Kurdish Policy Analysis

By Dr. Pshtiwan Faraj

Sulaimani, Iraqi Kurdistan — 17 May 2026

 Ali al-Zaidi enters office promising transparency and reform, but Iraq’s collapsing oil revenues, militia politics, and fiscal dependency may define his premiership before it truly begins.

Iraq’s new Prime Minister Ali al-Zaidi has launched sweeping transparency reforms while facing one of the country’s worst fiscal crises in years amid falling oil revenues, Hormuz disruptions, and mounting pressure from Washington and Tehran.

The arrival of Iraq’s new Prime Minister, Ali al-Zaidi, was supposed to signal a political reset after months of deadlock, elite bargaining, and regional instability. Instead, his first days in office have exposed the depth of Iraq’s structural crisis: an economy dangerously dependent on oil, a state weakened by corruption, and a political system trapped between competing foreign and domestic power centers.

Al-Zaidi formally assumed office in Baghdad this week during an official handover ceremony attended by outgoing Prime Minister Mohammed Shia al-Sudani. The transfer of power came after Iraq’s parliament approved a partially formed cabinet amid intense disputes over key ministries and the future direction of the Iraqi state.

But even before his government is fully assembled, Iraq is already confronting what may become its most dangerous economic moment since the post-ISIS financial collapse.

According to the ECO Iraq Observatory, the closure of the Strait of Hormuz following the widening regional war has devastated Iraqi oil exports and intensified a fiscal emergency that was already building beneath the surface. Iraq remains overwhelmingly dependent on crude exports for state revenue, making any disruption in oil transit a direct threat to salaries, subsidies, and state stability itself.

The observatory outlined three emergency options now facing Baghdad: large-scale domestic borrowing, currency devaluation, or external borrowing tied to international financial institutions such as the IMF and World Bank. Each carries severe political and social consequences.

Domestic borrowing may provide temporary liquidity, but Iraq has already relied heavily on treasury instruments in recent years, eroding financial reserves and increasing long-term vulnerabilities. Currency devaluation could boost dinar-denominated government revenues, but it would almost certainly trigger inflation and intensify public anger over declining purchasing power. External borrowing, meanwhile, risks subjecting Iraq to externally imposed reform conditions that could provoke political backlash from entrenched patronage networks.

The economic crisis confronting al-Zaidi is not simply a technocratic challenge. It is geopolitical.

The current turmoil was accelerated by the US-Israeli military campaign against Iran and Tehran’s subsequent closure of the Strait of Hormuz, one of the world’s most strategically critical energy chokepoints. Iraq, despite attempting to balance relations between Washington and Tehran, has become collateral damage in a wider regional confrontation it cannot control.

This is the paradox at the heart of Iraq’s new government.

Al-Zaidi emerged as a compromise candidate acceptable to both the Iran-aligned Coordination Framework and the United States after Washington reportedly opposed the return of former Prime Minister Nouri al-Maliki. Yet the same geopolitical forces that enabled his rise now threaten to destabilize his administration before it consolidates power.

Internationally, al-Zaidi is under pressure to curb militia influence, enforce financial compliance, and reassure foreign investors. Domestically, he must avoid provoking powerful armed factions deeply embedded within Iraq’s political system.

This explains why his first major move in office focused not on security, but governance and public optics.

In his inaugural cabinet directives, al-Zaidi ordered ministers to disclose their personal wealth within one week, froze major administrative reshuffles, and launched a broader transparency initiative aimed at signaling a break from Iraq’s corruption-ridden political culture.

The symbolism matters.

Corruption has become one of the central legitimacy crises of the Iraqi state. Public distrust toward political elites remains extraordinarily high after years of scandals involving oil revenues, ghost employees, procurement fraud, and politically protected business empires. Iraq consistently ranks among the world’s most corrupt states according to international transparency indexes.

By forcing ministers to declare their assets immediately, al-Zaidi is attempting to construct an image of technocratic discipline and state accountability. The move also serves another purpose: reassuring international financial institutions and Western governments that Baghdad is prepared to pursue reforms in exchange for economic assistance.

Yet Iraq’s political reality makes genuine anti-corruption reform extraordinarily difficult.

The Iraqi state is not merely weakened by corruption; in many ways, corruption is one of the mechanisms through which the post-2003 political order functions. Ministries are tied to party patronage systems, public employment networks sustain political loyalty, and state contracts often intersect with militia-linked economic interests.

This means any meaningful transparency campaign risks colliding with the very factions that helped bring al-Zaidi to power.

The deeper problem is that Iraq’s economic model itself has reached a breaking point.

For years, rising oil prices allowed Baghdad to postpone structural reforms while expanding public-sector employment and social spending. But Iraq’s economy remains dangerously undiversified, heavily centralized, and vulnerable to external shocks. The latest regional war has exposed how quickly Iraq’s fiscal stability can unravel when oil exports are disrupted.

Al-Zaidi has publicly promised a “comprehensive economic and financial reform program” aimed at diversifying Iraq’s economy, encouraging private-sector growth, and reducing dependence on oil revenues. He has also pledged investment in infrastructure, healthcare, education, and employment generation for Iraq’s growing youth population.

But Iraq has heard similar promises before.

Successive governments since 2003 have announced anti-corruption campaigns, economic diversification plans, and institutional reform strategies. Most failed because the political system itself benefits from preserving the status quo.

What makes the current moment different is the scale of external pressure converging on Iraq simultaneously.

Washington is demanding tighter financial oversight and limitations on Iran-backed militias. Tehran seeks to preserve its influence inside Iraq’s political and security institutions. International lenders may soon demand austerity and structural reforms. Meanwhile, ordinary Iraqis face rising economic uncertainty, inflation risks, and deteriorating public trust.

Al-Zaidi therefore inherits not only a state under fiscal strain, but a political order squeezed from every direction at once.

His rise also reflects a broader transformation in Iraqi politics: the increasing emergence of businessmen and technocratic figures as compromise leaders in a fragmented system where traditional political elites have lost credibility. Unlike many previous Iraqi prime ministers, al-Zaidi entered office primarily as a businessman and financial figure rather than a longtime ideological party operator.

That background may help him navigate economic negotiations and appeal to international actors. But it may also leave him politically vulnerable inside Iraq’s factionalized power structure, particularly given his lack of an independent security base or mass political movement.

The danger for Iraq is that the country may now be entering a period where economic instability and geopolitical competition reinforce each other simultaneously.

If oil disruptions continue and fiscal pressures worsen, Baghdad could face growing difficulty paying salaries and sustaining public spending. Any austerity measures or currency devaluation could trigger public unrest. At the same time, militia tensions, US-Iran rivalry, and regional conflict continue to threaten Iraq’s fragile internal balance.

For now, al-Zaidi is attempting to project an image of reform, discipline, and national renewal.

But Iraq’s history suggests that prime ministers rarely govern Iraq alone. They govern through negotiated coexistence with armed factions, foreign powers, economic elites, and patronage networks that often constrain the state more than strengthen it.

The real question is not whether Ali al-Zaidi wants reform.

It is whether Iraq’s system still allows reform to happen at all.

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