# Iraq's 2026 transition: oil dependence, federal bargaining and the struggle to convert security gains into productive capacity

Iraq enters the final quarter of 2026 with a different institutional setting from the one that defined most of the post-2003 period. Parliamentary elections held in 2025 were certified in December of that year, a new federal government led by Prime Minister Ali Falih al-Zaidi received parliamentary confidence on 14 May 2026, the United Nations Assistance Mission for Iraq ended its mandate on 31 December 2025, and the international coalition's military mission has been moving toward bilateral security arrangements. These changes reduce some forms of external political supervision while increasing the importance of domestic fiscal, federal and security institutions.

The economic structure remains much less transformed. Oil still supplies the fiscal and external base of the state, while electricity, natural gas, water, finance, labour-market absorption and federal coordination constrain the conversion of hydrocarbon income into broad productivity. The World Bank's current Iraq profile estimates that oil represented about 53 percent of real GDP, 88 percent of government revenues and 91 percent of merchandise exports in 2025. The same profile describes a sharp 2026 external shock from regional conflict and restricted oil movement through the Strait of Hormuz. The IMF country page now lists projected real GDP growth for 2026 at -6.8 percent, illustrating how quickly a hydrocarbon-centered growth model can transmit an external export shock into national output.

The central structural problem is therefore not a lack of resources. Iraq holds very large proven crude reserves, has major associated-gas potential, occupies the land bridge between the Gulf and Türkiye, and has a young population. The binding issue is the transmission mechanism between resource income and productive capacity. When oil receipts rise, the state can finance salaries, transfers, capital projects and imports. When export volume or price falls, liquidity tightens across the public sector and then transmits into contractors, households, banks and provincial investment. Diversification depends on whether infrastructure, energy reliability, water management, federal rules and private-sector finance become strong enough to weaken that transmission.

**Information cutoff: 29 September 2026.**

## The 2026 government operates inside a federal parliamentary system shaped by coalition bargaining

Iraq's 2005 Constitution establishes a federal parliamentary republic with executive authority divided between the President of the Republic and the Council of Ministers. Political practice since 2003 has also relied on coalition bargaining across Shi'a, Sunni and Kurdish parties and blocs. That bargaining structure is not identical to a constitutional quota system, but it has strongly influenced government formation and the distribution of senior offices.

The final results of the 2025 parliamentary election were certified in December 2025. Parliament granted confidence to the government of Prime Minister Ali Falih al-Zaidi on 14 May 2026. A 28 September 2026 meeting reported by the Iraqi Council of Representatives identified Nizar Amedi as President, Haibet al-Halbousi as Speaker and Ali Falih al-Zaidi as Prime Minister.

The institutional question is no longer whether Iraq can hold elections and form coalition governments. It is whether coalition formation can produce durable rules for budgeting, hydrocarbons, federal-regional transfers, infrastructure execution and the organization of armed authority.

| Date | Institutional change | Structural significance |
|---|---|---|
| 14 December 2025 | Final parliamentary-election results certified | Opened the constitutional sequence for the sixth parliamentary term |
| 31 December 2025 | UNAMI mandate ended | Shifted UN engagement from a special political mission to the Country Team and development framework |
| 17 March 2026 | Federal-KRG oil-export arrangement announced by the KRG | Created a new operational basis for northern exports and federal-treasury revenue transfer |
| 14 May 2026 | Parliament granted confidence to the Ali Falih al-Zaidi government | Established the current federal executive after post-election coalition formation |
| September 2026 | Second phase of the coalition military transition reached its scheduled endpoint | Increased the relative weight of bilateral security cooperation and Iraqi command coordination |

## Oil finances the state and dominates the external account

The U.S. Energy Information Administration classifies Iraq as the second-largest crude producer in OPEC after Saudi Arabia and estimates proved crude reserves at about 145 billion barrels. Production and export infrastructure are concentrated heavily in the south around Basra, while northern production links federal fields, the Kurdistan Region and the export corridor toward Türkiye.

The fiscal concentration is more important than the geological scale. World Bank estimates for 2025 indicate that oil accounted for roughly 88 percent of government revenue and 91 percent of merchandise exports. That creates a narrow transmission channel between global oil conditions and domestic public finance.

```chart
title: Iraq's oil dependence in 2025
unit: percent
type: bar
Oil share of real GDP | 53
Oil share of government revenue | 88
Oil share of merchandise exports | 91
```

The three percentages are not additive. They measure different parts of the economy. Together they show why the same oil shock can affect growth, the budget and foreign-exchange availability at the same time.

