Baghdad, Iraq – A colloquial phrase by Iraqi Minister of Health Abdul Hussein al-Musawi uttered at a meeting for medical staff, health workers and others in Baghdad made many Iraqis concerned. “There is no money,” he said, which, to many, seemed closer to an official declaration regarding the scale of the financial distress facing the Iraqi state. In an unprecedented moment of candour before his ministry’s employees, the minister revealed that the government has now placed securing salaries at the forefront of its priorities amid a stifling liquidity crisis. This marks the first time a government minister has spoken so clearly about the difficulty of financing the state’s basic expenditures.

According to the minister, the Iraqi government needs approximately 10.8 trillion dinars per month ($8.24bn), based on the Central Bank’s exchange rate, to cover salaries and basic obligations. This comes at a time when oil revenues are declining sharply following the halt of exports through the Strait of Hormuz, bringing back to the forefront the fragility of Iraq’s single-resource-based economy.

What is the public saying?

The effects of the financial crisis have begun to surface in street conversations, particularly among employees anxiously awaiting their salaries amid fears of mounting living pressures.

Government employee Amira Ali tells Al Jazeera the delay in salary disbursements has directly impacted the daily lives of families, forcing many to postpone meeting their basic needs.

She adds that the continuation of the crisis will lead to a further decline in living standards, alongside rising living costs and the difficulty of providing for family requirements.

Meanwhile, government employee Bashar Sabbar tells Al Jazeera that the delayed salaries have cast a shadow over employees facing financial obligations and repayment deadlines that cannot be postponed.

He notes that despite the extent of harm inflicted on citizens, the repercussions of the disruptions in the Strait of Hormuz and the current economic crisis present challenges that exceed the government’s capacity, emphasising that the citizen remains the weakest link and the most affected by the crisis.

Financial gap

A government source revealed to Al Jazeera that the crisis has moved beyond the warning stage, following the widening gap between the state’s actual revenues and its monthly obligations.

The source, who requested anonymity, says the total salaries of civil servants, retirees, and social welfare beneficiaries amount to 7.8 trillion dinars per month ($6bn). While the government has managed to disburse 3.5 trillion dinars so far ($2.7bn), and the Ministry of Finance provided an additional 1.65 trillion dinars ($1.3bn), this still leaves a deficit of 3.2 trillion dinars ($2.4bn) to cover the current month’s salaries.

He adds that state revenues during the past months of May and June did not exceed 3 trillion dinars per month ($2.3bn), a figure far lower than the volume of current spending, primarily on salaries.

The Hormuz shock

The crisis comes at a time when the government of Prime Minister Ali al-Zaidi was proposing an economic program based on implementing the “Development Road” project and expanding partnerships with the private sector and international companies, in an attempt to restructure the economy and reduce its reliance on oil.

However, the closure of the Strait of Hormuz exposed the limits of Iraq’s ability to face crises. The halt in oil exports led to a sharp decline in revenues, compounded by the stalling of projects to diversify export outlets through Turkiye, Syria, Jordan, and Saudi Arabia due to years-long political disputes, leaving the government facing an unprecedented financial test.

In an official acknowledgement of the crisis, Iraqi government spokesman Haider al-Aboudi said last Friday that the government may be “forced into domestic and external borrowing” if the repercussions of the Strait of Hormuz closure continue.

Austerity options

Government sources revealed to Al Jazeera that the crisis has prompted the government to prepare a broad program to rationalise spending, following the faltering of its plans to expand the role of the private sector, which primarily clashes with the electricity crisis.

The sources explain that “the electricity bill collection rate does not exceed 14%, leaving 86% of collection dues unpaid,” depriving the state of one of the most important resources it relied upon to finance energy projects.

The sources add that the government is considering reducing the annual allocations for the Ministry of Trade from 12 trillion dinars ($9.2bn) to 7 trillion dinars ($5.3bn), which will lead to a reduction in the items of the food ration card, limiting its distribution until the end of the year to only two quotas per family.

The plan also includes levying a fee of 4,000 dinars ($3) on each ration card and reducing the number of beneficiaries from 27 million to 20 million citizens, while considering delaying the inclusion of children in the ration card system until they reach the age of three. The government expects these measures to save between 700 and 800 billion dinars annually ($611m).

The austerity measures do not stop there, as they also include considering a reduction in purchase volumes of the wheat crop, while attempting to maintain the economic viability of agriculture, in addition to reducing the number of foreign diplomatic attaches and cutting the allocations granted to the regions.

Several experts and observers believe that what Iraq is experiencing today does not represent a liquidity crisis as much as the result of many years of reliance on oil as the backbone of the state’s public treasury.

Every decline in exports is directly reflected in salaries, services, and spending, which causes related crises to quickly turn into internal ones that primarily impact the employee salaries upon which the market depends.

In the absence of alternative income sources capable of offsetting this reliance, public finances remain vulnerable to volatility with every shock in the energy markets or export routes.