meed-logo

line1 line2 line3
SIGN IN / REGISTER

Iraq hits the spend button

11 May 2023

MEED's latest coverage on Iraq includes:

> GOVERNMENT: Sudani makes fitful progress as Iraq's premier
> POWER: Iraq power projects make headway
> UPSTREAM DEVELOPERS: No place like Iraq for international oil firms
> CHEMICALS: Iraq continues technical studies for $8bn chemical project
> SOLAR: Total continues 1GW Iraq solar talks
> TRANSPORT: Baghdad approves funds for metro and airport projects

 

After a year of turmoil, Iraq has found itself in a better place economically in 2023, with an improved fiscal and external position on the back of high oil prices and production and two years of budget surpluses.

That is the good news. Analysts fear that this relative strength may lead the government into dangerous territory. A 2023 budget submitted to the Council of Representatives amounts to ID199tn ($153bn) of spending – an unprecedented fiscal programme for Iraq, even if oil revenues look flush.

“Iraq remains vulnerable to swings in oil prices, especially given spending pressures, the difficulty of passing meaningful budget reforms and the shallowness of domestic financing options,” says Toby Iles, head of Middle East and Africa sovereign ratings at Fitch Ratings. 

“The proposed budget for 2023 pencils in large spending increases, including for sticky items such as salaries. This would increase Iraq’s vulnerability to oil price volatility.”

Previous episodes of low oil prices, in 2015-16 and 2020, quickly led to financing challenges and recourse to central bank borrowing, notes Iles.

The last time Iraq attempted to push through reforms was after the 2020 collapse in oil prices. But the recovery of prices, together with other factors, removed the immediate pressure for change and snuffed out these attempts. “One could argue that it was a wasted crisis,” says Iles.

Most of the budget is current spending – about three-quarters of it, leaving investment spending at ID49.5tn ($38bn). The budget anticipates a sizeable deficit of ID117.3tn ($89bn).

The deficit would be financed by a mix of funding from the Ministry of Finance’s account at the Central Bank of Iraq and foreign financing of investment projects. This would necessitate domestic borrowing of ID31.5tn ($24bn), according to an analysis by Ahmed Tabaqchali, chief strategist of the AFC Iraq Fund.

Cleared path for spending

The Iraqi authorities’ thinking is that now the political logjams of recent years have, for the most part, been removed, the timing is ripe to open the purse strings.

“They are sitting on $115bn of sovereign reserves, which they haven’t been able to spend for a couple of years,” says Michael Knights, a fellow at the Washington Institute for Near East Policy.

“And now they’ve got a fully empowered government. Soon they’re going to have a fully empowered budget. So they see it as time to splurge all the oil income that’s been built up.”

There is a logic to this. Yet the sheer scale of the financing programme is the issue here. The $153bn budget is one and a half times the last authorised budget in 2021, says Knights.

And if the budget is approved as part of a three-year programme – which remains an option – it leaves the state finances particularly vulnerable should oil prices slip.

“If you play out the numbers, you can see that if they spend at these record high levels for three years, they’ll wipe out the majority of their sovereign reserves. And they’ll be down to very close to import cover levels,” says Knights.

One particular concern is that the government intends to increase the size of the public sector by bringing hundreds of thousands of civil servants on board and paying them more. Public sector salaries and pensions are projected to account for 41 per cent of operating expenditures, according to Tabaqchali’s analysis.

In Knights’ view, this approach falls under “out populist-ing the populists, keeping people happy while the government cements its control over the military, the judiciary and intelligence services”.

Risk-fraught gambit

It may still be risky, given that Iraq struggled with the last major oil price drop in 2020. Having to cope then with the degree of public sector fixed expenses, it could be much harder to carry this off now.

Iraq’s single commodity dependence is more acute than other Middle East and North Africa (Mena) oil exporters. Oil revenue accounts for almost all of the government’s revenue and export revenue.

“This high commodity dependence is the key vulnerability, while weak governance and political risk undermine prospects for a stronger non-oil economy,” says Iles.

The undeveloped banking sector is also an important weakness, hampering non-oil development and limiting government financing options during times of fiscal deficit.

“Buoyant oil prices have improved many of Iraq’s sovereign credit metrics, but the absence of structural, economic or fiscal reforms and persistence of political risk constrain the rating (B-),” says Iles.

There will be positives that will emerge from the substantive spending programme. For one thing, there will be a substantial liquidity boost that will drive economic growth. It will also help insulate the government against protests.

For a country that, in the words of the World Bank, has suffered from a combination of corruption, weak state institutions and patronage – leaving 9 million Iraqis living below the poverty line and unemployment as high as 14 per cent – this spending will come as a soothing balm.

