Could US Ban on Iraqi Banks Cause a Sharp Decline in the Iraqi Dinar Exchange Rates?

The Iraqi dinar has faced plenty of challenges over the years, but one question is causing growing concern: could a U.S. ban on Iraqi banks trigger a sharp drop in the dinar’s value? While dramatic headlines suggest disaster, the reality is more complex. 

Iraq’s heavy reliance on oil, the U.S. dollar, and global banking networks puts it in a vulnerable position—but the country is not without resources or strategies to counter potential fallout. 

Let’s get a closer look at what’s happening, what it could mean, and how Iraq is responding.

What’s Behind the Potential Sanctions on Iraqi Banks?

To fully understand the situation, it’s essential to look at why these sanctions are being imposed and what they aim to achieve.

Why Are Sanctions Being Imposed? 

The latest round of U.S. sanctions targets over 20 Iraqi banks, including prominent ones like Al-Mashriq Islamic Bank and United Investment Bank. These measures are part of broader efforts to prevent dollar flows into countries like Iran and Syria, which are under heavy international scrutiny.

Which Banks Are Affected?

The affected banks have been barred from accessing U.S. dollar transactions, significantly tightening liquidity in Iraq’s formal financial markets.

Early Signs of Trouble

The Central Bank of Iraq (CBI) insists that these restrictions won’t trigger an immediate crisis. However, after sanctions on 14 banks in 2023, the dinar lost around 14% of its value—a cautionary example of how sensitive Iraq’s financial system is to external actions.

How Banking Restrictions Disrupt Currency Flow

Banking sanctions don’t just impact large financial institutions—they trickle down to businesses and ordinary citizens. 

Here’s how this disruption unfolds.

• Restricted Access to USD: With banks barred from dollar transactions, importers and small businesses struggle to secure the foreign currency needed for trade. This shortage fuels a rise in the parallel market rate.
• Black Market Growth: The scarcity of official USD channels leads to a flourishing black market, widening the gap between the official exchange rate (1,320 IQD/USD) and the parallel market rate (around 1,470 IQD/USD).
• Currency Smuggling Concerns: Sanctions have inadvertently encouraged smuggling, with billions of dollars allegedly leaving Iraq annually through illegal routes into neighbouring countries.
• Impact on Daily Life: Small businesses and consumers face higher import costs and inflation, adding pressure to Iraq’s already fragile economy.

Iraq’s Heavy Dependence on U.S. Dollar Systems

Iraq’s reliance on the SWIFT system—controlled by U.S. regulations—makes it extremely sensitive to sanctions. Roughly 85% of Iraq’s dollar transactions flow through SWIFT.

Add to this the fact that 90% of Iraq’s government revenue comes from oil exports priced in dollars, and you have a recipe for dependency. Domestically, about half of Iraq’s money supply is in U.S. dollars, further weakening demand for the dinar.

The CBI has tried to stabilize the market by auctioning off around $250 million in dollars daily. But the pressure is mounting. They’ve already had to increase these daily sales by 10% to keep the market from spiralling.

How Iraq is Responding

Iraq isn’t just sitting back. Here are the key moves the government and the CBI are making to avoid a currency crisis:

1. Expanding Electronic Platforms: Iraq has boosted the use of regulated electronic transfer systems. This has reduced rejected transactions by 40%, making cross-border trade more transparent.
2. Increasing Dollar Sales: To meet market demand, the CBI is ramping up its daily dollar auctions. While this may not be a permanent fix, it’s a critical short-term stabilizer.
3. Economic Diversification: Iraq is trying to lessen its dependence on oil by investing in housing, agriculture, and manufacturing. Over 10 trillion IQD has been loaned out for housing projects to help create jobs and diversify the economy.
4. Negotiating with the U.S.: Iraqi officials are working with the U.S. Treasury to ease restrictions by showing improvements in anti-money laundering and financial compliance.
5. Fighting Corruption: With an estimated $150 billion lost to corruption since 2003, tackling graft is now a priority. Without addressing this, monetary reforms will be hard to sustain.

So, What’s Next for the Iraqi Dinar?

A sharp decline in the dinar is possible, but a full-blown collapse doesn’t seem likely anytime soon. Iraq’s foreign reserves of over $100 billion can cover imports for more than a year—a solid financial buffer.

Still, if sanctions continue or worsen, the gap between the official and black market rates could widen even more, potentially hitting 1,500 IQD per USD. A depreciation of 5–10% over the next year is certainly within the realm of possibility.

Conclusion

The Iraqi dinar’s future will depend on how effectively Iraq can implement monetary reforms, fight corruption, diversify its economy, and maintain positive diplomatic relations with the U.S. and other international partners. While short-term fluctuations and depreciation seem likely, long-term stability is still achievable if these efforts are sustained. 

For investors, business owners, and anyone with interests in the region, the message is simple: keep watching U.S.-Iraq talks and the moves of the Iraqi Central Bank. 

These will be the key indicators of whether Iraq can steer clear of financial turbulence or brace for more pressure ahead.