Prepared by: Dr. Amjad Hamid Majid As of September 2026, the Iraqi economy is undergoing a critical phase marked by a combination of accumulated domestic pressures and external shocks associated with oil markets, regional tensions, and disruptions to export routes. The fundamental problem is not that Iraq is a resource-poor country; rather, its economic structure remains heavily dependent on oil at a time when the private sector and non-oil revenues have not yet reached a level capable of absorbing such shocks. World Bank data indicate that in 2025, oil accounted for approximately 53% of real GDP, 88% of government revenues, and 91% of merchandise exports. These figures illustrate the scale of the risk: any decline in oil production, prices, or export capacity is rapidly transmitted to the budget, government spending, investment, and overall market activity. From Oil Abundance to Liquidity Pressures During 2026, the Iraqi economy came under additional pressure as a result of regional instability and difficulties affecting oil exports through the Strait of Hormuz. In August 2026, Iraq’s oil exports increased to approximately 2.34 million barrels per day, compared with around 1.35 million barrels per day in July. Nevertheless, exports remained below pre-disruption levels, which had exceeded 3.3 million barrels per day. This improvement is significant, but it also highlights the extent to which public finances depend on the continuity of a largely single export route. The future outlook also remains highly volatile. In its 2026 updates, the International Monetary Fund noted that Iraq is among the commodity-producing economies most exposed to disruptions in energy production and transportation in the region. Regional growth forecasts have also undergone substantial revisions due to the continued disruptions affecting the Strait of Hormuz. Nevertheless, these pressures do not necessarily mean that Iraq is facing an immediate foreign-exchange reserve crisis. On 19 September 2026, the Central Bank of Iraq confirmed that its foreign reserves were sufficient to meet demand related to financing foreign trade, payment cards, and travelers through official channels. It attributed part of the increase in the exchange rate in the domestic market to speculation and expectations associated with geopolitical developments. The Major Imbalance in Public Finances The most complex issue is the increase in rigid expenditures in the face of limited non-oil revenues. In its assessment of Iraq, the International Monetary Fund warned that fiscal expansion in recent years had increased the budget’s exposure to declining oil prices. It noted that the oil price required to balance the budget had risen to approximately $84 per barrel in 2024, compared with around $54 per barrel in 2020. The IMF also emphasized that the growth of the public-sector wage bill and transfers, combined with weak non-oil revenues, is placing pressure on fiscal sustainability. This means that higher oil prices may temporarily ease the crisis, but they do not resolve the underlying structural problem. When oil prices rise, the government’s capacity to spend expands; when prices decline or exports fall, liquidity problems, project delays, and financing pressures emerge. Therefore, the real economic question is not: How much is oil worth today? Rather, it is: How much can Iraq finance its state and economy if oil revenues suddenly decline? Unemployment and the Public Sector The second major challenge concerns the labor market. Iraq’s estimated overall unemployment rate reached approximately 15.5% in 2025, according to World Bank data, while youth unemployment among those aged 15–24 stood at around 32%. The government sector cannot continue indefinitely as the principal source of employment. At the same time, the private sector remains limited in its capacity to absorb the hundreds of thousands of new entrants to the labor market each year. The World Bank itself points out that young people constitute a large share of the population, while the private sector’s capacity to create jobs remains limited. This creates a difficult economic cycle: citizens seek government employment because it offers greater stability; the state expands public-sector employment, increasing operating expenditures; fiscal space for investment consequently becomes narrower; the private sector remains weak; and demand for government employment increases once again. How Can Iraq Exit This Cycle? Breaking this cycle requires not a single measure, but a multi-year economic program that simultaneously addresses public finances, production, the private sector, banking, and energy. 1. Protect essential expenditure rather than implementing indiscriminate cuts. When revenues decline, priority should be given to essential salaries, social protection networks, healthcare, education, and productive investment, while lower-priority expenditures should be reviewed. The IMF has already called for improving expenditure efficiency and controlling current spending while protecting essential social and investment expenditures. 