## Fiscal procyclicality remains the main macroeconomic amplifier

The IMF's 2025 Article IV assessment described emerging financing constraints and arrears after rapid spending expansion. IMF staff estimated that the oil price required to balance the budget had risen to around $84 per barrel in 2024, compared with about $54 in 2020. The precise break-even level changes with production, spending and exchange-rate assumptions, but the direction is clear: a larger recurrent spending base makes the fiscal system more sensitive to oil conditions.

A hydrocarbon shock therefore does not remain inside the petroleum sector.

```flow
Oil export price or volume -> federal oil revenue -> treasury liquidity -> salaries, transfers and capital spending -> contractor and household cash flow -> bank deposits and private demand -> employment and investment
```

The mechanism also works in reverse. Higher oil income can rapidly expand nominal demand and public spending without automatically raising non-oil productivity. Lower income forces expenditure compression or financing measures before the private economy has enough depth to offset the shock.

## The Strait of Hormuz and southern terminals make geography a macroeconomic variable

Iraq's largest export system is oriented toward Persian Gulf terminals. EIA data show that more than 3.2 million barrels per day of seaborne crude were exported in 2024, with Asia receiving most volumes. The concentration of export capacity in the south makes maritime access through the Gulf and Strait of Hormuz a national balance-of-payments issue rather than a narrow logistics issue.

The World Bank's current country assessment describes the 2026 regional conflict and blockade of the Strait as having materially reduced export capacity and slowed production. The shock demonstrates a structural asymmetry: Iraq possesses very large reserves but has fewer fully substitutable export corridors than the size of the resource base would imply.

Northern export capacity matters for that reason even when it is smaller than Basra's system.

## Federal-Kurdistan oil bargaining is both a revenue issue and a state-capacity test

Relations between the federal government and the Kurdistan Regional Government combine constitutional ambiguity, fiscal transfers, public-sector salary disputes, field-level contracts and competing interpretations of authority over oil production and exports.

The Iraq-Türkiye Pipeline shutdown after 2023 sharply reduced the Kurdistan Region's formal export options. In February 2025 the federal parliament amended budget arrangements for compensation to international oil companies operating in the Region. On 17 March 2026, the KRG announced an agreement with the federal government to take technical and administrative steps for exports through the Kurdistan Region-Ceyhan route, including the transfer of sale revenue to the federal treasury.

The significance is broader than barrels. A stable federal-regional settlement would improve budget predictability, contractor payments and investment incentives. Recurrent bargaining uncertainty raises the discount rate applied to northern production and to the federal transfer system.

## Electricity is a productivity constraint despite Iraq's energy abundance

Iraq's electricity system illustrates the difference between owning hydrocarbons and delivering reliable energy services. EIA estimates show that around 99 percent of federal electricity generation comes from oil and natural gas. Domestic gas gathering and processing have not kept pace with demand, so power generation has depended partly on imported Iranian gas even while Iraq flares or underutilizes part of its associated gas resource.

The United States ended its sanctions waiver for direct electricity imports from Iran in March 2025, while gas dependence remained a separate operational issue. Iraq has therefore pursued several diversification channels: domestic gas capture, solar projects, interconnections with Türkiye, Jordan and the Gulf Cooperation Council network, and proposed LNG import capacity.

Electricity unreliability operates like a tax on production. Firms compensate with private generation, households bear direct service costs, and energy-intensive industries face a weaker investment case.

## The private sector remains too small to absorb the labour force at the required scale

Iraq's demographic structure creates both capacity and pressure. The World Bank estimates that people aged 15-29 make up roughly 29 percent of the population and reports unemployment above the regional average together with low labour-force participation. The ILO has been supporting a new 2026 national Labour Force Survey, the second nationally representative survey after 2021, to update the evidence base.

Public employment remains attractive because the state can offer wages and perceived security that many private employers cannot match. This creates a feedback loop: oil revenue supports payroll expansion; payroll expectations increase political pressure for public hiring; recurrent expenditure rises; and fiscal space for investment becomes more constrained.

Private-sector development therefore depends on more than business registration. It requires electricity, payments, credit, contract enforcement, transport, skills and enough macroeconomic stability for firms to invest beyond short trading cycles.

