Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)

Original Articles: 2021 Vol: 25 Issue: 5

Financial Sustainability in Iraq and Its Role in Reforming Fiscal Policy Duration (2005-2015)

Rajaa K. Abbood Al-rubaye, Babylon Education Directorate

Rajaa Jaber Abbass, Univesity of Warith Alambiyaa

Hind G. Almohana, University of Kufa

Citation Information: Al-rubaye, R.K.A., Abbass, R.J., & Almohana, H.G. (2021). Financial sustainability in iraq and its role in reforming fiscal policy duration (2005-2015). Academy of Accounting and Financial Studies Journal, 25(5), 1-16.


The Iraqi economy is suffering from structural imbalances, which are weak in the contribution of the economic sectors (agriculture, industry, services) in the GDP, and there is an expansion in public expenditure compared with limited public revenues, which caused a deficit in the general budget of the country over the years of study. The Iraqi economy needs to apply the principle of financial sustainability to the public debt and try to extinguish it, and indeed efforts were to monetary and financial policy in this area through the concealment the establishment of a new currency and the preservation of the financial reserves of the Central Bank of Iraq, and interest in taxes and the adoption of the policy of rationalization of spending, as well as a package of economic reforms reflected on the economic stability of the country, and research concluded that the financial sustainability of the Iraqi economy step in the direction as it serves the process of comprehensive economic development as reflected in the permanence of work and non-bankruptcy and avoid international crises by reducing the dependence on oil as the main source of revenue and the policy of economic diversification and diversify the sources of public revenue for ululation.


Iraqi Economy, Agriculture, Industry, Services, Central Bank of Iraq.


The phenomenon of the public budget deficit and the increase in public debt has grown and developed in recent times, which has called most of the economic literature to study the effect of public debt on financial sustainability and financial assessment and the state’s ability to pursue the stream of public spending and fulfill its financial obligations, due to its importance on the theoretical and practical levels. As well as its impact on the design, implementation and effectiveness of macroeconomic policy, and it is considered the basic indicator for measuring the strength and durability of the economy, and its ability to absorb internal and external economic shocks. The views of economic schools on the feasibility of financing with public debt have differed since the sixteenth century between its supporters and opponents, as some of the schools of thought in support see that debt financing stimulates economic activity and leads to the economy reaching full employment without burdening the current generations. While other schools see the opposition (Abdul-Jabbar, 2016). The public debt has negative effects on the public budget, because the debt in the long term is reflected in the burden on future generations, but abandoning the gold standard after World War I and allowing unrestricted monetary issuance and the succession of economic, financial and political crises, led to an increase in the pace of public spending and thus an increase the public debt and the deficit in the general budget. The budget deficit is due to many factors, the most important of which are the economic structure of the state, the social obligations it adopts, the emergency conditions it faces, whether economic or political, the degree of diversification of sources of public revenues, aspects of public spending, and it is noteworthy that the budget deficit is often its severity appears in developing countries, especially if their primary exports of raw materials are exposed to external shocks. Its public revenues and sudden pressure on public spending. All this is reflected in the budget carrying additional burdens to cover debt interest, which again leads to an increase in the deficit in the later stages, an increase in the demand for borrowable funds, the emergence of the effect of competition, and an increase in interest rates. Which is reflected in the authorities' push to withdraw from reserves or a new cash issue (Inflationary financing), which has severe implications for the process of growth and economic development. The Iraqi economy suffered from financial deficits during the study period, the reasons for which are due to the rentierness of the Iraqi economy and the increase in public spending due to wars and administrative and financial corruption. As well as its vulnerability to international crises and low oil prices, which led to the inability of its limited revenues to keep pace with public expenditures, which needs to apply financial sustainability indicators to ensure sustainability. Its economy and stability, not being exposed to bankruptcy or a decrease in the purchasing power of its currency and the stability of the exchange rate of its currency, which is reflected in the increase in confidence in the Iraqi economy and the failure of the investment approach to weakness, the continuation of services and the employees' obtaining their salaries on time.

First: the Research Problem

In light of the increasing government spending, the increasing budget deficit and the inability of public revenues to keep pace with that spending. As well as the absence of an effective tax system, administrative and financial corruption and structural problems in the Iraqi economy. As well as the burden of public debt on the state due to the wars that the state fought during this period.

