By Shatha Khalel
The most serious problem facing Iraq’s public finances is not simply the rising level of debt, but the way that debt can be created and who ultimately bears its cost. This is where former Deputy Governor of the Central Bank of Iraq and financial expert Dr. Mahmoud Dagher raises an important question about what might be described as “public debt by compulsion.” Can a government entity enter into a financial commitment without sufficient budget allocation or funding, only for that commitment to later become an obligation that the state is required to settle? If so, the Ministry of Finance may eventually find itself responsible for debt that was never properly funded through the normal budget process.
This is not merely an accounting issue. It goes to the heart of fiscal discipline. Public debt should not simply be equated with the total value of projects and expenditures listed in the budget. The Central Bank of Iraq previously stated that the planned deficit in the 2023–2025 budgets amounted to 191.5 trillion Iraqi dinars, while the deficit actually financed domestically through bonds and treasury instruments was only about 35 trillion dinars. This distinction is essential. Including a project in the budget does not mean the government has actually borrowed the money required to finance it. If funding is unavailable and expenditure does not occur, the estimated amount should not automatically become public debt.
The greater danger begins when financial commitments are created outside this sequence. Dagher points to the experience of contractors’ unpaid dues, when government spending entities entered into contracts with companies despite insufficient cash being available. Claims later emerged that could not simply be ignored because contractors may already have completed work or incurred real costs. Part of the problem was eventually addressed through financial instruments, including contractors’ bonds.
This is where the dangerous transformation occurs: an error or breach of financial discipline at the contracting stage later becomes an obligation of the Treasury. Future budgets are then forced to deal with financial decisions made in previous years without adequate funding. Dagher warns that this problem has re-emerged through outstanding payments owed to contractors and farmers during 2024 and 2025, with the pressure intensifying in 2026. Iraq’s Federal Financial Management Law No. 6 of 2019, as amended, establishes controls over public expenditure, while provisions governing continuing investment projects require appropriate allocations and verification that sufficient cash liquidity is available.
Why is this economically dangerous? When government expenditure exceeds revenue and cannot easily be postponed, the state needs financing. If external borrowing is unavailable or unsuitable, the pressure shifts inward—to state-owned banks, Treasury bills, government bonds and, ultimately, the financial relationship between the Ministry of Finance and the Central Bank.
At that point, public debt becomes much more than a number in government accounts. Increased government borrowing from domestic banks means a larger share of banking resources is directed toward financing the state rather than businesses and private investment. If banks’ liquidity weakens as they continue purchasing government debt instruments, pressure may eventually increase on the Central Bank to address liquidity shortages. This is one of the risks highlighted by Dagher. The International Monetary Fund has similarly stressed the need for Iraq to strengthen fiscal discipline to maintain debt sustainability, improve public financial management and limit fiscal risks and spending outside established budget frameworks.
The numbers themselves illustrate how quickly the pressure has been accumulating. Published data based on Central Bank figures indicated that domestic public debt had reached approximately 95.68 trillion Iraqi dinars by the end of April 2026, compared with around 90.52 trillion dinars at the end of 2025. More recent figures published in September indicated that domestic debt had reached approximately 109.5 trillion dinars by the end of July, including around 72.5 trillion dinars in Ministry of Finance obligations to the Central Bank, in addition to Treasury bills, loans and bonds.
Dagher, meanwhile, cited a figure of approximately 107 trillion dinars by August 2026. The differences between these figures should be understood within a broader problem that he himself highlights: multiple estimates of public debt and differences in how particular financial obligations are classified and calculated. The Ministry of Finance has also published public debt reports and data covering the first half of 2026, reinforcing the importance of establishing a transparent and consistent measure of Iraq’s liabilities that can be clearly monitored over time.
The greater risk becomes apparent when debt is connected to oil. Iraq can manage certain levels of borrowing when oil revenues are strong and exports remain stable. Debt becomes much more difficult to manage, however, when revenues decline, exports are disrupted or existing financial obligations continue to rise. Under those conditions, new development projects are no longer competing only with ordinary government expenditure for budget resources. They must also compete with debt interest and repayments, accumulated arrears, public-sector salaries and operating expenditures.
The result can be a gradual narrowing of the fiscal space available for public investment: a road remains unfinished, a school is delayed, a hospital receives insufficient funding, or an infrastructure project is postponed because future revenues have already become tied to decisions made in previous years. This is why the IMF has emphasized the importance of stabilizing Iraq’s debt while protecting essential social and investment expenditure.
The problem, therefore, is not that all public debt is inherently harmful. Borrowing can be a normal and useful economic instrument when it finances productive investment and when the government has a clear capacity to repay it. The problem begins when borrowing becomes a mechanism for repeatedly addressing structural fiscal imbalances, or when commitments that were never properly funded turn into claims imposed on future budgets.
At that point, the central question is no longer simply: How large is Iraq’s public debt?
The more important questions become: How was this debt created? What did it finance? Who authorized the original commitment? And where will the money to repay it come from?
This is the real danger behind the idea of “debt by compulsion.” If a government spending entity can bypass fiscal discipline today on the assumption that the Treasury will somehow settle the obligation tomorrow, the problem will not remain confined to a single contract or a group of unpaid contractors. It creates an incentive for the same behaviour to be repeated.
Protecting Iraq’s economy therefore requires more than setting a ceiling on public debt. It requires preventing unfunded commitments from arising in the first place, establishing consistent figures for debt and arrears, transparently disclosing existing obligations, and ensuring that every major public project is linked to genuine financing and a credible capacity to pay.
Because the most dangerous debt facing a state is not necessarily the debt whose size it already knows. It is the debt that appears only after the financial commitment has become a fait accompli—and the Treasury is left with no option but to pay.
Economic Studies Unit | North America Office
Al-Rawabet Center for Research and Strategic Studies