Index trend
Previous Quarterly Editions
Expropriation risk: 74 ► Political violence risk: 68 ▲ Terrorism risk: 45 ► Exchange transfer and trade sanction risk: 82 ▲ Sovereign default risk: 83 ►
Overall Risk Temperature: 77 (High) ►
Special topic:
Iraq has achieved a level of stability since 2003. It has a functioning government, regular elections and the lowest rates of terrorist violence in 20 years; however, the story is actually one of state capture. Tehran maneuvered Shia militias into government after the 2021 elections, elbowing out Shia cleric Muqtada al-Sadr who had sought to form a government with Kurdish and Sunni parties.
The Shia Coordination Framework formed the government under Prime Minister Mohammed Shia al-Sudani. It controls the Cabinet and Parliament until the next election in 2025. It has also taken over other institutions, including the Iraqi National Intelligence Service, Baghdad airport, anticorruption bodies and customs posts.
Iraq’s relationship with the liberal international order is weakening. Popular attitudes toward democracy continue to deteriorate. Around 41% of eligible voters voted in the December 2023 provincial elections. Apathy has increased among a young population that feels it has not seen the benefits of Iraq's massive oil wealth, much of which is misdirected or stolen. Chronic mismanagement in government, alongside persistent insecurity, has hindered policymaking. The non-oil economy is dysfunctional.
The government’s first draft budget is the largest in Iraq’s history; it proposed US$152 billion in spending, a roughly 50% increase from the last authorized budget in 2021. The government has pledged to sustain this level of spending for three consecutive years — right up until the October 2025 elections. This reckless level of expenditure ignores the warnings of the International Monetary Fund (IMF) and the World Bank, which have called on Iraq to reduce its swollen public sector.
Baghdad has been trying to maintain the fragile stability that it has achieved since the defeat of the Islamic State (IS), but it is now unable to find a balance between its two most powerful allies. The U.S. is shifting its focus away from Iraq, while Iran continues to see its militia allies as a safeguard against a resurgent Iraq on its border. For Iraq to build a functioning state that can participate fully in a rules-based international order, it would need to establish a monopoly over the use of force and integrate these groups into the state; however, at this time, the prime minister has little control over these groups.
Expropriation Risk 67 ( Medium high) TREND ►
Iraq continues to pay international oil company investors as regularly as possible despite facing significant payment challenges. Baghdad also strictly enforces the contracts of international pipeline projects.
Political Violence Risk 60 ( Significant) TREND ▲
Iraq is a flashpoint in the conflict between the U.S. and Iran, which has intensified since the outbreak of hostilities in Gaza on October 7, 2023. In mid-January, a barrage of ballistic missiles and drones struck various locations in Erbil Governorate, including two U.S. bases, a future U.S. consulate building currently under construction and the private residence of a prominent businessman. Iran claimed responsibility and alleged that the targeted sites were linked to the Israeli government.
There were major protests in Iraq from 2019 – 2021 called the October Protest Movement. It started as a call to improve service and increase access to jobs and eventually forced Prime Minister Adil Abdul-Mahdi’s resignation. The current prime minister, al-Sudani, has staked his political career in stabilizing Iraq since the national protests a couple of years ago. This has led paramilitary groups to crack down on opposition and freedom of expression.
After more than a decade, Iraq held provincial elections in December 2023. The government was determined to hold a stable election; security measures were higher compared with the 2021 general elections. Turnout was low, with only 41% of registered voters casting ballots, but there was no surge in security incidents.
In Kirkuk, 10 Turkmen political parties said they would boycott the parliamentary elections in Kurdistan Region of Iraq (KRI) in June. The announcement came after Iraq’s Federal Supreme Court abolished 11 quota seats allocated to Iraq’s recognized ethnoreligious minorities, including five seats that were designated for the Turkmen community. The development signals that the Shia majority is reducing protections for diverse representation, which could lead to a rise in political violence in the medium term.
