Government Formation Completed under Fiscal and Security Pressure: Iraq Moves from Managing Vacancies to Testing State Capacity

Monitoring period: 11–17 October 2026
Prepared by: Monitoring Department, Iraq Center for Future Studies (ICFS)

The Situation in One Minute

This week, the Council of Representatives completed the formation of Prime Minister Ali al-Zaidi’s government after five months of negotiations, approving eleven ministers and three deputy prime ministers. The completion of the executive structure, however, does not signify the end of the country’s decision-making crisis. The government has entered a more difficult phase: managing a severe economic contraction, absorbing the effects of the dinar’s devaluation, bringing weapons under state control, and assuming greater responsibility for national security following the conclusion of the international coalition’s mission.

The composition of the government indicates that Iraq’s political forces opted for broader participation and accommodation rather than the formation of a cohesive executive team. Political parties and faction-linked forces secured direct representation at senior levels of government. This may reduce the likelihood that their differences will escalate into open confrontation, but it also makes institutional reform and the establishment of unified control over weapons more difficult. The same forces whose influence the government is expected to regulate have simultaneously become part of its political and executive structure.

Economically, the crisis is no longer confined to the budget deficit. Forecasts of a 16 per cent economic contraction, the devaluation of the dinar, and rising oil transportation and insurance costs collectively indicate that the burden of the regional war is being transferred to the domestic market and Iraqi citizens. An oil price approaching $110 per barrel does not represent a net gain for Iraq if export volumes remain low and discounts, shipping costs, and insurance premiums remain elevated.

In northern Iraq, the withdrawal of Kurdistan Workers’ Party fighters from four camps demonstrated that the Turkish–Kurdish de-escalation process has begun to produce tangible effects inside the country. Yet vacating positions is not equivalent to ending an armed presence, just as registering civilian weapons is not equivalent to disarming armed factions. The common feature of both issues is that initial indicators are important, but their ultimate value depends on whether limited steps develop into verifiable institutional arrangements.

First: Key Domestic Developments

1. Completion of the Government: A Political Settlement, Not the Formation of a Cohesive Team

What happened: With 261 members in attendance, the Council of Representatives approved eleven ministers and three deputy prime ministers, ending vacancies in several important ministries, most notably Defence, Interior, and Planning. The cabinet was completed five months after parliament granted confidence to the first part of the government, following prolonged disagreements among political blocs over nominees and the allocation of senior positions.

Significance and implications: Filling the remaining ministerial posts gives the government a stronger legal and administrative capacity, but it does not eliminate the multiplicity of decision-making centres. The cabinet emerged more as a negotiated settlement among influential forces than as a team selected by the prime minister to implement a unified programme.

Granting senior executive representation to forces linked to armed formations further consolidates a policy of accommodation from within the state. This may help reduce tensions, but it also weakens the prime minister’s ability to adopt measures that conflict with the interests of those forces. The government’s central test will therefore concern the unity of executive decision-making, not the numerical completion of the cabinet.

2. Armed Factions Move from Indirect Influence to Executive Partnership

What happened: The new government includes figures affiliated with political forces that maintain armed extensions, including a prominent Asa’ib Ahl al-Haq leader appointed as a deputy prime minister. This comes at a time when calls to place all weapons under state control have yet to be translated into a declared programme addressing command structures, financing, weapons storage facilities, and advanced weapons systems.

Significance and implications: The appointment represents an expansion of the strategy of incorporating armed forces into government institutions, but it does not constitute professional security-sector integration. Genuine integration would require unified chains of command, budgets, doctrine, and operational decision-making.

Political incorporation on its own may instead allow an organization to retain its armed capabilities while acquiring additional influence within the state. The government is therefore more likely to pursue gradual regulation and accommodation than coercive disarmament. This approach may reduce the risk of internal confrontation, but it could also prolong the duality of security decision-making.

