Direct Policy Foundation Team

Introduction: A Trillion Dollars Without a Reserve

Between 1927 and 2003, Iraq earned roughly $283 billion in oil revenues; between 2003 and 2022 alone, it earned about $1,310 billion, according to an estimate by Issam al-Chalabi, who served as oil minister from 1987 to 1990 

These are nominal figures, unadjusted for inflation, and they are not drawn from a continuous series of audited government accounts. Even so, the scale is not in dispute — and neither is what happened when navigation through the Strait of Hormuz was disrupted in early March 2026. Oil exports fell from roughly 93–100 million barrels a month to 9,884,130 barrels in April, according to SOMO’s final figures. Monthly revenues fell from about 9.2 trillion dinars to roughly 1.4 trillion.

How large a gap that opened depends on what it is measured against. The Prime Minister’s financial adviser, Mazhar Mohammed Saleh, put the monthly financing gap at about 12.5 trillion dinars, or $9.5 billion, relative to fully budgeted spending. Measured against actual execution, the number is smaller: expenditure over the first four months of 2026 ran at about 9.4 trillion dinars a month, and Finance Minister Faleh al-Sari described a salary-specific shortfall of roughly 5 trillion dinars a month. Central Bank Governor Ali Mohsen al-Alak described the situation as no longer a deficit on paper but an actual and chronic one 

Despite collecting over a trillion dollars in twenty years, Iraq lacked a dedicated reserve to draw on when revenues stopped. The legal basis for saving exists: Article 19/II of the Federal Financial Management Law No. 6 of 2019 requires that surplus revenues, after covering any deficit, be set aside in a “sovereign fund”. Although the law was published on 5 August 2019, no institution has been established to implement it.

The issue is no longer whether Iraq should establish a sovereign fund, since the rule exists and a fund has been announced. The challenge is to create an effective institution. Without disciplined fiscal management and enforceable governance, the fund will not represent true savings but simply shift spending to a less supervised area.

Despite substantial oil revenues and a legal framework for saving, Iraq did not establish a functioning institution. This fiscal vulnerability became clear when exports were disrupted.

 

First: An Incomplete Rule and an Absent Execution

The problem with the 2019 provision is not only that it went unimplemented, but also that the text is deficient in itself. It does not create a fund, nor does it address governance, investment policy, or withdrawal rules. It ties saving to a surplus realized within a single fiscal year — a rare condition given Iraq’s spending structure. More importantly, the same law requires that all oil and gas revenues be paid into the general budget and delivered to the public treasury. Any deduction at source, before revenues enter the spending cycle, therefore requires amending the law or aligning the fund with it. Passing a separate statute alongside it is not enough.

The failure to implement the provision stems from Iraq’s spending structure. Salaries for employees and pensioners make up about half of public expenditure, and oil financed over 92 percent of budget resources in the first half of 2025. In this context, a surplus is not what remains after meeting spending needs, but what cannot be spent further. When the export corridor closed, the treasury had no earmarked assets to liquidate, leading to increased domestic borrowing and monetary expansion. Domestic debt reached a record 103 trillion dinars by May 2026, with about 8 trillion borrowed in April alone. Analyst Mahmoud Dagher expects debt to rise to 130–140 trillion if the crisis continues. The lack of savings provided no protection, turning a planned deduction into a later obligation with interest.

Because the 2019 rule was incomplete and unenforced, Iraq relied on borrowing and monetary expansion during the crisis rather than on prior savings.

Second: Wealth That Never Accumulated

Had Iraq set aside only 10 percent of its oil revenues between 2003 and 2022, the total transferred to a fund would have been roughly $131 billion before any return. Because those revenues were heavily concentrated in the later years, the average contribution has been invested for around eleven years rather than twenty. At a conservative nominal 5 percent, the portfolio would today be worth roughly $225 billion; at the 6.86 percent annualised return the Norwegian Government Pension Fund Global has achieved since 1998, closer to $270 billion. 

