By Dr. Pshtiwan Faraj | Kurdish Policy Analysis

Iraq faces a deep financial crisis as falling oil revenues and regional conflict threaten public sector salaries, exposing decades of economic mismanagement.

For years, Iraq appeared financially secure. Soaring oil prices generated extraordinary state revenues, at times exceeding $150 billion annually, giving successive governments an opportunity to diversify the economy, strengthen financial institutions, and prepare for future crises.

Today, however, Iraq finds itself confronting an unsettling question that few imagined would arise during years of record oil income:

Will the government still be able to pay the salaries of its public employees?

That question is no longer theoretical.

A significant number of public sector employees have yet to receive their July salaries as Iraq grapples with one of its most severe financial crises in years.

The immediate trigger has been the regional conflict following the outbreak of war between the United States and Iran. The closure of the Strait of Hormuz—the route through which most Iraqi oil exports pass—has dramatically reduced the country's principal source of revenue.

Yet many economists argue that the current crisis runs much deeper than the latest regional conflict.

The Immediate Shock: War and the Closure of Hormuz

The disruption of Iraqi oil exports has dealt a severe blow to government finances.

Because Iraq depends overwhelmingly on crude oil exports to finance its budget, any interruption immediately affects the state's ability to meet its financial obligations.

As security conditions across the Middle East remain uncertain and the possibility of a prolonged closure of the Strait of Hormuz cannot be ruled out, anxiety is spreading among Iraqi citizens.

The greatest concern is felt by public sector employees, pensioners, and social welfare beneficiaries, who together account for roughly 23 percent of Iraq's population and whose livelihoods depend directly on monthly government payments.

For millions of families, salary delays are not merely administrative problems—they determine whether households can afford food, medicine, rent, and other essential expenses.

The Root of the Crisis: More Than Just War

Most economists insist that blaming the crisis solely on regional conflict oversimplifies the problem.

The closure of the Strait of Hormuz may have accelerated the crisis, but the structural weaknesses were created over many years.

According to economic experts, Iraq's financial difficulties stem from several long-standing problems, including:

• excessive dependence on oil revenues,
• poor financial management,
• an oversized public sector,
• weak private-sector development,
• inefficient resource allocation, and
• widespread corruption.

In many respects, today's crisis represents the culmination of years of economic vulnerabilities rather than a sudden collapse caused exclusively by geopolitical events.

A Warning Issued Years Ago

Long before today's crisis emerged, some Iraqi politicians warned that the country's financial model was unsustainable.

In 2008, the late politician Ahmed Chalabi argued that continued poor financial management, rapid expansion of the public sector, and neglect of private-sector development would eventually leave the Iraqi government unable to pay employee and pension salaries.

At the time, such warnings were widely debated.

Today, many observers see those predictions as increasingly relevant.

Even if the government succeeds in securing salary payments over the next month or two, many economic forecasts suggest that prolonged regional instability and continued disruption of oil exports would significantly increase the likelihood of deeper fiscal difficulties.

The Growing Gap Between Revenue and Spending

The Iraqi government now faces a widening gap between available revenues and monthly obligations.

Finance Minister Faleh Sari has acknowledged the existence of a fiscal deficit that has affected the government's ability to complete salary payments, pensions, and social welfare transfers.

Government data indicate that Iraq's monthly obligations for salaries alone amount to approximately 7.8 trillion Iraqi dinars, or roughly $6 billion.

While officials acknowledge the seriousness of the situation, disagreements remain over the scale of the crisis and the best path forward.

Some government officials describe the challenge primarily as a temporary liquidity problem.

Many economists disagree.

Government View: A Liquidity Crisis, Not Bankruptcy

Economic adviser Mazhar Mohammed Saleh argues that Iraq is not suffering from a shortage of national wealth but from an exceptional liquidity crisis.

According to Saleh, if regional conflict continues into early next year and oil exports remain disrupted, Iraq may need to rely on a combination of domestic borrowing, foreign debt, and parliamentary approval of new borrowing legislation.

He also argues that the government should:

• reorganize spending priorities,
• use foreign currency reserves carefully,
• preserve financial stability, and
• ensure the continuity of salary payments.

From this perspective, the challenge lies in managing cash flow under extraordinary circumstances rather than confronting state bankruptcy.

Economists Offer a Sharper Critique

Not all experts share that assessment.

Economics professor Emad Latif Salim believes maintaining salary payments for approximately 9.5 million Iraqis—including around 7.35 million employees and **2.1 million social welfare beneficiaries—will become increasingly difficult if current conditions persist.

He argues that Iraq's operating budget has become heavily burdened by unnecessary expenditures and requires comprehensive restructuring.

Among the problems he identifies are:

• excessive operational spending,
• budget inflation,
• wasteful expenditures,
• large numbers of fictitious employees and pension recipients,
• and unnecessary security personnel whose salaries consume public funds without corresponding public benefit.

His criticism goes beyond the immediate crisis.

He questions how a country that generated approximately $150 billion annually in oil revenues over many years failed to establish sufficient financial reserves or a sovereign wealth fund capable of cushioning periods of economic shock.

Where Did the Money Go?

Perhaps the most difficult question confronting Iraq today is not whether salaries can be paid this month.

It is how one of OPEC's largest oil producers arrived at this point after decades of extraordinary energy income.

Economist Ziad al-Hashimi argues that Iraq has now officially entered a financial crisis.

According to al-Hashimi, the government's recent acknowledgment of liquidity shortages merely confirms what many economists had warned about for months.

He argues that large portions of Iraq's oil revenues are effectively consumed before reaching the state treasury.

Among the beneficiaries, he says, are:

• corrupt officials,
• party-affiliated economic networks,
• armed groups,
• debt obligations,
• and fictitious payroll beneficiaries.

In this chain of distribution, he argues, the ordinary Iraqi public employee often comes last.

An Economic Model Under Pressure

The current crisis has exposed Iraq's long-standing dependence on a single source of national income.

When oil prices are high and exports remain uninterrupted, government spending expands rapidly.

When external shocks occur, however, the state's financial vulnerabilities become immediately visible.

The absence of significant economic diversification has left Iraq with limited alternatives.

For years, economists have warned that relying almost exclusively on oil revenues would eventually expose the country to precisely this type of crisis.

Today, those warnings are being tested in real time.

The Months Ahead

Whether Iraq can continue paying public-sector salaries will depend largely on developments beyond its borders.

If regional tensions ease and oil exports resume normal levels, Baghdad may regain sufficient revenues to stabilize public finances.

If conflict persists and exports remain constrained, however, pressure on the budget is likely to intensify.

In that scenario, policymakers may face increasingly difficult choices involving borrowing, spending cuts, financial reforms, or a combination of all three.

Regardless of which path Iraq chooses, one reality has become increasingly clear:

The current crisis is not simply about delayed salaries.

It is exposing fundamental weaknesses in an economic model that generated immense oil wealth but failed to build the financial resilience necessary to withstand a major external shock.

After years in which Iraq earned unprecedented petroleum revenues, the question confronting the country is no longer how much oil it can produce—but whether it can transform that wealth into lasting economic stability before the next crisis arrives.

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