3. The Dinar Crisis Becomes a Social Test for the Government

What happened: The repercussions of the dinar’s devaluation to 1,520 dinars per US dollar continued, amid parliamentary moves to question the government, Ministry of Finance, and Central Bank over measures to protect markets and limit price increases. The decision was taken in an economy that depends heavily on imports to meet a substantial share of its food, consumer, and production needs.

Significance and implications: The new exchange rate provides the treasury with more dinars for every dollar of oil revenue. It therefore functions as a fiscal instrument for financing salaries and public expenditure when dollar-denominated revenues decline. It does not, however, create additional wealth; rather, it redistributes the loss between the state and the public.

The treasury benefits in accounting terms, while the cost of imported goods and production inputs rises and household purchasing power declines. Unless the measure is accompanied by effective market oversight and targeted assistance for the most vulnerable groups, the fiscal crisis may develop into social pressure that rapidly consumes the political capital of the newly completed government.

4. Economic Contraction Reveals a Crisis of Export Volumes, Not Prices

What happened: The International Monetary Fund estimated that Iraq’s economy would contract by approximately 16 per cent in 2026, one of the most negative forecasts in the region. This comes despite oil prices remaining high, as disruptions to production, exports, and maritime navigation have been accompanied by rising shipping and insurance costs.

Significance and implications: The forecast demonstrates that Iraq’s crisis is not principally the result of a low price per barrel, but of its reduced capacity to deliver oil to the market and convert exports into stable revenues. Higher global prices benefit Iraq only for the barrels it can export and receive payment for without exceptional discounts or additional costs.

Economic contraction also reduces the private sector’s capacity to absorb unemployment and deepens society’s dependence on public-sector salaries at a time when the treasury needs to contain expenditure. The government consequently faces a difficult equation: austerity would deepen the recession, while fiscal expansion would widen the deficit and intensify pressure on the dinar.

5. Kirkuk: A Successful Strike Followed by Failure to Secure the Site

What happened: The Iraqi Air Force carried out strikes against ISIS hideouts in Wadi Zghaytun, killing two members of the organization. An improvised explosive device subsequently detonated while security personnel were inspecting the strike site, killing a brigadier general and another service member and wounding others.

Significance and implications: The incident does not indicate that ISIS has returned as an organization capable of capturing cities. It does, however, confirm that the group retains an attritional capacity in difficult terrain and in gaps between deployed security units.

The incident also exposes a disparity between the effectiveness of aerial surveillance and targeting, on the one hand, and military-engineering procedures and post-strike site security, on the other. Following the end of the coalition’s mission, the effectiveness of Iraq’s security architecture will depend on its ability to integrate intelligence, aviation, ground forces, and explosive-ordnance disposal—not merely on possessing aerial platforms capable of striking targets.

6. Developing Kirkuk’s Oilfields: An Energy Project with Fiscal and Political Dimensions

What happened: The Ministry of Oil announced that operations at the Kirkuk, Bai Hassan, Khabbaz, and Jambur fields had been transferred to a joint operating entity as part of the development project with the British energy company BP. The project aims to raise oil production to 450,000 barrels per day and utilize approximately 500 million standard cubic feet of gas per day.

Significance and implications: The project extends beyond increasing production. It re-establishes Kirkuk as an important energy centre while combining oil production, gas development, and efforts to reduce flaring. It could also provide Iraq with northern production that can be linked to export routes less dependent on the Gulf.

Its strategic importance will nevertheless remain limited unless the capacity of northern export pipelines is increased and the legal and financial disputes between Baghdad and Erbil are resolved. Higher production without a stable export outlet may result in idle capacity or place additional pressure on storage facilities.

Second: Regional Developments and Their Implications for Iraq

7. PKK Withdrawal from Four Camps in Northern Iraq

What happened: Kurdistan Workers’ Party fighters withdrew from four camps in the Metina region near the Turkish border as part of measures associated with the process of dissolving the organization and disarming its fighters. The development coincided with Turkey’s preparations to reduce its presence at one of its military bases and hand the facility over to the Iraqi authorities.

