Can Iraq’s oil-funded social order survive uncertainty?

Can Iraq’s oil-funded social order survive uncertainty? By becoming the primary provider of employment and social welfare, the state becomes unable to scale back from said commitments without risking social destabilisation. Friday 11/09/2026 Traders take part in a protest against an increase in customs fees on imported goods, in Baghdad, Iraq, February 8, 2026. Iraq’s post-2003 social order has been dependent upon complicated patronage networks distributing a portion of oil revenues to the public through salaries, pensions, and state-sponsored social welfare programs. These dynamics have managed to keep a system impaired by structural contradictions and corruption afloat. However, this arrangement is currently facing an unprecedented test illustrated by the disruption to Iraq’s oil exports through the Strait of Hormuz. In a country where approximately 90 percent of its revenues is derived from exporting oil, mainly through the Strait of Hormuz, the ongoing reduction in traffic underlines the inherent vulnerabilities of the system. According to data published by the ministry of oil , exports from Iraq’s southern port-city of Basrahthrough the Strait of Hormuz have decreased from 101,160,349 barrels of oil in January to 20,238,836 across both May and June. The repercussions of this drastic loss of oil rents has already been felt by the public as they experienced delays in receiving their July and August salaries. Despite the government’s attempts to reassure the public, such as the minister of finance’s statement that salaries were completely covered and guaranteed, the ongoing regional escalation exposes a significant vulnerability; the endurance of Iraq’s political stability and order hinges upon external factors, mainly the continued flow of oil rents. This, in turn, raises the question: how long can Baghdad sustain its expansive state-funded social order if this disruption persists or another arises? A Social order sustained by oil rents Post-2003 governments have entrenched state spending on a fragile and unsustainable social safety net into the country’s social order. This has Led to an extraordinary dependence on state payments, primarily through public sector employment and social welfare programs. Based on the ministry of finance’s data in 2024 , the state has employed a total of 4,079,906 people. Incorporating the recipients of social welfare, which according to the ministry of labor and social affairs are approximately 8 million, places the total figure of individuals dependent on the state to about 12 million, with some estimates placing it at 14 million. Another interesting facet is the amount allocated to cover these expenditures within the federal budget. In 2015, according to the ministry of finance, 44.1 trillion Iraqi dinars ($33.6 billion) were allocated to cover both salaries and social welfare. In the following decade this number would more than double, bringing it to 90.67 trillion Iraqi dinars ($69.15 billion) in 2024. This year, according to the ministry’s data covering expenditures up to June, the state has spent 44.62 trillion Iraqi dinars ($34.03 billion) on salaries and social welfare alone. These numbers are in line with the level of expenditures established in the 2024 budget, however, calculating the percentages from the total revenues provide another significant angle. In 2024, funds allocated to cover employee compensation and social welfare accounted for 61.3% of total revenues.This year, however, government revenues are insufficient to cover these expenditures, with the two categories alone producing a budget deficit equivalent to 24.2% of total revenues. These figures tell an important story about the structural vulnerability of Iraq’s post-2003 political economy. Successive governments have utilised oil rents in expanding the public sector in order to attain a level of stability, acquire legitimacy, and form patronage networks. These dynamics have locked the country into a cycle of perpetual expenditure commitments which consume significant portions of state revenues. By becoming the primary provider of employment and social welfare, the state becomes unable to scale back from the said commitments without risking social destabilisation. Thus, within the state of fiscal disorder described above, the vast majority of the limited revenue is spent on salaries, pensions, and social welfare. Here, an important distinction is required. The dynamics examined above should not be interpreted as evidence that Iraq’s post-2003 political actors have manufactured a comprehensive welfare state or even that public sector employment is inherently unsustainable. Rather, it is their particular configuration in contemporary Iraq. Expenditures on salaries, subsidies, pensions, and welfare have been used as a tool of cultivating patronage networks and voting blocs, as well as an instrument of expanding privileges and accommodation among political actors. Furthermore, claims of ghost employee fraud –commonly referred to as “alien” employees– have repeatedly been raised to explain the exceptionally inflated public sector. These notions of “aliens” have repeatedly been raised regarding the security apparatus, particularly against –Iran-aligned– armed factions operating under the umbrella of the Popular Mobilisation Forces (PMF). For instance, in 2020, former member of the council of representative, Faiq al-Sheikh Ali stated that although the PMF claims that the total number of their personnel was 130,000, the real number was actually 48,000 fighters. The political implications of liquidity uncertainty The risk of the ongoing disruption to the flow of oil rents is characterised by the questions it raises concerning thegovernment’s fiscal liquidity. In this regard, Iraq’s banking system appears to be inadequately positioned. Although the Central Bank of Iraq has pursued efforts to encourage electronic payments and reducing dependence on cash, public confidence in the country’s electronic banking system remains limited. A significant number of Iraqis prefer to withdraw their salaries in cash upon receiving them, and many citizens still favour the use of cash transactions over electronic transactions. This lack of trust has, according to Ali Abdul Ridha Alalwan, the director of the Trade Bank of Iraq , led to more than 85% of the state’s cash liquidity being outside the banking system.This further limits the banking sector’s ability to mitigate the impact of any disruption to state revenues. The duration of the ongoing disruption in the Strait of Hormuz could therefore prove pivotal. In the short-term, the government could resort to the state’s federal reserves or to loans to temporarily avoid delays in imminent expenditures such as salaries and pensions. Nevertheless, this could also erode domestic and foreign confidence in the country’s economic and banking systems. On the other hand, a prolonged regional crisis would ultimately force the government to confront the structural vulnerabilities of Iraq’s political economy. As the September 30 th deadline set by prime minister Ali al-Zaidi to assert state monopoly over arms approaches, the political implications and risks of Iraq’s fiscal predicament rises. In this regard, the government has recently shifted its rhetoric from the elimination of weapons outside state control and the disarmament of armed factions to a more calculated and subdued tone, opting for phrases such as “regulating” and “organising” weapons instead. Traditionally, Iraqi political actors –especially where shared ethnic or sectarian identities are present– have favoured accommodation and compromise,often facilitated by access to state resources. Declining oil rents, however, could prove the costs of enforcing state authority to be too high. Beyond oil rents This situation encapsulates the structural vulnerabilities of Iraq’s post-2003 political economy. Dependence on oil rents has produced a bloated public sector and an overly corrupt system of patronage and rent distribution. Yet, the much-needed diversification of the economy would entail confronting the political arrangements which produced this political economy. Iraq could potentially return to the status quo if the current regional escalation is resolved. However, unless the system’s inherent structural contradictions and vulnerabilities are addressed, any future disruption will risk a serious economic and financial crisis, hence hindering the state’s capacity to balance the existing arrangements of political elites and financial desires of armed factions, with the needs of the public. This, in turn could potentially intensify overall frustration and result in the destabilisation of the very social order this political economy seeks to preserve.
2026-09-11 09:51:40