Shafaq News

Every day, above the oil fields of southern Iraq, gas burns
off into the sky in towers of orange flame. Iraq flares 1,200 million standard
cubic feet of gas per day —enough, if captured, to power the industries the
country doesn’t have. Instead, Baghdad imports gas from Iran to generate
electricity for the factories that cannot run without it. It pays billions for
the fuel it is simultaneously destroying. The ships that arrive at Umm Qasr
carrying rice, sugar, and cooking oil are a symptom of the same logic: a
country that possesses what it needs, and cannot stop paying others to provide
it.

Iraq’s GDP stood at $279.6 billion in 2024, according to the
World Bank. In that same year, oil accounted for 89% of the country’s foreign
exchange earnings, with crude oil accounting for between 92 and 99% of total
exports. The country sits atop one of the largest hydrocarbon reserves on
earth. And yet it cannot feed itself, power its factories reliably, or
manufacture goods that compete on its own domestic market.

The standard explanation —weak institutions, post-war
damage, incomplete reconstruction—describes symptoms while leaving the cause
untouched. The more accurate account is this: the political economy that oil
built in Iraq actively destroys the conditions under which domestic production
could ever compete. Every boom has deepened the dependency rather than reducing
it, not by accident but by design, because the system that distributes oil
revenues is also the system that governs, and it has no incentive to change.

$80 Billion in Imports

Iraq’s annual import bill exceeds $80–90 billion in goods,
according to Iraqi Ministry of Planning estimates. That number is striking
because of what it covers. Between 80 and 100% of many basic staples, including
wheat, rice, and sugar. The dependency on agricultural imports has been
building since the mid-1960s, accelerating through each successive conflict,
and never reversed during the periods of relative stability and high oil prices
that should, theoretically, have enabled investment in domestic alternatives.

The USDA’s Foreign Agricultural Service documented what this
looks like at ground level in its most recent grain reporting on Iraq. In one
recent drought year, the planted area for paddy rice fell by 96% compared to
the previous season, as the government restricted cultivation areas in the
south due to water shortages. Iraq —a country bisected by the Tigris and
Euphrates, ancient breadbasket of the Fertile Crescent— cannot reliably grow
its own rice.

The gap between what Iraq consumes and what it produces is
not a temporary problem awaiting the right infrastructure investment; it is the
settled outcome of a structural transformation that oil revenue accelerated and
that no government since 2003 has found either the tools or the political will
to reverse.

Dutch Disease, Iraqi Edition

Economists have a precise term for what happened: Dutch
disease describes the way a resource boom creates overreliance on one sector at
the expense of others, operating through two channels: a resource movement
effect, where labor migrates from manufacturing to the booming sector, causing
direct deindustrialization; and a spending effect, where increased revenues
raise demand for non-tradable goods, causing indirect deindustrialization. Iraq
exhibits both channels in their most acute form.

Oil extraction accounts for 55% of Iraqi GDP; manufacturing,
construction, water, and electricity combined account for 8%. Agriculture
accounts for 4%. The tradable, productive sectors of the economy were not
gradually outcompeted; they were crowded out by a state that, flushed with
petrodollars, found it cheaper and politically easier to employ people directly
than to build the conditions for a private economy.

Iraq’s labor force numbers around 15 million people, and
approximately 42% work in the public sector, an outcome rooted in decades of
state-centered economic policy, first institutionalized under the Ba’ath regime
and later reinforced during the post-2003 reconstruction period. The World Bank
reported that the average Iraqi public employee generates 17 minutes of
effective work per day. More than 10.5 million Iraqi citizens —approximately a
quarter of the total population— receive a monthly salary from the state.
Salary and pension obligations now exceed $48 billion annually, close to 40% of
the federal budget, according to Iraq’s Federal Board of Supreme Audit.

Every dinar spent retaining a surplus civil servant is a
dinar not spent on the power grid, the roads, or the credit facilities that
would allow a private manufacturer to exist, let alone compete.

Factories That Cannot Run

Of all the structural obstacles facing Iraqi producers, none
is more concrete or more consequential than electricity, and the way the
country manages its own energy.

Iraq is the world’s second-largest gas-flaring country after
Russia, burning 1,200 million standard cubic feet per day while simultaneously
importing gas from Iran at a cost of billions of dollars annually, spending
roughly $2.78 billion on Iranian gas in 2021 alone, and twice that the
following year, according to the Washington Institute for Near East Policy. The
fuel that could power Iraqi industry is instead lit on fire above the fields
that produce it, while the state pays a neighbor for the replacement.

The supply gap this creates is severe, even before an acute
outage in the summer season, Iraq generates around 24,000 megawatts,
considerably less than the estimated 34,000 megawatts needed to meet local
demand. The International Energy Agency projects the deficit will persist: even
if all planned capacity additions are completed and transmission reforms
implemented, Iraq will still face a shortage of approximately 10,000 megawatts
over the next five years.

For a manufacturer, unreliable electricity is not an
inconvenience; it is a structural cost that no tariff protection can offset. A
factory running on backup diesel generators faces energy expenses far above
those of competitors in Turkiye, Iran, or China, where power is stable and
often subsidized. Iraqi producers are asked to compete internationally with one
hand tied behind their back, and then told the problem is that their hand is
weak.

