The Iraqi Dinar (IQD) has been a topic of intense speculation for years, but 2025 is drawing significant attention due to emerging financial reforms and global economic shifts. Unlike previous years, the focus is now on Iraq’s exchange rate policies rather than mere speculation. Concrete policy changes and economic trends suggest that a new exchange rate could be revealed in 2025, potentially reshaping Iraq’s monetary landscape and influencing investors worldwide.

To make things clearer, let’s discuss the exchange rate of the Iraqi dinar.

What is an Exchange Rate:

An exchange rate is the value of one currency in terms of another. In Iraq, the exchange rate plays a critical role in determining the price of imports, the competitiveness of exports, and the overall health of the economy. When a currency strengthens, imports become cheaper, but exports may suffer. Conversely, a weaker currency can boost exports but raise the cost of imports, affecting inflation rates. As of early 2025, Iraq operates with two exchange rates (dual Exchange rates).

What is a Dual Exchange Rate?

A dual exchange rate system refers to the existence of two separate exchange rates for a currency within a country. One rate is typically the official rate set by the central bank or government, while the other is an unofficial, market-driven rate. 

This system allows for different exchange rates to be applied to different types of transactions, such as imports, exports, or even remittances. In Iraq, the Central Bank of Iraq (CBI) maintains an official exchange rate for most government-related transactions, while a parallel or market rate is often used in the private sector for other transactions.

1. Official Exchange Rate: The official exchange rate is the rate established by the Central Bank of Iraq (CBI), which dictates how much one U.S. dollar is worth in Iraqi dinars within the country’s regulated financial system. Currently, the CBI has set the official rate at 1,310 IQD per USD to maintain monetary stability and control inflation. This fixed rate is primarily used in government transactions, official banking operations, and international trade agreements.
2. Market Exchange Rate: The market exchange rate, on the other hand, is determined by supply and demand in the open market, particularly in currency exchange houses, unofficial trading platforms, and local transactions. Due to factors like inflation, currency shortages, and economic conditions, the market rate often deviates from the official rate. Currently, it hovers around 1,460 IQD per USD, meaning people exchanging dinars in everyday transactions may get a different rate than the one set by the government.

The gap between these two rates is 12%, which highlights a critical issue within Iraq’s monetary system. The gap between these rates exists due to foreign currency demand, trade imbalances, and economic speculation. The Iraqi government has been working on stabilizing this difference by implementing new financial policies, cracking down on illegal currency trading, and ensuring that banks follow the official exchange rate more strictly.

Why Does Iraq Have a Dual Exchange Rate?

Iraq’s dual exchange rate system emerged due to several factors, including economic instability, government policy, and external pressures. One of the main reasons for the dual system in Iraq is the government’s attempt to control the national economy in the face of fluctuating oil prices, inflation, and international sanctions. The official exchange rate, often set at a fixed or subsidized rate, is used for essential government transactions, such as importing goods for state-run projects and paying for imports in vital sectors. 

On the other hand, the market-driven rate, which is typically higher than the official rate, reflects the supply and demand for foreign currencies within the country, particularly the US Dollar.

The government’s dual exchange rate approach allows them to exert control over essential sectors while attempting to stabilize the currency. However, it can create challenges for businesses as they must navigate the complexities of these two different rates.

