Iraq is currently facing significant challenges as its foreign-currency reserves have plummeted by nearly $16 billion within just four months. This alarming decline has raised concerns about the country’s financial stability and its ability to pay civil servants as it grapples with economic pressures primarily stemming from geopolitical tensions.
Impact of Geopolitical Tensions on Foreign Reserves
The reduction in reserves is closely linked to the ongoing Iran-US conflict and the resulting closures of the Strait of Hormuz. This vital shipping lane is crucial for Iraq’s oil exports, which play a fundamental role in the nation’s economy. Prior to the conflict, the Central Bank of Iraq (CBI) held reserves of approximately $102 billion as of February 28. However, these reserves began to dwindle rapidly, falling to about $100 billion by the end of March and plummeting further to around $86 billion by June.
Mudhar Saleh, a financial adviser to Prime Minister Ali Al-Zaidi, attributed the sharp decrease in reserves to reduced oil revenues due to the repercussions of the crisis in the Strait of Hormuz. He went on to estimate that the reserves might have decreased even further to between $83 billion and $85 billion in recent months. The squeezing of foreign reserves signifies not only economic difficulties but also potential ramifications for public sector employees who rely on timely salary payments.
Government Responses and Economic Borrowing
The Iraqi government is currently relying on both central bank borrowing and local market loans to maintain monthly payrolls for government employees and meet its other financial obligations. Nabil Al-Marsoomi, an economist, highlighted this trend, indicating that government borrowing has surged dramatically in light of reduced revenues. This borrowing is indicative of a broader financial instability that poses risks for the country’s economic future.
In terms of oil exports, Iraq has exported approximately 268 million barrels of crude oil during the first half of 2026, averaging 1.5 million barrels per day. This export volume is significantly lower than pre-war levels, which saw exports at around 3.4 million barrels per day. The state organization for marketing oil, Somo, reported that these exports generated roughly $18.6 billion—falling short of the $27.5 billion generated in the first four months of the previous year.
Rising Domestic Debt Levels
As a direct consequence of the financial strain caused by dwindling oil revenues and increased borrowing, Iraq’s domestic debt has reached an alarming $79 billion by the end of May. This figure highlights the challenges faced by the government in managing its finances while ensuring essential services are maintained. The increase in debt raises concerns about long-term economic sustainability and the potential for a further downward spiral if revenues do not improve.
The combination of geopolitical crises, declining oil revenues, and escalating domestic debt paints a troubling picture for Iraq’s economic landscape. Without effective strategies to stabilize reserves and enhance public spending efficiency, the country could face further economic turmoil in the months to come. Monitoring these developments will be essential for understanding Iraq’s path forward amid these significant challenges.