Seventy per cent of Iraqi cash is outside the banking system. Governmental and financial institutions are suffering from a shortage of Iraqi dinars, while oil prices may drop. So, what do we know about the unknown future Iraq is heading towards?

Iraq is experiencing a financial crisis due to the lack of cash liquidity for three main reasons. First, more than 70 per cent of Iraq’s monetary supply has diminished due to ill-considered decisions by the Iraqi banking system. These decisions include restricting cash withdrawals for account holders and the exploiting of funds during banking transactions by fraudulent individuals within the bank. This has led to a loss of trust in government banks, forcing account holders to keep their money in cash, instead of depositing it in banks. 

The second reason is the inflation of operational costs at the expense of public revenues. 

The third reason is the strict regulatory measures implemented by the U.S. Federal System, in coordination and cooperation with the Central Bank of Iraq, to monitor financial transfers from Iraq to various countries worldwide. These measures aim to assist Iraq in dealing with contraband and money laundering rings, which have been responsible for smuggling tens of billions of US dollars outside of Iraq in recent years. 

The inheritance and debt cancellation 

According to data from the Public Debt Department of the Iraqi Ministry of Finance, the current political system has inherited a large amount of external debts, estimated at over 130 billion US dollars. 

To help Iraq overcome the repercussions of the previous era, the United Nations Security Council issued Resolution 1483 on 22 May 2003, establishing the Development Fund for Iraq (DFI). Under this resolution, all of Iraq’s revenues from oil and gas sales were to be deposited into the fund until an elected Iraqi government was formed to legitimately represent the Iraqi people. However, five per cent of these revenues were allocated to the Compensation Fund, which was established under UN Security Council Resolution 687 of 1991. 

Resolution 1483 in 2003 called on international financial institutions to assist Iraq in rebuilding and developing its economy. The resolution also referenced the willingness of Iraq’s creditors, including the Paris Club, to negotiate with Iraq to solve its debt issue. 

When the resolution was issued, Iraq engaged in multiple negotiations with its creditors, with unlimited support from the United States, the World Bank, and the International Monetary Fund (IMF). These negotiations resulted in the cancellation of 80 per cent of Iraq’s external debt, the rescheduling of the remaining debt, and the provision of new grants and loans to help Iraq overcome the consequences of the previous era and improve its economy. 

The inheritance and its aftermath 

To help Iraq improve its national economy, the International Monetary Fund (IMF) devised a roadmap for the country, which included several key steps. The roadmap primarily focused on rationalising governmental spending and diversifying income sources to reduce the burden on the public treasury and transition Iraq from a rentier economy to a state with multiple revenue streams. 

Iraq gradually implemented some of the IMF’s recommendations, in particular reducing government subsidies for ration card items and fuel, but within a limited scope. However, it failed to implement other crucial steps, especially regarding public sector reformation, private sector support, and creating a stable environment for investment. 

Across various successive governments, their representatives in parliament and various legislative sessions, political forces have consistently increased the number of state employees and expanded the number of individuals eligible for salaries and monthly disbursements from the state treasury. This was done by passing laws and issuing poorly thought-out decisions, primarily aimed at gaining public approval as well as by building electoral bases at the expense of the public interest. However, these forces failed to recognise the fact that they were steering the country towards total economic collapse, while overlooking crucial economic reforms. 

By July 2014, the Iraqi government found itself in an embarrassing position due to a decline in global oil prices, coinciding with a rise in operational expenditures resulting from flawed policies. Additionally, there was a significant surge in military spending due to the war against ISIS, which had seized control of several provinces by mid-June 2014. 

As a result, at the beginning of 2015, the government was forced to adopt austerity measures and rationalise government spending through policy adjustments. In July 2015, Iraq submitted an official request to the International Monetary Fund (IMF) for an emergency loan of 1.2 billion US dollars to address its financial crisis. 

By November 2015, at the request of the Iraqi authorities, the International Monetary Fund (IMF) began implementing a non-loan-based program, monitored by IMF experts. The program was created to establish the necessary conditions, build the required capacities, and achieve the performance record needed to move Iraq toward a credit stand-by arrangement. The program focused on four key elements: 

First, it is essential to reduce government spending, restore the stability of public finances, and achieve stable debt levels. 
Second, social spending should be safeguarded to ease the hardship faced by the most economically vulnerable groups, the internally displaced and refugees. 
Third, enhancements in public financial management should lead to better allocation of public funds and prevent the accumulation of outstanding debt. 
Fourth, reforming state-owned banks to limit their control over the banking system would minimise risks and uphold sector stability. 

Iraq’s commitment to some of the components of this program, coupled with the growth of the oil sector throughout the first half of 2016, had a significant impact on its support of economic stability at that time, despite the sharp decline in global oil prices. 

Repeating past mistakes 

During 2017 and 2018, Iraq continued to operate under the IMF program, paralleling a decline in war-related expenditures. The armed forces then secured a significant victory over extremist factions in mid-July 2017. This period also saw the stabilisation of global oil prices throughout 2017 and the first half of 2018, followed by a renewed rise in prices due to OPEC decisions, the US withdrawal from the nuclear agreement, and the imposition of new sanctions on Iran at the time. These factors resulted in an increase in Iraq’s oil revenues and a rise in non-oil revenues, stemming from a series of government measures taken at the time, allowing a partial recovery of the Iraqi economy. 

