#Iraqi Dinar diminishing value

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Will The Domino Effect of Currency Depreciation Reach Iraq in 2025? Iraqi Dinar Highlights.

The dramatic currency crisis sweeping through the Middle East has raised concerns about the domino effect of currency depreciation reaching Iraq in 2025. The Turkish lira dropped 38% against the US dollar in 2024. The Syrian pound and Iranian rial haven't fared better, losing 50% and 20% of their value.

Iraq's strong economic connections with these countries make it vulnerable to regional currency problems. Their combined annual trade is a big deal as it means that $20 billion, which could expose Iraq to regional currency instability. The Iraqi Dinar shows early warning signs as it trades 15% below its official Central Bank rate in unsupervised markets.

This article explores the potential ripple effects of regional currency depreciation on Iraq's economy. We'll learn about the factors that might shape the Iraqi Dinar's future in 2025 and beyond.

Understanding the Regional Currency Crisis

The regional currency landscape has undergone significant transformation across Iraq's neighboring countries. Specifically, the Iranian rial has weakened by 20%, the Turkish lira has declined by 38%, and the Syrian pound has experienced a 50% drop against the US dollar.

The current state of neighboring currencies

The severity of currency depreciation becomes evident through these key indicators:

Iranian Rial: Trading at 777,000 per dollar

Turkish Lira: Exceeding 35 per dollar

Syrian Pound: Lost over 90% since crisis onset

Key factors driving regional depreciation

External pressures and domestic challenges have consequently created a perfect storm for regional currencies. The decline of the Iranian rial stems primarily from US and European sanctions. Furthermore, the Turkish lira's depreciation results from growing fiscal deficits and budget imbalances.

Notably, excessive demand for US dollars has emerged as a critical factor across the region. The preference for physical dollars over electronic transfers has intensified, particularly in countries with devalued currencies.

Historical patterns and precedents

The historical trajectory reveals a concerning pattern. Since 2018, the Iranian Rial has lost nearly 90% of its value against the US dollar. Additionally, the Turkish Lira has experienced a similar fate, surrendering over 90% of its value in the past five years.

The banking sector's challenges have played a pivotal role in this crisis. For instance, Iraq's banking system remains underdeveloped, with only four bank branches and five ATMs per 100,000 citizens, compared to the regional average of fourteen branches and thirty-seven ATMs.

The socioeconomic impact has been particularly severe. According to UN data, 90% of Syria's population now lives below the poverty line. The situation has been exacerbated by ongoing conflicts and political instability, creating a challenging environment for currency stabilization efforts across the region.

Global Economic Factors Affecting Iraqi Dinar

Iraq's economic landscape stands uniquely vulnerable to global economic shifts, primarily due to its overwhelming dependence on oil revenues. The nation's financial structure reveals a striking reality: oil accounts for more than 99% of exports, 85% of the government's budget, and 42% of GDP.

International trade dynamics

Iraq faces major challenges with its import-dependent economy. The country earned over $1 trillion from oil exports across two decades, yet its total GDP reached only $253 billion by 2023. These numbers show how much the nation relies on imports to meet its needs.

Key trade indicators show this dependency:

Oil revenues make up 90% of state revenue

Changes in foreign exchange markets directly affect import-dependent sectors

Real non-oil GDP dropped by 9% in late 2022

Oil price implications

The relationship between oil prices and fiscal stability remains critical. Oil prices have followed a downward trajectory since mid-2022, dropping from over $120 per barrel to below $75. Moreover, the IMF projects that Iraq requires a break-even oil price of $96 per barrel for fiscal stability.

Global monetary policies

The Federal Reserve's policies have emerged as a crucial factor affecting the Iraqi dinar's stability. Subsequently, the Fed has implemented restrictions on dollar transfers to reduce currency flows to neighboring countries. These measures have created notable challenges:

Delayed or rejected Iraqi banking requests

Increased pressure on currency liquidity

Restrictions on physical dollar transfers

The monetary authority faces additional hurdles in maintaining stability through its foreign currency auction system. Overall, the central bank's efforts to modernize its liquidity management and anti-money laundering frameworks continue, though progress remains gradual against persistent structural challenges.

The Domino Effect Analysis

Iraq's economic relationships with its neighbors weave a complex web of financial dependencies. