The Impact of Domestic Public Debt and Budget Deficit on Aggregate Supply in Iraq

Abstract

public debt, the general budget deficit, and aggregate supply in the Iraqi economy—over the period 2004–2021, by employing the Vector ‎Error Correction Model (VECM), which is suitable for non-stationary, cointegrated time series. The structural imbalance in aggregate supply, driven by the high relative contribution of the oil sector, has significantly influenced changes across all economic sectors that constitute ‎the gross domestic product (GDP), as well as those linked through forward and backward linkages. Consequently, domestic public debt has ‎increased, accompanied by a limited sustainability of the budget deficit.‎

Furthermore, negotiations with the International Monetary Fund, the World Bank, and the Paris Club, in cooperation with international ‎financial and legal advisors and auditors, contributed to a substantial reduction in Iraq’s external debt—achieving an 80% write-off of the total ‎external public debt. This had a positive impact on the absolute values of GDP, the budget deficit, and the overall macroeconomic performance.‎

Econometric analysis confirms the existence of both long-run and short-run relationships among the study variables. These relationships ‎appear more pronounced in the direction from the budget deficit and aggregate supply to domestic public debt, as well as from domestic ‎public debt and aggregate supply toward the budget deficit within the Iraqi economy. Moreover, the temporal path of aggregate supply ‎closely mirrored the trajectories of both domestic public debt and the budget deficit throughout the period 2004–2021‎.