However, this recovery did not last long. As soon as the next government, led by Adel Abdul Mahdi, was formed, matters returned to their previous state. The fourth parliamentary session made several catastrophic mistakes, mainly through ill-considered amendments to the 2019 Federal Budget Law. These amendments included provisions obligating the government to reinstate employees whose contracts had been terminated, ensuring that the federal government would pay the salaries of Peshmerga fighters independently of the Kurdistan Region’s budget allocations, and allowing various ministries and state institutions to hire hundreds of thousands of new employees. Additionally, many workers were employed under the daily wage system, miyawma, later converted into contract employees, and subsequently granted permanent positions on the government payroll. 

This occurred amid complete government silence, with political representatives in the parliament ignoring the immense financial burdens these amendments would impose on the public treasury, especially regarding the 2019 Federal Budget Law and related decisions issued after its enactment. 

Towards the end of 2019, Iraq faced a severe crisis, overlapping with mass protests that erupted in October 2019. The protests and the ensuing events eventually forced Abdul Mahdi’s government to resign on 30 November 2019. This was followed by the global outbreak of the COVID-19 pandemic, leading to a sharp decline in international oil prices, further worsening Iraq’s economic challenges. 

Devaluation of the Iraqi dinar and the parallel market 

In early May 2020, a new government was formed under Prime Minister Mustafa Al-Kadhimi, implementing measures to overcome the economic crisis. One of the most significant decisions was made by the Central Bank of Iraq in late 2021, when it devalued the Iraqi dinar against the US dollar, adjusting it from 1,190 Iraqi dinars per US dollar to 1,470 Iraqi dinars per US dollar. This decision was made in coordination with the federal government and other major political forces as part of efforts to address the crisis. 

Al-Kadhimi’s government—whose term ended on 26 October 2022—was later blamed by many political factions for the decision and its aftermath. This shift in stance was an attempt by these factions to avoid responsibility and deflect public criticism. 

By 2023, the markets experienced a major shock following the strict regulatory measures imposed by the US Federal System to monitor foreign transfers from Iraq to various countries. These measures were designed to combat money laundering and currency smuggling carried out by corrupt networks and organised crime syndicates operating within Iraq. 

Continuing the cycle of mismanagement in state affairs, the Central Bank of Iraq, under the administration of the new Iraqi Prime Minister Mohammed Shia’ Al-Sudani, issued a new decision on 8 February 2023, to reduce the exchange rate of the US dollar against the Iraqi dinar, setting it at 1,320 Iraqi dinars per US dollar, instead of the previous rate of 1,470 Iraqi dinars per US dollar. Al-Sudani’s government made this move in response to the growing anger towards the rise of commodity prices and as an attempt to ease public discontent.  

However, this decision failed to positively impact the Iraqi streets, as prices remained unchanged and continued to rise. The US dollar exchange rate in the parallel market remained between 1,490 and 1,520 Iraqi dinars per US dollar in local markets due to the increasing demand for US dollars and the limited supply, despite the efforts of official authorities to control the exchange rate. This led to economic stagnation, forcing many professionals and business owners to seek alternative solutions. 

Poor planning, mismanagement, and the widespread prevalence of financial and administrative corruption have played a significant role in maintaining Iraq’s rentier economy despite the country’s available resources that could be leveraged to diversify income sources. 

What fate? 

Iraq has not made a single step forward in the past twenty years toward freeing itself from the constraints of the oil market due to its total reliance on oil sales revenues as the primary source for covering operational and investment expenses. 

Given the instability of global oil prices and their fluctuations—rising and falling in response to international events—Iraq will continue to experience economic instability in the future. Today, oil revenues barely cover operational expenses, and any drop in global oil prices would have catastrophic consequences for the country’s overall situation. 

This challenge is compounded by the fact that international financial institutions will no longer offer Iraq future loans to cover its operational expenses, leaving the country with limited options while facing serious economic challenges. 

Despite issuing nearly 105 trillion Iraqi dinars, approximately 80 billion US dollars, by the end of 2024, Iraq still suffers from the loss of more than 70 per cent of its monetary supply. This is due to two main factors. First, the absence of public trust in both governmental and private banks, which drives people to keep their savings in cash, outside the banking system. The second factor is the smuggling of Iraqi dinars into certain neighbouring countries. 

Rather than addressing this issue at its foundation, relevant authorities have resorted to ineffective and temporary solutions, such as attempting to conceal smuggling and money laundering operations, which are often carried out by private banks for the benefit of influential figures inside and outside of Iraq.  

Therefore, Iraq must prioritise and embrace a comprehensive revolution in administrative and financial reform, covering all sectors without exception. 

Addressing Iraq’s economic challenges requires restructuring the public sector, rationalising government spending, and supporting the private sector for it to become a real partner. Additionally, reforming the Iraqi banking system to ensure its alignment with global standards and rebuilding public trust are vital steps. Without these reforms, Iraq is headed toward an uncertain future.