Significance and implications for Iraq: The process presents an opportunity to reduce Turkish military operations inside Iraqi territory and restore greater authority to Baghdad and Erbil in some border areas. It does not, however, guarantee the withdrawal of all PKK members or the dismantling of the organization’s networks and weapons depots. Nor does it resolve the status of its non-Iraqi fighters.

Baghdad faces a dual challenge: preventing fighters from redeploying to new locations and ensuring that vacated areas do not become security vacuums contested by multiple local forces. If the process continues, the issue may shift from a Turkish military confrontation inside Iraq to trilateral security and legal arrangements involving Baghdad, Erbil, and Ankara.

8. Hormuz and Oil: Prices Rise as Export Viability Declines

What happened: Brent crude approached $110 per barrel amid growing concerns about disruptions to Middle Eastern energy supplies, while shipping and insurance costs on some routes exceeded one-third of the value of the commodity being transported. The United States and other energy-consuming countries also continued drawing on strategic reserves in an attempt to stabilize the market.

Significance and implications for Iraq: Higher oil prices appear favourable for the Iraqi budget, but they may conceal a decline in net revenue. If Iraq sells smaller volumes, offers larger discounts, or absorbs exceptional shipping and insurance costs, the price increase may not compensate for the loss in export volume.

This helps explain renewed interest in the Kirkuk–Ceyhan and Kirkuk–Baniyas pipelines, as well as other routes that could move Iraqi oil beyond the Strait of Hormuz. These alternatives, however, require time, investment, and political agreements. In the near term, Iraq will therefore remain exposed to the consequences of any renewed escalation in maritime tensions.

The Overall Picture

This week, Iraq brought the phase of an incomplete government to an end, but it has not yet entered a phase of unified government. The remaining positions were filled by broadening the accommodation among influential actors, including forces linked to armed factions. This provides the political system with short-term stability, but it also distributes veto power throughout the executive and raises the cost of difficult decisions.

The core dilemma is that the instruments used to maintain stability may obstruct reform. Incorporating armed forces into the government reduces the likelihood of confrontation with the state, but it does not dismantle their independent structures. Registering civilian weapons may help limit communal violence, but it does not address drones, missiles, or autonomous operational decision-making.

Progress in establishing state control over weapons should therefore not be measured by the number of applications filed or registration centres opened. It should be assessed by whether command structures, financing, communications, and advanced weapons systems are transferred to a single governmental authority.

Economically, the state faces a widening gap between nominal revenues and their real value. Higher oil prices and a weaker dinar may increase the volume of revenue recorded in local currency, but they do not prevent production from contracting or purchasing power from declining.

If the government uses the exchange rate to protect public-sector salaries, it transfers part of the deficit to citizens through inflation. If it rapidly reduces expenditure, it risks deepening the recession. The less costly approach would be to protect essential spending, defer unproductive commitments, and reduce export-related losses rather than rely on currency devaluation alone.

From a security perspective, Iraq does not face a single, uniform threat. In central and northeastern areas, ISIS cells continue to wage a limited campaign of attrition. Along the northern border, the beginning of the PKK’s withdrawal creates an opportunity to reorganize deployments, while the operational decisions of some armed factions remain beyond full state control.

The conclusion of the international coalition’s mission therefore does not mean the end of bilateral cooperation, military advice, or arms support. Nor does it mean that the Iraqi state has automatically fulfilled the requirements of independent security management.

The central conclusion is that Iraq has moved from a crisis of vacant offices to a crisis of performance. The question is no longer who occupies the ministries, but whether a government divided among competing forces can adopt and enforce unified decisions on public finances, weapons, and energy.

The week’s developments indicate that political settlements remain capable of preventing open confrontation. They have not yet, however, produced an executive authority able to impose the same priorities on all its partners.