What does the Iraqi economy need to reform? An analytical look at the current situation and potential paths to correction.
For many years, the Iraqi economy has suffered from a clear paradox: possessing substantial financial resources, yet lacking the capacity to translate these resources into genuine and sustainable development. The relative financial stability Iraq enjoys today does not necessarily reflect a sound economic structure; rather, it masks accumulated structural imbalances stemming from excessive dependence on oil, an inflated role for the state, and weak economic and administrative institutions. Therefore, any serious discussion of reforming the Iraqi economy must begin with a realistic diagnosis of these imbalances before proceeding to prescribe reform measures.
Successive governments have managed short-term stability through increased public spending, benefiting from oil revenues and high foreign currency reserves. However, this approach has created a fragile economy more dependent on oil price shocks than on production. Public budgets have ballooned since 2004, not as a result of growth in the productive base, but due to expanding operating expenses, particularly salaries and subsidies, making the state the largest employer and source of income in the country. This reality has placed a constant burden on public finances and limited the government’s ability to direct resources toward long-term investment and development.
The bloated public sector and the multiplicity of laws governing salaries and benefits have created profound distortions in the income structure and undermined the principles of fairness and efficiency. The economy cannot become productive as long as government employment remains a substitute for genuine job opportunities in the private sector. Therefore, reforming the salary scale and linking wages to productivity, along with redefining the state’s role from direct employer to regulator and supporter, represents a fundamental step in the reform process.
At the same time, the social support system reflects another form of structural dysfunction. While socially important, the comprehensive nature of the support has led to significant resource waste and reduced the effectiveness of social protection. Reform here does not mean reducing support as much as it means redirecting it towards the most vulnerable groups and linking it to genuine economic empowerment policies that create opportunities for work and production instead of perpetual reliance on subsidies.
The energy sector represents one of the most significant structural challenges draining public finances and hindering growth. Massive spending on electricity has failed to provide a stable service due to deficiencies in management, governance, and revenue collection. The continued flaring of associated gas is a glaring example of resource mismanagement, costing Iraq billions of dollars annually that could have been used to generate energy, income, and employment. Genuine reform in this sector requires a comprehensive restructuring, not partial or temporary solutions.
Regarding public debt and fiscal deficits, the problem lies not in their existence itself, but in how they are used. Borrowing to finance operational spending exacerbates the crisis, while debt can be a positive tool if directed towards productive projects with clear returns. Hence, the need arises for a medium- and long-term fiscal framework that links deficits to growth and prevents imposing unfair inflationary or tax burdens on citizens.
Despite this, Iraq possesses significant strengths, most notably monetary stability, high foreign reserves, and low inflation. However, these indicators will remain limited in their impact unless they translate into genuine growth in the real economy. This requires a fundamental reform of the banking sector, enabling it to finance investment and production, rather than simply acting as a conduit for liquidity.
The weakness of non-oil revenues also reveals the depth of the institutional crisis. The absence of effective governance, complex procedures, and the prevalence of the informal economy all limit the state’s ability to collect revenue fairly and efficiently. Institutional reform is no less important than fiscal reform, as it provides the framework within which economic policies are implemented.
Ultimately, no economic reform in Iraq can succeed without a strong and effective private sector. The state can no longer continue to be the sole engine of the economy. What is needed is a stable business environment that protects investors, reduces bureaucracy, and provides clear and fair rules for competition. A competent private sector is not a replacement for the state, but rather an essential partner in achieving development.
The Iraqi economy stands at a pivotal moment. It must either leverage its current financial stability to launch genuine structural reforms that rebuild the economy on a foundation of production and diversification, or continue its reliance on oil and public spending, with all the future risks that entails. Reform is not merely a political choice, but an economic imperative to guarantee stability and development for future generations.
Economic Unit / North America Office,
Rawabetcenter.com