Iraq deficit may prompt return to international debt market
- Parliament debates law on subject
- Revenues down due to Hormuz
- Domestic borrowing hits record high
Iraq is considering a return to the international debt market to cope with a budget deficit swollen by lost revenue during closures of the Strait of Hormuz.
The country has one of the lowest foreign public debt profiles in the world and instead relied on domestic borrowing. Foreign debt stands at nearly $13 billion, according to the Central Bank of Iraq (CBI).
External debt peaked at more than $130 billion at the time of the 2003 US-led invasion of Iraq. This was due to heavy borrowing under the government of Saddam Hussein during the 1980-1988 conflict with neighbouring Iran.
In 2004, outstandings were slashed after Iraq reached an agreement with the Paris Club – a group of major creditor nations – to write off nearly 80 percent of the debt, said Samir Fakhri, director of statistics at the CBI.
Last week, the state news agency said Iraq’s parliament was debating a law to allow for external borrowing, ahead of the 2027 budget due before the end of this year.
“I don’t think Iraq needs a law for foreign borrowing, but I believe they are trying to determine the debt ceiling,” said Nabil Al-Marsoomi, an Iraqi economist.
“The 2027 budget could include how much Iraq needs to borrow from abroad. I believe Iraq needs to borrow because of high spending and low oil exports due to the closure of the Strait of Hormuz. We know that over the past months, Iraq has been spending far more than it is earning,” he told AGBI.
Al-Marsoomi said Iraq can likely tap funds from abroad, despite a B- sovereign credit rating assigned by Fitch and other agencies. But the non-investment-grade rating is likely to affect borrowing costs and the type of lenders available.
Iraq has resorted to local banks to fund its budget, pushing domestic debt to an all-time high of around $79 billion at the end of May, the CBI said in August.
Finance vital projects
Iraq, which controls the world’s fifth-largest recoverable oil deposits, had borrowed nearly ID13 trillion ($9.9 billion) in just five months since the start of 2026, of which about ID8 trillion was obtained during April, the CBI said.
“The aim of borrowing from abroad is to secure funds to finance strategic and vital projects, especially in the health and electricity sectors,” said Nassir Turki, a member of parliament’s finance committee.
“There is a need to obtain loans because the deficit is swelling and the government is finding it difficult to secure funds for expenditure, mainly salaries,” he added.
Iraq is turning abroad because local institutions lack sufficient liquidity to lend to the government, bankers said. Most Iraqis keep their money at home.
Ali Al-Alwan, manager of the state-owned Trade Bank of Iraq, said more than 85 percent of the money supply remains outside the banking system.
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“The large proportion of funds circulating outside banks poses a significant challenge to the economy, as it reduces the banking sector’s ability to circulate liquidity, finance projects, and expand lending and investment operations,” he told local reporters.
A senior government adviser said last month that Iraq is expected to issue a 2027 budget with a projected deficit of ID64 trillion on the assumption that exports will remain stifled by disruption to Hormuz shipping.
The 2027 draft budget, which is likely to be sent to parliament for approval in October, will be based on an average oil price of $60-$70 a barrel, Mudhar Saleh, a financial adviser to prime minister Ali Al-Zaidi, said.