The confrontation between Iran and Israel has exposed critical weaknesses in Iraq’s financial structure and fragile oil export infrastructure, raising concerns about whether Baghdad fully grasps the severity of the situation or plans to address its chronic economic vulnerabilities.
According to a report by the British outlet Amwaj, Iraq initially responded to the outbreak of the Iran-Israel conflict with a mix of hope and concern. The spike in oil prices provided temporary relief amid ongoing financial strain from declining oil export revenues. However, uncertainty around the conflict’s direction and speculation over the closure of the Strait of Hormuz revealed Iraq’s financial fragility—over 90% of Iraq’s energy exports pass through the strait, meaning even record oil prices offer little protection from the fallout of a regional war.
The report highlighted Iraq’s lack of contingency planning and questioned its ability to endure prolonged instability. Iraq’s involvement in regional fault lines has left it vulnerable to external shocks once again.
Although the ceasefire on June 24 eased immediate tensions, the showdown between Tehran and Tel Aviv exposed structural flaws in Iraq’s financial system and weaknesses in its export framework. The federal government has not taken serious steps to reduce dependency on the volatile oil market. Prime Minister Mohammed Shia’ Al-Sudani’s administration has not submitted budget schedules to parliament despite it being part of a three-year plan (2023–2025).
Projections in the report warn of an annual deficit of nearly 64 trillion Iraqi dinars (around $48 billion) due to falling oil prices. Most revenues go toward salaries for 4 million public employees, with income falling 3% short of expenditures.
In an unprecedented move, the government allowed the Ministry of Finance to tap into unclaimed tax deposit funds—temporary holdings from companies and individuals—and transfer them to a special account for the General Tax Authority, with the condition that the deposits be less than five years old. This underscores Iraq’s limited financial options.
Experts also warn of Iraq potentially returning to borrowing from the IMF, which would be seen as a significant regression. Current financial practices are worsening pressure, delaying development projects and regional allocations amid deeply rooted economic dysfunction beyond political processes.
The report points to misallocation of resources, a stagnant private sector, poor long-term planning, and politicized economic tools—fiscal policy is often used as leverage in internal conflicts between political parties and between Baghdad and the Kurdistan Region. Baghdad has accused the region of unauthorized oil deals and exporting crude through Turkey’s Ceyhan port without federal consent.
Domestic oil sector disputes reflect deeper strategic failures, especially Iraq’s near-total reliance on a single export route. The Iran-Israel conflict and regional instability since the October 7, 2023, attacks highlighted the dangers tied to this corridor. Any escalation could block over 90% of Iraq’s oil exports, inflicting losses up to $250 million per day—a severe blow to a fragile economy.
Alternatives like land shipping have proven unreliable and costly. Iraq has made little progress securing alternative export routes despite evident risks. Though the country announced plans to boost oil output to over 6 million barrels/day by 2029, export infrastructure remains critically outdated.
Projects like the $9 billion Basra-Aqaba pipeline and the long-stalled Basra-Yanbu line remain hindered by political divides and funding issues. Talks with Syrian authorities to revive the Kirkuk-Baniyas pipeline have resumed with no concrete results, and the Kirkuk-Ceyhan pipeline to Turkey is still inactive. None of these alternatives are deemed viable, politically neutral, or secure—leaving Iraq highly exposed to regional instability.
The report also highlights deeper economic dysfunction, including neglect of non-oil sectors. The IMF has warned that Iraq’s financial deterioration stems from overdependence on oil, inefficient spending, lack of energy resources, a fragile financial sector, and widespread corruption.
The recent escalation should not be seen as an isolated event but as a final warning. The IMF urges urgent reforms, including wage structure fixes, modernization of state banks, and investment in infrastructure to promote economic diversification—especially in energy, transport, and trade sectors.
The report concludes: Without substantial reforms, Iraq will remain vulnerable to global market fluctuations and increasingly beholden to the interests of its neighbors.