Economy Iraq’s fiscal policy under fire over record domestic debt By Nadim Kawach January 24, 2025, 4:28 PM Reuters Under prime minister Mohammed Al-Sudani Iraq's domestic debt has grown through a combination of oil output cuts and increased public spending Iraq’s domestic debt at $64bn Spending higher than forecast Oil output cuts a problem Iraq risks draining local liquidity and stifling economic growth with its policy to rely heavily on domestic borrowing to fund its widening budget deficit, experts say. The Opec producer’s domestic debt has now hit an all-time high of around 83 trillion dinars ($64 billion) as a result of heavy borrowing to shore up the shortfall in the 2023 and 2024 budgets in which the government overshot forecast spending. Mudhar Saleh, a financial adviser to prime minister Mohammed Al-Sudani, said Baghdad’s decision to trim oil output by around 200,000 barrels per day, following Opec+ requirements, exacerbated the problem as it forced the government to increase borrowing. He told Iraq’s Al-Forat news agency last week that Baghdad had to spend more to fund stalled projects included in the landmark three-year budget that was approved in 2023. Iraqi economists said the soaring debt has already affected domestic liquidity and that this could have an impact on citizens’ living standards and block projects by the private sector. “The reason for the surge in the domestic debt is that the government relies heavily on borrowing from the local market instead of foreign financial markets,” said Salah Nouri, an economist at the Iraqi Institute for Economic Reforms. “This is not the right approach because it directly affects liquidity with the local public banks and the civil servants’ pension fund… This in turn will hinder the banks’ ability to lend the private sector and weaken its role in supporting GDP growth.” Another Iraqi analyst said Iraq earned as much as $90 billion from oil exports in 2024, yet the domestic debt swelled by around 17.5 percent at the end of the year. “The domestic debt is now at its highest level in Iraq’s history… It appears that the government is overshooting spending, especially current expenditure at the expense of capital expenditure… This will have several negative repercussions,” said Nabil Al-Marsoumi, an economics professor at Basra University. In a Facebook post this week, Al-Marsoumi said this approach would largely affect investment in Iraqi development projects, hinder GDP growth and weaken the government’s ability to repay debt on time. ‘It’s costing huge sums’ – Iraq may stop buying Iranian gas Iraq makes huge oil discovery but faces Opec restrictions Iraq lowers ceiling to crack down on money laundering “It could also create upward pressure on prices and increase the burden of debt servicing… This in turn will affect the living standards of citizens as it could lead to liquidity shortages that will force the government to curtail social spending, which is essential to tackle widening poverty and unemployment rates.” According to Al-Marsoumi, overspending widened the actual deficit in the 2023 budget by nearly 43 percent to around 90 trillion dinars ($68.6 billion) against a projected shortfall of about 63 trillion dinars ($48 billion). He said the increase in the deficit was caused after the government overshot spending to 225 trillion dinars ($171.7 billion) from a projected $153 billion. Like other Gulf states, Iraq’s budget is heavily reliant on oil export earnings, which provide nearly 90 percent of its total revenue.