Measuring and analyzing the impact of oil price shocks on domestic public debt in the Iraqi economy for the period (2004-2026) using the Nonlinear Distributed Slower Auto regression (NARDL) model

Background The Iraqi economy—the subject of this study—is a rentier economy highly susceptible to shocks stemming from oil price fluctuations. Consequently, oil revenues in the general budget are significantly affected by these shocks, given that they account for 90% of total public revenue—a fact that has deeply entrenched the rentier nature of the Iraqi economy. Throughout the 2004–2026 period, any negative shock to oil prices led to an increase in domestic public debt. Ultimately, oil price shocks during the study period drove up levels of domestic public debt, reflecting structural imbalances in the general budget that cannot be remedied through short-term fiscal reforms. Methods The Nonlinear Distributed Autoregressive Laggard (NARDL) model was applied. Time series stationarity testing was conducted using the Dickey-Fuller test (ADF) and the Phillips-Perron test (p-p). The model was then modeled and cointegrated using the Wald test. To confirm the suitability of the nonlinear methodology, the Ramsey reset test was applied Diagnostic tests and model stabilization were also performed. Results The time series for oil prices and domestic public debt are non-stationary at the level—meaning they are not integrated of order I(0)—but they become stationary (integrated of order I(1)) and free from unit roots after first-differencing. The estimated model does not suffer from autocorrelation among the residuals; The Durbin-Watson (D.W.) statistic is 1.88, which exceeds the coefficient of determination (0.96). Moreover, there is a non-linear relationship—both short-term and long-term—between shocks to oil prices and domestic public debt. Conclusions Iraq’s Domestic public debt in the Iraqi economy is positively affected by every negative oil price shock, reflecting a structural imbalance in the nature of the Iraqi budget. Obligatory government expenditures contribute to the rise in domestic public debt. Financing fixed financial obligations from variable oil revenues is a serious problem in the Iraqi economy.