By: Shatha Kalel
Iraq’s current economic challenge is about far more than falling oil revenues, pressure on the dinar, or the sharp contraction expected in 2026. The deeper concern is that several weaknesses built into the economy over many years are now being exposed at the same time. Iraq remains heavily dependent on oil revenues, government spending is dominated by salaries and other recurrent obligations, domestic production outside the oil sector remains limited, imports meet a large share of local demand, and the country still lacks enough alternative export routes to comfortably absorb a major regional disruption.
For years, the central question surrounding Iraq’s economy was what would happen if oil prices fell sharply. The events of 2026 have raised a different question: what happens when Iraq has the oil and international demand still exists, but getting that oil to the market becomes difficult, expensive or uncertain?
That distinction matters.
The disruption of shipping through the Strait of Hormuz has shown that Iraq’s vulnerability does not begin and end with the price of a barrel. There is an entire chain between the oil field and the state treasury: production, pipelines, storage, ports, tankers, insurance, shipping routes and access to buyers. A serious disruption at any point in that chain can quickly become a problem for public finances. From there, the effects can spread to government investment, liquidity, the exchange rate, domestic prices and household purchasing power.
The figures available in September 2026 illustrate the scale of the challenge. The European Bank for Reconstruction and Development projected a contraction of around 12 percent in Iraq’s economy in 2026, largely because of regional tensions and disruption to oil exports. World Bank figures also show just how concentrated the country’s fiscal position remains: oil accounted for about 88 percent of government revenue and 91 percent of merchandise exports in 2025.
This does not mean Iraq is approaching immediate financial collapse. That would overstate the situation. The country still has substantial financial buffers. International reserves were estimated by the World Bank at about $98.7 billion in February 2026, giving Iraq an important degree of protection against a temporary external shock.
But reserves should be understood for what they are: protection against a crisis, not a permanent replacement for income.
They can give the government time. They can help stabilize markets, finance essential imports and provide room to adjust spending. What they cannot do indefinitely is compensate for a prolonged disruption in the country’s main source of revenue. If reserves begin to finance a structural gap rather than a temporary emergency, the important question is no longer how large they are. It becomes how quickly they are being used.
That is where the longer-term danger begins.
Iraq’s public finances make this particularly important. The government carries large commitments in public-sector salaries, pensions, transfers and operating expenditure. These obligations cannot simply be switched off when oil revenues fall. They are economically important and socially sensitive.
The result is an uncomfortable fiscal imbalance. Much of government expenditure is fixed or difficult to reduce quickly, while the revenue supporting that expenditure depends heavily on a commodity exposed to global prices, regional conflict and export disruptions.
High oil revenues can conceal this weakness. A crisis exposes it.
If export volumes remain below normal for a prolonged period, the choices become increasingly difficult. The government can borrow more, postpone investment, draw further on financial reserves, increase non-oil revenues or cut and reprioritize spending. None of these options is cost-free.
Postponing investment is a good example. Politically, delaying an infrastructure project may be easier than touching salaries or pensions. Economically, however, repeated cuts to investment carry their own price. Roads, electricity, water systems, industrial development and other productive projects are postponed. Jobs are not created. Future growth becomes weaker. In effect, the country can end up protecting today’s expenditure by sacrificing part of tomorrow’s productive capacity.
There is another danger: a fiscal crisis does not remain inside government accounts.
Iraq imports a significant share of the goods consumed in its domestic market. When shipping becomes more expensive, insurance costs increase, trade routes are disrupted and the parallel exchange rate comes under pressure, those costs eventually reach businesses and consumers. Food, medicines and other essential goods become more expensive.
Inflation under these circumstances is not simply a percentage reported in an economic bulletin. For a household living on a fixed salary, what matters is how much that salary can actually buy.
A government may continue paying salaries on time while families still become poorer in real terms. If wages remain unchanged but food, rent, transport and essential services become more expensive, purchasing power falls. Economic resilience, therefore, cannot be measured only by whether the state continues to meet its payroll. It must also be measured by whether household incomes retain their value and whether essential markets remain stable.
Perhaps the most important lesson from the present crisis concerns the way Iraq exports its oil.
