion Iraqi dinars (roughly $5.9 billion), which increases to about 11 trillion dinars when factoring in costs for electricity, pharmaceuticals, food subsidies, and debt servicing. Approximately nine million Iraqis directly depend on these payments, impacting nearly 40 million individuals in a population of roughly 50 million.
Financing Iraq’s Growing Deficit
With oil revenues dwindling, Iraq has resorted to domestic borrowing to meet its financial obligations. The Finance Ministry has begun issuing treasury bills with interest rates between 3% and 5%, enabling state-owned banks to obtain needed liquidity. This method has increased Iraq’s domestic public debt to over 106 trillion dinars, with a significant portion held by the Central Bank. Although reserves were diversified across gold and foreign currencies before the war, they have since dwindled, yet they remain adequate enough to cover around 90% of local currency in circulation.
Saleh pointed out that foreign exchange reserves have dropped by less than 50% since the conflict began, indicating some level of stability through these challenging times as delayed payments from prewar oil shipments have helped ease financial strain.
Future Economic Directions and Challenges
The recent visit of Prime Minister Ali al-Zaidi to Washington was described by Saleh as pivotal for Iraq’s economic strategy. The trip laid a foundation for focusing on “economic geography,” prioritizing resource management, production, and investments over geopolitical tensions. Though efforts have been made to enhance economic cooperation under the long-standing Strategic Framework Agreement with the U.S., progress has been limited, with security taking precedence.
During the visit, 48 memorandums of understanding valued at approximately $60 billion were signed, aimed at revitalizing economic trust between the two nations. Iraq hopes major U.S. energy firms will assist in increasing oil production to raise additional revenues; however, significant unresolved issues concerning fund governance and management remain.
Further complicating Iraq’s economic resurrection is its relationship with OPEC. Saleh argues for a more favorable production quota to facilitate economic recovery and development funding. Meanwhile, reforms in Iraq’s banking sector have become urgent amid growing scrutiny and sanctions pressure from the U.S. aimed at combating issues like money laundering.
As Iraq navigates its economic dilemma amid ongoing conflict, the effectiveness of these reforms and international relations will significantly shape its future growth trajectory.