A Budget Renegotiated Every Year: Why Iraq Needs a Fiscal Contract Written into Law

Iraq’s budget problem is not a shortage of numbers but the absence of a rule for setting them. On 7 November 2026 the cabinet postponed its vote on the 2027 budget to a session on 10 November, because Baghdad and Erbil could not close a gap of 1.33 percentage points: Baghdad offers the Kurdistan Region 12.67% of the budget, and the Region wants 14%.

The numbers behind the delay

Iraq has no enacted budget law for 2026 at all. Spending runs on the “1/12 rule”: each month the government may spend one-twelfth of a previous year’s allocations, which in practice covers salaries and running costs only. In the first nine months of 2026 the deficit reached about IQD 36.26 trillion (roughly USD 23.9bn at the official rate of IQD 1,520 per dollar), against IQD 8.13 trillion in the same period of 2025. Oil revenue fell 50.8%.

The draft 2027 budget, as reported in the press, foresees spending of about IQD 217 trillion (USD 143bn) and revenue of about IQD 174 trillion (USD 114bn), leaving a planned deficit near IQD 43 trillion (USD 28bn). It assumes oil at USD 58 a barrel and exports of 4 million barrels a day. Actual exports averaged about 3.35 million b/d in October. These are draft figures; the official document has not been published.

Ordinary Iraqis read the delay through their pay slips. Funding for October salaries was held up by a cash shortage before payments began on 25 October, and the Region’s finance ministry deposited IQD 834.92 billion (about USD 549m) for the same month. Around 15 million people are estimated to depend on income from the treasury.

Diagnosis: the channels of transmission

The dispute over the share is the symptom; the cause is the lack of a fixed revenue-sharing formula. Each budget reopens the same files: the percentage, the volume of oil the Region hands over (450,000 b/d this time), border-crossing revenue, and new demands such as Sulaymaniyah’s call for a separate allocation.

The damage travels through three channels:

1. Without an enacted budget, every monthly payroll becomes a liquidity decision, which erodes confidence.
2. Public investment. The 1/12 rule funds operating costs only, a member of parliament’s finance committee said, so projects stall and contractors go unpaid.
3. The private sector and prices. Late payments depress demand, while higher shipping costs and the October devaluation push up food prices: sugar rose 15.4% and rice 10.8% after the exchange-rate change.

On top of this sits an external shock. The Strait of Hormuz has been effectively closed since late February 2026, and Basrah crude sells at discounts of USD 34.5–37. Basrah Heavy fetched about 53 a barrel on 5 November while Brent stood near 98. Higher world prices are simply not reaching the treasury.

What the world says

The OECD’s 2026 report on people and the budget argues that well-designed fiscal rules and institutions remain essential but “are no longer sufficient” on their own. It records a 47-percentage-point trust gap between people who feel they have a say in government and those who do not, and finds independent fiscal institutions among the most trusted public bodies.

An OECD working paper on fiscal risks (2026) finds that risks are larger during booms than conventional methods suggest. At the top of the cycle, the structural balance would need to be about 1.5 points of GDP higher to keep debt stable over five years. The lesson for Iraq is direct: what is not saved in years of high oil prices is paid for in the crisis.

Harvard economist Jeffrey Frankel has made Chile the reference case. Commodity exporters tend to spend in booms and cut in busts, amplifying the cycle. Chile instead lets independent expert panels set the reference copper price and trend output, keeping budget assumptions out of political bargaining. Frankel concludes that Chile’s fiscal institutions “could usefully be emulated everywhere”. Iraq’s USD 58 and 4 million b/d are the opposite: numbers set and negotiated by the government, not by an independent technical body.

The IMF said on 29 October 2026 that Iraq faced severe financing constraints even before the war, and that its narrow non-oil revenue base adds pressure on public finances. Iraq has requested a new programme, and press reports cite an IMF forecast of a contraction of about 16% in 2026.

The consultancies’ reading

PwC Middle East (2025) proposes a simple test of real diversification: a weakening correlation between oil prices and growth in non-oil GDP and non-oil revenue. It put Saudi Arabia’s fiscal break-even at about USD 96.2 a barrel, with current spending trimmed and capital spending kept high.

PwC’s Strategy& warned in 2016 that Gulf budgets would need cuts of about USD 100bn a year (7% of GDP) to balance at USD 50 oil, and urged cost restructuring rather than across-the-board cuts. For Iraq the point is that a budget is managed through the structure of spending, not only its ceiling.

The Iraqi view: Al-Jabri’s positions

Mr. Khaled Al-Jabri, President of the Osoul Foundation for Economic Development and Sustainable Development, stated that the problem between the federal government and the Region is “structural”, not new. In his words, there is “no financial contract between the two sides, governed and documented by a clear law”.

Al-Jabri points to Germany, where the states have their own resources, contribute to the federal budget and draw from it for their projects. In Iraq, by contrast, Basra provides almost the entire budget and receives, as he put it, “a drip” in return, while the Region keeps its border revenues. His remedy is to redraft the financial contract between the centre, every province and the Region, so that each contributes a share and keeps a share for its own development.

In the view of Mr. Khaled Al-Jabri, the crisis between Kurdistan and Baghdad is “a legislative problem more than a financial one”. Iraq’s laws were designed for a centralised state in the 1980s, yet the country is trying to apply them in a federal way.

