MEASURING AND ANALYZING THE IMPACT OF PUBLIC DEBT FINANCING RISKS ON THE BUDGET DEFICIT IN IRAQ FOR THE PERIOD 1990–2024

Resumo

In light of the growing challenges faced by developing and rentier economies, the issue of financing the public budget deficit through public debt has taken a prominent place in the concerns of economic policymakers and macro-financial analysts. This research aims to shed light on this problem from an analytical perspective in a developing oil-dependent country such as Iraq, covering the period 1990–2024. The study employs quantitative analysis using dynamic panel data models to understand and analyze the relationship between fiscal deficit and public debt, as well as the impact of other macroeconomic variables—such as monetary issuance, inflation, government spending, and GDP—on Iraq’s fiscal sustainability. The main finding is the existence of a long-term relationship among the key variables. Pedroni’s cointegration test revealed that these variables move together in the long run, despite differing short-term dynamics. The study applied standard tests such as Levin, Lin & Chu, which showed that all variables are non-stationary at level but become stationary after first differencing, supporting the validity of dynamic models. When estimating these relationships through PMG, MGE, and DFEE models, the PMG model demonstrated the best statistical performance according to the Hausman test, and was therefore adopted in analyzing the relationships. Results indicated a significant positive effect of public debt on the fiscal deficit, with the coefficient of public debt’s impact on Iraq’s deficit recorded at 0.482—a relatively high value for an oil-dependent country. This reflects weak efficiency in debt management, with borrowing directed toward current rather than capital expenditures. On the other hand, inflation was found to have a negative effect on the deficit, which may be explained by the decline in the real value of debt or by relative improvement in tax revenues during inflationary periods, despite accompanying social costs. Meanwhile, monetary issuance and government spending both showed positive effects on the deficit, consistent with economic theory that expansion in money supply or expenditures without sustainable financing sources exacerbates the deficit gap. In conclusion, the study emphasizes the need to reconsider public debt management policies, shifting from a consumption-based financing approach to investment-oriented financing that yields sustainable returns. It also recommends enhancing transparency and efficiency in public financial management, broadening the tax base, and adopting flexible fiscal policies built on economic diversification. For Iraq, as an oil-dependent state still vulnerable to energy market fluctuations, tax reform and institutional governance remain essential prerequisites for achieving fiscal stability and reducing excessive borrowing risks.* Research derived from the doctoral thesis tagged: The risks of financing the budget deficit with public debt: a comparative standard study for selected countries with a reference to Iraq for the period (1990-2024).