How the Strait of Hormuz Closure Is Pushing Iraq Toward Economic Collapse

Oil Exports in Freefall

Iraqi oil exports have plummeted from millions of barrels per day to roughly 400,000 barrels, a catastrophic decline that threatens to unravel the country's already fragile economy. The collapse in exports is a direct consequence of the ongoing U.S. and Iran conflict, now in its 34th day, which has effectively shut down Iraq's primary export route.

Since the United States launched its initial strikes against Iranian targets in early February 2026, the Strait of Hormuz, the critical maritime corridor through which the vast majority of Iraqi crude flows to global markets, has been essentially closed. It remains closed as of today. For a country whose national budget is overwhelmingly funded by oil revenue, this blockade is not just an economic setback; it is an existential threat.

A One Dimensional Economy Under Siege

Iraq's near total dependence on oil revenue is the result of decades of conflict and instability. Having only recently emerged from the devastating war against ISIS, the country has had neither the time nor the stability to diversify its economy in any meaningful way. Oil is not simply Iraq's largest source of income; it is virtually the only thing keeping the economy afloat.

The 400,000 barrels currently being exported are moving through two alternative routes, both of which carry significant political risk. Approximately 100,000 barrels per day are being transported by tankers through Syria, while the remainder flows from Kirkuk through the Kurdistan Region via the Ceyhan pipeline to Turkey. Neither Syria nor the Kurdistan Regional Government is on favorable terms with Baghdad, meaning that even these limited export channels could be cut off at any moment if political tensions escalate.

Making matters worse, the oil moving through these alternative routes is being sold at steep discounts and subjected to heavy service charges. Even with global crude prices trading above $110 per barrel, the actual revenue reaching Iraqi state coffers is far below what the country needs to function. The math is stark: the income generated under these conditions would not be enough to cover the salaries of public sector employees alone.

This is where Iraq's structural vulnerability becomes most acute. The Iraqi government is by far the largest employer in the country. For millions of Iraqi families, a government salary or pension is the sole source of household income. When the state cannot pay its employees, the consequences ripple through every corner of the economy, from markets and shops to housing and basic services.

With export revenue at a fraction of what is needed, the government now faces a ticking clock. Current projections suggest that Iraq has enough cash on hand to cover April salaries and maintain basic government operations through the end of the month. Beyond that, the outlook turns dire. Starting in May, the government is expected to struggle to meet its financial obligations, including payroll, essential services, and infrastructure maintenance.

The financial sector is already bracing for impact. Iraqi banks have begun imposing limits on cash withdrawals, a clear sign that institutions are preparing for the possibility of a bank run. With prices for basic necessities already rising and the war showing no signs of ending in the coming weeks, there is a growing risk that citizens will begin hoarding cash at home, draining the banking system of liquidity.

According to inside sources, banks are planning to suspend all withdrawals for both personal and business accounts beginning in the first week of May if conditions do not improve or new cash inflows do not materialize. This would be a devastating blow in a country where the economy still operates primarily on cash.

It is worth noting that the Central Bank of Iraq, even before the current crisis, had already identified this vulnerability. In a prewar effort to strengthen the formal banking system, the Central Bank urged citizens to deposit their Iraqi dinars and dollars into bank accounts, citing concerns about insufficient physical currency to meet demand. The war has now turned those concerns into an unfolding reality.

The economic crisis is compounding an equally dangerous security crisis. Iranian linked proxy militias operating inside Iraq have escalated their activities, launching attacks not only against U.S. forces and foreign institutions but also against targets in both federal Iraq and the Kurdistan Region.

What makes the current situation particularly alarming is that these militia groups have stopped coordinating with or taking direction from the Iraqi government. In a dramatic escalation, the militias have reportedly included Iraqi military and government assets among their targets. The United States has publicly warned that militia groups are expected to carry out attacks within Baghdad itself within 24 to 48 hours and that the Iraqi government is no longer in control of these armed factions.

This warning came just days after the Iraqi Prime Minister visited militia headquarters and publicly declared them an integrated part of the Iraqi armed forces. Following the U.S. statement, however, the tone from Baghdad shifted. A statement from the Council of Ministers suggested that the Prime Minister and several cabinet members are now attempting to distance themselves from the militia forces, most likely under pressure from Washington as U.S. strikes against militia positions inside Iraq continue.

A Perfect Storm Building

Iraq now finds itself caught between multiple converging crises. The Iran conflict has choked off the country's primary revenue stream. Alternative export routes are politically fragile and financially insufficient. The banking system is under strain. Government salaries, which sustain millions of households, are weeks away from potential disruption. And armed militia groups, nominally part of the state's security apparatus, are acting independently and destabilizing the country from within.

The political landscape adds another layer of danger. With competing factions, armed groups operating outside government control, and mounting economic desperation among the population, the conditions are forming for a crisis that goes well beyond fiscal shortfalls. If the war with Iran continues and the internal situation deteriorates further, Iraq could find itself on the edge of yet another civil conflict within a matter of weeks.

The international community and regional stakeholders should be paying close attention. What is unfolding in Iraq is not merely the fallout of a regional war; it is the potential collapse of a state that was already struggling to hold itself together.