Government Spending And Its Impact On Economic Growth In Iraq
Economic researcher Bassam Raad Bassam Raad | Economic Researcher Government spending is considered one of the main factors influencing economic growth in Iraq. It plays a fundamental role in stimulating local economic activity and has multiple impacts, ranging from positive to negative.
In a press statement by the Economic Advisor to the Prime Minister, Dr. Mazhar Mohammed Salih, published in Al-Mada newspaper, issue No. 5916, issued on Thursday, May 29, 2025, the Advisor said, “The country relies on oil revenues to finance public expenditures, representing up to 90% of total revenues, while government spending constitutes approximately 50% of the gross domestic product (GDP), which translates into approximately 85% of total demand, or spending on economic activity.” End.
In this article, we will review the impact of government spending on economic growth in light of the Advisor’s statement.
The Importance of Government Spending
When government expenditures constitute a large percentage of the GDP, this means that the government plays a major role in the economy. Government spending contributes to infrastructure, education, and health, enhancing the economy’s ability to grow.
Dependence on Oil Revenues: Iraq relies heavily on oil revenues, making government spending vulnerable to oil price fluctuations. Over the past two years, Iraq has seen an increase in government spending due to rising oil prices, but this increase now appears unsustainable with prices currently on a downward trend.
The Gap Between Operating and Investment Spending: There is a significant gap between operating spending, which constitutes 70% of total public spending, and investment spending. Reducing this gap is essential to boost economic growth.
Fiscal Deficit: Data published on the Central Bank’s website indicate that the total domestic debt increased from 70 trillion dinars in January 2024 to 80 trillion dinars in October 2024.
This means there is an actual deficit in the 2024 budget, covered through domestic borrowing and deductions from treasury transfers. The deficit is estimated at 4.2% of GDP in 2024. This deficit reflects the large size of spending compared to available revenues, increasing pressure on the economy.
Impact on Economic Growth: Economic growth in Iraq is heavily dependent on government spending, especially given the weakness of other economic sectors such as industry and agriculture. This reliance could lead to economic risks such as deflation in the event of fluctuations in the oil asset cycle.
In conclusion, government spending, which amounts to nearly 50% of GDP, reflects a heavy reliance on the government for economic activity, raising concerns about future economic growth given the unsustainability of spending if oil revenues collapse. https://economy-news.net/content.php?id=55990
Foreign Reserves Between Inflation Targeting And External Rent Shocks
Dr. Haitham Hamid Mutlaq Al-Mansour Monetary policy relies on a fixed exchange rate system to guide the real exchange rate towards the short-term target inflation rate. This system is appropriate for the Iraqi economy, as real output values are linked to global prices due to the unilateral structure of the economy and the sharp decline in the contribution of non-oil exports to fixed capital formation. Therefore, the fixed exchange rate system was a realistic option to avoid the erosion of the value of the dinar.
Due to the impact of external rent shocks, controlling foreign reserves (dollars, gold, and securities included on the asset side of the Central Bank’s balance sheet as Iraq’s external debt) has become an instrumental approach to managing the Central Bank’s responses to the aforementioned shocks.
This involves regulating exchange rate fluctuations, targeting inflation rates. Inflation can rise and fall due to external rent shocks, leading to fluctuations.
Therefore, the Central Bank uses its reserves to sterilize the dinar’s expansion through dollar purchases and sales, and cash transactions in the stock market, both buying and selling, to achieve the target exchange rate.
The movement of foreign reserves is linked to public spending on oil revenues in dollars after the Central Bank exchanges them for dinars to meet demand from the private and public sectors, as well as government and household purchases. Depending on the surplus and deficit in the balance of payments, reserves grow or shrink.
When oil revenues rise, the central bank refrains from financing the budget deficit, and the government reduces its spending, aiming to raise foreign reserves to be used to finance the budget deficit when oil revenues decline again.
Foreign reserves witnessed a significant increase due to the positive shock in the second half of 2021, reaching 3.244 million barrels per day at an average price of $110 per barrel. This increased Iraq’s surplus in public finances and overall external balances, as reserves exceeded $90 billion, helping to stabilize the stabilization system and inflation targeting.
