One of the big issues that the Iraqi economy is currently struggling with is the presence of an informal economy, which encompasses economic activities that operate outside government oversight and legal regulation. In Iraq, this includes tax evasion, unregistered enterprises, informal employment, smuggling of fuel and consumer goods, and illicit trade in imported products. Many individuals resort to these practices either to avoid complex regulations and taxation or because formal employment opportunities remain limited.
Moreover, the informal economy undermines Iraq’s national development in several crucial ways. To begin with, the Iraqi state is deprived of substantial revenue, which limits its capacity to fund essential public services such as education, healthcare, and infrastructure. According to the Iraq Labor Force Survey 2021, around 66.6 % of employed persons in Iraq hold informal jobs, and roughly 54.8 % of total employment lies in the informal sector. These figures mean that many workers and businesses operate outside formal systems, failing to pay taxes or contribute to socialsecurity funds, which weakens the state’s ability to deliver public goods.
In addition, widespread informal economic activity distorts fair competition. Businesses that play by the rules and pay their taxes often struggle to compete with those that ignore the law. Reports show that many private sector firms in Iraq list competition from informal firms among their major constraints, thereby discouraging investment and growth in the formal sector.
Furthermore, informal trade and smuggling significantly weaken economic governance and social welfare. In Iraq, for example, an investigation estimates that a fueloil smuggling network generates at least 1 billion USD annually by exploiting subsidized fuel supplies. Such diversion of state-allocated resources erodes institutional trust, undermines the rule of law, and creates vulnerabilities in employment and socialprotection systems.
Participation in the shadow economy amplifies inequality in Iraq because informal workers lack legal protections, stable wages, and access to social security, leaving them more vulnerable to exploitation and long-term poverty. It also reduces labor rights by keeping large segments of the workforce outside regulated systems, where abuses go unreported and workers have little recourse or bargaining power. For instance, workers with lower educational attainment are disproportionately affected. For instance, about 80 % of those with only primary education in Iraq work informally, compared with around 37 % of those with tertiary education. Youth unemployment remains high, making many young Iraqis more likely to accept unstable, informal work.
To address these issues, Iraq must adopt a comprehensive strategy aimed at shifting economic activity from informal into formal structures. Reducing tax burdens on citizens and simplifying regulatory frameworks would lower barriers to formal business operations. Strengthening governance, enhancing lawenforcement and customs oversight, and confronting corruption are also essential. Expanding formal employment, especially for youth, and promoting financial inclusion, formal contracts, and public awareness of regulatory compliance will further support the transition.
The shadow economy presents a serious and persistent challenge to Iraq’s national developmentbecause it operates outside the various systems meant to regulate economic activity, collect revenue, and protect workers. Although informal employment and trade may provide short-term livelihoods, the long-term effects are harmful, including diminished state revenue, weak social protection, unfair competition, and reduced economic fairness, ultimately undermining the foundations of a stable and sustainable economy. For Iraq to achieve sustainable growth and improved social welfare, the government, private sector, and citizens must work together to build a transparent, regulated, and equitable economic environment.