Introduction
War in Iran erupts at a critical time for the Iraqi economy. Iraq relies heavily on oil exports to finance most of its budget and suffers from a very fragile economic and financial structure that is easily affected by external shocks. Although Iraq is not a party to the war, its geographical proximity to the conflict zone, its dependence on the Persian Gulf for maritime transport, and its economic dependence on Iranian energy resources make it likely to be more affected by the war’s repercussions than many of its regional neighbors. In this analysis, we will examine the main mechanisms by which the shock will be transmitted to the Iraqi economy and assess the risks associated with short- and medium-term scenarios.
First: Oil Export Disruptions… Directly Impact Government Revenues
Since oil constitutes more than 90% of Iraq’s revenue base, any disruption to petroleum product exports poses a significant threat to financial stability. In the event of attacks on shipping in the Gulf or the closure of the Strait of Hormuz, which would negatively impact a large portion of Iraqi oil exports, the Iraqi government has declared force majeure on some oil fields operated by international companies.
Short-term consequences:
- A significant decline in government revenue.
- A severe impact on the ability to fund public sector salaries and expenditures.
- An increased likelihood of a larger fiscal deficit and depletion of reserves.
Due to its lack of genuine economic diversification, Iraq is more vulnerable than many other countries to any negative shock in the energy sector.
Second: Gulf Trade Disruptions… Iraq’s Maritime Lifeline Under Threat
More than 90% of Iraq’s foreign trade passes through the Gulf; therefore, increased attacks on ships off the port of Faw and/or disruptions to shipping lanes will lead to delays in the arrival of essential goods.
Expected Impacts:
- Delays in the arrival of food and medicine to Iraq.
- Increased shipping and insurance costs.
- Higher prices for locally available basic commodities.
These disruptions exacerbate the pressures already faced by Iraqi families struggling to meet their daily needs due to reduced disposable income.
Third: Increased Living Pressures on Families in Iraq
Iraqi society begins this crisis with a severely weakened capacity to cope, as most families rely on government salaries or government-provided funds for living expenses. Most people have no savings.
The Effects of the War on Daily Life:
- Increased prices for food, transportation, medicine, and other necessities.
- Anxiety about delayed salary payments or reduced government spending.
- Worsening levels of poverty and unemployment.
As a result of these conditions, the economic shock spreads rapidly from the national level to every citizen.
Fourth: Threat to Electricity Supply… A Strategic Vulnerability
Iraq relies heavily on imported gas from Iran to generate approximately one-third of its electricity. Any disruption to this gas supply due to war could lead to:
- Frequent power outages.
- Increased electricity costs for manufacturing.
- Additional strain on household budgets during the peak summer months.
Therefore, Iraq is more vulnerable than many of its neighbors, which have abundant alternative energy options.
Fifth: Macroeconomic Risks… The Possibility of a Recession
According to estimates from various international organizations, the war in the Middle East has led to downward revisions in projected growth rates for the region, particularly for oil-exporting countries directly affected by the conflict. For example,
For Iraq:
- Higher oil prices might theoretically be beneficial;
- However, the decline in oil exports negates any potential benefits.
A sharp contraction in GDP, and possibly a recession, seems likely if the crisis continues.
Sixth: Why is Iraq more vulnerable to the negative repercussions of the conflict?
Five key reasons contribute to Iraq being more vulnerable to the negative repercussions of the conflict than the Gulf states:
- Total dependence on oil; lack of diversified revenue streams.
- Weak institutions; poor financial management.
- Lack of sufficient financial reserves comparable to those held by Saudi Arabia or the United Arab Emirates.
- Reliance on maritime trade through the Gulf for almost all imports.
- Social safety nets’ dependence on external factors; citizens feel any financial shock immediately.
Conclusion:
The Iran-US war clearly demonstrates the vulnerability of the Iraqi economy to regional shocks and underscores the urgent need for comprehensive structural reforms, such as diversifying revenue sources, strengthening energy infrastructure, and establishing backup shipping routes. With tensions persisting, Iraq stands at a critical economic crossroads, requiring immediate strategic decisions to mitigate risks and ensure continued social and financial stability.
Akkad Center for Economic and Financial Studies
