BY : Shatha Kalel
Since 2003, Iraq has experienced an exceptional expansion in public spending, reaching its peak in the past decade, with total state budgets exceeding USD 2,028 billion. Despite this unprecedented level of resources, the Iraqi economy continues to suffer from deep structural imbalances, reflected in weak economic diversification, fragile public finances, and declining sustainability. To understand this paradox, it is essential to place Iraq’s experience within a comparative context alongside other oil producing countries that have managed oil revenues more effectively.
Iraq: High Spending and Limited Growth
Iraqi budget data show a significant rise in public expenditure, particularly after 2010, as the state became the primary employer and relied almost entirely on oil revenues. Spending has been heavily concentrated on wages, subsidies, and operating expenditures, while productive investment has remained limited. This model has resulted in a consumption based economy dependent on imports, with restricted job creation outside the public sector.
Comparison with Other Oil Producing Countries
Norway: Institutional Management of Oil Revenues
Although Norway is an oil producing country, it adopted a model based on separating government spending from oil price fluctuations, channeling surpluses into a sovereign wealth fund invested globally, and limiting the use of oil revenues in the annual budget. This approach has produced long term financial stability, a relatively diversified economy, and strong shock absorption capacity.
Saudi Arabia: Gradual Economic Transformation
Saudi Arabia has faced challenges similar to Iraq in terms of oil dependence, yet since the mid 2010s it has pursued reforms including restructuring subsidies, reducing reliance on public sector employment, and investing in non oil sectors. Despite ongoing challenges, this path has eased fiscal pressure and improved financial discipline.
United Arab Emirates: Early Economic Diversification
The UAE adopted an early strategy to diversify income sources, with non oil revenues now forming a substantial share of public finances. This diversification has reduced exposure to oil price volatility and enabled sustainable spending without excessive expansion of the public sector.
The Gap Between Iraq and Its Peers
In comparison, Iraq has used oil revenues primarily for direct spending rather than building productive assets, failed to establish effective sovereign saving mechanisms, and linked social stability to public sector employment. As a result, public finances remain highly vulnerable to oil price declines or rising fiscal obligations.
From Planned Deficit to Real Deficit
For many years, Iraq’s budget deficit was managed through optimistic price assumptions or temporary financing tools. The current phase, however, signals a qualitative shift toward a real deficit, reflected in growing difficulty meeting basic obligations. This indicates that the existing fiscal model has reached its limits.
Policy Implications
Comparative experience shows that the size of resources is not the decisive factor; rather, it is how those resources are managed. Continuing to rely on the same tools will deepen the crisis. An alternative path requires restructuring public spending, separating fiscal stability from oil prices, directing investment toward productive sectors, and redefining the state’s role from direct financer to regulator and enabler.
Conclusion
Iraq’s financial crisis is not unique among oil producing countries, but it has become more severe due to the absence of institutional transformation. International comparisons demonstrate that reform is possible, but it requires a fundamental shift in the philosophy of public resource management, moving from a spending based logic to one focused on building a productive economy.
Economic Studies Unit – North America Office
Center for Linkage Studies and Strategic Research