Shafaq News
On February 28, US-Israeli military operations against Iranforced a de facto closure of the Strait of Hormuz, cutting Iraq's oil exportvolumes to below 800,000 barrels per day and costing the country an estimated$128 million daily, according to the Eco Iraq Observatory. For an economy thatdepends on oil for between 90 and 95 percent of state revenues, the shock wassevere in that it arrived while Iraq was operating without an approved budgetmade it structural.
Six months into 2026, and the government of Prime MinisterAli Al-Zaidi continues administering a $280 billion economy through emergencyspending provisions designed for temporary shortfalls rather than sustaineddisruption. Oil income had already fallen 16 percent in 2025, against abreak-even price of $84 per barrel and a market rate hovering near $67.Parliament has failed to pass a budget on schedule for the fourth time since2003, leaving the government with no fiscal instrument to absorb the pressure,and, as of February, no margin to absorb the shock.
The International Monetary Fund, in a warning issued lastweek, ranked Iraq among the economies most exposed to regional disruptions in2026, flagging serious repercussions for inflation, external accounts, andpublic finances. What amplifies the damage is that Iraq arrived at this momentalready weakened. The three-year budget framework covering 2023, 2024, and2025, the government's last comprehensive financial roadmap, expired at the endof last year. Parliament has not approved a 2026 spending plan, and indicationsnow suggest it will not. The government is instead operating under Article 13of the Federal Financial Management Law No. 6 of 2019, which authorizes monthlyexpenditures equivalent to one-twelfth of the previous year's approved budget.
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Mudhhir Mohammed Saleh, the financial adviser to the primeminister, described the mechanism to Shafaq News as a safeguard for continuity,one that protects salaries, wages, pensions, and social welfare payments whileenabling financing of essential investment expenditures based on theimplementation rates and available liquidity. But this framing omits what theone-twelfth rule cannot do: it cannot launch new projects, respond to changingpriorities, or provide the fiscal flexibility that economic management in acrisis requires.
Iraq has now spent roughly 16 months without approved budgetschedules. More than 4,500 projects across the country have already stalled—some for years, according to parliamentary data— and specialists warn thatcontinued budget paralysis will add further initiatives to that list.
Economic expert Dhiaa Al-Mohsen, speaking to Shafaq News,argued that the budget is not merely a financial instrument but the centralmechanism through which the state manages its economic and investment activity.
"The ministries and provincial administrations willgradually lose their medium- and long-term planning capacity," Al-Mohsenwarned, adding that reduced government spending weakens economic momentumacross construction, manufacturing, transportation, and services. "Thestate can be managed, but development cannot."
Economic researcher Ahmed Eid explained to Shafaq News thatthe one-twelfth rule deepens financial uncertainty and restricts thegovernment's ability to execute economic plans efficiently. It also “underminesconfidence among state contractors and investors, domestic and foreign, whocannot plan around a future that has not been legislated.”
The employment dimension compounds the pressure. Governmenthiring has historically served as the primary channel through which Iraqigraduates enter the labor market. Under temporary spending rules, Al-Mohsenwarned that recruitment opportunities will become "extremelylimited," with exceptions concentrated in healthcare, education, andsecurity. He cautioned that such restrictions risk intensifying socialpressures in a country where youth unemployment already runs at persistentlyhigh levels.
According to financial expert Mahmoud Dagher, Iraq's publicfinances have evolved since 2004 into a "salary economy,” which alonerequires approximately nine trillion Iraqi dinars (roughly $6.8 billion) eachmonth, and any disruption to oil exports, however brief, carries the potentialto push public finances into paralysis.
"If crises persist for a prolonged period, thegovernment may resort to temporary austerity measures," Dagher told ShafaqNews, citing potential steps including improved collection of electricity andwater fees, deferrals of payments owed to farmers and contractors, restrictionson non-essential imports, and freezes on allowances, promotions, and bonuses.
“The priority is spending efficiency and expenditure control,preserving foreign currency reserves, which constitute the primary defense ofthe Iraqi dinar and the financing of imports,” he added.
Dagher identified a technical and legal complication thatdistinguishes the current episode from previous budget delays. Parliamentfailed to approve spending and revenue schedules during 2025, meaning thebaseline from which the one-twelfth rule calculates monthly allocations carriesits own irregularities. That detail, which might appear procedural, carriesmaterial implications for how the rule is applied and what counts as anauthorized expenditure.
Ahmed Eid warned that the government may be compelled toexpand its reliance on domestic financing mechanisms, including taxes, fees,and borrowing from local banks, cautioning that this path raises medium-termfinancial risks if not accompanied by genuine structural reform.
For now, the Central Bank remains the primary backstop. Thegovernment's ability to secure liquidity through deficit financing, including,in extremis, discounting treasury transfers through the Central Bank, is thelast line of defense in a scenario where oil revenues fall sharply and do notrecover quickly. Dagher described a "zero oil revenue" scenario asone that would confront Iraq with difficult economic and political choices amidrising financial obligations and growing social pressures.
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Economic expert Safwan Qusay pointed out that the governmentshould pursue alternative financing mechanisms for investment projects outsidethe traditional budget framework. Continued reliance on the one-twelfth rule,he told Shafaq News, effectively confines expenditures to operational needs,making it necessary to establish a special framework for financing investmentthrough borrowing legislation or public-private partnerships.
He proposed expanding the role of investment portfolios andauthorities “by offering infrastructure and service projects to investors inexchange for opportunities in commercial, tourism, and real estate sectors,”thereby sustaining project financing independent of the annual budget cycle.
Into this landscape, the government has pointed to its Iraq2035 economic vision as a structural response to the underlyingvulnerabilities. Saleh described it as a roadmap for fiscal and economicdiversification, targeting a rise in non-oil revenues to 46 percent of totalstate income and an increase in the private sector's contribution to GDP from37 percent currently to 53 percent by 2035. The Market Development Council, headded, would play a central role in attracting investment and advancing Iraq'stransition toward a more diversified and sustainable economy.
What is less clear is the path from the present moment, astate running on emergency provisions, with 4,500 stalled projects, constrainedhiring, and an oil revenue base that a regional conflict can halve in weeks, toan economy capable of generating half its income from non-oil sources within adecade.
Iraq's policymakers have produced visions before, but withoutthe legislative and institutional foundations to deliver them. The budgetprocess itself illustrates a gap between parliament, which routinely fails toapprove spending plans on time, and its position to enact the structuralreforms that economic diversification requires.
: Deficit soars, projects freeze: Iraq heads into 2026 with NO BUDGET
Iraq 2035 may be a sound framework on paper. The institutionsresponsible for delivering it have spent 16 months unable to pass a budget, andthe oil revenues that must finance any meaningful transition remain exposed tothe kind of regional disruption that closes a strait before a ministry canconvene.
Written and edited by Shafaq News staff.
