Baghdad (IraqiNews.com) – The debate over Iraq’s rising internal debt continues to intensify. Economic expert Manar Al-Obaidi has issued a detailed analysis, arguing that the true danger of the debt lies not just in its size, but in its high cost, its non-productive use, and its growing burden on the national banking system.
Al-Obaidi pointed out that while Iraq’s internal debt-to-GDP ratio currently sits around 39%—safely below the 50% critical threshold used by many nations—the composition of the GDP is the source of vulnerability. With over 65% of GDP reliant on the oil sector, any drop in global oil prices would automatically shrink the national product, drastically increasing the debt ratio even if the absolute debt volume remains unchanged.
Five Critical Risks of Internal Debt
Al-Obaidi outlined five interconnected factors that make the current internal debt situation a major concern for Iraq’s financial stability:
- High Interest Costs: Recent government bonds have been issued with high annual interest rates, approaching 10%. This rate places a significant burden on the general budget, particularly if oil revenues decline, making the debt increasingly difficult to service.
- Investment Black Hole: The debt is primarily being used to cover operational deficits (salaries and day-to-day spending) rather than financing strategic, value-added projects. This prevents the non-oil sectors from growing, thus undermining the government’s economic diversification goals.
- Contractionary Policy: High-interest government borrowing discourages banks from funding private sector projects, thereby reducing the capital available for productive investments and limiting overall economic growth.
- Banking System Exposure: Government debt’s share of the total banking system assets has surged by 116% in one year, rising from 6% to 13% of total assets. This rapid expansion creates sovereign risk exposure for the banks and restricts their flexibility in financing other, more productive economic activities.
- Risk Structure: The inherent risk in the debt’s structure means the government will struggle to sustain it over time, forcing a dependency on high oil prices to mask the structural financial deficit.
Al-Obaidi concluded that the solution is not a temporary “financial patch-up” but a comprehensive restructuring of operational expenditures, diversification of income sources, and a shift away from oil dependency to an economy driven by wealth creation.