This is an illustration built on stated assumptions, not an audited estimate, and it is deliberately an upper bound: a flat 10 percent deduction in deficit years would itself have been debt-financed saving, which the fifth section of this paper argues against. A rule-based version would have accumulated less, but at no borrowing cost.

Even at $225 billion, the portfolio would cover roughly two years of the widest measure of the current monthly gap, and closer to four years of the narrowest. The amount actually available for drawing would have been confined to the stabilization portfolio and governed by its rules, not the whole fund, since generational money is not money for present spending. Distributed arithmetically across the 46,118,793 people recorded in the 2024 census, it works out to an accounting share of roughly $4,900 per person — a figure that means little unless set against each citizen’s share of the public debt, a point returned to below.

A modest deduction from oil revenues could have created a substantial portfolio, but its value and utility depend entirely on underlying assumptions and withdrawal policies.

Third: An Idea Announced but Never Institutionalized

In August 2021, then Prime Minister Mustafa al-Kadhimi stressed the importance of laying the groundwork for a “Generations Fund.” In February 2025, the prime ministerial adviser Amer al-Adhadh explained that establishing any sovereign fund requires legislation by parliament, and that what had been floated earlier was no more than media talk. That description captures the root of the problem: the idea keeps being presented as a prime minister’s project rather than a permanent institution of the state, and so it expires with his term.

The pattern is repeating on a larger scale. In June 2026, Prime Minister Ali Faleh al-Zaidi announced an “Energy and Development Fund,” to be initially financed by revenues equivalent to 500,000 barrels per day, with the possibility of expanding to 2 million barrels per day and potentially operating outside OPEC quota constraints. Its accounts were to be held at leading American banking institutions, and its resources deployed through agreements with American companies in electricity and infrastructure, with the fund projected to mobilize around $400 billion over three decades. The announcement came amid a package of agreements and a memorandum of understanding signed with the American side in July 2026, without publication of an official text confirming that the fund formed part of that package. By 1 July, the design had already shifted: al-Zaidi said the fund would be backed by the Central Bank of Iraq, offered for public subscription, and opened to Saudi, Emirati, and Qatari participation alongside American and European funds and banks. A vehicle whose shape changes twice in a fortnight is precisely the kind that needs a statute rather than an announcement.

Two issues precede any assessment of the project. The first is that the significant question is not domicile. Iraq’s oil revenues have been held since 2003 within existing arrangements at the Federal Reserve Bank of New York, an arrangement that gives Washington practical leverage over a critical financial chokepoint even though the account remains Iraqi sovereign property. Opening additional accounts in the United States does not, in itself, introduce any new dependency. What is new is the legal character of the vehicle: a fund that invests in projects executed by American companies is not a receipts account, and it raises questions the existing arrangement never had to answer — who owns the account, who holds the assets, on what conditions they may be transferred, what immunities attach, and who has authority to order disbursement.

The second issue is that Iraq already has a development institution. The Iraq Fund for Development, established under Regulation No. 3 of 2023, is mandated to develop non-oil resources, attract capital, and build partnerships with the private sector; creating a second development window beside it risks institutional duplication before any savings actually occur.

Fund initiatives continue to appear as temporary government projects, and the latest proposal raises concerns about its legal structure and potential overlap with the Iraq Fund for Development.

Fourth: Three Gulf Models

The Kuwaiti model. Decree-Law No. 106 of 1976 required an annual transfer of at least 10 percent of public revenues to the Reserve Fund for Future Generations. Law No. 18 of 2020 converted that mandatory transfer into one conditional on a realized surplus, on the recommendation of the responsible minister. It passed at a moment when the General Reserve Fund’s liquidity had eroded to roughly two billion dinars against monthly drawdowns of about 1.7 billion. The savings rule was not broken by an explicit decision; it was hollowed out through a quiet legislative amendment passed in a moment of incapacity. The lesson is not that surplus-conditional saving is wrong; this paper recommends it. The lesson is that the amendment procedure, not the formula, is what needs fortifying.