Here Al-Jabri meets the OECD and Frankel: rules before numbers, institutions before deals. He adds an Iraqi specificity. The contract is not only about the Region; it must cover Basra, Maysan, Dhi Qar and Anbar, and activate Basra’s dormant petrodollar law.

On the assumptions, Al-Jabri stated that 4 million b/d and USD 58 are “hypothetical”, reminding listeners that the document is a budget plan, not a final account. The export figure was not reached even before the crisis, and the price is achievable with discounts, but the course of the war is unknown.

He also offered simple arithmetic. Binding expenditures are about USD 125bn; if USD 20bn is raised domestically, USD 105bn must come from oil. At 3.5 million b/d exports:

On revenue, Al-Jabri draws on Imam Ali’s instruction to his governor Malik al-Ashtar that developing the land matters more than collecting tax. In Iraqi dialect he sums it up as: “go create economic activity, and the revenue will come”. This matches PwC’s test: sustainable non-oil revenue comes from growing activity, not from new levies on stagnant activity.

Al-Jabri relays the IMF’s advice not to finance deficits with short-term bonds, and notes the absence of “public financial management systems” that produce forecasts one and ten years ahead. He describes a government facing two risks at once: scarce revenue and spending that has swollen over 23 years. The salary bill rose from about IQD 3 trillion a month a decade ago to more than IQD 7.7 trillion (about USD 5.1bn) excluding the Region.

From the field

As guest Qutaiba Zaki, Senior Manager at Deloitte Middle East – Iraq, said in the episode “السياسات الضريبية في العراق بين التعقيد والرقمنة!” (Tax Policy in Iraq: Between Complexity and Digitisation) of the Seed | Nmw podcast, Iraq relies on taxes for about 9% of revenue against 90% from oil, while many countries rely on taxes for 80–90%. He noted that reforms lifted the tax share from 6% to 9%, though he would have preferred gradual implementation, and warned that spending not planned in step with revenue forces Iraq to borrow at home and abroad.

Recommendations

1. Cabinet and parliament: pass a “federal fiscal contract” law that sets the Region’s and provinces’ contributions and shares by a published formula for five years, with quarterly settlement of oil and border revenues.
2. Ministry of Finance: adopt a three-year medium-term fiscal framework with a reference oil price set by an independent expert panel on the Chilean model, and publish three price-and-volume scenarios.
3. Ministry of Finance and Central Bank: finance the deficit with medium- and long-term bonds rather than short-term paper, and publish the debt maturity schedule.
4. Ministry of Finance: give salaries a legal payment priority with a published calendar, so that each payroll stops being a negotiation.
5. Ministry of Finance: build an integrated public financial management system that produces one- and ten-year forecasts and publishes actual spending monthly.
6. General Commission for Taxes: widen the base by easing registration and activity first, before new taxes on restaurants and home-based workers, and phase reforms in gradually.

Conclusion

Tuesday’s session may settle the percentage, but it will not settle the rule. Without a fiscal contract written into law, the same dispute will return with the 2028 budget, and civil servants and contractors will pay for it again.

Why Osoul?

The Osoul Foundation for Economic Development and Sustainable Development is an Iraqi institution that links data to economic decision-making. It combines monitoring of the Iraqi street, measurement of household and business opinion, and comparison with the best international practice to produce actionable solutions.

• Daily monitoring and the weekly Iraq Economic Observatory: tracking what Iraqis discuss on the economy and services, and government decisions, in their regional and global context.
• Surveys and indices: the Business Outlook Survey, the Service Gap Burden Index, and periodic surveys built on established international survey methodologies.
• Knowledge from the field: a library of documented economic positions, and the Seed | Nmw podcast, which interviews leaders of Iraqi companies.
• Workshops and policy briefs: workshops with research centres and stakeholders whose outputs become recommendations for decision-makers.
• Advisory and technical services for major companies and government agencies: data-driven studies, diagnostics and reform proposals, including concept papers on fiscal reform for decision-makers.
• The Foundation’s work is available at www.ofesd.com and on its social media accounts.

Sources

• OECD (2026), The People and the Budget: Empowering Public Understanding of Public Finances
• OECD (2026), Assessing risks to fiscal policy: calibrating stochastic debt sustainability analysis (SDSA) models, OECD Economics Department Working Papers No. 1871
• Jeffrey Frankel (2011), A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile, Harvard CID Working Paper No. 216
• PwC Middle East (2025), Oil-funded growth or true diversification? Key metrics to watch in the GCC
• Strategy& (2016), Fit for Service government: The opportunity in the GCC’s fiscal challenge
• Al-Monitor (2026), IMF says engaging Iraq, preparing new bailout program
• Kurdistan24 (2026), Erbil-Baghdad disagreements delay Iraq’s 2027 federal budget approval
• Baghdad Today (2026), Budget session postponed
• Qatar News Agency (2026), Iraq records a fiscal deficit of IQD 36.26 trillion
• Shafaq News (2026), Iraq’s oil exports rise 9.5% in October SOMO discounts on Basrah crude · Cash shortage delays October salary funding
• Al-Mada (2026), Kurdistan Region salary funding
• Non14 (2026), Prices after the exchange-rate change