2. Increase non-oil revenues without constraining economic activity. Reform does not mean imposing arbitrary taxes. Rather, it requires building more efficient digital tax and customs administrations, reducing tax evasion and leakage, and gradually broadening the tax base. The IMF has specifically emphasized the importance of increasing non-oil revenues and improving customs administration and excise taxation. 3. Gradually restructure the public-sector wage bill. The solution is not to dismiss employees abruptly, but to limit unnecessary expansion in public-sector recruitment, undertake genuine workforce planning, link employment to actual needs and productivity, and shift a greater share of job creation toward the private sector. 4. Make the private sector more competitive. Iraqi investors need an environment in which they can establish businesses, obtain financing, import equipment, execute contracts, and protect their rights without excessive administrative costs. Reforms that promote competition and reduce barriers facing businesses can gradually transform the state from the “largest employer” into a regulator and catalyst for economic activity. 5. Reform the banking sector. It is difficult to build a strong private economy in the absence of a banking system capable of efficiently transforming savings into loans and productive investments. The IMF has emphasized the importance of restructuring major state-owned banks, modernizing the banking sector, and strengthening its relationships with international correspondent banks. 6. Transform energy from a burden into a productive sector. Iraq is a major oil producer, yet it continues to face shortages of electricity and gas—a costly economic contradiction. Investment in capturing associated gas, expanding generation and transmission capacity, reducing losses, and developing solar energy can lower production costs for factories, farms, and services. The World Bank identifies electricity and water shortages among the factors that have weakened non-oil economic growth. 7. Prioritize industry, agriculture, and exportable services. Economic diversification does not mean eliminating oil; rather, it means using oil revenues to build additional sources of income. Food industries, petrochemicals, fertilizers, construction materials, modern agriculture, logistics, technology, and religious and cultural tourism can create employment and local added value if adequate infrastructure and financing are available. 8. Establish a fiscal policy that counteracts oil-price volatility. When oil prices rise, part of the exceptional revenues could be directed toward reserves or a fiscal stabilization fund rather than being converted entirely into permanent spending commitments. When prices fall, these reserves can be used to cushion the shock. Such a mechanism would reduce the link between government expenditure and daily fluctuations in the oil market. 9. Address unemployment through skills development, not recruitment alone. There is a need to strengthen the links between universities and technical institutes, labor-market requirements, vocational training, and entrepreneurship programs. The International Labour Organization has already been cooperating with Iraqi institutions on national programs aimed at supporting job seekers and connecting young people with labor-market needs, an approach that could be further expanded. Iraq Does Not Need to Abandon Oil, but to Use It Differently It is unrealistic to speak of a “post-oil” Iraqi economy in the near term. Oil will remain the most important source of income for years to come. Therefore, the more realistic objective is to move from an economy that relies on oil to finance current consumption toward an economy that uses oil revenues to finance productive assets and sectors. There is a substantial difference between spending an additional one billion dollars on permanent operating obligations and investing the same amount in an electricity grid, a gas project, an industrial zone, a transportation system, or digital infrastructure capable of generating income and employment opportunities for many years. Iraq’s economic challenge is not a shortage of wealth, but excessive dependence on a single resource, rising fixed expenditures, the limited contribution of the private sector and non-oil revenues, and insufficient creation of productive employment opportunities. In 2026, regional developments once again demonstrated how quickly disruptions to oil exports can spread throughout the wider economy. There is no quick solution capable of addressing these imbalances within a matter of months. However, a comprehensive approach combining fiscal discipline, protection of investment and essential services, banking-sector reform, increased non-oil revenues, and the development of the energy and private sectors can make the Iraqi economy more resilient to oil-related shocks and create employment opportunities beyond the public sector. Ultimately, the objective is not to reduce the importance of oil merely for the sake of reducing it, but to transform oil wealth from a source for financing the state into a foundation for building an economy capable of sustaining itself even when oil revenues decline.