An Analysis of the Impact of Financial Sustainability Indicators on the Inflation Rate in Iraq A Quantitative Economic Study Using the ARDL Model for the Period 2004–2022

Abstract

This research aims to analyze the impact of financial sustainability indicators on the inflation rate in Iraq for the period (2004-2022) by examining the relationship between financial sustainability indicators and determining their influence on price stability. It assumes that unsustainable fiscal policies exacerbate inflation rates, whereas improving financial sustainability through enhancing non-oil revenues and rationalizing public spending contributes to reducing inflationary pressures and promoting economic stability. The study employs the modern cointegration methodology based on the Autoregressive Distributed Lag (ARDL) model. The econometric analysis results of the estimated ARDL model indicate a positive and significant relationship between the inflation rate and the following financial sustainability indicators: public debt to GDP (X2), total revenues to GDP (X4), and oil revenues to total revenues (X5), implying that an increase in these indicators leads to higher inflation rates. Conversely, a negative and significant relationship was found with the indicators of public revenue coverage of public expenditures (X1), the tax gap (X3), and external debt to exports (X6), suggesting that improving these indicators can help mitigate inflation. The research recommends adopting balanced fiscal policies by diversifying revenue sources, controlling public debt levels, and enhancing the efficiency of government spending. Additionally, it emphasizes the need for effective coordination between fiscal and monetary policies to curb inflation and enhance economic stability in Iraq.