BY: Shatha Kalel
The Iraqi economy is currently facing increasing pressure on its monetary stability due to a combination of internal and external factors, most notably the impact of U.S. sanctions on Iran. The official restriction on dollar transactions with Iran has led to the emergence of informal channels aimed at obtaining hard currency from the Iraqi market. This has directly affected the exchange rate of the Iraqi dinar, causing it to depreciate.
From an economic perspective, this phenomenon can be interpreted as a form of unregulated capital flight, where U.S. dollars are withdrawn from the economy without any real productive return. This behavior creates an imbalance in the supply and demand of foreign currency. Demand for dollars rises in the parallel market, while supply remains limited within official channels controlled by the Central Bank. As a result, the dinar faces continuous pressure, leading to its decline in value.
The impact is not limited to exchange rates alone but extends to the effectiveness of monetary policy. The existence of an active parallel market reduces the Central Bank’s ability to control liquidity and maintain monetary stability. As these informal channels expand, a significant portion of financial activity moves outside regulatory oversight, weakening economic policy tools and increasing uncertainty.
Moreover, this phenomenon contributes to the growth of the shadow economy, which operates outside legal and regulatory frameworks. This type of economy does not contribute to government revenues and lacks oversight, leading to reduced financial transparency and increased risks of corruption and smuggling. Additionally, trading dollars outside the formal banking system creates a high-risk environment that may involve illegal activities such as counterfeiting and money laundering.
One of the most direct consequences of this crisis is the rise in imported inflation. Iraq relies heavily on imports to meet its basic needs, and as the dinar weakens, the cost of imported goods increases. This leads to higher prices in the local market, disproportionately affecting low-income groups and intensifying social and economic challenges.
At the regional level, Iraq appears as a vulnerable link in the network of economic interactions, as it is highly sensitive to political pressures and sanctions imposed on neighboring countries. This situation highlights Iraq’s heavy dependence on the U.S. dollar and unbalanced trade relationships, making it more exposed to external shocks.
Given these conditions, it becomes essential to adopt more comprehensive and stringent economic policies. This includes strengthening oversight of the currency market, regulating dollar sales, and combating informal financial channels. In the long term, the solution lies in diversifying the Iraqi economy and reducing dependence on imports and the dollar by supporting domestic production and stimulating non-oil sectors.
In conclusion, the depreciation of the Iraqi dinar is not merely a temporary monetary issue but a reflection of deeper structural imbalances within the Iraqi economy. With ongoing regional pressures, achieving stability will require fundamental reforms that balance monetary stability with sustainable economic development.
Economic Studies Unit – North America Office
Center for Linkage Studies and Strategic Research