A compromise between rival factions allowed the formation of an Iraqi government after months of deadlock, but the country’s new premier may have little room to address the deepening political and economic turmoil.

The nomination of Adel Abdul Mahdi, a Shiite independent, as prime minister capped five months of jockeying that followed an inconclusive election in May.

Simmering public anger flared into violent protests against Iraq’s entire political class, spurring the rival factions to agree on the former vice president and oil minister as the country’s next leader.

Mr. Abdul Mahdi, who is 76, now has 30 days to form a cabinet. The next government’s list of challenges include overhauling a struggling oil-dependent economy and rebuilding infrastructure destroyed in the war against Islamic State. Iraqi security forces must also prevent a resurgence of the extremist group, which has been regrouping in northern Iraq while politicians wrangled in Baghdad.

Yet politicians and analysts say any efforts by Mr. Abdul to make significant changes could be thwarted by vested interests of the very parties that coalesced behind his nomination.

“Abdul Mahdi has a reformist strategy but he will still be affected by the same complex political environment that brought him to power,” said Raid Fehmi, a communist lawmaker and leading figure within the Sairun coalition that won the most votes in the election. “This raises doubts and concerns about how much he can achieve.”

Under Iraq’s complex political system that took shape after the U.S.-led invasion in 2003, the presidency is reserved for Kurds, the speaker of parliament is a Sunni and the prime minister is from the Shiite majority. Those positions have usually been filled by quid-pro-quo deals between different parties, which includes sharing out ministries and using them for patronage. That has created an ineffective, corrupt bureaucracy and bloated payroll on which most of Iraq’s oil revenue is wasted.

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In the aftermath of the election, competing Shiite factions—each claiming to have a majority of seats in parliament—paralyzed policy-making and left unaddressed the country’s daunting challenges, from government corruption and infrastructure development to security.

The U.S. and Iran backed rival groupings. Having invested billions of dollars in the war against Islamic State, the U.S. didn’t want to see the formation of Iraq’s government dictated by Iran’s allies. For Iran, having a friendly government next door is crucial as the country comes under growing pressure from Washington and its allies.

Rivalry between Tehran and Washington escalated dangerously after protests over poor services in the southern city of Basra evolved into a broader rejection of the entire political class, culminating in the Iranian consulate being torched.

Rockets were then fired toward U.S. diplomatic missions in Baghdad and Basra. Washington later said it was closing its consulate in Basra. Both the countries blamed the other for the attacks on their missions. The U.S. condemned the attack on the Iranian consulate and Iran rejected the accusation.

Mr. Abdul Mahdi visited outgoing Prime Minister Haider al-Abadi on Wednesday and discussed cabinet formation. The two men agreed that reconstruction and providing job opportunities were top priorities, according to a statement from Mr. Abadi’s office.

A World Bank assessment earlier this year estimated Iraq needs more than $80 billion to repair damage from the war against Islamic State but funds have been slow to materialize amid political uncertainty.

Mr. Abdul Mahdi outlined his vision of the next prime minister’s job last month before he emerged as the unrivaled candidate for the position, stressing the importance of rule of law, respect for the constitution and combating corruption.

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“In addition to rationalizing the activities of the state, its budgets, its expenditures and its projects, we must make investment, whether public or private, national or foreign, a major issue that is protected and appreciated by all,” he said in a post on his

Facebook

page.

Jan Kubis, special representative of the United Nations secretary-general for Iraq, described the challenges for the new government as “enormous.”

“Iraq needs a stable, national government that brings Iraqis together and restores hope in their country as they move forward in the post-Daesh period,” he said, using an Arabic acronym for Islamic State.

Write to Isabel Coles at isabel.coles@wsj.com and Ali Nabhan at ali.nabhan@wsj.com

Corrections & Amplifications
An earlier version of this article incorrectly spelled Adel Abdul Mahdi’s name as Mr. Abdul Madhi in one instance. (Oct. 3)



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