Oil revenues constitute half of the gross domestic product and more than 90% of the general budget revenues, and the accumulation of debts in the last quarter of the last century called for the pursuit of financial sustainability in various forms through new mechanisms, but the focus was on the sustainability of public debt.

Second: The Importance of Research

The importance of research lies in achieving financial liquidity, providing solvency, and ensuring the sustainability of the economy in all its sectors without interruption despite the political and economic crises that Iraq is exposed to, as well as providing funds to confront the war effort against the enemies. As well as interest in debts and converting them to serve economic development and increase revenues and not passing it on to future generations.

Third: the Research Hypothesis

The research starts from the hypothesis that (if financial sustainability is achieved it has a major role in creating economic stability in Iraq, provided that it controls the external and internal debts and strives to maximize the state's public revenues through taxes, reduce imports and economic diversification, and eliminate administrative and financial corruption).

Third: Research Objective

The research aims to

  1. Analyzing, testing and evaluating Iraq's ability to achieve financial sustainability in light of the deficit in the public budget.
  2. Explaining the role of financial sustainability in reforming the financial policy in Iraq.

Fourth: Research Structure

For the purpose of achieving the research its objectives, it is divided into three sections, the first deals with financial sustainability, conceptual and intellectual aspects, while the second topic deals with the study and analysis of financial sustainability indicators, while the third section deals with the reality of financial policy in Iraq during the period (2005-2017).

The First Topic: Financial sustainability is both conceptual and intellectual aspects

First: Financial Sustainability

The term Financial Sustainability is one of the terms used in financial policies, and there is no agreement on a specific definition of this term, but it can be defined (the financial situation in which the country is able to continue the current expenditure and revenue policies in the long term without reducing its solvency or exposure. The risk of bankruptcy or failure to fulfill its future financial obligations), and financial sustainability depends on the existing situation and long-term future expenditure and revenue expectations, and according to these expectations current policies are modified, whether by increasing or decreasing expenditures or revenues. The term financial sustainability is related to another term.

It is the financial gap, which is defined as the difference between the present value of all the state’s obligations and its future revenues. The purpose of the financial sustainability that countries seek is to cover fiscal deficits and on easy terms. One of the factors affecting financial sustainability is the rise in the state’s public debt, interest rates and real local product growth as well the growth rates of expenditures and revenues. In order to ensure the continued financial sustainability of the state, legal and economic frameworks must be in place to limit the growth of the costs of current spending programs, or to allow them to grow in equipment. Countries seek to achieve financial sustainability in order to enable them to borrow to cover the financial deficit on easy terms, and in the event that countries lose the principle of financial sustainability, they become vulnerable to a lack of confidence in the ability of their markets to fulfill their financial obligations. Which pushes creditors to stop lending to them, and the high ratio of public debt to GDP is one of the most negative factors affecting the country's continued enjoyment of financial sustainability as well as real interest rates, real GDP growth rates and the growth rates of expenditures and revenues. Financial sustainability depends on its implementation on an economy. Diversified and does not depend on a single sector, but rather on foreign investment and small and medium enterprises, and financial sustainability reflects the success of the fiscal policy. The economic recession that swept the world after the financial crisis that occurred in 2008 has pushed most countries to adopt expansionary investment policies in spending in order to avoid a recession in the markets, which was reflected in the exposure of these countries to an increase in the balance of payments deficit that requires adopting the principle of financial sustainability to ensure the continuation of the economy in a healthy way.  The reasons for applying financial sustainability in most countries of the world were the periodic economic crises in the capitalist world, the steady rise in the size of the financial costs required for production in the long run, and the demographic and climate change due to global warming and the ineffective exploitation of economic resources.

Second: The Relationship of Financial Sustainability with sustainable Development

There is a difference between financial sustainability and sustainable development. Sustainable development refers to achieving economic growth, taking into account environmental dimensions that ensure the preservation of natural resources and not wasting them, as well as social dimensions and protection programs for people with limited incomes. The spread of the concept of sustainable development in development thought came after the results of the (Stockholm) Conference on Sustainable Development in 1972, which included the necessity of preserving the environment and natural resources, due to the emergence of environmental incidents and their global impact. Consider the negative effects resulting from them, and their impact on humans, natural resources and the environment (Al-Faris 2001).