Currency crisis averted

Another plus is that the country’s currency crisis of previous months, which led to a shortage of dollars, appears to have been contained.

“The dollar shortages that we have seen in Iraq since late 2022 reflect governance issues and political risk, rather than any fundamental economic imbalances. The central bank’s foreign reserves are at record high levels,” says Iles.

The constraints on FX supply came from long-standing concerns about the ultimate recipients and uses of FX sold via the central bank’s daily auctions. However, notes Iles, now there are higher volumes again in the central bank’s daily auctions and the premium of the unofficial exchange rate over the official rate has narrowed to some extent, reflecting gradual adaptation to the central bank’s new procedural requirements.

If more robust and transparent procedure bed in and normalise, this will have ultimately been positive.

And yet, if the 2023 budget gets passed and Iraq commits itself to a highly expansionary three-year fiscal cycle, fresh vulnerabilities will be baked into the Iraqi economic system that could store up troubles for later generations of Iraqis to deal with. The clock is ticking.

https://image.digitalinsightresearch.in/uploads/NewsArticle/10835821/main.gif
James Gavin

Register for MEED's guest program now to access this article.

Click here to register
Exclusive from Meed
Related Articles
  • Chinese contractor wins Morocco solar plant deal

    10 August 2026

    China Harbour Engineering Company (CHEC), a subsidiary of China Communications Construction Company (CCCC), has won a contract to build a solar photovoltaic (PV) power plant in Fez in northern Morocco.

    Known as GreenPower Morocco 4 (GPM4), the project is being developed by Moroccan company GPM Holding through its utility-scale solar subsidiary GPM Parks.

    The project covers engineering design, equipment procurement and installation, construction of an operation and maintenance building, grid connection and commissioning. It also includes upgrades to the associated substation.

    According to CHEC, the completed plant will supply electricity to the local grid, although it did not disclose the project’s capacity or contract value. 

    The project is being developed under Law 13-09, which provides Morocco’s framework for private renewable energy generation.

    According to its website, GPM Holding is also developing another solar PV project called GreenPower Morocco 2 (GPM2). This follows the completion of its first solar project, the 34MW project (GPM1) commissioned in Tangier in 2024. 

    GPM1 was developed by Green Power Morocco, a special purpose vehicle owned by GPM Holding and UAE-based Amea Power. The $30m project covers 75 hectares and includes 91,000 PV panels. It is expected to generate about 66,149MWh a year.

    The project has a 25-year power purchase agreement in place with Amendis, a subsidiary of Veolia Morocco. PowerChina was the main engineering, procurement and construction (EPC) contractor.

    Chinese contractors have previously been involved in other projects in Morocco’s renewable energy sector.

    Shandong Electric Power Construction Company (Sepco 3), a subsidiary of PowerChina, was part of the EPC consortium for the 200MW Noor 2 concentrated solar plants and 150MW Noor 3 concentrated solar power projects at the Noor Ouarzazate complex.

    New contract awards have been limited in Morocco in 2026, although six solar PV plants are now in the execution stage under phases one and two of the 305MW Noor Atlas solar PV programme.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/18263680/main.jpg
    Mark Dowdall
  • Aramco puts out fire at Jizan refinery after Houthi strike

    10 August 2026

    Saudi Aramco said it had extinguished a fire that broke out at its Jizan refinery on Saudi Arabia’s Red Sea coast after the facility was hit in drone strikes by Yemen-based Houthi rebels on 9 August.

    The kingdom’s Ministry of Energy said the fire occurred at an Aramco refinery facility in Jizan and that emergency authorities had completed the necessary procedures to deal with the incident.

    The energy ministry did not say what started the fire, saying only that the incident caused no injuries.

    The Houthi rebels later claimed responsibility for the attack.

    The province of Jizan lies close to Saudi Arabia’s border with Yemen and has repeatedly been targeted by the Houthis in attacks on the kingdom’s energy infrastructure.

    The strike on the Jizan refinery was the second attack on the facility by the Houthis in as many weeks. Aramco shut the refinery on 27 July following a similar drone strike, which, according to media reports, damaged the integrated gasification combined-cycle unit and tank farm at the complex.

    On a call with investors to discuss Aramco’s second-quarter results, CEO Amin Nasser said recent attacks on the company’s facilities in the world’s top oil-exporting country had caused some disruption to production, but that he was confident operations could be restored quickly. He said the attacks had had no material operational or financial impact.

    Jizan refinery complex

    Saudi Aramco’s sprawling Jizan refinery complex entered operations in 2021.

