Iraqis headed to the polls on Tuesday in their sixth parliamentary election since 2005, in a vote seen as pivotal not only for politics but for the country’s economic future. While the political atmosphere is relatively calm, international financial institutions warn that Iraq faces deep structural challenges requiring urgent reform by the next government.
Prime Minister Mohammed Shia al-Sudani, seeking a second term, pledged sweeping financial reforms, describing the next phase as requiring “surgical operations” to reduce the budget deficit and increase non-oil revenues.
He admitted to adding about 700,000 public-sector jobs over the past three years to avert unrest like the anti-government 2019 protests, a move that has swollen the civil service to four million employees. Nearly 90 percent of public spending now goes to salaries, pensions, and subsidies, according to Bloomberg.
Al-Sudani vowed to redirect Iraq’s youth, who make up around 60 percent of the population, toward private-sector employment by easing regulations and attracting foreign investment in key areas such as industry, tourism, and agriculture. He also signaled “preferential conditions” for US energy firms to develop the hydrocarbons sector.
Iraq’s core challenge remains financial sustainability, undermined by dependence on oil and unsustainable spending. Oil revenues still account for over 90 percent of government income, leaving the country vulnerable to global price fluctuations and OPEC+ decisions.
Public wages and pensions now consume more than 60 percent of the 2024 budget, leaving little room for investment.
The International Monetary Fund (IMF) estimates that Iraq now needs oil prices above $84 a barrel to balance its budget, up from $54 in 2020. With Brent crude expected to average below $70 in 2025, Baghdad faces growing fiscal strain that could threaten salary payments, as occurred in 2020.
Without swift corrective measures, government debt could rise to 62.3 percent of GDP by 2026.
Meanwhile, the non-oil sector - key to diversifying the economy - has sharply slowed, with growth falling from 13.8 percent in 2023 to 2.5 percent in 2024.
Persistent corruption, weak governance, chronic electricity shortages, and a fragile banking system continue to weigh on productivity and private sector growth.
Economists say the next government must act quickly. In the short term, spending plans for 2025 should be reviewed to curb nonessential expenditures and preserve liquidity. Over the medium term, fiscal adjustments of 1 to 1.5 percent of non-oil GDP annually are needed to stabilize debt.
Key reforms include strengthening tax and customs administration, revising income-tax exemptions, introducing a potential sales tax, and rationalizing the wage and pension systems. Protecting capital investment in infrastructure, particularly in transport and energy, is seen as crucial for long-term diversification.
The new government’s first test will be passing the 2026 budget amid falling oil prices. Despite the return of some international players such as ExxonMobil, foreign investment remains cautious due to security concerns and interference by armed groups in projects.
Ultimately, Iraq’s next leadership faces an existential economic challenge: to begin painful reforms that reduce oil dependency and tame the ballooning wage bill, or risk renewed financial and social instability.
Lasting stability, analysts say, will require more than temporary calm; it demands genuine governance reform and the political will to turn promises into action.