For decades, calls for economic reform have focused on diversifying Iraq’s sources of income away from oil. That remains essential. But 2026 has revealed another form of diversification that deserves equal attention: Iraq also needs to diversify the routes through which its oil reaches the world.
An economy can possess enormous oil reserves and still remain vulnerable if most of its export capacity depends on a limited number of routes. This is not simply an oil-sector issue. It is a national economic-security issue.
Baghdad has already looked for ways to increase exports through the north toward Türkiye’s Ceyhan port and to move some southern crude northward. These steps are useful during an emergency, but the available alternatives are still not large enough to replace Iraq’s southern export capacity.
Trucking oil across the country may help at the margin. It is not a substitute for strategic infrastructure.
Iraq needs greater pipeline capacity, more storage flexibility, stronger logistics and more than one reliable route to international markets. The objective should be straightforward: disruption in one maritime corridor should not be capable of placing the finances of the entire country under severe pressure.
There are, however, two different tasks ahead, and they should not be confused.
The first is managing the present crisis.
That means protecting foreign reserves, reviewing lower-priority expenditure, ensuring financing for food, medicine and essential public services, maintaining core salary obligations, limiting destabilizing speculation in the currency market, protecting strategic stocks and accelerating practical alternatives for oil exports.
It also means planning for the possibility that the crisis lasts longer than expected.
Iraq should have fiscal plans for several time horizons. What changes if the disruption continues for another three months? What if it lasts six months? Which expenditures must be protected? Which projects can wait? How much additional borrowing can the state absorb without creating a larger problem later?
A period of uncertainty requires contingency planning. Building policy around the assumption that conditions will quickly return to normal is itself a risk.
The second task is much larger. Iraq has to address the structure of its economy.
Economic diversification has often been discussed as a long-term development ambition. It should now be treated as part of national economic security.
Agriculture matters not only because it contributes to GDP, but because domestic food production reduces exposure to external supply shocks. Industry matters because producing more goods locally reduces import dependence and creates employment. A stronger private sector matters because an economy in which the government remains the dominant employer will always place enormous pressure on the state budget.
Every viable private-sector job created outside the government payroll matters. Every competitively produced essential good that replaces an import matters. Every dollar earned from a non-oil export matters. Individually, these changes may appear small compared with oil revenues. Collectively, they determine how vulnerable Iraq will be when the next shock arrives.
None of this can happen without broader reforms. Businesses need a more predictable environment. Banks need to play a larger role in financing productive investment rather than remaining peripheral to much of the real economy. Public institutions need to become more efficient, and government expenditure needs to place greater emphasis on infrastructure and productive capacity.
So, can Iraq withstand the present crisis?
For a temporary shock, Iraq has important advantages, including substantial oil resources and significant international reserves. But the more useful question is not simply whether Iraq can withstand the shock. It is how long it can do so, and at what economic cost.
A resilient economy is not one that can spend reserves for a few more months. It is one that can absorb a major disruption without entering a cycle of widening deficits, growing debt, inflation, weaker investment and declining purchasing power.
If shipping conditions improve and oil exports recover, economic activity could rebound strongly. The EBRD’s projection of growth of around 14 percent in 2027, following the expected contraction in 2026, demonstrates how quickly the headline numbers could change if export conditions normalize.
But a recovery in GDP should not be confused with the disappearance of the underlying vulnerability.
In fact, one of the biggest risks may come after the immediate crisis has passed. Oil exports could recover. Revenues could rise again. Pressure on the dinar could ease. The urgency for reform could fade.
Iraq could simply return to business as usual.
That would be a mistake.
The lesson of 2026 is not that Iraq lacks oil. It is almost the opposite. Iraq possesses extraordinary oil wealth, yet the crisis has shown that possessing a resource is not the same as having secure access to the income generated by it.
The real danger is not that Iraq will run out of oil. The danger is that the finances of an entire country remain overwhelmingly tied to one resource whose route to international markets can be disrupted by events largely outside Iraq’s control.
For Iraq, the next stage should therefore not be about waiting for normality to return. It should be about reducing the damage the next crisis can cause.
A crisis becomes truly dangerous when it reveals a weakness, passes, and nothing changes.
Economic Studies Unit | North America Office
Al-Rawabet Center for Research and Strategic Studies