From Controlling Armed Power to Safeguarding the Economy: Iraq’s Government Faces Its First Test of Authority

Reporting Period: 16–22 October 2026
Prepared by: Monitoring Department – Iraq Center for Future Studies (ICFS)

The Week in Brief

This week marked the Iraqi government’s first substantive test following the completion of its cabinet. After months dominated by negotiations over ministerial appointments, the central question has shifted from who participates in government to whether a coalition built on accommodation among competing centres of power can enforce decisions that affect the interests of its own partners.

The first test emerged over the state’s monopoly on arms. The government signalled that it may pursue legal action against incitement to violence and attempts to obstruct its weapons-control policy. This tougher posture, however, coincides with the inclusion of political actors associated with armed groups in senior executive positions. Baghdad’s emerging strategy therefore rests on three parallel tracks: political co-optation, legal pressure and the avoidance of direct military confrontation.

Economically, the government adopted measures intended to limit the immediate consequences of the dinar’s depreciation and the rising cost of imports. These included opening agricultural imports, easing the entry of medicines and removing customs duties on imported solar-energy systems. Such measures may reduce shortages and short-term price pressures, but they do not address Iraq’s structural dependence on imports or the weakness of domestic production.

The energy sector also registered an important development. Basra Oil Company signed a memorandum of understanding with ExxonMobil concerning a seawater project required to sustain production at southern oilfields. This coincided with the launch of the Iraqi–American Business Council, suggesting that bilateral relations are increasingly shifting from direct military engagement towards investment, energy, finance and commercial influence.

Regionally, attacks in the Gulf and Saudi Arabia, together with Iranian warnings of a wider response, pushed Brent crude above $112 per barrel. Higher prices, however, do not necessarily translate into equivalent gains for Iraq. Elevated insurance costs, expensive tanker rates, export discounts and the possibility of shipping interruptions continue to erode the net value of Iraqi oil exports. Maritime security has therefore become directly connected to Iraq’s budget, exchange rate and capacity to finance public salaries.

I. Key Domestic Developments

1. Weapons Control Moves from Negotiation to Legal Pressure

What happened: The government issued a statement reaffirming constitutional protections for freedom of expression and the media, while warning against their use to incite violence, promote internal conflict or support weapons outside state authority. It instructed the relevant institutions to initiate legal proceedings against those involved in media-based incitement or in obstructing decisions related to state control over arms, citing counterterrorism and criminal legislation.

Significance and implications: The statement represents a shift from closed political negotiations towards raising the legal and reputational cost of opposing the government’s policy. Yet it addresses the political and media environment surrounding armed groups more directly than their material capabilities. Missiles, drones, financing networks, storage facilities, communications systems and independent command structures remain the real indicators of whether the state is gaining control. An expansive interpretation of “obstruction” could also blur the distinction between incitement to violence and legitimate criticism, making consistent and narrowly defined enforcement essential.

2. Political Co-optation of Armed Actors Faces Its First Contradiction

What happened: The completed cabinet began its work with the participation of political figures and organisations associated with armed formations. At the same time, the government continued to promise an end to any military decision-making outside the recognised chain of command. Some actors affected by the weapons-control agenda have consequently become direct participants in the executive branch responsible for implementing it.

Significance and implications: The government is effectively pursuing political co-optation: giving armed political actors a direct stake in institutional stability while encouraging them to relinquish autonomous military authority. This approach may reduce the risk of internal confrontation, but political participation does not amount to security-sector integration. A group may operate inside government, parliament and the Popular Mobilisation Forces while retaining separate financing, communications, weapons depots and operational leadership. The most probable course is therefore gradual regulation and containment rather than coercive disarmament. The principal risk is that institutional integration becomes largely formal, leaving the underlying structure of autonomous force intact.

3. The Government Addresses the Immediate Effects of the Dinar’s Depreciation

What happened: The Council of Ministers authorised agricultural imports through the end of 2026, eliminated customs duties on imported solar-energy systems and facilitated the release of medicines and vaccines held at border crossings by postponing some fees and penalties. The decisions followed the adjustment of the official exchange rate and rising import costs.

