By : Shatha Kalel
Iraq is facing a critical and complex public finance challenge. Its total debt—internal and external—has ballooned to nearly 96 trillion Iraqi dinars. While some downplay the risk, citing that a large portion is domestic and denominated in dinars, the structure and purpose of this debt reveal deep-rooted economic vulnerabilities that cannot be ignored.
The Debt Breakdown: Internal vs. External
As of the most recent estimates:
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External debt stands at around 19.5 trillion dinars (~$15 billion). This includes loans from international institutions such as the World Bank, IMF, and governments like Germany, Japan, and the UK. Much of this debt is low-interest and long-term, and has largely been used to finance investment and infrastructure projects.
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Internal debt is far more substantial, exceeding 77 trillion dinars, or over 80% of Iraq’s total debt. Of this:
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52 trillion dinars are owed to the Central Bank of Iraq, mainly through monetary issuance (i.e., printing new money).
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25 trillion dinars are owed to commercial banks and holders of national bonds.
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Although technically “internal,” this debt is far from harmless.
How Did Iraq Get Here?
Unlike external debt, which is typically used to fund capital projects, much of Iraq’s internal debt was incurred simply to cover budget deficits—especially during crises like the war against ISIS (2014–2016) and the COVID-19 pandemic (2020). The government has leaned heavily on borrowing not to invest, but to pay salaries and cover operational expenses.
To do this, it borrowed from state-owned and commercial banks, effectively withdrawing liquidity from the market. Funds that should be supporting private sector growth, small businesses, and industrial development were redirected into public payrolls and consumption. This crowds out private investment and stifles economic productivity.
Even more concerning, not all of these loans are based on actual deposits or savings. Many are financed by printing new money, a process known as deficit financing. This has weakened the value of the Iraqi dinar, fueled inflation, and reduced the purchasing power of ordinary citizens.
Why Domestic Debt Is Not Risk-Free
Some argue that because Iraq’s internal debt is in dinars, it’s not dangerous. But this overlooks serious risks:
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Confidence in the financial system can collapse if the government fails to repay banks.
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If citizens lose trust in banks, a wave of withdrawals could trigger a financial crisis.
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Continuous printing of money causes inflation, harming the middle and lower classes most.
These risks are real, even if no foreign currency is involved.
A Dangerous Trend: Borrowing Without Growth
Most countries borrow to invest in factories, infrastructure, education, and development. Iraq, by contrast, borrows to pay ministries and salaries. This is non-productive debt—it doesn’t generate income or long-term value.
In just one year, domestic debt jumped by 13 trillion dinars—the same amount it rose over the previous four years combined. Yet, no major investments, no decrease in imports, and no growth in the private sector have followed.
Instead of stimulating the economy, this debt merely sustains a bloated public sector, creating a dangerous cycle of borrowing without return.
Undisclosed and Legacy Debts
Adding to the complexity are two unquantified debt categories:
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Gulf War-era debts: Estimated at $45 billion, largely owed to Gulf states for financing the Iran-Iraq war.
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Chinese agreement loans: Part of the Iraq-China oil-for-infrastructure deal. These debts are not fully transparent, with unclear interest rates and guarantees.
These hidden liabilities increase Iraq’s exposure to future fiscal shocks.
What Can Be Done? A Roadmap to Reform
To address its debt crisis, Iraq must take bold and targeted action:
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Restructure Public Spending
Shift spending away from salaries and towards infrastructure, healthcare, and education. Reduce reliance on emergency hiring and focus on efficiency. -
Reform the Banking Sector
Encourage banks to finance private sector projects, not just government deficits. Incentivize small and medium-sized enterprise (SME) lending. -
Stop Printing Money
Phase out deficit financing by the Central Bank. Instead, use real market-based financing tools and improve revenue collection (e.g., tax reform). -
Increase Non-Oil Revenues
Invest in agriculture, tourism, industry, and digital economy sectors to diversify income sources beyond oil. -
Transparency and Public Accountability
Track and disclose how every dinar of borrowed money is spent. Use digital tools and public dashboards to show real-time financial data. -
Debt Restructuring and Audits
Reassess all domestic and foreign obligations, particularly those with unclear terms like the China deal. Engage international advisors for sustainable debt frameworks.
Conclusion: A Ticking Clock
Iraq’s internal debt is not a hidden treasure—it’s a warning sign. It reflects deep flaws in fiscal management, a culture of short-term solutions, and a heavy reliance on oil revenues. Unless Iraq restructures its public finances, enhances economic productivity, and changes how it borrows and spends, the country risks a future debt explosion that will burden generations to come.
The time to act is now—not when the fire under the ashes becomes an uncontrollable blaze.
Economic Studies Unit / North America Office
Al-Rabetah Center for Strategic Research and Studies