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Iraq’s Economy at Risk: $1 Drop in Oil Prices Could Mean $1 Billion Annual Loss

Economist Alaa Al-Fahd has issued a critical warning regarding the implications of declining global oil prices on the Iraqi budget. Speaking on Thursday, January 30, 2025, he highlighted that a one dollar drop in oil prices equates to an estimated loss of one billion dollars annually, posing a significant risk to the financing of salaries and development projects within the country.

Decreased Gains and Financial Implications

Al-Fahd emphasized the heavy reliance of Iraq on oil revenues, which accounts for 85% of government financing. This dependency makes the nation particularly vulnerable to global economic fluctuations. He elaborated that a mere one dollar decrease in oil prices directly translates into substantial revenue losses, adversely affecting critical funding for essential projects and employee remuneration, thus posing a considerable burden on the national budget.

Investing in Associated Gas: Opportunities Amidst Challenges

Despite governmental efforts aimed at diversifying income sources through associated gas investments, Al-Fahd noted that Iraq will be unable to fully exploit its potential in this sector before 2028. This delay is attributed to the necessity for significant investments and the establishment of advanced infrastructure. He remarked, “While these initiatives are crucial for reducing dependency on oil, they demand time and capital, which may not be readily available amid ongoing financial challenges.”

An $80 Oil Price Threshold: A Critical Benchmark

Al-Fahd underlined that the current oil price benchmark set in the general budget constitutes a “red line” for the government. He cautioned that any dip below the $80 per barrel threshold could severely undermine the state’s capacity to meet its obligations, from salary disbursements to the execution of development initiatives. He noted that persistent price declines may force Iraq to consider expenditure reductions or risk resorting to costly borrowing alternatives.

Initiatives for Diversification: Gradual Progress with Future Concerns

While acknowledging government efforts to enhance non-oil revenues through the growth of agricultural and industrial sectors, Al-Fahd pointed out that these measures are still in nascent stages and have yet to deliver substantial returns to offset potential reductions in oil income. He asserted that to strengthen these initiatives, legislative reforms are essential along with the attraction of foreign investment, especially given the competitive regional and global landscape.

Current Challenges: A Complex Landscape

The recent price drops coincide with urgent needs to finance the reconstruction of war-torn areas, amidst rising unemployment and poverty rates, which increase the strain on social spending initiatives. Coupled with regional competition in the energy sector, these factors further complicate Iraq’s financial trajectory.

Al-Fahd’s warnings underscore a fundamental structural issue within the Iraqi economy, reminiscent of past crises linked to volatile oil prices. As neighboring Arab nations rapidly undergo economic transformations, Iraq must adopt more proactive strategies to avert potential financial difficulties that could lead to renewed cycles of debt and instability.

These warnings serve as a critical call for the restructuring of the Iraqi economy to mitigate risks before it is too late. While fluctuations in oil prices are not a novel occurrence, the lack of viable alternatives could steer Iraq back into financial deficit, as witnessed in previous years.

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