Significance and implications: The government is attempting to increase the supply of food, medicine and alternative energy systems before currency depreciation produces wider shortages or another surge in prices. Yet liberalising imports is a short-term anti-inflation measure rather than a productive economic policy. It may moderate prices temporarily, while exposing Iraqi farmers and manufacturers—whose fuel, fertiliser and equipment costs have also increased—to stronger foreign competition. The solar-energy exemption also indicates that the government increasingly expects households and businesses to assume part of the cost of managing electricity shortages rather than relying exclusively on the public grid.

4. Water Scarcity Becomes a Question of Domestic Governance

What happened: Parliament’s Committee on Regions and Governorates reviewed the Ministry of Water Resources’ response to drought and declining water availability. Discussions covered 92 projects, the creation of a national database for water allocations, the monitoring of illegal withdrawals, strategic storage and existing water arrangements with Türkiye.

Significance and implications: Reduced flows from Türkiye and Iran remain central to Iraq’s water crisis, but they do not fully explain it. Inefficient irrigation, unauthorised withdrawals, fragmented institutional authority and the absence of integrated operational data also reduce Iraq’s ability to manage scarce supplies. If present trends continue, competition will intensify among drinking water, agriculture, industry and power generation. Technical disputes over allocations could consequently evolve into political and social tensions between governorates. Managing domestic demand is therefore becoming as important as negotiating additional releases from upstream states.

5. ExxonMobil Re-engages Through Southern Oil Infrastructure

What happened: Basra Oil Company signed a memorandum of understanding with ExxonMobil for the second phase of a seawater-utilisation project intended to support reservoir pressure in southern oilfields, with a stated capacity associated with approximately 2.5 million barrels per day of production. The agreement coincided with the launch of the Iraqi–American Business Council in Baghdad.

Significance and implications: The project is not primarily designed to generate an immediate production increase. Its strategic value lies in providing the water required to maintain reservoir pressure and prevent output from declining as major fields mature. It therefore protects the foundations of state revenue rather than simply adding a short-term export figure. Politically, ExxonMobil’s renewed engagement and the new business council indicate that the Iraqi–American relationship is moving from a military framework towards investment, energy, finance and trade. Its durability will depend on contractual stability, corporate security and Baghdad’s ability to prevent strategic projects from becoming instruments in domestic patronage networks or regional rivalry.

II. Regional Developments and Their Implications for Iraq

6. Allegations of Iraqi Militia Financing Open a New Financial Front

What happened: The commander of US Central Command alleged that Iran-aligned groups, including Iraqi factions, had begun transferring financial resources to the Islamic Revolutionary Guard Corps as Iranian revenues declined under the pressure of war and sanctions. Washington did not publicly provide independently verifiable details identifying the Iraqi groups, the sums involved or the transfer mechanisms.

Significance and implications for Iraq: The statement should be treated as an American allegation rather than an established fact. Nevertheless, it reveals the likely direction of US pressure. Washington may increasingly target companies, banks, commercial fronts and transfer networks associated with armed groups, rather than concentrating solely on their military capabilities. The end of the coalition’s mission does not necessarily reduce American leverage, given Iraq’s dependence on the dollar and international financial channels. If Iraqi institutions do not establish credible domestic oversight and investigations, external sanctions could affect entities beyond the intended targets and place additional pressure on the exchange rate and legitimate commerce.

7. Baghdad Reasserts the Principle of Non-Use of Iraqi Territory

What happened: Iraq’s Ministry of Foreign Affairs reiterated that the constitution and government policy prohibit the use of Iraqi territory for armed activity against other states. The statement came amid intensified Houthi attacks on Saudi Arabia and heightened threats across the Gulf, following earlier incidents that raised concerns about the potential use of Iraqi territory or networks in regional attacks.