Terrorism Risk 38 (Medium low) TREND ►
Total deaths from terrorism have fallen 99% since 2007. The risk of a significant IS resurgence is low. The army and security services have partly raised their capacity by cooperating with local militias. Repatriation of IS affiliates from prisons in northeast Syria is a security concern and has sparked opposition among local tribal leaders who are unwilling to reintegrate them.
A second source of terrorism risk is from Shia militias. These militias have mostly halted their anti-U.S. campaign, though the Iran-backed Islamic Resistance in Iraq claimed responsibility for a deadly attack on a U.S. military base in Jordan on January 28. In response, the U.S. hit targets in Iraq and Syria on February 2 and again on February 7, killing a militia commander in Iraq. Active fighting between the two sides has halted since the U.S. began discussions with the Iraqi government to end the U.S.-led military presence in the country.
Exchange Transfer and Trade Sanctions Risk 73 (Medium high) TREND ▲
Turkey halted oil exports from the KRI in March 2023 after a French arbitration court ruled that Ankara had breached legal agreements with Baghdad. While Iraq and Turkey may be able to manage the economic fallout from the halt in Kurdish oil exports, the KRI is bearing the brunt of closure. It relies on oil exports for 80% of its budget.
High-level talks have taken place in Baghdad, Erbil and Dubai to restore the over 400,000 barrels of oil per day to international markets. One outstanding issue is revenue sharing. Iraq's 2023 national budget law includes restrictive terms that Baghdad leaders use to prevent financial transfers to the Kurdistan Regional Government (KRG). Without any guarantee that those roadblocks can be removed, there is little incentive for the KRG to put crude into a pipeline to be sold by federal authorities disinclined to share the proceeds.
Another related issue concerns the payment of international oil companies. Officials in Baghdad are interpreting certain provisions in the new budget law to mean that companies operating in Kurdistan can only receive US$6 per barrel, far below what their contracts stipulate. In February 2024, Iraq’s Federal Supreme Court ruled that the KRG must transfer all oil and non-oil revenues, potentially settling any dispute regarding the KRG's ability to sell oil independently.
In 2023, the Iraqi dinar declined against the U.S. dollar. It peaked at 1,650 dinars per dollar but rebounded to 1,310 dinars per dollar in early 2024. Despite efforts by the central bank to reduce the parallel market rate of the dinar to the dollar, the gap between the official and parallel exchange rates has widened. The unofficial rate is approximately 20% below the official one.
The fluctuation in the dinar’s value is primarily linked to Iraq’s oil-dependent economy and Washington’s restrictions on money laundering and sanction-skirting activities in neighboring countries, mainly Iran and Syria. In January 2024, the U.S. Treasury Department designated another Iraqi bank as a conduit for terrorist financing. In February, Iraq banned several banks from U.S. dollar transactions amid concerns about smuggling dollars to Iran. U.S. dollar remittances can only be withdrawn in dinars since January 2024.
Iraq has been buoyed by robust foreign exchange reserves, consolidating gains from bumper oil revenues. The central bank has implemented measures to strengthen the dollar reserves of 10 private Iraqi banks held in U.S. banks. The U.S. also continues to grant Iraq waivers to purchase Iranian gas and electricity. These waivers aim to reduce Iran’s influence over Iraq, as Tehran has previously halted natural gas exports to Iraq. Critics argue, however, that the policy grants Iran greater access to funds.
Sovereign Default Risk 74 (Medium high) TREND ►
In December 2023, Fitch maintained the stable outlook for Iraq’s long-term foreign-currency issuer default rating and affirmed it at B–. High oil prices have improved many credit metrics over the past year, but the fundamentals remain under strain with persistent political risk and a lack of structural, economic or fiscal reforms. Iraq’s budget will probably return to deficit in 2024 as the government’s spending increases and oil prices trend down.
Iraq retains substantial sovereign reserves of more than $100 billion as of the end of 2023. According to the IMF, Iraq’s non-oil GDP grew 6% in 2023, and inflation declined from 7.5% to 4%. Public debt, however, is expected to nearly double from 44% in 2023 to 86% by 2029. Much-needed structural reforms include improving credit access, reforms to pensions, combating corruption and removing hurdles to private sector development.
