BY: Shatha Kalel
Iraq’s economy is entering a critical phase that requires a fundamental shift from managing immediate fiscal pressures to addressing structural imbalances accumulated over many years. Foremost among these challenges are the country’s heavy dependence on oil revenues, rising recurrent expenditures, limited contributions from non-oil revenues, and the weak capacity of productive sectors to generate income and employment independently of government spending.
Within this context, the perspective presented by Ali Al-Zaidi on supporting the government’s economic reform agenda is particularly relevant, especially regarding the transition from broad policy decisions to establishing institutions capable of implementing and sustaining reform.
The success of any economic reform program cannot be measured solely by the adoption of government decisions, regardless of their significance. Rather, it depends on the ability of state institutions to translate those decisions into clearly defined measures, measurable outcomes, and mechanisms for continuous monitoring and evaluation.
Accordingly, supporting the government’s economic reform agenda requires a comprehensive institutional approach involving the Ministry of Finance, the Ministry of Planning, revenue-generating agencies, and regulatory and oversight institutions. The Central Bank of Iraq must also fulfill its responsibilities within its legal mandate and institutional independence, while the private sector must assume a greater role in economic development.
The overarching objective is to move beyond responding to crises as they emerge and toward building an economy that is more resilient to external shocks and domestic financial pressures.
## Expenditure Discipline Before Seeking New Revenue Sources
Meaningful economic reform begins with the public budget. Rising government expenditure should not be treated as an unavoidable or permanent reality. Instead, the structure of public spending requires a comprehensive review that distinguishes essential expenditures on public services, investment, and social protection from spending that can be rationalized without undermining citizens’ welfare or the efficiency of state institutions.
This process should include reviewing privileges, allowances, administrative expenditures, official travel, and unnecessary security arrangements, alongside improving the efficiency of government procurement and public contracts while reducing financial waste.
The objective is not indiscriminate austerity, but rather maximizing the economic and social value generated by every Iraqi dinar spent.
To illustrate the potential fiscal impact, consider a hypothetical government budget with total expenditure of IQD 217 trillion and a deficit of IQD 50 trillion.
If expenditure were reduced to IQD 200 trillion while revenues remained unchanged, the deficit would decline to approximately IQD 33 trillion.
In other words, a reduction in expenditure of IQD 17 trillion would lower the budget deficit by approximately 34%.
Although this example is illustrative and does not represent finalized budget figures, it demonstrates the considerable fiscal impact that disciplined expenditure management could achieve if implemented through a systematic institutional framework.
## Border Crossings and Customs: Existing Revenues That Require Better Management
A second essential component of economic reform involves strengthening non-oil revenues, particularly those generated through border crossings, customs administration, and taxation.
Increasing government revenues does not necessarily require imposing additional taxes or financial burdens on citizens. There is a fundamental distinction between introducing new taxes and improving the collection of revenues already legally owed to the public treasury.
Substantial improvements could be achieved through the digitalization of customs procedures, the electronic integration of border crossings with the Ministry of Finance and other relevant authorities, and the reduction of paper-based and cash transactions.
Stronger oversight is also required to combat smuggling, invoice manipulation, customs undervaluation, and other practices that undermine public revenues.
Furthermore, revenue-generating institutions should operate under clearly defined monthly targets, supported by regular comparisons between actual collections and projected revenues.
Such an approach would transform the expansion of non-oil revenues from a repeatedly stated policy aspiration into a measurable institutional responsibility.
## The Exchange Rate Is Not a Substitute for Fiscal Reform
When the Iraqi dinar depreciates against the US dollar, the Ministry of Finance can receive a larger nominal amount in dinars when converting dollar-denominated oil revenues.
For example, assuming monthly oil revenues of USD 7 billion:
– At an exchange rate of IQD 1,300 per US dollar, revenues would equal IQD 9.1 trillion.
– At an exchange rate of IQD 1,500 per US dollar, the same revenues would equal IQD 10.5 trillion.
– The resulting nominal difference would amount to IQD 1.4 trillion per month.
If the same level of dollar-denominated revenues were maintained throughout an entire year, the cumulative nominal difference would reach IQD 16.8 trillion.
However, this accounting increase does not represent the creation of additional real wealth.
