Beyond Oil: Iraq struggles to diversify its troubled economy

Shafaq News/ Iraq is losing billions annually due to poor resource management, underdeveloped industries, and a lack of strategic economic planning. Experts warn that unless the government addresses these systemic problems, the country will struggle to reach its economic potential despite its abundant natural resources.
While Prime Minister Mohammed Shia Al Sudani’s administration has made moves to support local industries and reduce dependence on oil, political and structural challenges continue to hinder progress.
Overdependence on Oil
Oil is the backbone of Iraq’s economy, accounting for roughly 90% of government revenue. However, disputes with the Kurdistan Regional Government (KRG) have disrupted exports, exacerbating the country’s fiscal problems.
The Kurdistan Regional Government is the official governing body of the semi-autonomous Kurdistan Region in northern Iraq. It governs four provinces: Erbil, Al-Sulaymaniyah, Halabja, and Duhok as well as the Raparin and Garmian Administrations.
Since March 2023, oil exports from the Kurdistan Region (through Turkiye’s Ceyhan pipeline) have been suspended due to a legal dispute. The International Court of Arbitration ruled in favor of Baghdad, requiring Turkiye to pay $1.5 billion for unauthorized oil shipments between 2014 and 2018. But the decision also halted Kurdish oil exports, costing Iraq an estimated $15 billion last year alone.
Economist Mustafa al-Faraj noted that ongoing disagreements between Erbil and Baghdad have only worsened the situation.
“This dispute drains Iraq’s finances daily,” he told Shafaq News. “On top of this, Iraq pays penalties to Turkiye while failing to address inefficiencies in its energy sector.”
Iraq’s gas flaring problem is another drain on its resources. Instead of capturing the natural gas produced as a byproduct of oil extraction, Iraq burns much of it off, wasting billions annually.
Iraq is the world’s second-largest gas flarer after Russia, according to the World Bank. This practice not only costs the country over $2.5 billion annually but also contributes to significant air pollution, impacting public health and the environment.
Neglected Potential
Other than oil, Iraq’s vast agricultural land and rich history allow major economic diversification. However, both sectors remain underdeveloped. Faraj emphasized the country’s failure to capitalize on this. “Climate change and poor water management have leftover 60% of Iraq’s farmland unused,” he said. “Dams in Turkiye and Iran reduce river flow into Iraq, worsening the crisis.”
Tourism, particularly religious tourism, is yet another sector with uncapitalized opportunities. Iraq hosts millions of pilgrims each year, especially to cities like Najaf and Karbala.
In 2023, according to the Iraqi government, more than 20 million pilgrims attended the Arbaeen pilgrimage in Karbala, making it one of the largest religious gatherings in the world. However, Iraq’s infrastructure, from limited hotel capacity to poor public transportation, prevents such massive gatherings from bringing significant economic benefits.
Economic Identity Crisis
Economist Ahmed Abdrabbuh pointed to a deeper issue: Iraq’s unclear economic vision. “Our laws still reflect a state-led economy, but policies increasingly lean toward capitalism. This inconsistency creates confusion and blocks meaningful reform,” he said.
Abdrabbuh stressed the need for a 30-year economic strategy aimed at reducing oil dependence and fostering sustainable growth.
This identity crisis has many causes, but perhaps the main reason to blame is Iraq’s political instability, which complicates long-term planning. Power-sharing among Sunni, Shia, and Kurdish factions often delays reforms, leaving critical legislation hanging.
The Role of Public Institutions
Former Deputy Chairman of Baghdad’s Chamber of Commerce, Hassan al-Sheikh, identified inefficiencies in Iraq’s public institutions as a significant barrier to economic growth.
“The bloated public sector is one of the biggest drains on Iraq’s economy,” he said. “Instead of leading economic growth, these institutions have become burdensome and lack a clear vision.”
He further highlighted issues of overstaffing and mismanagement.
“These institutions should be drivers of progress, not a burden. The solution lies in activating the private sector, which can create jobs and generate economic growth,” he added.
Private Sector Growth and Export Revival
Efforts to stimulate the private sector have shown some progress. In 2024, Iraq opened several factories producing ceramics, dairy products, and poultry. Aqeel Raouf Ahmed, an advisor to the Iraqi Federation of Industries, said exports are also growing.
“We’ve gone from being an importer to exporting over 80 locally made products, including food, fertilizers, and even carpets,” he noted.
Prime Minister al-Sudani has declared 2025 the “Year of Iraqi Industry,” signaling a vision that intensifies focus on local production. The government plans to protect domestic industries with tariffs once local output meets 50% of market demand.
Energy Reform Plans
Al-Sudani’s administration has also prioritized reforms in the energy sector, particularly in gas utilization and petrochemical production. During a January visit to Baiji, Iraq’s largest refinery complex, al-Sudani announced plans to turn the city into a regional hub for petrochemical industries.
“We’re committed to ending gas flaring by 2028, which will save billions and reduce environmental harm,” he said.
Gas flaring reduction has been promised by previous administrations, but progress has been slow due to corruption, lack of infrastructure, and instability caused by groups like ISIS.
The Road Ahead
Iraq’s economic path is still long and full of challenges and obstacles – from its heavy dependence on oil and political infighting to underutilized resources – but with initiatives that promise to prioritize local industry and reduce waste in the energy sector, there is hope for a more balanced and resilient economy. Success, however, will depend on Iraq’s ability to implement such reforms, and then sustain them in the long term.