## Banking depth and payment infrastructure still limit capital allocation

Iraq's financial system has modernized unevenly. The Central Bank has promoted electronic payments, banking reforms and tighter compliance around foreign-exchange transactions, while the IMF continues to identify a weak banking sector and large state footprint as structural constraints.

A shallow credit system matters because oil revenue is collected centrally while productive opportunities are geographically and sectorally dispersed. If banks cannot transform deposits and public liquidity into risk-priced private credit, diversification remains dependent on budget allocations, state banks, cash financing and foreign investors.

The problem is not merely the quantity of money. It is the institutional machinery that allocates capital across firms and projects.

## The post-ISIS security transition reduces one risk while exposing governance questions

The territorial defeat of ISIS ended the phase in which large parts of Iraq were outside federal control, but the security system that followed remains institutionally layered. Federal armed forces, the Counter Terrorism Service, police, border forces, the Popular Mobilization structure and the Kurdistan Region's Peshmerga all occupy roles shaped by law, wartime mobilization and political agreements.

The United States and Iraq announced in 2024 a two-phase transition from the Global Coalition's military mission toward bilateral security partnerships. The first phase concluded the coalition mission in Iraq; the second phase was designed to continue support for counter-ISIS operations in Syria from Iraq through September 2026, subject to conditions and consultation.

The relevant measure of state capacity is increasingly whether Baghdad and Erbil can coordinate security, borders, intelligence and command relationships without allowing armed competition to fragment fiscal or territorial authority.

## The end of UNAMI marks a shift from political mission to development framework

UNAMI concluded its mandate on 31 December 2025 after more than two decades. The United Nations Country Team continued under the Resident Coordinator and a new Sustainable Development Cooperation Framework for 2025-2029.

The institutional meaning is significant. International engagement is shifting away from a special political mission toward development, governance, social services, climate adaptation and technical assistance. That does not imply that political disputes have disappeared. It means that more of the burden for resolving them now lies inside Iraqi constitutional and political institutions.

## Water is becoming a production, food and territorial-governance constraint

Water scarcity is no longer separable from macroeconomic planning. The United Nations reported that above-normal rainfall in the 2025-2026 winter improved storage substantially and left reserves sufficient for roughly two years of drinking and household needs. The same assessment stressed that the rebound recovered only part of the losses accumulated since 2020 and did not remove the structural aridity, evaporation and upstream-flow pressures facing the country.

Agriculture is directly exposed, but the transmission goes further. Water conditions affect electricity, food imports, rural employment, internal migration and provincial politics. Better rainfall can temporarily reduce pressure without changing the underlying need for irrigation efficiency, transboundary coordination and water-quality management.

## Al Faw and the Development Road are an attempt to monetize geography beyond oil

The Grand Faw Port and Development Road project represent a different model of external integration. The objective is to connect Gulf shipping with Iraqi rail and road infrastructure toward Türkiye and Europe, creating logistics, warehousing, industrial and transit activity that is not directly tied to crude exports.

Iraqi port authorities continued legal and international coordination on the project during 2026, including discussions about the project's legislative framework and links with Oman and the quadrilateral framework involving Iraq, Türkiye, the United Arab Emirates and Qatar.

The economic test is execution rather than headline scale. Port throughput, rail completion, border processing, private logistics investment, industrial zones and operating costs will determine whether the corridor becomes a productive network or remains primarily a capital-project narrative.

## Iraq balances several external relationships because no single partner solves its constraints

Iraq's external relationships are structurally plural. The United States remains important for security cooperation, finance and international economic connectivity. Iran is linked to energy supply, trade, religious networks and political relationships. Türkiye is central to water, northern security, commerce and the Ceyhan export corridor. Gulf states are relevant to electricity interconnection, capital and logistics. China is a major buyer of Iraqi crude and an investor in energy and infrastructure.

This pattern is better understood as constraint management than as a binary geopolitical alignment. Different external partners are connected to different domestic critical constraints, and the Iraqi state attempts to preserve room to cooperate across them.

