Crude oil exports have turned into a leading sector of the economy since 2003. Increased oil prices following the COVID-19 pandemic have led to higher government expenditures, which, in turn, have created a significant burden on diversifying the economy in non-oil sectors and implementing large-scale infrastructure and social projects that contribute to the country's sustainable socioeconomic development. The focus on the oil sector had negative trends on the economy, a decrease in the share of the non-oil tradable sector of the GDP, and depreciation of the real exchange rate of the Iraqi dinar. The story of Iraq’s economic turmoil is unique with many macroeconomic fiascos that are tightly related to years of wars and internal conflicts, Iraq is a classic case of what is known as the “oil curse” but undoubtedly not linked to the “Dutch Disease” concept, which ideally should have led to an appreciation of a country’s currency due to a rise in oil exports, Iraq’s non-oil sectors such as manufacturing and agriculture have weakened post-2003 exasperated by increase in oil production besides sharp depreciation of the country’s currency. Thus, Iraq’s economic model of Dutch Disease has turned to what we call “Iraq Syndrome”.

This report investigates Iraq’s oil-dependent economy due to more than 50 years of central government control over the economy and socialism. The study found that government expenditures, primarily sourced from oil revenues, have worsened the “spending effect” in the last two decades due to an absolute and relative increase of employment in the public sector— another unprecedented symptom of a syndrome that has not been seen in Dutch Disease theory before. The situation exacerbated the economy with two dilemmas, namely high government spending due to bloated public service and weakened private sector participation in the country’s GDP, especially in the agriculture and manufacturing sectors.

The combination of these two effects has created three testable predictions of Iraq Syndrome: (a) a decline in the manufacturing sector; (b) a surge in the overall government operational budget; and (c) high demand for foreign currency, due to an increased import of most consumable goods.