By> Shatha Kalel
In a bid to address the growing fiscal deficit and finance its ambitious infrastructure projects, the Iraqi government has decided to issue bonds worth 3 trillion dinars (approximately $2.3 billion), aimed at local banks. This decision has sparked significant discussion about Iraq’s current economic situation, the pressures on its budget, and the strategies employed by the government to stimulate growth. The bonds are expected to offer higher interest rates than previous bond issues, signaling a shift in the government’s approach to securing funding. But what does this decision mean for Iraq’s economy at large?
Why the Need for Borrowing?
Iraq, which has been struggling with a chronic budget deficit, is turning to domestic banks to finance its plans. The Iraqi economy is heavily reliant on oil exports, but recent fluctuations in global oil prices, combined with cuts in production as part of the OPEC+ agreement, have strained the government’s budget. Additionally, the government is committed to funding a wide range of infrastructure projects, including investments in energy, water, tourism, and electricity. These sectors alone have been allocated $100 billion over the next three years.
However, the government’s income from oil exports has been insufficient to meet these financial demands, resulting in the need for additional sources of financing. As a result, the Iraqi Ministry of Finance has turned to bond issuance as a tool to secure the necessary funds for development.
Details of the Bond Issuance
According to a letter issued by the Central Bank of Iraq, the new bond issuance will be offered in two tranches to local banks. The first tranche will be worth half a million dinars per bond, with a two-year maturity period and an annual interest rate of 8%. The second tranche will offer bonds valued at one million dinars each, with a four-year term and a higher interest rate of 10%. These bonds are set to be sold between March 20 and 29, 2025.
This move comes just after the first national bond issuance, which occurred between February 10 and March 10, 2025. The initial bond issue, valued at 2 trillion dinars, was aimed at individuals and companies, offering lower interest rates of 6% for two-year bonds and 7.5% for four-year bonds. However, the demand was disappointing, with only 25% of the bonds being sold—about 500 billion dinars out of the 2 trillion dinars on offer.
The low subscription rate for the first issuance highlighted the lack of interest from the market in the offered returns. This prompted the government to rethink its approach by offering more attractive terms, specifically targeting banks with high liquidity. The new issuance promises higher returns, which could be more appealing to these institutions.
Economic Implications and Impact on the Budget
The bond issuance has several implications for Iraq’s economy, both in the short term and long term.
1. Addressing the Budget Deficit:
The most immediate benefit of issuing these bonds is to address the budget deficit, which has been exacerbated by the volatility in oil prices. With lower-than-expected oil revenues, the Iraqi government has been struggling to balance its budget. By issuing bonds, the government can raise funds to cover its spending needs, particularly for its major infrastructure projects, without immediately increasing taxes or cutting vital public services. The new bond offering is expected to attract local banks with high liquidity, helping the government fill the financing gap.
2. Inflationary Pressure and Debt Burden:
One of the risks associated with borrowing large sums of money is the potential for inflationary pressure. While the interest rates on the new bonds are designed to be attractive, the increased demand for government debt could drive inflation in the short term. Additionally, the accumulation of debt through bond issuance will add to Iraq’s long-term financial obligations, potentially limiting future fiscal flexibility.
3. Attracting Banks and Strengthening the Banking Sector:
By offering higher interest rates and targeting local banks, the Iraqi government is essentially luring the banking sector into a more active role in financing national development. This could have positive implications for Iraq’s banking sector, encouraging more investment and increasing its involvement in the country’s economic growth. However, this could also expose local banks to more risk, as they will hold more government debt on their balance sheets. While government bonds are typically considered low-risk, the economic uncertainty in Iraq may still present challenges for the banking sector.
4. Economic Growth and Infrastructure Development:
The government has allocated a substantial amount of funds—$100 billion—towards infrastructure development over the next three years. This investment is critical for driving long-term economic growth in Iraq. With improvements in energy, water, and tourism infrastructure, the country could see greater economic diversification, reducing its dependence on oil revenues. Furthermore, by boosting infrastructure, the government is aiming to create jobs, attract foreign investment, and stimulate growth in key sectors. However, the financing of such large projects depends on the successful issuance of these bonds and the ability of the government to manage the funds effectively.
5. Public Confidence and Investment Environment:
While the high interest rates may attract domestic investors, they also raise questions about the long-term sustainability of the government’s fiscal policy. If the government continues to rely heavily on borrowing to finance its projects, it could undermine confidence in the stability of the dinar and the broader economy. For this reason, the success of the bond issuance will depend not only on attractive returns but also on public trust in the government’s ability to manage its finances.
Conclusion: A Delicate Balancing Act
The Iraqi government’s decision to seek to borrow 3 trillion dinars through bonds is a strategic move aimed at addressing its budget deficit and funding vital infrastructure projects. The higher interest rates offered in the new bond issuance are designed to attract banks, which play a central role in Iraq’s economic development. However, this decision carries risks, including potential inflationary pressure, increased debt burdens, and the long-term stability of the country’s financial system.
While the bond issuance provides an immediate solution to Iraq’s financing challenges, it also highlights the underlying economic difficulties the country faces. Iraq’s reliance on oil exports, fluctuating oil prices, and political instability mean that the government will need to carefully manage its fiscal policy to avoid future economic crises. For now, the bond issuance represents a necessary step in Iraq’s efforts to stimulate growth and secure the funds needed for its ambitious infrastructure agenda.
Economic Unit/North America Office
Al Rawabet Center for Research and Strategic Studies