Stopgap spending: Iraq's budget ambitions clash with fiscal reality

 Shafaq News/ A widening gap between Iraq’s budgetary ambition and its fiscal capacity is forcing the government into stopgap financing measures, exposing how vulnerable the country’s oil-dependent economy remains to even modest shifts in global energy markets.

Despite a record three-year budget approved in 2023, the government has resorted to reallocating tax trust funds to cover public sector wages, in an unusual move that lawmakers see as a “clear signal” of tightening liquidity.

This budget, passed under Law No. 13, is based on a crude oil benchmark of $70 per barrel, but revenues briefly exceeded expectations early in the year, with oil trading around $75. However, prices have since fallen below $62 following the removal of OPEC+ production limits, cutting into the country’s main revenue stream.

With oil accounting for nearly 90% of government income, the fiscal impact has been immediate. Lawmaker Zuhair al-Fatlawi confirmed that the government had drawn from contractor-held tax deposits to meet payroll obligations. “This reflects a shortfall in liquid funds,” he told Shafaq News. “Routine revenue flows are proving inadequate.”

Ministries such as Health and Water Resources are operating without full allocations. Capital projects in Babil, Al-Diwaniyah, and Karbala have either slowed or halted due to inconsistent disbursements. “Some regions are funded, others are left waiting,” al-Fatlawi emphasized.

Revenue Rigidity

Prime Minister Mohammed Shia al-Sudani’s Financial and Economic Advisor, Mudher Mohammad Saleh, defended the fiscal approach, pointing to mechanisms within the budget law that allow for flexibility. “The budget operates on the principle of fiscal space,” he explained. “It enables borrowing, resource reallocation, and controlled spending adjustments.” The government is authorized to borrow up to 64 trillion Iraqi dinars ($48.89B) if needed.

Iraq’s vulnerability is less about the oil price itself and more about the absence of diversified revenue sources. Non-oil tax collection remains underdeveloped, and budget execution is inconsistent across agencies. “Oil volatility is a risk, but institutional rigidity is the larger issue,” said a Baghdad-based analyst.

Notably, payment delays to contractors are triggering liquidity problems in the private sector, and further disbursement lags could freeze project pipelines and reduce market activity in a heavily state-led economy.

“Liquidity stress is contagious in Iraq’s fiscal ecosystem,” public finance expert Mustafa al-Faraj affirmed. “When escrow funds are repurposed, it undermines financial discipline and signals deeper structural imbalance.”

The IMF has noted that delayed infrastructure investment can cut expected GDP impact by up to 40%, weakening the effectiveness of public spending even when funding is eventually restored.

Tools Available, but Reforms Lag

Iraq’s Central Bank holds more than $100 billion in foreign reserves, offering a strategic buffer. However, economist Safwan Qusay cautioned against using reserves to plug structural gaps. “These reserves are meant for external stability, not internal liquidity.”

Qusay advocated for accelerating domestic reforms: enforcing utility payments, monetizing idle public assets, and revising land-use fees. “The state needs to act more like an investor and less like a passive payer,” he emphasized, estimating that if prices stay below projections, Iraq could face monthly shortfalls exceeding $1.5 billion.

In that scenario, options include tapping domestic bond markets or seeking external financing—a move that could further test fiscal credibility.

Disparities in budget transfers across provinces have also raised concerns about equity and governance. With the next national elections set for November 2025, prolonged underfunding in public services may carry political consequences, particularly in provinces already expressing frustration over project delays and financial uncertainty.

For now, Iraq is not in immediate fiscal crisis, but the warning signs are evident. Reliance on short-term measures to manage a structurally rigid and oil-dependent system has narrowed policy space, and without faster reform and revenue diversification, fiscal pressures could escalate into grave economic and political risks.