Iraq Faces Austerity and Borrowing Risk if Strait of Hormuz Stays Blocked, Iraq's PM Adviser Says

Peregraf — Iraq may be forced to resort to internal borrowing to secure public sector salaries and meet foreign financial obligations if the ongoing war disrupts oil exports through the Strait of Hormuz, the financial adviser to Prime Minister Mudher Muhammad Saleh said on Saturday.

Saleh said the financial impact of any obstruction to Iraqi oil exports would not appear immediately but would likely be felt after about two months due to the time lag between exporting crude oil and final pricing.

"There is an impact from the disruption of Iraqi oil exports through the Strait of Hormuz on the overall financial and economic situation in the country, but it does not appear now because oil is exported first and then priced later," Saleh told the Iraqi News Agency. 

He explained that the effects would likely begin to emerge around the fifth and sixth months if exports remain disrupted. 

"The impact will begin to appear approximately two months from now due to the halt in exports," he said, adding that current estimates suggest the conflict may last up to four months.

If the crisis persists, Saleh said the government would have no option but to borrow domestically in order to continue paying public sector wages, pensions and other obligations.

"The government has no solution but to resort to borrowing for the purpose of providing salaries and paying foreign obligations," he said.

According to Saleh, Iraq may also be forced to enter a period of financial austerity as the effects of disrupted oil flows begin to take hold.

"Iraq will go through an austerity phase regarding wages, pensions and social welfare," he said, referring to possible reductions or tighter spending during the peak of the crisis.

Despite the risks, Saleh said Iraq currently possesses sufficient financial reserves to withstand several months of disruption. 

He noted that coordination between monetary and financial authorities would allow the government to rely on internal borrowing mechanisms supported by the country's reserves.

"Iraq's cash reserves support its ability to obtain internal loans, which will increase if the crisis persists," he said. "However, Iraq is fortified and will not be significantly affected if this crisis lasts four to five months."

The warning comes as tensions in the region escalate amid the ongoing US–Israel war on Iran, which entered its 15th day on Saturday.

The conflict has raised fears that Iran could move to close the vital Strait of Hormuz, one of the world's most important oil shipping routes. Nearly a fifth of global oil supplies pass through the narrow waterway, and any prolonged closure could severely disrupt exports from Iraq and other Gulf producers.

For Iraq, which relies heavily on oil revenues to fund the state budget and pay millions of public sector employees, a sustained disruption in shipments through the Strait of Hormuz could place significant strain on government finances in the months ahead.