The Iraqi government’s decision to borrow: economic analysis and implications

The Iraqi government’s decision to borrow: economic analysis and implications

3-26-2025

In an attempt to address the growing fiscal deficit and finance its massive infrastructure projects, the Iraqi government has decided to issue bonds worth 3 trillion dinars (approximately $2.3 billion), directed to local banks. This decision has sparked widespread debate about the current economic situation in Iraq, the pressures on its budget, and the government’s strategies to encourage economic growth. These bonds are expected to offer higher interest rates than previous issuances, representing a shift in the government’s approach to securing financing. But what are the implications of this decision for the Iraqi economy as a whole?

Why the need to borrow?
The Iraqi economy relies heavily on oil exports, but recent fluctuations in global oil prices, coupled with production cuts under the OPEC+ agreement, have negatively impacted the state budget. In addition, the government has pledged to finance a range of infrastructure projects spanning energy, water, tourism, and electricity. $100 billion has been allocated for these projects over the next three years.

However, government revenues from oil exports were insufficient to meet these financial requirements, creating a need for additional funding sources. Consequently, the Iraqi Ministry of Finance resorted to issuing bonds as a tool to secure the necessary funds for development.

Bond Issuance Details:
According to a letter issued by the Central Bank of Iraq, the new bond issue will be offered in two tranches to local banks. The first tranche will be worth half a million dinars per bond, with a two-year maturity and an annual interest rate of 8%. The second tranche will be worth one million dinars per bond, with a four-year maturity and an annual interest rate of 10%. These bonds are scheduled to be sold between March 20 and 29, 2025.

This decision follows the closing of the first national bond issuance, which took place between February 10 and March 10, 2025. The issuance was directed at individuals and companies, with lower interest rates—6% for two-year bonds and 7.5% for four-year bonds. However, demand was weak, with only 25% of the bonds allocated to individuals and companies sold, equivalent to approximately KWD 500 billion out of a total of KWD 2 trillion.

The low subscription rates in the first issue indicated weak demand for the returns offered. Therefore, the government decided to adjust its strategy by offering more attractive terms, targeting banks with high liquidity. The new bonds are expected to offer higher yields, making them more attractive to these institutions.

The economic repercussions and impact on the budget
: The bond issuance has many repercussions on the Iraqi economy, both in the short and long term.

1. Addressing the budget deficit:
The biggest benefit of issuing these bonds is addressing the budget deficit, which has increased due to volatility in oil prices. With projected oil revenues declining, the Iraqi government has been struggling to balance the budget. By issuing bonds, the government can raise funds to cover its spending needs, particularly for infrastructure projects, without increasing taxes or cutting public services. The new bonds are expected to attract liquidity from local banks, helping the government bridge the funding gap.

2. Inflationary pressures and debt burden:
Among the risks associated with large borrowing is the potential for increased inflationary pressures. While the higher interest rates on the new bonds are intended to attract banks, increased demand for government debt could lead to inflation in the short term. Furthermore, the accumulation of debt through bond issuance will increase Iraq’s long-term financial obligations, potentially limiting budget flexibility in the future.

3. Attracting banks and strengthening the banking sector:
By offering higher interest rates and targeting local banks, the Iraqi government is attempting to encourage the banking sector to play a more active role in financing national development. This could have positive repercussions for the Iraqi banking sector, as it would boost investment and increase its participation in the country’s economic growth. However, this sector may expose local banks to greater risks, as these banks would be committed to more government debt on their balance sheets. Although government bonds are typically considered low-risk, economic uncertainty in Iraq could pose challenges for the banking sector.

4. Economic Growth and Infrastructure Development:
The government has allocated a significant sum of $100 billion for infrastructure development over the next three years. These investments are vital to driving long-term economic growth in Iraq. With improved energy, water, and tourism infrastructure, Iraq could see economic diversification, reducing its dependence on oil revenues. Furthermore, infrastructure stimulus aims to create jobs, attract foreign investment, and stimulate growth in key sectors. However, financing these mega-projects depends on the success of bond issuances and the ability to manage funds effectively.

5. Public Confidence and Investment Environment:
While high interest rates may attract local investors, they also raise questions about the long-term sustainability of the government’s fiscal policy. If the government continues to rely heavily on borrowing to finance its projects, this could undermine confidence in the stability of the dinar and the economy as a whole. Therefore, the success of the bond issuance will depend not only on attractive returns, but also on public confidence in the government’s ability to manage its finances.

Conclusion: A Delicate Balance
The Iraqi government’s decision to borrow 3 trillion dinars through bonds is a strategic move aimed at addressing the budget deficit and financing vital infrastructure projects. The high interest rates in the new bond issuance are seen as a way to attract banks, which play a central role in developing the Iraqi economy. However, this move carries risks, including inflationary pressures, increased debt burden, and the stability of the country’s financial system.

While the bond issuance provides an immediate solution to Iraq’s financing challenges, it also reflects the country’s underlying economic difficulties. Its dependence on oil exports, oil price volatility, and political instability mean the government will need to carefully manage its fiscal policy to avoid future economic crises. For now, the bond issuance represents a necessary step in Iraq’s efforts to stimulate growth and secure the funds needed for its ambitious infrastructure agenda.

Economic Studies Unit / North America Office

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