Iraq budget gap swells on essential spending and low oil revenue

• Deficit widens by $6bn
• Spending on wages and social care
• Oil revenue down steeply

Iraq’s budget deficit has widened by billions of dollars after the effective closure of the Strait of Hormuz choked off most of the oil revenue on which the country depends.

With oil exports still uncertain and much of its spending difficult to cut, Baghdad faces mounting pressure to borrow more or rein in expenditure as the fiscal gap widens.

The deficit, the difference between spending and revenue, increased by nearly $6 billion to about $22 billion (ID29 trillion) for the first seven months of 2026, new figures from the finance ministry show.

Spending was put at ID68 trillion and revenues nearly ID39 trillion for the period.

Oil export earnings accounted for the bulk of Iraq’s income, standing at nearly ID30 trillion during the seven-month term, according to the ministry.

More than half the expenditure went on wages to public servants, at ID35.8 trillion. This was followed by social care at ID16 trillion.

Iraq’s crude oil earnings came to $85 billion in 2025, when it exported 3.4 million barrels per day, according to the Kuwait-based Arab Energy Organization.

‘Inability to control spending’

The country’s oil production has fallen to one of its lowest levels this year as a result of Iran’s blockade of Hormuz, through which all crude produced in southern Iraq normally passes.

“I think the budget deficit this year will be one of the largest in Iraq’s modern history due to the disruption of its oil exports and its inability to control spending,” said Manar Al-Obaidi, manager of the Iraq Future think tank.

“Although oil exports have partially recovered, there is uncertainty regarding Hormuz and the deficit is already very high [so far] this year.”

Analysts said last week that Iraq had restored its oil exports to 70 percent of pre-war volumes after it increased shuttling transfers through the Strait of Hormuz and neighbouring Iran turned a blind eye to some shipments.

Iraq, home to six super-giant oilfields, dispatched an average of 2.6 million bpd from September 1 to 20, according to London-based market intelligence provider Vortexa.

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The Gulf state has resorted to borrowing, mainly from the local market, to fund its fiscal deficit in the absence of other major sources of income.

Heavy borrowing over the past few months boosted the country’s public domestic debt to an all-time high of ID103 trillion at the end of May. Baghdad is also considering a possible return to global debt markets to fund spending.

Sitting atop the world’s fifth-largest proven oil deposits of around 145 billion barrels, Iraq has approved the construction of pipelines to Turkey and Syria in order to bypass Hormuz.

Baghdad has failed to issue state budgets during 2025-26 because of domestic political uncertainty and other issues. Spending every month during that period was based on one twelfth of the 2024 total.

The 2027 draft budget, which is likely to reach parliament for approval this month, will be based on an average oil price of $60-$70 a barrel, Mudhar Saleh, a financial adviser to prime minister Ali Al-Zaidi, said.

The debate on the 2027 budget comes as Iraq tries to disarm Iran-backed militias following the exit of US-led allies.