    Aramco undertook the estimated $16bn-plus project in late 2010. The scheme consists of a refinery with an output capacity of 400,000 barrels a day (b/d), a major marine terminal and a 4GW combined-cycle power plant in Baish, in Saudi Arabia’s southwestern Jizan region.

    The Jizan refinery covers an area of 12 square kilometres. The complex processes Arabian Heavy and Arabian Medium crude grades to produce 80 million b/d of gasoline, 250 million b/d of diesel and more than 1 million tonnes a year of petrochemical products such as benzene and paraxylene.

    A multiple-pier marine terminal supports the supply of crude oil from oil fields located mainly in the kingdom’s Eastern Province to the refinery, as well as the export of surplus refined products to overseas markets. The terminal has been designed to accommodate very large crude carriers.

    A 4,000MW combined-cycle power plant uses approximately 90,000 b/d of vacuum residue from the refinery to generate electricity, hydrogen and water for the refinery, while conveying excess power to the national grid.

    The hydrocracker unit comprises two parallel trains with a combined capacity of 54,500 b/d. The diesel hydrotreater plant comprises two trains, each with a capacity of 87,500 b/d.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/18262347/main.jpg
    Indrajit Sen
  • Shamal picks Dutco for Dubai Zoo site homes

    10 August 2026

    Dubai-based Shamal Holding has awarded local contractor Dutco Construction the main construction works contract for a low-rise residential project on the site of the former Dubai Zoo in Jumeirah 1.

    The project will comprise 90 low-rise homes and is designed as a residential leasing community that will remain under Shamal’s ownership, with all homes offered for premium leasing.

    The development will retain mature trees from the former zoo and is planned around shared courtyards, landscaped open spaces and a central park. Residents will have access to a clubhouse, wellness area, children’s play area, family pool, lounge and gym.

    The architect is DXB Lab. The local H&H is the development manager for the project.

    Dutco has previously worked with Shamal on infrastructure elements of the Dubai Harbour and Dubai Harbour Marinas developments.

    Shamal’s wider real estate portfolio includes the Naia Island, Dubai Harbour and Nad Al-Sheba Gardens developments. The company also holds hospitality and leisure assets, including partnerships with Jumeirah, Hilton and Baccarat, and operates attractions such as Skydive Dubai and Deep Dive Dubai.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/18262386/main.png
    Colin Foreman
  • WEBINAR: Mena Oil & Gas Projects Market 2026-27

    10 August 2026

    Webinar: Mena Oil & Gas Projects Market 2026-27 
    Thursday 27 August 2026 | 11:00 AM GST  |  Register now

    Agenda:

    • Summary of the Mena oil, gas and petrochemicals projects market 
    • Overview of major megaprojects, including project programmes
    • Analysis of active contracts and spending to date
    • Review of top contracts by work already awarded
    • Long-term capital expenditure outlays and forecasts
    • Key contracts expected to be tendered and awarded over the next 18 months
    • Leading clients, contractors and market participants
    • Spending by segment: oil, gas and petrochemicals (upstream, downstream, onshore and offshore) 
    • Audience Q&A 

    Hosted by: Indrajit Sen, MEED’s oil & gas editor

    Click here to register

    https://image.digitalinsightresearch.in/uploads/NewsArticle/18260597/main.gif
    Indrajit Sen
  • Spanish firm renews Yanbu desalination O&M contract

    10 August 2026

    Spain’s Aqualia has announced it has renewed a contract to operate and maintain three floating desalination plants in Yanbu on Saudi Arabia’s Red Sea coast.

    The contract was awarded by the National Shipping Company of Saudi Arabia (Bahri) and will run until 14 September 2028, with an option to extend for a further two years.

    The three reverse osmosis (RO) plants are mounted on barges and have a combined production capacity of 150,000 cubic metres a day (cm/d). Each plant has a capacity of 50,000 cm/d.

    The three plants were originally deployed at Al-Shuqaiq and are designed to be relocated along Saudi Arabia’s coastline according to water demand. The barges are currently located at Yanbu.

    The $255m floating desalination project was commissioned for the Saudi Water Authority in 2022, with Bahri as the developer and UAE-based Metitio as the main contractor.

    Bahri is publicly listed on the Saudi Exchange but has significant government ownership, with the Public Investment Fund (PIF) holding 22.5% and Saudi Aramco Development Company owning 20% of the company.

    Aqualia is providing operation and maintenance services in Saudi Arabia through its joint venture Haji Abdullah Alireza Integrated Services Company (Haaisco), in which it holds a 51% stake.

    https://image.digitalinsightresearch.in/uploads/NewsArticle/18259350/main.jpg
    Mark Dowdall