The Emirati model, and Abu Dhabi in particular, offers a lesson in separating functions, though the separation is not absolute. The Abu Dhabi Investment Authority (ADIA) manages government capital through a diversified global portfolio with a long-term horizon, aiming for sustainable financial returns. Mubadala, by contrast, combines financial returns with strategic investments in sectors that diversify Abu Dhabi’s economy and build national companies and new industries at home and abroad. No single institution carries both the preservation of wealth and the financing of economic transformation; the functions sit in separate bodies with different mandates and priorities. That separation reduces conflicting objectives, shields generational savings from domestic spending pressure and quota politics, and prevents duplication.

Saudi Arabia’s Public Investment Fund takes the opposite approach, combining investment, development, and quasi-fiscal roles within a single portfolio. Its announced strategy for 2026–2030 acknowledges the difficulty of balancing developmental impact against financial return and adopts dual evaluation models in response.  A state with solid fiscal discipline may absorb that complexity. A state still building its governance system will struggle.

The point generalizes beyond the Gulf. In July 2026, the International Monetary Fund argued that legal separation — whether through independent funds or legally ring-fenced windows — is the better way to pursue distinct mandates, citing the Nigeria Sovereign Investment Authority as a model.

Kuwait demonstrates how a savings rule can erode over time, while the Emirati and Saudi examples illustrate the governance and accountability impacts of separating or merging mandates.

Fifth: The Fiscal Rule Before the Fund

The alternative approach begins from a governing observation: a fund does not create a surplus. Unless it is preceded by a fiscal base that constrains current spending and the public payroll and sets a clear benchmark for the non-oil deficit, the fund becomes a new front for state borrowing and spending. Five pillars follow.

1. A composite savings rule, not a fixed percentage during a deficit. A fixed deduction under a chronic deficit means, in practice, borrowing to save—placing money at a lower yield while carrying debt at a higher cost. The IMF documented this in Ghana, which saved about $500 million across two sovereign funds between 2012 and 2014 while borrowing nearly $7 billion at rates exceeding the funds’ returns by roughly five percentage points. Gabon showed the same pattern, depositing at lower yields while paying higher interest on external debt. A New Fiscal Framework for Resource-Rich Countries. The alternative is a three-step rule: transfer only when a reference price or declared structural balance is exceeded; settle arrears and high-cost debt first; then move the remaining surplus into the designated windows.
2. Two windows, not three. A stabilization window and a generational window, legally separated, each with its own mandate, withdrawal rule, and independent performance measure. The development function stays with a reformed Iraq Fund for Development to prevent duplication. Norway achieves stabilization through its fiscal framework rather than a second fund: over the long run, the non-oil structural deficit should not exceed the fund’s expected real return, estimated at 3 percent. Iraq needs the harder version, legal ring-fencing, because its level of fiscal discipline alone will not support a framework.
3. Realistic sequencing. The immediate priority is the law and the governance system, with an explicit prohibition on debt-financed saving. Once revenues recover, build a stabilization reserve covering three to six months of core expenditure. Only later should structural surpluses feed a generational fund invested exclusively abroad, protecting it from quota politics and from concentrating risk inside the very economy it exists to insure.
4. Integration with the budget, not escape from it. All revenues must pass through the treasury and the official accounts, and every transfer and withdrawal must appear in the budget law and the final account. This is the basic safeguard against a shadow budget, and it aligns the fund with the 2019 law rather than setting it against it.
5. Protection against quiet amendment. An ordinary law cannot prevent a later parliament from amending it by a simple majority, so a qualified-majority requirement is a political guarantee rather than an enforceable legal defense. Procedural safeguards are more effective: a mandatory interval between the tabling of an amendment and the vote on it, publication of an independent fiscal assessment, two separate voting sessions, and a bar on passing amendments by insertion into the budget law — alongside consideration of constitutional entrenchment at a later stage.