The financial structure of the electricity sector ensures
the crisis cannot self-correct. Only about 20% of electricity bills are paid in
full, driven by weak enforcement and a widespread public expectation that
electricity should be a free public service. More than 50% of generated
electricity is lost before billing through theft and inefficiency, and less
than 30% of total production contributes to financial revenue, leaving only
about 10% of operational expenses covered by collections.

A ministry that recovers a tenth of its operating costs
cannot invest in the grid. A grid that cannot be invested in remains
unreliable. An industry that cannot rely on the grid cannot grow. The loop is
closed, and it has been closed for decades.

Tariff That Is Not a Tariff

Protective tariffs exist on paper for domestic
manufacturers. The government operates a Public Distribution System providing
subsidized staple foods, purchases grain harvests at above-market prices, and
has backed financing for over 1,300 industrial projects. Formally, the
architecture of industrial protection is present.

What is also present —and what systematically neutralizes
it— is the border. Cartels maintain control around Iraq’s key crossing points,
employing false trade invoicing whereby importers misrepresent or undervalue
products to pay less import duty, while encouraging officials to ignore
mandatory inspections. Analysts estimate that smuggling and illicit trade
activities deprive the state of between three and four billion dollars in lost
revenue annually. A tariff that is not enforced at the point of entry is not a
tariff; it is an announcement.

Transparency International’s 2024 Corruption Perceptions
Index scored Iraq at 26 out of 100, against a world average of 43. The IMF, in
its 2023 Article IV consultation, found that customs procedures required urgent
modernization and that anti-smuggling initiatives had not been implemented on a
meaningful scale. It also recorded, without evident surprise, that
approximately $2.5 billion was stolen from Iraq’s General Commission for Taxes
in 2021–22, only a fraction of which has been recovered.

owsThe Public Distribution System, meanwhile, provides genuine
short-term relief. Research by the WFP and the IPC found that the PDS sl the
transmission of global food price shocks to Iraqi consumers, with local prices
adjusting to roughly 68% of an international price increase after five months.
But the same research concluded the system strains the public budget while
failing to provide long-term protection from global price volatility.

Political Trap

This is the argument that matters most, and the one most
economic reporting on Iraq consistently avoids: import dependence is not a
policy problem awaiting a technical solution. It is the equilibrium output of a
rentier political settlement, and every actor inside that settlement has a
rational interest in preserving it.

Rentier dynamics have produced deeply rooted public
expectations of state generosity. Any attempt to cut subsidies or restructure
the payroll risks provoking popular backlash —as Prime Minister Haider al-Abadi
found directly when his 2015–18 reform efforts were met with mass protests. The
government distributes oil revenues not primarily to develop the economy, but
to maintain social peace.

Public employment is patronage institutionalized. Subsidized
imports are a transfer payment that happens to destroy the market for domestic
producers. The arrangement works, politically, for as long as oil prices
cooperate.

They are not cooperating as the oil price required to
balance Iraq’s budget rose to around $84 per barrel in 2024, up from $54 in
2020, as spending expanded and non-oil revenues stagnated. With oil trading
well below that threshold, Iraq is running a structural fiscal deficit while
being politically unable to address its causes. Non-oil GDP was projected to
slow to just 1% in 2025 as falling oil prices and financing constraints weighed
on government spending and consumer sentiment.

The IMF’s 2025 Article IV mission delivered its verdict
without diplomatic softening: Iraq’s vulnerabilities have increased in recent
years due to a large fiscal expansion, and the country is struggling with high
unemployment, an excessive state footprint, a weak banking sector, corruption,
and an inefficient electricity sector. It called for customs enforcement,
tariff reform, wage bill reduction, labor market liberalization, and governance
improvements —presenting these not as optional enhancements but as interlocking
necessities. Iraq has received versions of the same prescription, from the same
institution, in nearly the same language, for more than a decade.

Read more: Youth in despair, no jobs to share: Iraq’s workforce hanging in the air

Gas Will Keep Burning

Iraq will not resolve its import dependency through targeted
subsidies, above-market procurement prices, or financing windows for industrial
projects. These are interventions inside a system whose own logic produces the
problem they are designed to solve. The dependency will begin to close only
when the cost of maintaining the current settlement exceeds the cost of
dismantling it, when oil revenue falls far enough, for long enough, that the
state can no longer afford to employ a quarter of the population, subsidize
electricity it cannot bill for, and look the other way at borders it does not
control.

That moment may be approaching as it has approached before
—after 2014, after 2020— and passed without transformation. Whether this time
is different depends less on any particular minister or reform package than on
whether the fiscal pressure now building is severe enough to break the
political coalition that has made dependence the rational choice for twenty
years.

Until then, the gas will keep burning above the southern
fields. The ships will keep arriving at Umm Qasr. And somewhere between the
flame and the cargo hold lies the answer to a question Iraq has not yet decided
it wants to ask.

Read more: Iraq’s gas flaring paradox: a wealth of resources, a nation in need

Written and edited by Shafaq News staff.