Third: Opinions of schools of thought on Financial Sustainability and Public Debt

There are several opinions of schools of thought on public debt and its relationship to financial sustainability, including the classic school that is based on assumptions of government non-interference in economic activity and the adoption of an economic structure based on belief in the freedom of individuals to act, free competition and the principle of free trade. Considering that the flexibility of prices and wages is sufficient to create a state of full employment, as she believed in the balance of the public budget and rejected government intervention in it.

It is noteworthy that it has an opposing trend in financing increasing public expenditures with public debt, derived from the idea of ??automatic balance or the idea of ??neutrality of fiscal policy at the level of full employment, that financial sustainability has its roots from the classical theory, especially the writings of David Hume, Adam Smith and David Ricardo who mainly discussed the effects of public debt On economics and how to finance the deficit through a comparison between taxes and borrowing to finance the deficit, which is later known as the Ricardian equivalent by Robert Barrow in 1074, as well as the time constraint of the government budget presented by (Hamilton and Flavin) and inspired by the theory of consumer maximization, and the principles that the classic relied on to clarify The concept of financial sustainability (Ricardian equivalent, non-Ponzi financing, and time budget constraint) is based on achieving financial balance for the public budget, and the deficit, if any, is paid with taxes in the future, so that it equals the current value of the public debt, taking into account that the future revenue stream devolves into the public debt to zero. The classical thought took an opposing trend to public debt, and the idea of deficit financing did not gain acceptance, because it leads to higher interest rates and future tax increases to meet the debt burdens, as well as considering government interference in economic activity as a disruption of economic stability.

These ideas continued until the Great Depression at the end of the second decade of the twentieth century, while the Keynesian school had another opinion that contradicts the principles of classicism, which is the importance of government intervention in economic activity, and the state can direct the public debt to productive uses that enhance the effective demand that determines the aggregate supply. Keynes concluded that with the increase in income, the tendency to consume decreases and the tendency to save increases. Here, the problem of imbalance between saving and investment occurs, and the problem of unemployment and stagnation appears, and from here the state must intervene to increase public spending to stimulate effective demand. Whereas the monetary school led by (Milton Friedman), which focused on money, monetary policy and combating inflation, i.e. achieving monetary stability, and not achieving full employment, as the Keynesians claimed, and this can only be achieved through a strict monetary policy that balances the quantity of money with the growth of the national product. The monetary school believes that the causes of economic problems are due to the adoption of Keynesian policies that resulted in an increase in public spending, an increase in the budget deficit and public debt. To achieve this, the growth of the deficit in the public budget and the reduction of public debt, due to increased state intervention in economic and social activity, must be eliminated by reducing public spending, limiting public investment, and raising the interest rate on government loans. Whereas, the school of supply economics, stemming from neoclassical thought, considers that it agrees with the monetarists in limiting the role of the state, unleashing market forces and controlling the rates of money growth. Increasing production - given the Laffer curve, there is absolutely no fear of the effect this will have on budget revenues. On the contrary, it will increase tax revenues. The international institutions had another vision that was consistent with the neoclassic, as it affirmed that the capitalist system is able to automatically organize itself, balance and stability automatically, provided that it is free and competitive.

Also keeping the state away from interfering in economic activity, and it is known that the budget deficit is growing and exacerbated by the contrast between the growth of expenditures and the decrease in revenues, the deterioration of the purchasing power of money and the increase in the costs of the commodity and service production requirements that the state needs to perform its functions, as well as inflationary pressures, and the increase in public investment costs and financial sustainability. Therefore, international institutions turned to confirm that the treatment of the deficit in the public budget is done using the neoclassical vision, and confirmed that the capitalist system is able to automatically organize itself and rebalance it automatically, provided freedom and free competition.

