Iraq grapples with liquidity crisis amid leadership stalemate

BAGHDAD – Iraq is facing a dual political and financial crisis that threatens to further complicate an already fragile situation, as a prolonged deadlock over appointing a prime minister and president coincides with mounting signs of a severe liquidity shortage.

According to informed sources cited by the Kurdish Iraqi news agency Shafaq News, the caretaker government led by Mohammed Shiaa al-Sudani has been forced in recent months to withdraw approximately 20 trillion Iraqi dinars from Rafidain Bank and between 7 and 8 trillion dinars from Rasheed Bank. In addition, around $7 billion was reportedly drawn from another bank, alongside further sums from specialised state-run lenders, in order to cover public sector salaries and pensions.

If confirmed, the figures point not merely to temporary fiscal pressure but to a genuine liquidity squeeze affecting the state banking system itself. The scale of the withdrawals suggests that Iraq’s room for financial manoeuvre is narrowing rapidly, raising concerns that any additional shock, such as a downturn in global oil prices or unexpected spending demands, could push the government towards difficult choices, including delaying salary payments or resorting to further domestic borrowing.

Economists warn that such borrowing would risk compounding the problem by recycling the crisis within the financial system rather than resolving it.

While the immediate challenge appears to be one of liquidity, analysts say the roots of the crisis are structural. Iraq’s public finances remain overwhelmingly dependent on oil revenues, leaving the budget highly exposed to fluctuations in global energy markets. Productive sectors outside hydrocarbons contribute only marginally to state income, depriving the treasury of more stable and diversified revenue streams.

Longstanding concerns over waste, weak planning and limited oversight of public spending have also resurfaced. Experts argue that without urgent reform to rebalance state finances and curb inefficiencies, liquidity strains are likely to recur.

The prospect of oil price volatility has intensified fears that the crisis could escalate. With crude exports providing the bulk of government income, even a modest decline in prices would sharply reduce fiscal inflows, amplifying pressure on the state’s ability to meet its vast wage bill.

Politically, the crisis is unfolding against a backdrop of unprecedented paralysis. Iraq remains locked in a stalemate over the selection of a prime minister and president, leaving the caretaker administration with limited authority and political cover to take bold fiscal decisions.

Observers interpret the government’s relative silence on the scale of the financial strain as a reflection of this paralysis. A caretaker administration, constrained by its temporary mandate, may be reluctant to declare a major crisis that could expose it to legal or political backlash from rival factions.

Yet the absence of clarity is itself fuelling unease. Market confidence has been dented by the lack of transparent communication, prompting concerns that depositors could accelerate withdrawals or convert savings into foreign currencies, further tightening domestic liquidity and creating a self-reinforcing cycle of pressure.

The liquidity crunch also raises questions about transfers to the Kurdistan Region, particularly the long-contentious issue of salary allocations between Baghdad and Erbil. Historically, budget transfers have served as a political lever in negotiations between the federal government and the regional authorities.

In times of fiscal strain, there are fears that Baghdad could tighten or delay payments to the region, whether out of necessity or as a bargaining tool. Any such move would risk political escalation, especially if it results in delayed wages for public employees in the Kurdistan Region, a socially-sensitive issue with the potential to spark unrest.

The convergence of political gridlock and financial stress has turned the liquidity crisis into a complex national challenge. Without swift corrective measures to restore balance to public finances and rebuild confidence in state institutions, analysts warn that the strain could spread beyond the banking system.

In a country where periodic financial bottlenecks have previously triggered social protests, there are serious concerns that renewed economic pressure could inflame an already tense social climate.

For now, Iraq stands at a delicate juncture: caught between a stalled political process and tightening fiscal constraints, with the stability of both its financial system and its broader political order increasingly at stake.