Ask any Iraqi citizen, business owner, or investor about the Dinar’s exchange rate against the US Dollar, and you’ll sense a mix of frustration, anxiety, and uncertainty. In local markets, exchange rates fluctuate daily, with citizens often paying more than official rates due to parallel market manipulation. Meanwhile, international investors wonder if Iraq’s monetary framework is solid enough to stabilize the Dinar against the ever-dominant USD.

But why does Iraq struggle so much with keeping its currency stable against the dollar? What forces — both external and internal — keep challenging the Central Bank’s efforts? 

If you’ve been following this issue or holding the Dinar, understanding these underlying pressures is essential. 

Let’s unpack the key challenges facing the Iraqi Dinar in maintaining a stable exchange rate against the USD and explore whether Iraq can realistically overcome them.

Global Dollar Strength and Its Ripple Effects

The first and often underestimated challenge is external: the US Dollar’s global dominance.

• A Strong USD Means Pressure on Emerging Markets: In recent years, the dollar has surged against almost all currencies. The reasons are multi-faceted: interest rate hikes by the US Federal Reserve, global investor demand for safe assets, and geopolitical crises pushing capital into the US. When the dollar strengthens, emerging market currencies — like the Iraqi Dinar — naturally face depreciation pressures.
• Iraq’s Dollar Dependency: Iraq’s economy is heavily dollarized. Most international trade, including essential imports, is paid for in USD. Even domestically, many Iraqis measure wealth and large transactions in dollars rather than Dinar. This psychological and structural dependency makes Iraq especially vulnerable when the dollar tightens globally.
• Higher Import Costs: As the USD appreciates, Iraq’s imports become more expensive in Dinar terms. Given Iraq’s reliance on imported goods — from machinery and technology to everyday products — this pushes up inflation and forces the Central Bank to spend more of its foreign reserves defending the currency.
• Ripple Effect on Investment: A strong dollar also reduces foreign direct investment in Iraq. Investors prefer placing their money in US assets that yield higher returns with lower perceived risk. This capital outflow further weakens Iraq’s financial position and indirectly pressures the Dinar.

Iraq’s Oil Revenue Dependency and Its Fluctuations

The second major challenge is entirely homegrown: Iraq’s over-reliance on oil revenue.

• Oil Makes Up Over 90% of Iraq’s Budget: Iraq’s financial lifeblood is oil. More than 90% of its national budget is funded by oil sales, which are conducted in US dollars. This means that every oil price fluctuation translates directly into either relief or strain on the Dinar.
• Volatility and Exchange Rate Impact: When oil prices are high, Iraq enjoys an influx of USD, allowing the Central Bank to maintain Dinar stability and even support domestic economic programs. But when oil prices crash — as seen during the 2020 pandemic — Iraq’s foreign reserves deplete, forcing currency devaluations and causing exchange rates to spike against the dollar.
• Delayed Payments and Market Panic: There are also instances when oil revenues are delayed due to international contractual disputes or logistical issues. Even temporary delays can spark panic in the local forex markets, driving black-market rates higher as people scramble to secure USD.
• Failure to Diversify: Despite government pledges, Iraq’s economy remains dangerously undiversified. Other sectors like agriculture, tourism, and manufacturing remain underdeveloped, leaving the Dinar vulnerable to every oil market fluctuation. Until Iraq builds alternative revenue streams, oil volatility will continue to dictate its currency’s fate.

Monetary Policy Adjustments by the Central Bank

The third challenge comes from within: how the Central Bank of Iraq (CBI) manages or struggles to manage monetary policy.

• Adjusting the Official Rate: The CBI occasionally adjusts the official exchange rate in response to global pressures or internal deficits. In late 2020, for example, Iraq devalued the Dinar by 22% against the dollar to help balance its budget. While this move was necessary, it triggered domestic inflation and public discontent.
• Auction System Weaknesses: Iraq’s foreign currency auction system — where the CBI sells USD to local banks and companies — has been riddled with inefficiencies and corruption. The system was originally designed to stabilize exchange rates but has often been exploited, with dollars leaking into black markets rather than reaching legitimate businesses.
• Difficulty Controlling the Black Market: Despite frequent interventions and new regulations, the CBI struggles to bring black-market exchange rates in line with official rates. The inability to enforce strict oversight in currency sales undermines public trust in official exchange rates and perpetuates market distortions.
• Limited Monetary Tools: Unlike larger economies, Iraq’s central bank has limited tools at its disposal. It cannot simply raise interest rates dramatically or conduct large-scale quantitative easing. The lack of financial depth and structural constraints means the CBI is often reacting to events rather than proactively shaping market expectations.

Market Manipulation and Black Market Pressures

The fourth and perhaps most frustrating challenge is the persistent presence of black-market currency trade and manipulation by illicit actors.

• Black Market Undermines Official Policy: No matter how hard the CBI tries to stabilize the official rate, Iraq’s black market often runs its show. Traders, smugglers, and currency speculators exploit loopholes and weak enforcement, driving up the parallel market rate and causing confusion in the economy.
• US Sanctions on Neighboring Countries: US sanctions on countries like Iran and Syria also indirectly impact Iraq. These sanctions create strong demand for US dollars in these neighbouring countries, leading to illegal USD outflows from Iraq. The smuggling of currency tightens domestic dollar availability and inflates black-market rates.
• Daily Rate Volatility: It’s not uncommon for ordinary Iraqis to face different exchange rates on a daily basis. This unpredictability hurts small businesses, importers, and families who rely on stable currency values for savings and expenses. The presence of parallel markets means that official rates lose credibility among the public.
• CBI’s Efforts and Limitations: The Central Bank has attempted multiple crackdowns on black-market dealers and revised currency auction procedures. But these efforts often fall short due to deep-rooted corruption, political interference, and lack of law enforcement capacity.

Final Thought:

The road to stabilizing the Iraqi Dinar against the US Dollar is anything but simple. Iraq faces a perfect storm: global dollar strength, oil dependency, monetary policy constraints, and black-market manipulation. Each factor, on its own, would be challenging; combined, they form a monumental obstacle.

Yet, not all hope is lost. Iraq has shown signs of progress. The government has recently made stronger attempts to diversify the economy and modernize financial systems. The CBI is rolling out new digital solutions to reduce currency smuggling and bring more transactions into official channels.

But ultimately, overcoming these hurdles will require political will, economic reforms, and international cooperation. Iraq needs to move beyond being a reactive economy, constantly responding to crises, and instead build a proactive, diversified financial ecosystem.

The Iraqi Dinar’s struggle against USD challenges is a marathon, not a sprint and only bold, sustained reforms can carry it across the finish line.