Iraq’s Government Runs Out of Money as US-Iran Conflict Chokes Its Oil Lifeline
Iraq is facing one of its most severe fiscal crises in years. Senior officials have publicly acknowledged that the government simply does not have enough money to meet basic monthly obligations. The cause is clear: the ongoing conflict between the United States (alongside Israel) and Iran that began in late February 2026 has sharply restricted the Strait of Hormuz, the narrow waterway through which the overwhelming majority of Iraq’s oil exports normally pass.
Oil is not just Iraq’s main export—it is the foundation of the state. Roughly 90 percent or more of government revenue and about 95 percent of merchandise export earnings come from crude. Before the fighting, Iraq produced around 4 to 4.2 million barrels per day and exported approximately 3.3 to 3.4 million barrels daily, earning close to $6–7 billion in a typical month. Nearly all of that oil left the country via southern terminals in Basra and Umm Qasr, then sailed through Hormuz.
Once Iran restricted or near-closed the strait, the effect was immediate and devastating. Seaborne exports collapsed by about 83 percent in March compared with the previous year. By April and May they had fallen further, at times to roughly 100,000 barrels per day or less—around 3 percent of normal levels. Monthly oil income dropped to $2–2.3 billion and in some periods closer to $1 billion. Even with partial easing of transit later in the year, volumes remained far below pre-war norms. In July, total exports were reported around 42 million barrels for the month—still well under half the pre-crisis average of roughly 105 million barrels.
The arithmetic is unforgiving. The Iraqi government needs approximately $6.5 billion to $8.3 billion every month just to cover public-sector salaries, pensions, and social welfare payments that support millions of people. Payroll alone accounts for close to $6 billion. Non-oil revenues remain modest. The result has been a large and persistent gap. In the first four months of 2026 alone, the finance ministry recorded a deficit of about $5 billion. Cumulative lost oil revenue since the conflict began has been estimated by government advisers at $40–45 billion by mid-year.
Domestic debt has climbed to record levels as Baghdad has turned to local banks to cover shortfalls. The Central Bank has injected large volumes of liquidity—reports mention tens of thousands of billions of dinars—through a combination of drawing on reserves and expanding the money supply. Officials have warned that this excess liquidity has outstripped the real capacity of the economy, raising risks of inflation and currency pressure. Credit rating agency S&P Global projected a real GDP contraction of around 15 percent for 2026 and full-year oil production averaging 2.9 million barrels per day, roughly 28 percent below 2025 levels.
Prime Minister Ali al-Zaidi, who took office in mid-May after months of political deadlock, inherited an already strained treasury operating without a full approved 2026 budget. The government has been relying on emergency spending provisions that limit monthly outlays to a fraction of the previous year’s budget. Priority has been given to protecting salary and pension “red lines,” but even that has proven difficult. In recent months, partial payments and delays have become common. Finance officials have turned to fresh borrowing of more than 3 trillion dinars (around $2.3 billion) from private banks simply to keep August payrolls moving. Employees in several ministries, including electricity, have staged protests over unpaid July wages.
The crisis has also accelerated other policy efforts. Al-Zaidi’s government has launched a high-profile anti-corruption campaign, recovering hundreds of billions of dinars in cash and assets. Officials speak of maximizing non-oil revenue through better customs collection, tax reforms, and recovering looted public funds. Longer-term plans include diversifying export routes—expanding the northern pipeline through Turkey to Ceyhan, exploring a major new pipeline from Basra northward with international partners including Chevron, and reducing dependence on a single chokepoint. Yet these projects take years, not months.
Iraq’s predicament is made more complex by its geopolitical position. The country hosts residual U.S. forces while also containing powerful Iran-aligned armed groups. Washington temporarily suspended physical dollar cash shipments earlier in the conflict before resuming them under tighter conditions aimed at limiting flows that could benefit Iranian-backed militias. Baghdad has responded with commitments to assert greater state control over weapons and reduce parallel economies. At the same time, the government must maintain workable relations with Tehran. The result is a delicate and often uncomfortable balancing act.
For ordinary Iraqis the effects are concrete. A large public sector employs more than four million people; salaries and pensions form the backbone of household income for a significant share of the population. Delayed pay cascades into unpaid bills, reduced consumer spending, and rising hardship. Health and other services have already felt the squeeze as ministries receive only fractions of planned allocations. Analysts warn that prolonged shortfalls could increase poverty and fuel unrest in a country that has experienced repeated waves of protest over living conditions and governance.
The longer-term risk is structural. Iraq’s economy remains a classic rentier model: volatile external income supporting large, rigid public spending with limited productive diversification. The Hormuz disruption did not create this vulnerability—it exposed and amplified it. Even if navigation through the strait recovers more fully, the episode has demonstrated how quickly fiscal stability can evaporate. S&P and other observers expect a rebound in 2027 if exports normalize, but the path remains uncertain while regional tensions persist.
Iraqi officials continue to stress that salaries remain the top priority and that fields are ready to ramp production once secure export routes reopen. In the meantime, the government is operating in emergency mode—borrowing, printing, cutting non-essential spending, and promising reform. Whether these measures can bridge the gap until oil volumes recover, and whether the political will exists for deeper changes that reduce oil dependence, will determine if 2026 marks a temporary shock or the beginning of a more prolonged period of lean years.
The numbers leave little room for ambiguity. When monthly oil earnings fall below one-third of the cost of keeping the state functioning, a country as oil-dependent as Iraq inevitably runs short of money. The US-Iran conflict has made that reality unavoidable.
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