Forced Public Debt

Public debt is the running total of the deficits the state has actually incurred in its annual budgets. It follows that the debt can only rise in a year when the budget closes with a deficit.

And a deficit is only counted once it has actually been financed through one of the standard debt instruments, whether loans, treasury bills or bonds, raised at home or abroad. Take a simple example. Say the 2025 budget includes a project to pave a street at a cost of 100 million dinars. If there is no revenue to pay for it, and no way to borrow the money from any source, the project simply drops out of the budget when the fiscal year ends. Its cost is not counted in the deficit, and so it adds nothing to the public debt.

So when the Treasury cannot raise the loans needed to fund the projects listed in the budget, the Ministry of Finance is under no obligation toward those projects, and it is wrong to treat them as commitments that must be honored. The budget is a set of annual financial estimates. None of it becomes real spending by the end of the year unless it has been funded, either from the revenue the state collects or from the sources used to finance the deficit.

The limits of deficit financing

Budget after budget, Iraq has struggled to fund its investment projects, and at times even its operating expenses, because it could not raise money from sources beyond its own revenue, whether banks, other domestic institutions or international lenders.

The rise in public debt to 107 trillion dinars as of August 2026 has made it plain that the state-owned banks can no longer finance the budget deficit the way they used to. It has also put heavy pressure on the ability of the Central Bank of Iraq to discount the treasury bills that the Ministry of Finance issues to the state banks it controls. Those banks cannot afford to fund the bills, so they pass them on to the Central Bank for discounting.

When unfunded contracts become debt

This is not a new problem. In 2016, contractors’ arrears caused a public outcry. The Ministry of Finance had not recorded the amounts owed to contractors in the budget, so it never financed the shortfall on those projects. Those amounts were certainly never counted as part of the deficit, which means they were never added to the public debt either. How, then, do debts like these end up being paid?

The root of the problem lies with public spending units (the ministries, governorates and other bodies that spend budget funds), which have been overstepping the rules. This happens with centrally funded projects, with the regional development program and even with self-funded entities. These units sign contracts with construction companies when the money is not there, relying instead on a pledge to pay once funding becomes available. A pledge like that violates the rules and procedures of the budget, which are laid down in Financial Management Law No. 6 of 2019. Article 16(1)(a), in Chapter Four on budget implementation, reads:

“No commitment may be entered into until it has been confirmed that the necessary allocation is available.”

In the 2016 case, the arrears were settled by issuing contractor bonds. In effect, the budget was forced to shoulder the debt because of flawed contracts signed in breach of budget law. Those contracts were worth more than 5 trillion dinars.

Arrears return

The finance and planning ministries should have made sure the same mistake was not repeated. They should have warned spending units against taking on financial commitments to outside parties, however important the projects, for as long as the Treasury is unable to borrow. Such commitments also break established budget rules and the Financial Management Law.

Even so, arrears owed to contractors, and to farmers as well, began to pile up in 2024 and 2025, and they have grown steadily through 2026.

We now have more than one figure for the size of the public debt, and the Ministry of Finance is in a bind over repayment. It cannot pay voluntarily, since that would break the rules and the law. So will it be forced to?