Baghdad’s proposed 2027 spending plan projects a $28.4 billion deficit despite falling oil revenues, rising financial pressures and an appeal for assistance from the International Monetary Fund.
Iraq is considering a record 2027 federal budget worth approximately 217.2 trillion dinars ($143.6 billion), even as declining oil income and mounting fiscal pressures expose a widening gap between government spending ambitions and the country’s available resources.
The proposed legislation, reviewed by The National, anticipates spending far beyond projected revenues, raising questions about how Baghdad intends to finance its commitments amid an economic downturn linked to disruptions in regional oil shipments.
Under the draft, government revenue is expected to reach 174.2 trillion dinars, including approximately 144 trillion dinars from crude oil sales and 30.2 trillion dinars from non-oil sources. This leaves an estimated shortfall of 43 trillion dinars, equivalent to roughly $28.4 billion.
The legislation proposes several ways to finance the deficit, stating that it “is covered from the surplus realised from the increase in crude oil export prices or increased crude oil exports or internal and external borrowing and from carry-over funds”.
However, the financing strategy faces considerable uncertainty as Iraq grapples with reduced export earnings, declining foreign reserves and growing pressure to meet public-sector obligations.
Oil disruptions intensify budget pressures
Iraq’s financial position has deteriorated since the Iran war began in late February, disrupting shipping through the Strait of Hormuz, a critical passage for global energy supplies.
The country’s dependence on petroleum exports leaves its public finances particularly exposed to interruptions in maritime trade. More than 90 per cent of government budget revenue comes from oil exports, most of which traditionally move through the strait.
The disruption has sharply reduced shipments. Iraqi crude exports dropped from 3.36 million barrels per day in February to just 131,000 bpd in April, significantly undermining the monthly oil revenues that had previously averaged approximately $7 billion.
Figures from the Finance Ministry covering the period through the end of August show that government revenue stood at about 45.3 trillion dinars, compared with expenditure of 78.9 trillion dinars.
Baghdad has increasingly drawn on its foreign currency reserves to bridge the funding gap. Data from the Central Bank of Iraq indicate that reserves have fallen from approximately $109 billion to $80.6 billion.
The deterioration has prompted the government to seek international financial assistance, marking its first such request since Iraq’s 2016 Stand-By Arrangement with the International Monetary Fund.
IMF Managing Director Kristalina Georgieva confirmed at the institution’s Annual Meetings in Bangkok this month that Iraqi officials had approached the Fund and formally requested a financing programme.
“We will get to Iraq both money and policy support,” she said, adding that the IMF intended to support Iraq “very firmly” with a requested loan programme. “We have made significant progress towards the programme. We have still a bit more work to do together and I’m confident we will be successful.”
The IMF has forecast that Iraq’s economy will shrink by 16 per cent in 2026, while the country’s current account deficit is projected to reach 10.8 per cent of gross domestic product this year.
These projections underscore the financial challenges confronting the government as it prepares a budget built around substantial public expenditure.
A government official told The National that the proposed plan could assume an oil price of $58 per barrel and exports of approximately four million bpd, including production from the Kurdistan region.
Public-sector commitments remain substantial
Despite the revenue shortfall, the draft allocates considerable resources to wages, social assistance and other government obligations.
Salary expenditure is projected at 64.7 trillion dinars, while social welfare programmes would receive approximately 33 trillion dinars. Grants, subsidies and interest payments account for another 17 trillion dinars, with debt servicing requiring a similar amount.
The scale of these commitments reflects the government’s continued reliance on public spending to support households and sustain employment, but it also limits the room available to adjust expenditure when oil revenues decline.
Baghdad has responded to immediate cash shortages by borrowing from domestic sources to meet payroll obligations. It has also moved to devalue the dinar, a measure intended to increase the local-currency value of oil earnings denominated in dollars.
Economist Nabil Al Marsoomi of Baghdad said the proposed spending trajectory was difficult to reconcile with the country’s financial circumstances.
“The state is in severe financial distress and, instead of tightening, the government is expanding expenses,” Baghdad economist Nabil Al Marsoomi told The National. “We were surprised by a large, highly stretched expansionary budget, and it seems that the Ministry of Finance and Planning are very relaxed. The salary item is very large, along with social welfare and debt service, and the deficit gap is very large.”
He warned that uncertainty surrounding oil exports could leave the country facing further financial difficulties.
