Iraq And The Risks Of Closing The Strait Of Hormuz: Financial Repercussions And Strategic Options
Economy News – Baghdad Dr. Haitham Hamid Mutlaq Al-Mansour / Economist
In a report published by Reuters this week, JPMorgan warned that the continued closure of the Strait of Hormuz would place significant pressure on oil exports from Iraq and Kuwait, potentially forcing both countries to reduce their production in the near future.
This warning comes amid the strategic importance of the strait, which connects the Gulf to the Gulf of Oman and the Arabian Sea, and through which approximately 20% of global oil and liquefied natural gas trade passes, making it one of the most vital energy arteries for the international economy.
According to the aforementioned bank's estimates, a continued closure could halt a significant portion of oil supplies from both countries within a few days. Iraq possesses export reserves sufficient for only about three days, while Kuwait has a relatively larger capacity, enough to sustain exports for approximately fourteen days thanks to its available storage facilities.
With tanker traffic disrupted in this vital waterway, Iraq may be forced to reduce its exports through the strait. If tanker traffic continues to be disrupted in this crucial waterway, global oil supply could decline by approximately 3.3 million barrels per day by the eighth day of the conflict in the Middle East.
This could rise to about 3.8 million barrels per day by the fifteenth day, before reaching nearly 4.7 million barrels per day by the eighteenth day if the closure persists.
This scenario is particularly dangerous for Iraq given the rentier nature of its economy and its heavy reliance on oil revenues. Under normal circumstances, Iraq exports approximately 3.3 to 3.5 million barrels per day from its southern ports via the Gulf.
These exports constitute about 85–90% of total state revenues and nearly 60% of GDP, both directly and indirectly. Assuming an average oil price of $80 per barrel, halting the export of approximately 3.3 million barrels per day would mean a loss of about $264 million daily, equivalent to roughly $1.85 billion weekly.
These losses could exceed $8 billion monthly if the disruption continues.
These losses are quickly reflected in Iraq's public finances, as the annual budget amounts to approximately 150 trillion Iraqi dinars (around $115 billion), with over 90 trillion dinars of that amount dependent on oil revenues.
Therefore, a halt in exports for a period ranging from two weeks to a month could lead to a significant financial gap exceeding $6 billion to $10 billion, placing direct pressure on the government's ability to pay the salaries of 7 million employees, retirees, and social welfare beneficiaries, in addition to funding infrastructure projects and investment spending.
Furthermore, a decline in oil revenues of this magnitude could impact Iraq's foreign currency reserves at the Central Bank of Iraq, estimated at approximately $110-115 billion. The government might be forced to draw on these reserves to cover current expenditures and maintain the stability of the dinar's exchange rate.
As the crisis persists, Iraq's trade balance, which relies on crude oil for over 95% of its exports, could suffer a severe imbalance. This, in turn, would affect liquidity levels in the domestic economy and the state's ability to finance food and commodity imports.
Thus, the closure of shipping through the Strait of Hormuz could transform from a mere crisis in global energy markets into a direct financial shock to the Iraqi economy, given its heavy structural dependence on oil exports, most of which transit through this strategic waterway.
Therefore, we suggest several necessary steps to address and mitigate the impact of the lockdown shock, as follows:
First: The political steps to mitigate the risks of the shock are based primarily on balanced diplomacy, seeking to reduce regional tensions, and strengthening Iraq’s role as a conciliatory actor in the region, in a way that protects its economic interests and reduces its exposure to the repercussions of geopolitical conflicts.
Secondly: Economic steps. From a "technical-economic" perspective, one of the most important alternatives within the framework of strategic treatment is:
1.Adopt flexible oil export policies by diversifying export routes and reducing dependence on the Gulf. Iraq has an alternative outlet via the Kirkuk-Ceyhan pipeline, which transports oil to the Turkish port of Ceyhan on the Mediterranean Sea. This requires expediting its reactivation and increasing its export capacity to more than 1 million barrels per day, thus providing a strategic outlet away from the geopolitical risks in the Gulf.
Furthermore, efforts can be made to revive the Basra-Aqaba pipeline project, which connects Iraq to the Red Sea via Jordan, with a design capacity that could reach 1 million barrels per day. This would give Iraq an additional outlet outside the sensitive straits.
2. A flexible storage policy aimed at expanding oil storage capacity both inside and outside Iraq. Increasing storage capacity to at least 20 to 30 million barrels in southern ports or in external storage facilities gives Iraq greater flexibility to continue production even in the event of a temporary export disruption, instead of having to reduce production within a few days.
3. Adopting prudent fiscal policies that reduce overall dependence on oil for budget financing by increasing non-oil revenues, particularly taxes and customs duties, and by stimulating productive sectors such as agriculture and manufacturing. Raising the contribution of non-oil revenues from approximately 10% currently to 25% of total public revenues in the coming years will reduce the economy's vulnerability to oil price shocks.
4. One strategic financial measure is the establishment of a stabilization fund or sovereign emergency fund into which a percentage of oil revenues are transferred during periods of high prices. A fund of between $50 billion and $100 billion could provide a financial buffer, allowing the government to fund salaries and essential expenditures for several months in the event of a sudden export shock.
5. Iraq can work within the framework of coordination with OPEC and major producing countries to mitigate fluctuations in the global market, and seek temporary logistical arrangements in emergency situations, such as using pipelines or export facilities in other countries in the region.
Finally, the most effective solution is to diversify exports in the long term, so that oil is not the almost sole source of revenue. Increasing the contribution of non-oil sectors to GDP to more than 50% over the next decade will make the economy less vulnerable to geopolitical shocks. https://www.economy-news.net/content.php?id=66461