However, with global oil prices heading towards a negative shock this year (2025) to less than $60 per barrel, and the Central Bank continuing its sterilization policies and measures towards international compliance, this led to a decline in reserves to less than $97 billion in March 2025, after having been around $105 billion in December 2024.
Due to the recent shock, the Central Bank resorted to compensating by increasing its foreign exchange sales.
Therefore, in light of external rent shocks, we see the need for coordination between government policy and the Central Bank. From the government policy side, spending must be restricted to purely technical limits, thus deepening the reduction of the government deficit and strengthening the strategic role of reserves.
Monetary policy must sustain its goal of achieving a stable inflation rate by managing the movement of the dollar exchange rate and demand for it in the interest of price stability and reducing costs in favor of rational spending policies.
Achieving low and stable inflation is an important factor in enhancing the local and foreign investment climate, which is linked to related economic policies, including commercial, agricultural, and industrial policies.
In short, the dependence of foreign reserve volatility on external shocks will remain a limiting factor in the national economy’s ability to combat inflation and support the investment climate. Therefore, two levels of optimal solutions can be identified. The first, at the strategic level, involves sustained coordination between fiscal and monetary policies.
The second, at the macro and structural level of the Iraqi economy, lies in addressing the rentier nature of the economy by gradually increasing the contribution of non-oil GDP to meet aggregate domestic demand, while supporting export diversification policies. https://economy-news.net/content.php?id=55965
The Development Bank Announces Its Diamond Sponsorship Of The Anti-Money Laundering And Combating The Financing Of Terrorism Conference In Baghdad.
Banks Economy News – Baghdad The International Development Bank announced on Thursday its sponsorship of the Anti-Money Laundering and Combating the Financing of Terrorism Conference in Baghdad.
In a statement seen by Al-Eqtisad News, the bank said, “Based on its strategy based on compliance and transparency, the International Development Bank, one of the largest private banks in Iraq, announced its participation as the diamond sponsor of the second Anti-Money Laundering and Combating the Financing of Terrorism Conference, which will be held at the Rashid Hotel in the capital, Baghdad, over two days, May 28 and 29, 2025, under the patronage of Prime Minister Mohammed Shia Al-Sudani, and with the participation of an elite group of banking leaders and regulatory bodies, both locally and internationally.”
He added, “This conference is being organized by the Union of Arab Banks in cooperation with the Central Bank of Iraq and the Iraqi Private Banks Association, under the title ‘Challenges Facing Arab Banks in Complying with International Laws and Legislation and Meeting the Requirements of Correspondent Banks.’
It brings together Iraqi bankers and regulatory authorities to highlight the most prominent challenges that continue to hinder Iraqi banks from opening effective channels with international financial markets and correspondent banks, in addition to reviewing ways to enhance the confidence of the international financial community in the Iraqi banking sector.”
The bank explained that “this conference provides a high-level platform for discussing the challenges facing Arab banks in meeting correspondent banking requirements and implementing international best practices in the areas of governance, risk management, compliance, and combating money laundering and terrorist financing, with a focus on the importance of technological and digital development to enhance oversight and transparency systems.”
“We are proud to sponsor this prominent banking event, which represents a strategic platform for exchanging expertise and enhancing coordination between banks, financial institutions, and regulatory authorities,” said Ziad Khalaf Abd, Chairman of the Board of Directors of the International Development Bank, according to the statement.
He stated, “Our commitment to compliance and transparency is not just a regulatory imperative, but an integral part of our vision to achieve sustainable growth, enhance the bank’s leading position in the financial sector in Iraq, and position it on the regional and international stage.”
The bank noted that “the conference will address a number of strategic financial topics, including: enhancing integration with the global financial system and developing relationships with correspondent banks, preventing the risks of inclusion on grey and black lists, building a culture of institutional compliance, and activating cooperation between internal departments.
It will also review the applications of financial technology and artificial intelligence in combating financial crimes, highlight the role of central banks in supporting sustainable compliance, and strengthen partnerships with regional and international institutions to achieve global standards.”
He explained that “the conference will be attended by decision-makers in the banking sector, as well as managers of compliance and risk, internal audit, anti-money laundering, information security, and other specialized personnel, as part of the effort to enhance the efficiency of Arab banking and modernize the institutional structure in line with the requirements of the current stage.” https://economy-news.net/content.php?id=55982
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