Al-Shakeri examines Iraq’s extreme vulnerability during the 2026 conflict. With the dinar weakening and food prices rising by 25%, the state faces a “two-month window” before it can no longer pay salaries. The report highlights how the March 18 strike on Iran’s South Pars field pushed Iraq toward a massive summer electricity deficit.
The US-Israeli war on Iran has disrupted oil exports, pushed up prices and deepened fears of electricity shortages.
Iraq has been increasingly dragged into the US and Israel’s war with Iran, with both sides attacking each other on its territory. Civilians have suffered as rockets and drones fall near residential buildings in cities including Baghdad and Erbil.
The war has also exposed the fragility of Iraq’s economy and society. Most Iraqis are facing this latest conflict with limited financial resources and minimal savings, and with low confidence in the state to protect them from the war’s impact.
For many households, the war has caused anxiety over whether they will keep receiving their salaries or be able to access food and medicine. There are also concerns over whether electricity supplies will continue as temperatures rise ahead of summer.
Suspected Iranian attacks on two tankers in Iraqi waters near the port town of Al Fao in early March have also highlighted Iraq’s heavy dependence on maritime trade. The disruption to Gulf shipping is already constraining imports and leaving Iraq-bound cargo stranded or delayed.
For a country that moves more than 90 per cent of its trade by sea, prolonged disruption in the Gulf risks hitting Iraq’s economy and depriving it of crucial oil exports that finance the majority of the state’s budget.
Iraq’s safety net undermined
Iraq is confronting the war with weaker governance structures and less capacity to shield society from the fallout than many of its neighbours.
The Iraqi state budget is the main safety net for much of the population. It provides salaries to millions of Iraqis, and many households still rely on state spending for their day-to-day survival, whether through salaries, pensions or welfare linked to public expenditure.
Iraq’s economy is still heavily dependent on oil, with crude sales making up more than 90 per cent of the state’s income. When oil flows are disrupted, state spending is affected. In turn, this hits household budgets through increased rent, food, transport, medicine and education costs.
The war on Iran has exposed this reliance by directly damaging Iraq’s export capacity. Baghdad declared force majeure on foreign-operated oilfields after disruption in the Strait of Hormuz halted most crude exports.
Iraq still has about $97 billion in reserves, but much of that is not immediately liquid, and reserves can only provide short-term relief. Economists have estimated that Iraq has around two months before salaries are directly impacted, after which the government will have to resort to temporary fixes to keep salaries paid.
Across Iraq, basic food prices have risen by 15 to 25 per cent. In the Kurdistan Region, officials report that the price of vegetables usually imported from Iran has doubled, while fuel prices have reportedly risen by more than 20 per cent in some cities.
Meanwhile, the dinar has weakened on the black market from the official rate of 1,300 to about 1,550 to the dollar, adding further pressure on household purchasing power.
Looming electricity shortages
Electricity is likely to be the most serious way in which the war will be felt inside Iraqi homes.
Despite Iraq having large natural gas reserves, it flares most of this gas as it lacks the infrastructure to use it as fuel for electricity. Since 2017 Iraq has instead relied on imported Iranian natural gas to provide electricity. More than 30 per cent of Iraq’s current electricity generation depends on those imports, leaving it exposed to regional tensions.
Israel’s 18 March attack on Iran’s South Pars gas field disrupted a significant portion of Iraq’s gas imports. Gas supplies to Iraq have now resumed, but only partially, stabilizing the grid but leaving little margin for further disruption.
The electricity system remains fragile heading into the summer, when demand rises sharply due to the heat. With total generation capacity at only around 24-28 gigawatts and projected peak demand in 2026 at 57 gigawatts, any further disruption could quickly deepen shortages.
That vulnerability was already visible on 4 March, when Iraq suffered a nationwide blackout after a sudden drop in gas supplies to the Rumaila gas-fired power plant in Basra.
Iraq has previously explored alternatives to Iranian imported gas, including importing gas from Qatar and Oman and efforts to expand domestic gas production. But these are not immediate substitutes.
In Iraq, electricity shortages have historically sparked protests, with many citizens believing that years of higher oil revenues should have led to improvements to the country’s electricity infrastructure. The current conflict exposes how little has been done to make the system more reliable, despite repeated warnings.
Political fallout?
Pressures from the war risk inflaming a set of pre-existing and politically charged grievances.
In Iraq, state legitimacy has already been weakened by years of corruption, policy short-termism and uneven provision. As the economic impact of the war ramps up, the public perception that the government cannot be relied on in a crisis matters almost as much as the immediate material impact.
Protests over jobs and services were already re-emerging before the war. Earlier waves of protest targeted the ruling elite over corruption and the failure to provide services. Historically, many protesters have also rejected Iranian influence as well as the wider pattern of foreign interference in Iraq enabled by the post-2003 political system.
The current war has evoked many of these grievances. But it has not produced a uniform public response.
Some Iraqis have voiced anger at Iran and its allies in Iraq for exposing the country to a conflict it cannot afford. Others recently protested in solidarity with Iran and tried to storm the US embassy in Baghdad.
For many Iraqis, these positions are not mutually exclusive. Anger at Tehran’s influence can coexist with rejection of US military action. Likewise, criticism of Iraqi armed groups can sit alongside resentment of Israel and the US’s role in widening the war.
These are not seen as contradictory positions, but rather overlapping responses to a conflict in which external actors, local armed groups and a weak state have all helped expose the country to violence it cannot control.
Urgent response needed
For Iraq, the most urgent test now is how the state responds to the pressure the war is putting on society.
The government cannot mitigate every impact of a widening regional war, but it can reduce how deep the impact is felt by Iraqi households.
This requires the government to find short-term creative solutions to protect salaries. These could include strategies from the COVID-19 era, when Baghdad prioritized wage and pension payments by relying more heavily on treasury bills and domestic borrowing, and used the central bank and banking system to keep liquidity and payments moving.
In the long term, Iraq also needs to diversify its income away from its overreliance on oil revenues. Iraq should also insulate against disruption in the Strait of Hormuz by securing alternative and reliable routes for the import of essentials, for example through Jordan, Turkey and Syria.
Iraqis are already living through the effects of this war. What matters now is whether the state can protect ordinary people from once again having to bear the brunt of a crisis.