Iraq faces salary crisis as oil exports collapse during Iran conflict

Saturday 14 March 2026 - 08:20

By: Dakir Madiha

Iraq faces salary crisis as oil exports collapse during Iran conflict

Iraq is confronting a severe economic shock as the near collapse of its oil exports threatens the government’s ability to pay public sector salaries as early as next month. Officials warn that the country’s oil dependent economy is approaching a fiscal crisis after the disruption of its main export routes during the regional conflict linked to Iran.

Two Iraqi Kurdish officials told the Associated Press on March 13 that Baghdad may soon struggle to cover state payroll obligations if oil exports remain largely halted. The warning comes as the Iraqi government urges Kurdish authorities to resume crude shipments through a pipeline to the Turkish port of Ceyhan, currently the country’s only viable export route.

Negotiations between Baghdad and the Kurdistan Regional Government have stalled because of long standing disputes over financial arrangements and political authority related to oil revenues.

Iraq’s oil sector has been heavily disrupted since the beginning of US Israeli strikes against Iran on February 28. Production at major southern oil fields has dropped by roughly 70 percent, falling from more than four million barrels per day before the conflict to around 1.3 million barrels per day, according to industry sources cited by Reuters.

Oil Minister Hayan Abdel Ghani said the country would maintain output near 1.4 million barrels per day. About 200,000 barrels are currently being transported by truck through neighboring Turkey, Syria, and Jordan.

The sharp decline is not due to a shortage of reserves but to the effective closure of the Strait of Hormuz, which previously handled about 97 percent of Iraq’s oil exports. With tankers unable to reach southern export terminals and storage facilities reaching capacity, the state run Basra Oil Company has redirected much of the remaining production toward domestic refineries.

In northern Iraq, drone attacks carried out by militias aligned with Iran have also disrupted production. The Sarsang oil field in the Kurdistan region, operated by HKN Energy, was struck by drones, forcing a halt to operations.

The fiscal consequences are severe for a state heavily dependent on oil income. Oil revenue accounts for more than 90 percent of Iraq’s government income and supports a vast public payroll that includes more than three million employees and roughly four million pensioners.

Monthly salary obligations total about nine trillion Iraqi dinars, equivalent to roughly 6.8 billion dollars. With export revenues collapsing, government finances are under growing pressure.

The financial strain is worsened by logistical problems linked to the conflict. Government sources told The New Region that oil revenue funds held at the US Federal Reserve have not been transferred to Iraq since early 2026 because suspended flights have disrupted financial transfers. As a result, Baghdad’s accessible cash reserves have become extremely limited.

Baghdad has asked Kurdish authorities to export at least 250,000 barrels per day from the Kirkuk fields through the Ceyhan pipeline. Kurdish negotiators, however, have demanded the removal of restrictions on US dollar access and the restoration of economic arrangements with Baghdad before agreeing to resume exports.

A Kurdish official told Asharq Al Awsat that Baghdad would need to provide more than transit fees to secure cooperation. The official argued that the pipeline had been financed by funds that became debts owed to the Kurdistan region rather than by the Iraqi state treasury.

Analysts warn that a prolonged disruption of exports could trigger wider economic instability. Kurdish Iraqi analyst Farhad Soleimanpour said an extended halt in oil revenue would likely weaken the Iraqi dinar and accelerate inflation.

Another analyst, Tamer Badawi, offered a blunt assessment, warning that sustained delays in oil revenue and public sector salaries could turn Iraq into a “powder keg” of economic and political instability.