How the Dual Exchange Rate Affects Businesses in Iraq

• Accessing Foreign Currency for Imports: Businesses that rely on importing goods often find it difficult to access foreign currency at the official exchange rate, which is usually more favorable. Due to the limited availability of foreign currency at the official rate, many businesses are forced to purchase dollars at the parallel market rate, which can be considerably higher. This leads to increased costs for imported goods, impacting profitability, pricing strategies, and consumer prices.
• Exporters and Their Revenue: While exporters may benefit from the market-driven exchange rate when they receive payment in foreign currencies, they face challenges in converting those foreign earnings back into Iraqi Dinars. If the official rate is artificially lower than the market rate, exporters may receive less value for their earnings when converting back to the local currency, which can discourage international trade. The discrepancy between official and market rates can lead to less favorable conditions for businesses engaging in foreign trade.
• Uncertainty in Pricing: Businesses in Iraq that rely on fluctuating foreign exchange rates must deal with pricing uncertainty. When the official rate is different from the market rate, businesses may struggle to determine accurate pricing for their goods and services, particularly when dealing with imported raw materials or products. The unpredictable nature of exchange rates forces businesses to either absorb higher costs or pass them on to customers, both of which can affect demand and profitability.
• Cash Flow Management: Companies may experience difficulties in cash flow management, as the dual exchange rate creates discrepancies between costs, revenues, and liabilities. For businesses that need to settle payments in foreign currencies, the fluctuation between the official and market exchange rates can complicate financial forecasting and planning. Cash flow disruption can also arise when businesses cannot access foreign currency in time to meet obligations at the official rate, forcing them to resort to the black market at a higher cost.
• Increased Transaction Costs: Due to the dual exchange rate system, businesses must often engage in additional financial transactions to ensure access to foreign currency at the appropriate rate. This could involve securing dollars through the informal market, incurring additional transaction costs and delays. Moreover, the dual rate system complicates financial accounting and reporting, as businesses need to track transactions at different exchange rates to comply with both government regulations and market-driven practices.
• Impact on Small and Medium-Sized Enterprises (SMEs): SMEs, which often have fewer resources than large corporations, are particularly vulnerable to the dual exchange rate system. These businesses may struggle more than larger companies to navigate the complexities of different rates, and they often lack the expertise or capital to manage the additional costs associated with obtaining foreign currency from the open market. As a result, SMEs could face significant financial strain, which could affect their ability to grow and compete effectively.

Historical Context of Iraq’s Exchange Rates

Iraq’s exchange rate has undergone several significant changes in recent years:

• December 2020: Iraq devalued the dinar by 23% due to a severe fiscal crisis driven by plummeting oil prices and the economic fallout of the COVID-19 pandemic. The dinar moved from 1,182 to 1,450 IQD per USD.
• February 2023: To counter inflation and stabilize the economy, Iraq revalued its currency, shifting the rate from 1,450 to 1,310 IQD per USD.
• 2024: The US dollar appreciated by approximately 3.3%, making imports cheaper but posing challenges for Iraq’s export sector.

Economic Implications of Dual Exchange Rates:

The dual exchange rate system has far-reaching consequences for Iraq’s economy. Let’s break down the primary effects:

• Slower Economic Growth: The gap between the official and market rates creates uncertainty for businesses. Companies may struggle to plan investments, set prices, or negotiate contracts when currency values fluctuate unpredictably. This discourages both domestic and foreign investments, slowing economic growth.
• Increased Corruption: The disparity between rates incentivizes corrupt practices. Entities with access to the official exchange rate can obtain dollars cheaply and sell them at a higher market rate for a profit. This practice undermines economic stability and increases illicit financial activity.
• Complicated Fiscal Policy: Managing the economy becomes challenging with two exchange rates. The government finds it harder to implement monetary policies, control inflation, or maintain a stable business environment. Dual rates complicate fiscal planning, leading to inconsistent economic outcomes.

Predictions for 2025:

Forecasts for the Iraqi Dinar’s exchange rate in 2025 vary, with some analysts predicting a gradual strengthening of the currency. 

According to recent projections:

• The USD/IQD exchange rate may decline steadily throughout the year.
• By December 2025, the exchange rate could reach around 1,217 IQD per USD.

These predictions, however, depend on several factors, including oil prices, government policies, foreign investment, and political stability.

Last Words:

Iraq’s exchange rate situation in 2025 remains a complex issue. While predictions suggest a potential strengthening of the dinar, the government must tackle the underlying causes of the dual rate system to ensure sustainable economic growth. By unifying exchange rates, boosting transparency, and diversifying the economy, the Iraqi dinar can achieve financial stability and investor confidence.

Lastly, the future of the Iraqi Dinar hinges on sound economic policies and strategic reforms.