Significance and implications for Iraq: A declared policy of neutrality is insufficient unless it is supported by effective control over launch systems, borders, financing channels and the operational decisions of armed factions. Baghdad has a direct interest in protecting its economic relationship with Saudi Arabia and the wider Gulf, particularly as it seeks investment and alternative energy corridors. Weapons control has therefore become a foreign-policy requirement as well as a domestic security issue. Any future attack credibly linked to Iraqi territory could expose the country to diplomatic pressure, economic penalties or a security response whose scale Baghdad may be unable to contain.

8. Escalation around Hormuz Raises Oil Prices but Reduces Revenue Certainty

What happened: Brent crude rose above $112 per barrel following intensified Houthi attacks on Saudi Arabia, new incidents involving vessels in and around the Gulf and the Strait of Hormuz, and Iranian warnings of a broader response. Regional exports continued through protected convoys and altered shipping arrangements, but at substantially higher transport and insurance costs.

Significance and implications for Iraq: Higher benchmark prices do not automatically produce a proportional increase in Iraqi revenue. The state’s actual return depends on the number of barrels delivered, the realised sale price after discounts, and the cost of transport and insurance. Prolonged insecurity could therefore produce the paradox of higher international prices alongside lower or less predictable Iraqi receipts. Diversifying export routes has consequently become an immediate fiscal requirement rather than a distant infrastructure ambition. Northern and Mediterranean routes, however, require rehabilitation, additional capacity and durable political agreements; they cannot replace southern exports in the short term.

The Overall Picture

The government’s first full week revealed that completing the cabinet did not eliminate Iraq’s competing centres of power. It instead transferred their contradictions into the executive branch. The government must now manage partners that may simultaneously possess political representation, parliamentary influence and armed capacity, making decisions on weapons, financing and strategic contracts a test of its actual cohesion.

On weapons control, Baghdad has raised the level of legal pressure without yet producing sufficient material indicators of implementation. Establishing state authority is not synonymous with registering civilian firearms, placing fighters on official payrolls or assigning formal titles to existing formations. The decisive benchmark is whether any actor retains the capacity to initiate military action, control strategic weapons, maintain independent depots or operate a separate command-and-communications structure.

The current process is therefore better understood as containment and negotiated regulation than as comprehensive disarmament. That distinction matters. Containment may reduce immediate instability and gradually narrow the operational space available to armed groups. It may also, however, provide them with additional time and legal cover to reorganise while preserving their essential capabilities.

Economically, the government is trying to distribute the costs of the crisis and prevent currency depreciation from generating acute shortages. Opening imports, facilitating medicine clearance and reducing the cost of solar systems are necessary defensive measures, but they may weaken domestic production if maintained without targeted support for Iraqi producers. Meanwhile, the weaker dinar increases the amount of local currency obtained from every dollar of oil revenue but transfers part of the fiscal adjustment to households through higher prices.

ExxonMobil’s re-engagement and the expansion of Iraqi–American commercial cooperation demonstrate that the post-coalition period will not constitute a complete American withdrawal from Iraqi affairs. Instead, US influence is being reorganised around oil, investment, dollar access, financial compliance and sanctions. Iran, for its part, continues to possess political, factional and commercial networks inside Iraq. The country will therefore remain a space of managed competition between the two sides, even after the end of the coalition’s formal mission.

Regionally, Gulf security has become a daily variable in Iraqi state planning. Escalation threatens tankers and public revenues, raises the cost of imports and increases pressure on Baghdad to prevent Iraqi territory or financial institutions from being used in the wider conflict. Weapons control, oil exports and relations with Gulf states can no longer be treated as separate policy files.

The week’s developments suggest that the government’s core difficulty is not a lack of declared policy, but the unequal capacity to enforce it against actors with different levels of power and access. A rapid, coercive campaign against armed groups remains unlikely. The more plausible trajectory is a prolonged combination of political co-optation, organisational regulation, legal pressure and financial scrutiny. Whether this process strengthens the state or merely repackages existing power structures will depend on one decisive outcome: the establishment of a single, enforceable chain of command over the use of force.