Mr Al Marsoomi said the budget may take Iraq into “another tunnel because until today the picture is not clear, especially in the Strait of Hormuz”, describing the draft as a political document rather than an economic one.
He also criticised the emphasis on public benefits and political considerations in the proposed spending plan.
“It is a budget that reflects the behaviour of the rentier state, a populist budget that tries to please people as much as possible. It does not care about economic efficiency, but rather cares about the desires and needs of people and electoral votes,” he said.
Government plans additional public-sector appointments
The proposed budget’s expansionary direction was reinforced by a decision announced following a meeting chaired by Prime Minister Ali Al Zaidi on Saturday.
The prime minister directed that 500,000 workers employed on temporary contracts or daily wages be granted permanent positions under next year’s budget. The plan also includes the creation of 120,000 additional contract positions.
According to a government statement, Mr Al Zaidi said the administration would work to “secure the necessary allocations to implement the decision”.
The proposed recruitment measures could increase pressure on government finances by adding to the public-sector wage bill, which already represents the largest individual spending category in the draft.
Their implementation will depend on the availability of funding as the government attempts to balance employment commitments against the need to contain the deficit.
Oil exports recover, but revenue relief may take time
There are indications that Iraq’s oil sector is beginning to recover from the disruptions experienced earlier in the year.
Crude exports have climbed back to approximately 3.4 million bpd so far in October, offering some relief to a government heavily dependent on petroleum income.
Nevertheless, higher shipment volumes have not translated into an equivalent improvement in earnings. The State Organisation for Marketing of Oil, known as Somo, has faced pricing constraints and substantial discounts linked to maritime risks, with reductions sometimes reaching $25 to $30 per barrel.
The government anticipates further improvement in exports in the coming weeks. However, the delay between shipping crude and receiving the associated revenue means the fiscal benefits will not be immediate.
With the collection process taking at least two months, the impact of the latest export recovery is expected to become more apparent later in the year.
This timing presents an additional challenge for policymakers seeking to finance current obligations while preparing for another year of substantial expenditure.
Budget introduces tighter conditions for Kurdistan
The draft also sets out financial and oil-sector requirements for the Kurdistan Regional Government, maintaining the region’s allocation at 12.7 per cent of actual federal spending after sovereign expenditures are excluded.
The arrangement comes despite calls from Kurdish authorities for a larger share of federal resources.
Under the proposed legislation, the regional government would be required to export at least 400,000 bpd through Somo, in co-ordination with the federal Oil Ministry.
The draft stipulates that “If exports via Turkey’s Ceyhan or any other outlet is not possible, the KRG must deliver the quantities to the federal ministry for domestic use as needed,” it said.
The proposed rules also require the Kurdistan Regional Government to transfer its non-oil revenues to the federal treasury for examination by federal and regional auditing authorities.
Any surplus gas must be handed over to the federal government, or its value will be deducted from the region’s allocation. The draft further restricts the regional administration from entering into oil and gas agreements with domestic or foreign companies outside the federal Oil Ministry’s framework.
Federal funding would be conditional on compliance with these requirements. The Finance Ministry would release monthly allocations only after receiving the required financial statements and confirming that the stipulated conditions had been met.
The provisions could become a source of further negotiations between Baghdad and Erbil as both administrations seek to establish the region’s financial entitlements and obligations.
On Sunday, Kurdistan Prime Minister Masrour Barzani told local media that “no final agreement has been reached yet with Baghdad and talks are continuing to defend Kurdistan people’s rights and to secure its financial allocations”.
Cabinet and parliament approval still pending
The proposed budget remains subject to further government review before it can proceed to its final legislative stage.
The Cabinet must approve the draft before it is submitted to parliament for final endorsement, leaving room for changes to its spending commitments, revenue assumptions and deficit-financing arrangements.
For Baghdad, the central challenge is whether projected improvements in oil exports and potential international assistance will be sufficient to sustain the proposed expenditure programme.
The combination of a substantial projected deficit, declining reserves and a large public-sector wage bill has intensified scrutiny of the government’s fiscal strategy.
Although the recovery in crude shipments offers some hope of improved revenues, uncertainty over regional shipping conditions, oil prices and the timing of payments continues to complicate budget planning.
The final version of the 2027 budget will therefore be closely watched for signs of whether Iraq intends to maintain its current spending commitments or introduce adjustments to reflect its more constrained financial position.