The volume of oil exports does not increase merely because the exchange rate changes, nor do the underlying dollar-denominated revenues. Meanwhile, currency depreciation can raise import costs, contribute to domestic price pressures, affect external financial obligations, and weaken household purchasing power.
Consequently, exchange-rate adjustments should not be regarded as an alternative to comprehensive fiscal and institutional reform.
The more effectively the government controls expenditure, mobilizes genuine revenue sources, and stimulates domestic production, the greater its capacity to address fiscal imbalances through sustainable economic instruments rather than short-term monetary adjustments.
## From Government Decisions to Institutional Implementation
The central principle of effective economic reform is that policy decisions require institutions capable of implementing them and measuring their results.
The government could establish a unified institutional framework for monitoring economic reform, bringing together financial, planning, revenue-generating, and oversight authorities, each operating within its respective legal mandate.
Such a framework should be supported by clearly defined objectives, performance indicators, implementation responsibilities, and regular evaluation mechanisms.
A periodic economic performance report could provide transparent answers to several essential questions:
– How much have non-oil revenues increased?
– What level of government expenditure has been rationalized?
– How much revenue has been generated through border crossings and customs?
– How have the fiscal deficit and public debt evolved?
– What proportion of government expenditure has been directed toward productive investment?
Through this approach, economic reform would move beyond the announcement of policy decisions toward the systematic measurement of outcomes.
Government institutions would become accountable for achieving specific objectives, while progress could be independently monitored, assessed, and reviewed.
## Productive Capacity Is the Real Foundation of Sustainable Reform
Nevertheless, reducing the fiscal deficit and controlling public expenditure are not sufficient to build a strong and resilient economy.
Reform that remains confined to the public budget is primarily fiscal reform. Iraq requires a broader economic transformation that revitalizes industry, agriculture, services, investment, and small and medium-sized enterprises.
Banking-sector reform and the expansion of financing for productive economic activities are equally essential components of this transformation.
An economy does not become stronger merely by reducing expenditure. Its underlying strength increases when it develops the capacity to produce, export, generate employment, and create diversified revenue streams that are not overwhelmingly dependent on oil.
Therefore, fiscal consolidation must be integrated with a clear strategy for expanding domestic production, improving the investment environment, strengthening financial intermediation, and enabling private-sector growth.
Under such a strategy, public financial resources would increasingly serve as instruments for stimulating economic activity rather than maintaining an economic structure heavily dependent on government expenditure.
## Citizens Must Remain the Ultimate Measure of Reform Success
Citizens must remain at the center of any economic reform program.
The success of reform should not be assessed exclusively through reductions in fiscal deficits or increases in government revenues. It must also be evaluated according to its capacity to preserve economic stability, improve public services, create employment opportunities, and protect purchasing power.
For this reason, expenditure rationalization should not undermine healthcare, education, social protection, or essential public investment.
Major economic policy decisions should also be preceded by rigorous assessments of their potential social consequences, including their effects on consumer prices, household income, employment, and living standards.
The ultimate purpose of economic reform is not simply to improve government accounting indicators, but to establish a more efficient, productive, and resilient economy capable of delivering better living conditions for citizens.
## Conclusion: Economic Reform Must Become a State-Building Project
The Iraqi government’s economic reform agenda presents an opportunity to move beyond temporary responses to fiscal pressures and address the structural causes of economic vulnerability.
The importance of linking this agenda to institutional capacity lies in a fundamental economic reality: even the most significant policy decisions cannot achieve their intended objectives without institutions capable of implementing, monitoring, and evaluating them.
Supporting the government’s economic reform program, therefore, should not be understood as increasing public expenditure or continuously searching for temporary revenue sources.
Instead, it requires empowering state institutions to control expenditure, strengthen revenue collection, safeguard public resources, encourage investment, and stimulate productive economic activity.
Iraq possesses substantial financial, human, and economic resources. The central challenge lies in managing these resources efficiently and transforming them into sustainable economic value.
The reform framework Iraq requires can ultimately be summarized through four interconnected pillars: **a clear government vision, strong institutions, effective oversight, and a productive economy.**
When these elements operate as an integrated system, economic reform can evolve into a comprehensive national development project rather than remaining a temporary response to recurring fiscal crises.
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Economic Studies Unit | North America Office
Rawabet Center for Research and Strategic Studies