The Iraqi economy has suffered for many years from a clear paradox. It possesses large financial resources, yet it has a weak ability to transform these resources into real and sustainable development. The state of relative financial stability that Iraq is experiencing today does not necessarily mean that the economic structure is sound. Rather, it conceals deep and accumulated structural imbalances resulting from excessive reliance on oil, the inflated role of the state, and weak economic and administrative institutions. Therefore, any serious discussion about reforming the Iraqi economy must begin with a realistic diagnosis of these imbalances before moving on to reform prescriptions.
Successive governments have managed short-term stability through expansionary public spending, benefiting from oil revenues and rising foreign reserves. However, this approach has created a fragile economy that depends on oil shocks rather than on production. Public budgets have expanded significantly since 2004, not because of growth in the productive base, but due to rising operational expenditures, especially wages and subsidies. As a result, the state has become the largest employer and income source in the country. This reality has placed a permanent burden on public finances and limited the government’s ability to direct resources toward investment and long-term development.
The expansion of the public sector workforce and the multiplicity of salary and allowance laws have created deep distortions in the income structure and weakened principles of equity and efficiency. An economy cannot transform into a productive one as long as public employment replaces real job opportunities in the private sector. Therefore, reforming the wage scale, linking wages to productivity, and redefining the role of the state from a direct employer to a regulator and supporter represent essential steps in the reform path.
At the same time, the social support system reflects another form of structural imbalance. While universal subsidies have important social value, they have led to significant waste of resources and reduced the effectiveness of social protection. Reform here does not mean reducing support, but rather redirecting it toward the most vulnerable groups and linking it to genuine economic empowerment policies that open the door to work and production instead of permanent dependence on assistance.
The energy sector represents one of the most prominent structural challenges draining public finances and hindering growth. Massive spending on electricity has failed to provide a stable service due to weaknesses in management, governance, and revenue collection. The continued flaring of associated gas is a clear example of poor resource management, costing Iraq billions of dollars annually that could have been transformed into energy, income, and job opportunities. Genuine reform in this sector requires comprehensive restructuring, not partial or temporary solutions.
Regarding public debt and fiscal deficits, the problem does not lie in their existence per se, but in how they are used. Borrowing to finance operational spending deepens the crisis, while debt can be a positive tool if directed toward productive projects with clear returns. This highlights the need for a medium- and long-term fiscal framework that links deficits to growth and prevents placing unfair inflationary or tax burdens on citizens.
Despite these challenges, Iraq has important strengths, most notably monetary stability, high foreign reserves, and low inflation. However, these indicators will remain limited in impact unless they are translated into real growth in the actual economy. This requires fundamental reform of the banking sector so it can finance investment and production rather than merely act as a channel for liquidity circulation.
The weakness of non-oil revenues further reveals the depth of the institutional crisis. The absence of effective governance, complex procedures, and the spread of the informal economy all limit the state’s ability to collect revenues fairly and efficiently. Institutional reform is no less important than fiscal reform, as it provides the framework through which economic policies are implemented.
Ultimately, no economic reform in Iraq can succeed without a strong and active private sector. The state can no longer continue as the sole engine of the economy. What is needed is a stable business environment that protects investors, reduces bureaucracy, and provides clear and fair rules for competition. An efficient private sector is not a substitute for the state, but an essential partner in achieving development.
Today, the Iraqi economy stands at a critical turning point. Either the current financial stability is used to launch genuine structural reforms that rebuild the economy on the foundations of production and diversification, or reliance on oil and public spending will continue, with all the future risks this entails. Reform is not merely a political option, but an economic necessity to ensure stability and development for future generations.
Economic Studies Unit – North America Office
Center for Linkage Studies and Strategic Research