Iraq’s Economy Teeters as Oil Sales Collapse

Crude exports have fallen by more than 70% because of hte war in Iran, leading to major shortfall in the state budget

Raya Jalabi in Beirut

Iraq is facing an economic crisis following the collapse of its oil sector due to the Iran war, compounding the pressures on a weak caretaker government struggling to contain the fallout of a spiralling conflict.

The country’s oil exports have fallen from 3.4mn barrels per day to around 250,000 since the war started, with storage tanks at near-critical levels, as Iran’s effective closure of the Strait of Hormuz shut off its main shipping route. Production has been slashed by nearly three quarters.

Tasked with tackling the crisis is a caretaker government with limited powers, still in place five months after the last general election.

The administration has also been grappling with more than three weeks of US strikes on Tehran-backed Shia militias inside Iraq, as Washington fights a shadow front of the Iran war on Iraqi soil. This week, seven Iraqi soldiers were killed in an apparent US strike on a military base.

“Iraq is much more vulnerable than the Gulf states right now,” said Renad Mansour, director of the Iraq Initiative at the Chatham House think-tank. “In normal times, a fragmented state can muddle through. But at moments of massive conflict, it’s much more susceptible to shock.”

Iraq’s failure to modernise and diversify its economy over the past two decades has left it uniquely exposed to this disruption, economists say.

One of the world’s most oil-dependent nations, Iraq’s crude sales make up around 90 per cent of the state budget. It also relies on imports for 90 per cent of consumer goods, food and medicine — many via Hormuz. And its grid depends heavily on Iranian gas imports, which have plunged due to Israeli attacks on Tehran’s largest gasfield.

The country, OPEC’s second-largest producer, has already lost about $5.4bn — almost 2 per cent of its 2024 GDP — in oil sales from the Strait’s closure, estimated Justin Alexander, director of Khalij Economics.

The budget is under severe strain, with enough money to pay public sector salaries for the next month or two, but problems look set to arise in May, said Abdul Rahman al-Mashhadani, an Iraqi economist.

The government’s challenge has been complicated by rogue Iran-backed Shia militia groups that have attacked a range of US targets, including its embassy in Baghdad and military base in Erbil, as well as hotels and oil and gas installations.

Apparent US retaliations have hit locations across the country, including a strike on a residential area in central Baghdad last week.

“For the past few years, the government took advantage of relative stability to build bridges and roads instead of also diversifying its economy and creating a coherent security sector that could have put an end to these attacks,” said Mansour.

Baghdad is urgently trying to find alternative ways to ship its oil to global markets, including by repairing the pipeline currently in use and another damaged pipeline in the north. Last week, Baghdad declared force majeure on all oilfields developed by foreign oil companies.

It hopes to increase current exports to 500,000 b/d but even that “will not be enough, not even to cover basic obligations such as social welfare payments, let alone salaries”, he said.

It is only able to export the current quarter of a million b/d via a pipeline that runs from the semi-autonomous Kurdistan region to Turkey’s Ceyhan port. The arrangement is tenuous, owing to a longstanding dispute between the Kurdish authorities and Baghdad, and only came about due to pressure from Washington, Iraqi officials told the FT.

In January, the country’s foreign minister who also chairs the economic committee, said the country was running a monthly deficit to fund the bloated public sector payroll — a key source of patronage for political parties, which accounts for around 40 per cent of Iraq’s workforce.

“The government has no real options except to borrow directly from the central bank and also from the IMF,” Mashhadani said, noting that the central bank has stepped in during previous crises, such as the Covid-19 pandemic.

The CBI claims to have 12 months of import cover, but much of its liquidity sits in accounts controlled by the US Federal Reserve. Before the war, Washington threatened Iraq with a dollar crunch if it failed to rein in the militias. There are fears it will renew those threats, Iraqi officials said.

Additional reporting by Anas al-Gburi in Baghdad and Verity Ratcliffe in London