## The structural dashboard shows where oil income does and does not become capacity

| System | Current strength | Main constraint | Evidence to watch |
|---|---|---|---|
| Hydrocarbons | Large reserves and export scale | Export chokepoints, OPEC+ constraints, price exposure | Production, Basra loadings, northern pipeline flows |
| Public finance | Large oil-funded revenue base | Recurrent spending, arrears risk, procyclicality | Oil revenue, payroll, investment execution, non-oil revenue |
| Federalism | Constitutional regional structure | Transfer and hydrocarbon bargaining | KRG transfers, salary payments, export agreements |
| Electricity | Large generation system | Gas supply, losses, reliability | Domestic gas capture, imports, grid availability |
| Private economy | Large domestic market and young population | Credit, power, skills, public-job preference | Labour-force data, private credit, firm investment |
| Water | Large river system and improved 2026 storage | Structural scarcity, quality, evaporation, upstream dependence | Reservoirs, irrigation use, salinity, crop output |
| Logistics | Gulf ports and land bridge to Türkiye | Project execution and border efficiency | Al Faw throughput, rail milestones, transit time |
| Security | Stronger territorial control than during the ISIS war | Coordination across armed institutions and jurisdictions | Counter-ISIS activity, federal-regional coordination |

The strongest systems are those directly connected to sovereign resource income and security mobilization. The weaker systems are the conversion mechanisms between rent and productivity.

## A durable change would require the non-oil system to become less dependent on the oil cycle

Several observations would indicate a structural improvement without requiring any political or ideological judgment.

Non-oil revenue would rise relative to recurrent expenditure. Domestic gas capture would replace a larger share of imported fuel. Electricity reliability would improve without a comparable rise in fiscal subsidy. Private credit and formal employment would grow outside state-linked sectors. Federal-Kurdistan budget and oil arrangements would become more predictable. Water productivity would improve despite variable rainfall. Development Road infrastructure would generate measurable commercial throughput rather than only construction spending.

The opposite pattern would preserve the existing equilibrium: higher oil income financing a larger recurrent state during good years, followed by liquidity compression when price, production or export routes weaken.

## Sources

- International Monetary Fund, Iraq country page, accessed 29 September 2026: https://www.imf.org/en/countries/irq
- International Monetary Fund, Iraq: 2025 Article IV Consultation, 14 July 2025: https://www.imf.org/en/publications/cr/issues/2025/07/11/iraq-2025-article-iv-consultation-press-release-staff-report-and-informational-annex-568569
- World Bank Group, Iraq country overview, accessed 29 September 2026: https://www.worldbank.org/ext/en/country/iraq
- U.S. Energy Information Administration, Iraq country analysis, updated 14 July 2025: https://www.eia.gov/international/analysis/country/IRQ
- Iraqi Council of Representatives, government confidence vote, 14 May 2026: https://iq.parliament.iq/blog/%D9%85%D8%AC%D9%84%D8%B3-%D8%A7%D9%84%D9%86%D9%88%D8%A7%D8%A8-%D9%8A%D8%B5%D9%88%D8%AA-%D8%B9%D9%84%D9%89-%D8%A7%D9%84%D9%85%D9%86%D9%87%D8%A7%D8%AC-%D8%A7%D9%84%D9%88%D8%B2%D8%A7%D8%B1%D9%8A-%D9%88/
- Iraqi Council of Representatives, Presidencies meeting, 28 September 2026: https://iq.parliament.iq/en/2026/09/28/presidencies-hold-a-meeting-at-baghdad-palace-to-discuss-general-conditions-in-the-country-and-the-region/
- Independent High Electoral Commission, certification of final 2025 election results, 14 December 2025: https://ihec.iq/41982/2025/12/
- United Nations in Iraq, continued engagement after UNAMI, 4 January 2026: https://iraq.un.org/en/307884-united-nations%E2%80%99-continued-engagement-iraq-after-unami
- United Nations in Iraq, Rain Brief, 5 June 2026: https://iraq.un.org/en/316784-rain-brief-recent-rainfall-and-water-situation-iraq
- International Labour Organization, Iraq 2026 National Labour Force Survey design, 13 August 2026: https://www.ilo.org/resource/news/iraq-finalizes-design-2026-national-labour-force-survey
- Kurdistan Regional Government, statement regarding oil exports, 17 March 2026: https://gov.krd/english/news-and-announcements/posts/2026/march/statement-by-the-krg-negotiating-team-regarding-oil-exports/
- U.S. Department of State, joint U.S.-Iraq statement on the Global Coalition military mission transition, 27 September 2024: https://2021-2025.state.gov/joint-statement-announcing-the-timeline-for-the-end-of-the-military-mission-of-the-global-coalition-to-defeat-isis-in-iraq/
- Grand Faw Port / General Company for Ports of Iraq, Development Road legal framework workshop, 26 April 2026: https://alfawport.gov.iq/5584/