By Shatha Khalel
The significance of the Central Bank of Iraq’s latest statement lies not only in its assurance that the country has sufficient foreign currency reserves, but also in its timing and what it reveals about the pressures facing the Iraqi economy. On September 19, 2026, the Central Bank confirmed that it was able to meet demand for foreign currency to finance external trade, settle bank card transactions, and provide travelers with dollars at the official exchange rate. It attributed the recent rise in the dollar in local markets largely to speculation, market expectations, and the exploitation of geopolitical tensions in the region. The reassurance comes at a time when the parallel market has witnessed a noticeable weakening of the dinar, with $100 trading at around 160,000 Iraqi dinars in the unofficial market. This raises an important economic paradox: if Iraq possesses substantial foreign currency reserves, why is the dollar rising? And why is the market concerned if, according to the Central Bank, its capacity to finance foreign trade remains intact?
The answer begins with an important distinction between a reserve crisis and a crisis of access and confidence. The fact that the Central Bank holds substantial dollar reserves does not necessarily mean that every participant in the economy can obtain dollars at the same speed or cost. Iraq’s foreign exchange market effectively operates through two channels: official channels governed by banking, compliance, and foreign trade financing requirements, and a parallel market that meets other forms of demand for dollars. A widening gap between the official and parallel exchange rates can therefore indicate demand that is not being fully met through official channels, but it can also reflect precautionary and speculative demand driven by expectations that the dollar may become more expensive in the future.
This is where expectations themselves become an economic force. When households and businesses expect the dollar to rise, demand for it increases. Higher demand pushes the exchange rate upward, and the increase itself can then generate further anxiety and additional buying. The market can consequently enter a cycle of fear, demand, speculation, and more fear. From this perspective, the Central Bank’s statement should not be read merely as an announcement about the size of Iraq’s financial resources. It is also an attempt to manage market expectations and prevent anxiety from developing into collective economic behavior that places further pressure on the dinar.
The second challenge is more directly connected to the daily lives of Iraqis: the transmission of exchange-rate volatility into prices, inflation, and purchasing power. Iraq depends heavily on imports to satisfy domestic demand. An importer who cannot obtain dollars at the official cost and instead has to purchase them in the parallel market faces a higher import bill. That additional cost does not remain with the importer. It gradually moves through the supply chain, from wholesalers to retailers and ultimately to consumers.
At that point, the problem becomes much larger than the dollar price displayed at currency exchanges. A weaker dinar in the parallel market can translate into higher prices for food, clothing, electronics, spare parts, raw materials, and other imported goods. If household incomes remain unchanged while prices rise, purchasing power declines even without a nominal reduction in wages. This is one of the most important channels through which exchange-rate pressure can move into the real economy. Higher prices force households to reduce consumption, while weaker consumption can slow commercial activity. This is particularly significant because the Central Bank itself referred in its statement to concerns circulating about rising prices and slower market activity.
A longer-term analysis, however, places the current situation within a broader structural issue: the rentier nature of the Iraqi economy and its dependence on both oil and the dollar. Oil accounts for roughly 90 percent of Iraqi government budget revenues, according to Reuters, while a significant share of Iraq’s oil proceeds passes through Central Bank accounts at the Federal Reserve Bank of New York. This structure gives Iraq considerable capacity to accumulate foreign reserves when oil exports and prices are favorable. At the same time, however, it makes fiscal and monetary stability highly dependent on the continued flow of oil revenues and reliable access to the international financial system.
Reuters reported in August 2026 that Iraq held more than $100 billion in reserves in the United States, highlighting the sensitivity of Iraq’s economy to its financial relationship with Washington. The central economic question, therefore, is not simply whether the Central Bank can defend monetary stability today. It is how long the Iraqi economy can maintain that capacity if geopolitical shocks persist or if oil revenues and international financial channels come under sustained pressure.
From this perspective, the current situation can be considered through three possible paths—not as firm predictions, but as a framework for understanding the risks. The first is that the dollar’s recent rise is driven primarily by speculation and temporary anxiety. Under this scenario, easing geopolitical tensions, continued availability of foreign currency, and renewed market confidence could narrow the gap between the official and parallel exchange rates.
The second possibility is that the gap persists for a longer period. In that case, inflationary pressures become more significant because businesses may increasingly price goods according to the effective cost of acquiring dollars rather than the official exchange rate. The longer this divergence continues, the greater the possibility that parallel-market exchange rates become embedded in domestic pricing decisions.
The third and more serious economic scenario would emerge if sustained high demand for dollars coincided with a prolonged decline in foreign currency inflows. At that point, the problem would no longer be primarily a crisis of expectations. It could gradually develop into pressure on foreign reserves, fiscal policy, imports, and overall economic activity.
Foreign reserves, therefore, regardless of their size, should not become a substitute for addressing Iraq’s structural economic imbalances. Reserves represent a line of defense, but they are not a permanent solution to the budget’s dependence on oil, the market’s reliance on imports, or the persistent gap between official and parallel foreign exchange channels. The more reserves are used to absorb shocks without simultaneously expanding the economy’s ability to generate alternative sources of foreign currency, the more stability remains dependent on two factors over which Iraq has limited control: global oil conditions and the geopolitical environment.
The question that should shape Iraq’s economic debate, therefore, is not simply: Does the Central Bank have enough dollars today? Its latest statement says that it does. The more important question is: Does the Iraqi economy have a structure capable of reducing its recurring need to defend the dinar with oil-generated dollars?
That is where the deeper challenge lies. Sustainable monetary stability is not measured solely by the amount of foreign currency held by the Central Bank. It also depends on an economy’s ability to produce, export, attract investment, diversify sources of revenue, and develop a banking system capable of channeling foreign currency efficiently and transparently toward legitimate economic activity.
Until those structural foundations become stronger, movements in the dollar will remain more than an indicator of Iraq’s foreign exchange market. They will continue to serve as a mirror of confidence in the economy, a measure of its capacity to absorb external shocks, and a test of whether Iraq can ultimately transform its oil wealth from a tool used to defend short-term stability into the foundation of an economy that is less vulnerable to future crises.
Economic Studies Unit / North America Office
Al-Rabet Center for Research and Strategic Studies