A Study of the Impact of External Balance Fluctuations on the Sustainability of the General Budget in Iraq for the Period 2004-2023

Abstract

This research aims to identify the actual effects of the public budget deficit on the trade balance, by focusing on the nature of the relationship between the two variables within the economic framework known as the twin deficit hypothesis through a study of the public budget in Iraq for the period 2004-2023. The research adopts financial and economic units of analysis represented by time series and percentages, and it also raises an important question: 'Can the impact of external balance fluctuations on the sustainability of the public budget be studied?' Based on this, the research presents several findings, the most important being the numerical aspects of public budgets in Iraq and the extent to which the trade balance is affected through multiple channels, notably the increase in effective aggregate demand and the resulting rise in foreign imports, in addition to the indirect effects of interest rates and the exchange rate. This reflects on the competitiveness of the Iraqi economy. Furthermore, the relationship between the public budget deficit and the external account deficit is a direct one, and in its simplest cases, a causal relationship is apparent. This necessitates, and the research recommends, the adoption of a highly capable fiscal policy, improving the efficiency of public expenditure, and diversifying sources of public revenue.