Alwaght- In recent decades, Iraq has been struggling with multiple economic challenges stemming from wars, sanctions, and extensive oil market fluctuations. One of the most important indicators that very well reflects the country's financial situation is the government's foreign currency debt. This debt has not only impacted the government's financial power, but also has unleashed substantial consequences to the economic development, investment, and public welfare.
With parliamentary elections set for November 11, the government's mounting domestic and foreign debt has become a central point of contention. Rival parties are now sharply criticizing the Sudanese government's management of the national debt and its impact on the economy.
Concerns growing about budget deficit increase
Domestic concerns are mounting over Iraq's rising budget deficit and the growing difficulty of financing it through traditional means. Many fear that if oil prices, the benchmark for the annual budget, fall from their current level, the government will be unable to cover its operational expenses.
The debt crisis intensified last Saturday when Central Bank Governor Ali Al-Allaq revealed that Iraq's total internal and external debt has reached approximately $150 billion. He reported that domestic debt soared to 90.3 trillion dinars, with external debt hitting $43 billion. Al-Allaq warned that the "very large" budget deficit cannot be covered by loans and bonds alone, a statement that has sparked widespread alarm over the government's fiscal policies.
Central bank reaction and adjusting the statistics
Facing a backlash, Iraq's Central Bank moved to reassure the public, asserting that the public debt-to-GDP ratio has not exceeded 43 percent and remains within a "safe limit."
In an official statement, the Central Bank clarified that while the three-year budget law for 2023-2025 had projected a deficit of 91.5 trillion dinars, the actual shortfall over this period was only 35 trillion dinars. It confirmed this gap was financed through domestic bonds and treasury transfers.
The Central Bank further revealed that actual borrowing accounted for just 18.2 percent of the planned deficit, which it presented as evidence of "a high level of coordination" between the government and the Central Bank to control public debt.
According to the statement, the country's repayable external debt, after deducting suspended and non-recoverable debts from the former regime, stands at only $13 billion. Of the 91 trillion dinar domestic debt, 56 trillion originated from debts accumulated up to the end of 2022, with only 35 trillion dinars accrued over the last three years. The Bank emphasized that most of this debt resides within the state-owned banking system.
The Central Bank insisted that the sub-43 percent debt-to-GDP ratio is "moderate" and "safe" by international standards, asserting it does not place a heavy burden on the economy.
PM al-Sudani's response
Amid the political backlash ignited by the Central Bank's debt figures, Prime Minister Mohammed al-Sudani moved to assuage public concern. In a meeting with Arab and foreign journalists on Monday evening, he asserted, "Iraq's financial and economic situation is at its best," and placed the blame for the current budget deficit on the "flawed policies inherited from previous governments."
Al-Sudani pointed to a reduced deficit of 34 trillion dinars and maintained financial stability. He explicitly distanced his government from responsibility for the $41 billion debt to the Paris Club, calling it a legacy of the former regime.
Turning the tables on his parliamentary critics, the PM said: "The representatives who are now protesting the debts are the same ones who voted for this budget and were fully aware of its details, including the deficit figures and the borrowing required to cover it."
A key financial strategy of Al-Sudani's government has been a landmark three-year budget, designed to pivot towards domestic investment and curb reliance on foreign loans. Despite its 64-trillion-dinar shortfall, the budget explicitly channels resources into infrastructure and development projects.
Doubts and criticism by critics
However, some observers and government critics allege the Central Bank's retreat from its initial figures is a political maneuver to appease the government and quell public anger ahead of the elections.
Critics accuse al-Sudani of fueling an unprecedented rise in domestic debt through lavish spending to secure voter support.
In this context, Siham Yusuf, a professor of economics, warned that a "worrying reality" lies behind the Central Bank's official numbers. "Over half of the domestic debt is owed to the Central Bank itself, with most of the remainder held by state-owned banks," she explained. "In essence, the government is borrowing from itself, a form of hidden money printing."
She added: "More alarming is that these loans fund operational costs, not investments. The money pays for salaries, benefits, and subsidies, generating no future returns. This debt is not creating jobs or productive projects; it is merely keeping the country afloat."
Economic consequences of foreign currency debts
The accumulation of the foreign currency debts has brought massive consequences to the Iraqi economy. The first and most important consequence is the periodic budget deficit that pushes the government to further borrowing and reducing the developmental expenses.
A second consequence is rising inflation and a sharp decline in the public's purchasing power. As foreign exchange reserves shrink and import dependency grows, currency fluctuations have driven up the cost of essential goods. This situation is placing a disproportionate burden on low-income and vulnerable segments of society.
Third, the crisis is stifling both domestic and foreign investment. Soaring debt and a lack of fiscal stability have significantly raised the risks of investing in Iraq, causing many potential investors to steer clear of the market.
The tough outlook for next government
Iraq's foreign currency debts are a heavy legacy from the past decades whose handling requires precise financial policies, structural reforms, and political stability. Despite some positive measures, al-Sudani's government still has a long way to reduce its debts and improve the nation's economic conditions.
Many economists have warned that the next government will have to grapple with serious economic and financial challenges. The surge in home debts may push the government to devalue dinar against the US dollar and also embark on austerity measures to pay for operational expenses, 65 percent of which are public sector salaries.