The Second Topic

Application and Analysis of Financial Sustainability Indicators in Iraq

International experiences indicate that the deficit in the public budget continues, which has led to an increase in the public debt, which entailed carrying the budget with additional burdens to cover the interest of the debts, which was again reflected in the increase in the deficit in the later stages, and then borrowing money from abroad or from inside to finance the deficit, The increase in demand for borrowable cash balances and the effect of competition and the rise in interest rates, which led the authorities to withdraw from reserves or new monetary issuance (inflationary financing), which was reflected in the increase in overall demand for domestic and foreign goods and services, which was reflected in a series of negative consequences for growth and economic development. The financial crisis in 2008 led to countries resorting to stimulus policies in order to avoid a global economic recession, in return for a decrease in tax revenues, which caused huge financial deficits in many developing and even developed countries. The total is in many countries of the world. Therefore, sustainability indicators must be studied and analyzed to protect the Iraqi economy and are summarized as follows:

First: the Ratio of Public Debt to GDP:

The International Monetary Fund defines public debt (as the total liabilities that require the performance of the principal and interest, on a specific date or dates, and it consists of all obligations represented by debt instruments, namely: debt bonds and bills, loans, SDRS, currency and deposits, insurance systems, and pensions. Consolidated guarantees, accounts payable), and that financing government expenditures can be done in two ways, the first is through taxes and the second, through borrowing, which is usually called public debt. The government public debt in developed capitalist countries grew significantly after the Second World War and so far, and that was because of the frequent wars and economic crises, as well as the great expansion of social and economic jobs, the expansion of state functions and the scientific and technological development. The rates of increase in the ratio of public debt to gross domestic product are among the most influencing factors on the sustainability of the country's financial situation, in addition to government spending that has increased at a higher rate than the growth of public revenues (Al-Ali, 2012).

Capitalism has known since the last century the phenomenon of exporting capital in its two forms, as capital for production and capital for credit. It granted loans, provided credit, and marketed bonds to Egypt, Tsarist Russia, and the Ottoman Empire. Suddenly, in the seventies, the external indebtedness of the various countries doubled and turned into a global phenomenon. In the 1980s, it turned into a global crisis, as the external debt of developing countries doubled several times, reaching in 1960 about 18 billion in debt service of 2.6 billion dollars, which increased in 1970 to reach 74 billion dollars with the aim financing the deficit in the balance of its payments or providing external financing for economic development, then it rose to $ 1,000 billion in 1980 with a debt service estimated at $ 68 billion. While the increase in financial deficits strengthened the current account in developed European countries and the United States of America, due to the age structure of the population, unemployment and the position on taxation, which damaged the relationship with the requirements of stimulating economic growth, such as the increase in military spending in the United States, all these factors have contributed The increase and continuation of the fiscal deficit, which fueled the external deficit by relying on deficit financing on foreign inflows as a result of investment in safe assets. Debt management is the process of developing and implementing a strategy for managing government debt in order to provide the required amount of financing and achieve the government's objectives related to risk and cost management, and most countries have sought to create non-inflationary sources to finance the fiscal deficit by developing their financial markets and maintaining their monetary and economic efficiency. The expansion of the public debt base comes from the economic crises and wars that result in stagnation in economic activity, which pushes the state to external borrowing. The size of the public debt is measured through its ratio to the gross domestic product, and whenever the gross domestic product and national wealth grow positively and steadily there is no those who are concerned about the public debt, but about the increase in the ratio of public debt to the national product, this negatively affects economic activity, as it pushes countries to raise taxes to finance the deficit, in addition to high interest rates and the emergence of competition, and the Central Bank of Iraq, after obtaining independence in the decision and in terms of debt sustainability, had a major role through understandings with international institutions (the International Monetary Fund and the World Bank), and on 21 | 2 | 2004, the Paris Club issued 80% in exchange for obliging Iraq to implement economic reforms (Salih, 2009).

From the observation of Table 1, we see that the size of the Iraqi external debt reached in 2004, about 125 billion dollars, which decreased to 114 billion dollars in 2005, and decreased in 2010 to about 88.61 billion dollars. The high oil prices played a major role in paying off a large part of these debts. It can be said that debts have dangerous effects on the country's economic future, so there must be a financial sustainability that requires compatibility between the size of the public debt and the burdens of servicing the public debt.

Table 1
Total Public Debt And Its Ratio To Gdp (Current Prices) (2004-2010) Billion Dollars
Years Internal Debt External Debt Total Debt Total Debt / GDP
2004 4.0777 125 129.0777 390.90
2005 4.257 114 118.257 270.48
2006 3.847 95.973 99.82 152.30
2007 4.137 99.522 103.659 117.04
2008 3.734 95.583 99.317 75.4
2009 6.887 89.911 96.798 80.6
2010 7.846 88.612 96.458 65.7
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