Iraq Grapples with Economic Challenges Amidst Post-Election Government Formation

Post-Election Landscape and Government Formation

Iraq is navigating a critical period following its parliamentary elections held on November 11, 2025. The elections, the sixth since 2003, saw a voter turnout of 56 percent. While Prime Minister Mohammed Shia al-Sudani's political alliance, the Reconstruction and Development Coalition, secured the largest number of seats with 46 in the 329-member legislature, no single bloc achieved a majority. This outcome necessitates a complex and potentially prolonged process of coalition-building among Shia, Sunni, and Kurdish factions to form a new government.

During this period, Iraq is governed by a caretaker administration, which operates with significant limitations. Such a government is legally restricted from passing new laws, approving multi-year contracts, or initiating structural reforms, functioning at an estimated 20-30 percent of its normal capacity. This political vacuum exacerbates the country's existing economic vulnerabilities, as crucial policy decisions and reform efforts are stalled.

Deep-Seated Economic Vulnerabilities

Iraq's economy remains overwhelmingly dependent on its oil sector, which accounts for over 90-95 percent of government revenue and exports. This reliance exposes the national budget to the volatility of global oil prices, creating fiscal instability. Despite being an oil-rich nation, Iraq struggles with economic diversification, infrastructure deficiencies, and political instability, which collectively limit its growth potential.

The country's economic landscape is further complicated by:

• High Unemployment: The unemployment rate, particularly among the youth, remains a pressing concern. While it reportedly fell to 13 percent at the start of 2025 and was 13.4 percent in May 2025, Trading Economics projects it to reach 15 percent by the end of 2025. Female unemployment is notably higher, standing at approximately 18 percent. With nearly 60 percent of the population under the age of 25, widespread youth unemployment fuels social unrest.
• Systemic Corruption: Corruption is deeply embedded within Iraq's public administration and economic policy, leading to the loss of hundreds of billions of dollars over the past two decades. Iraq consistently ranks among the most corrupt nations globally according to Transparency International's Corruption Perceptions Index. This pervasive issue undermines public services, hinders infrastructure development, and discourages private sector investment.

Pathways to Reform and Stability

Addressing these challenges requires comprehensive reforms focused on economic diversification, private-sector development, improved governance, and strengthened public service delivery. International bodies such as the International Monetary Fund (IMF) and the World Bank have consistently emphasized the need for structural reforms to reduce oil dependency and enhance the efficiency of public expenditure.

Efforts are reportedly underway to modernize the banking system, stabilize local markets, and attract investment. The establishment of the Iraq Development Fund and regulatory improvements are part of initiatives aimed at diversifying the economy beyond oil. However, the success of these reforms hinges on the ability of the newly formed government to overcome political fragmentation and implement sustained, impactful changes that can foster long-term economic stability and prosperity for Iraq.