For the second year in a row, Iraq is operating under the “1/12 financial management rule,” a temporary mechanism that allows the government to spend only one-twelfth of the previous year’s operational expenditures each month. While the measure ensures the continued payment of salaries and pensions, it has effectively left the country without a federal budget, freezing investment, development projects, and provincial allocations.
The absence of a general budget comes amid sharp volatility in global oil prices, driven by regional political tensions, and a growing domestic liquidity crunch. Together, these pressures have reduced Iraq’s financial system to what economists increasingly describe as a payroll mechanism, with little ability to stimulate economic growth or support productive activity.
Economic experts interviewed by dinaropinions.com warned that the situation constitutes a “major crisis” with far-reaching consequences. While declining revenues were cited as the reason no budget was submitted last year, analysts argue that the same constraints are now pushing the incoming government toward a similar deadlock.
Operational spending—covering salaries, fuel, food rations, and basic ministry expenses—has historically consumed the bulk of Iraq’s budget, while investment spending has typically accounted for less than 30 percent. From this perspective, economist Nabil Jabbar al-Ali noted that Iraq has effectively been operating under a 1/12-style system for years, even when budgets were formally approved.
Al-Ali told dinaropinions.com that the next government is likely to continue relying on the 1/12 rule, as it guarantees operational spending at a time when oil revenues are insufficient to finance major projects. He added that the same revenue shortfall was behind the failure to pass a budget last year.
Even if a budget is submitted in the coming year, al-Ali expects it to focus primarily on settling accumulated debts—particularly payments owed to contractors and companies—rather than launching new investment initiatives.
Under Iraq’s amended Financial Management Law of 2019, government spending in the absence of an approved budget is capped at one-twelfth or less of the previous year’s actual current expenditures, excluding non-recurring items. The mechanism remains in effect until a federal budget law is passed. The law also requires that if no budget is approved, the previous year’s final accounts become the basis for the new fiscal year and must be submitted to parliament.
Iraq has faced similar paralysis before. In 2015, the government reportedly refrained from submitting budget schedules to avoid political exploitation during elections. More recently, the outgoing government approved a record three-year budget for 2023, 2024, and 2025—each exceeding 200 trillion dinars (about $152.7 billion)—with projected annual deficits of roughly 60 trillion dinars.
Economist Ali Karim Ithheib warned that the absence of a budget goes far beyond a technical issue, effectively freezing the country. He said it halts projects, public hiring, and development plans at a time when Iraq is already grappling with a financial and liquidity crisis.
Ithheib stressed that Iraq’s near-total reliance on oil revenues exposes it to “financial chaos” whenever prices fall, highlighting the lack of long-term fiscal planning. The consequences, he said, are felt directly by citizens through reduced job opportunities and deteriorating services, while investors—both local and foreign—are discouraged by the absence of a clear financial vision.
“The 1/12 rule may keep the state functioning at a basic level,” Ithheib said, “but it is a temporary lifeline, not a fiscal policy suitable for running a country the size of Iraq.”
Under this system, spending is largely confined to salaries and routine operational costs, leaving no room to launch new projects or complete stalled ones. Contractors are among the hardest hit, as delayed payments force some to suspend work or withdraw entirely, worsening unemployment and weakening the local market. Prolonged reliance on the rule, he added, erodes confidence in Iraq’s economic environment and deepens investor hesitation.
Despite parliamentary elections held in October 2025, a new government has yet to be formed. Political blocs remain divided over electing a president, a prerequisite for nominating a prime minister. Negotiations continue, but concerns are growing that the crisis could drag on, given constitutional timelines that allow a prime minister-designate up to 30 days to form a cabinet and seek parliamentary approval.
Economist Mustafa al-Faraj painted an even bleaker picture, saying several companies and contractors have already declared bankruptcy and begun liquidating assets due to unpaid government dues. The halt in public hiring and slowdown in private-sector activity, he warned, are intensifying unemployment and economic strain.
Based on current indicators, al-Faraj said a new government is unlikely to be formed before mid-year, making it nearly impossible to pass a budget for the current fiscal year and pushing the crisis into the next one.
“No country can function without a budget and rely solely on operational spending,” he said. “This approach shuts down projects, freezes promotions, and ultimately harms both citizens and public employees.”
As Iraq drifts deeper into another year without a comprehensive budget, economists agree on one point: while the 1/12 rule keeps salaries flowing, it cannot replace a coherent fiscal strategy or sustain an economy already strained by oil dependence, political deadlock, and eroding confidence.
