Economist: Iraq’s Domestic Debt Risk Lies in Its Structure, Not Its Size
Baghdad – Economic expert Manar Al-Obaidi has clarified that Iraq’s internal debt does not currently pose a critical threat to the national economy, but warned that its growing cost and composition could become problematic if not properly managed.
In a statement to {dinaropinions.com}, Al-Obaidi explained that the danger of domestic debt depends not on its absolute value but on its ratio to gross domestic product (GDP). With Iraq’s GDP estimated at 230 trillion dinars, the internal debt stands at roughly 39% of GDP, below the internationally recognized risk threshold of 50%.
Oil Dependence Raises Vulnerability
Al-Obaidi cautioned that the real risk comes from Iraq’s heavy reliance on oil, which accounts for more than 65% of GDP. A decline in oil prices, he said, would contract GDP and automatically raise the debt-to-GDP ratio — even if total debt levels remain unchanged — putting additional pressure on public finances.
High Interest Rates Increase Fiscal Burden
He also expressed concern about the high interest rates attached to recent domestic bond issuances, some nearing 10% annually. These rates, he noted, could impose a heavy burden on the national budget, particularly if oil revenues fall.
“When the government borrows at high rates, it not only increases its repayment costs but also crowds out private investment,” Al-Obaidi said, noting that banks become less inclined to finance productive projects, which limits private-sector growth and job creation.
Debt Should Fund Productive Projects
The economist emphasized that domestic borrowing is not inherently negative if funds are directed toward strategic and development-oriented projects that create added value and employment. However, using debt solely to cover operational deficits transforms it into a drag on fiscal flexibility and weakens efforts to diversify the economy away from oil.
Rising Exposure in the Banking Sector
Al-Obaidi also revealed that government debt holdings within the banking system have surged by 116% in one year, rising from 6% of total banking assets in 2024 to 13% in 2025. This, he warned, increases banks’ exposure to sovereign risk and reduces their ability to finance other sectors.
Call for Comprehensive Debt Management
He concluded by saying that concerns about domestic debt go beyond its size, extending to its structure, cost, and economic impact. Al-Obaidi urged authorities to adopt a comprehensive strategy for debt management, ensuring borrowing remains sustainable, productive, and aligned with long-term economic goals.