Two further dimensions cannot be overlooked. The first is federal: the law should define the fund’s relationship with the Kurdistan Region and the producing governorates under Articles 111 and 112 of the Constitution, rather than relying on a general formula of shared ownership. The second is that the resilience required is not only fiscal. The Hormuz crisis showed that a fund can offset a revenue interruption but cannot address an export interruption. Diversifying export outlets and building strategic storage and alternative routes must proceed in parallel.

The alternative approach links the fund to a fiscal rule, separates stabilization from generational savings, integrates the fund into the budget, strengthens procedural safeguards, addresses federal arrangements, and diversifies export outlets.

Sixth: From Rent to Shared Ownership

Oil revenue is contested by blocs and provinces in annual negotiations, and that contest is one of the engines of identity-based division. Converting part of it into an equally owned asset could change the character of the relationship with the wealth itself — from a share divided each year into joint ownership that is neither distributed annually nor subject to periodic bargaining.

The idea can be made concrete by publishing an annual per capita accounting share of net sovereign wealth. What is meant is precisely an accounting division, not a personal account or a withdrawable right. Norway’s fund is worth roughly four million kroner per registered resident, but that figure functions as an indicative measure rather than an individual balance. It should be published alongside per capita public debt, because presenting assets in isolation from liabilities gives a misleading picture of net wealth.

The political effect remains a possibility, not a guaranteed outcome. It depends on transparency, on building durable public trust, and on equitable representation in the fund’s management. If those conditions hold, the fund may address something the numbers alone do not reveal: the barrel extracted today also belongs to the Iraqi who will be born thirty years from now, and there is no moral or economic justification for one generation consuming the full value of a depleting resource.

A fund could transform part of the rent into shared national ownership, but its political impact relies on transparency, public trust, and equitable representation.

Recommendations

First, adopt a fiscal rule before establishing the fund, including a ceiling on the growth of current spending and the public payroll, and a declared benchmark for the non-oil deficit.

Second, legislate a dedicated fund law through the Council of Representatives, consistent with Federal Financial Management Law No. 6 of 2019, that defines the fund’s mandate, its financing source, and its deposit and withdrawal rules before any further funds are deposited into it. If a vehicle proceeds ahead of that law, it should, at a minimum, be barred from receiving deducted oil revenue until the statute is in force.

Third, adopt a composite savings rule based on surplus or extraordinary rent rather than a fixed percentage deducted during deficit, giving priority to clearing arrears and high-cost debt.

Fourth, legally separate the stabilization and generational windows and confine the structure to those two, keeping the development function with the Iraq Fund for Development after its reform, and defining the fund’s relationship with the Kurdistan Region and the producing governorates under Articles 111 and 112 of the Constitution.

Fifth, integrate the fund into the budget and the final account, subject it to the Financial Supervision Bureau and to independent external audit, prohibit borrowing against its assets without legislative approval, and adopt the procedural safeguards that protect it from quiet amendment.

Sixth, publish the per capita accounting share of net sovereign wealth paired with the per capita share of public debt, and work in parallel to diversify export outlets, because a fund offsets an interruption in revenue, not an interruption in exports.

The fund’s effectiveness requires a disciplined fiscal base, a clear separation of functions, full budgetary integration, independent oversight, and parallel treatment of the fragility of Iraq’s export routes.

Takeaways

The 2026 crisis tested Iraq’s institutional engineering more than the size of its wealth. A country that has received more than a trillion dollars found itself borrowing to pay a single month’s salaries, not because the legal rule was missing, but because the text was written without the institution capable of executing it. The present moment is a rare opening: a legal basis in place since 2019, a fund under construction, a new parliament, and a crisis that made the cost of delay unmistakable.

The opening can still be missed if the order of priorities is reversed. A fund that fills before its governance rules are settled does not preserve the wealth of future generations; it relocates state spending into a less supervised space. The institution should be built before the treasury is full, not after.

The 2026 crisis revealed that Iraq’s problem is institutional rather than financial, and that a fund succeeds only if its governance and rules are built before its resources accumulate.