BAGHDAD – In a stall off a narrow, winding alley of Baghdad's oldest market, Ahmed Khalaf sells the smallest luxuries: nail polish, plastic hair barrettes, colored pencils.

Even during the pandemic, by midmorning the stalls in Shorja market would normally be thronged with shoppers buying food staples and household goods. But last week the aisles were nearly empty.

"Our customers are mostly government employees, but as you can see, they're not coming," said Khalaf, 34.

His troubles are a ground-level indicator of what economists say is the biggest financial threat to Iraq since Saddam Hussein's time. Simply put, Iraq is running out of money to pay its bills, threatening the country on several fronts.

The financial crisis holds the potential to destabilize the government, which was ousted a year ago after mass protests over corruption and unemployment, touch off fighting among armed groups, and empower Iraq's neighbor and longtime rival, Iran.

Iran in the past has taken the opportunity posed by a weak Iraqi central government to strengthen its political power and the role of its paramilitaries within Iraq.

With its economy hammered by the pandemic and plunging oil and gas prices, which account for 90% of government revenue, Iraq was unable to pay government workers for months at a time last year.

Last month, Iraq devalued its currency, the dinar, for the first time in decades, immediately raising prices on almost everything in a country that relies heavily on imports. And last week, Iran cut Iraq's supply of electricity and natural gas, citing nonpayment, leaving large parts of the country in the dark for hours a day.

"I think it's dire," said Ahmed Tabaqchali, an investment banker and senior fellow at the Iraq-based Institute of Regional and International Studies. "Expenditures are way above Iraq's income."

Many Iraqis fear that despite Iraqi government denials there will be more devaluations.

"Everyone is afraid to buy or sell," said Khalaf, who turned to business when he couldn't find a job with his degree in sociology.

While the currency devaluation took most Iraqis by surprise, the economic and financial crisis has been years in the making.

Public sector salaries and pensions cost the government about $5 billion a month, but its monthly oil revenue recently has reached only about $3.5 billion. Iraq has been making up the shortfall by burning through its reserves, which some economists say are already insufficient.

The International Monetary Fund concluded in December that the country's economy was expected to have contracted by 11% in 2020. It urged Iraq to improve governance and reduce corruption.

The government has proposed sweeping measures to try to bolster the economy, including tax increases, in a plan now before Parliament. But many politicians are counting on the prospect of increased oil prices this year to delay passing what economists say are urgently needed reforms.

Until that happens, unemployment is expected to grow as about 700,000 young people enter the job market each year. With few jobs to go around, they are likely to join what has become a permanent underclass.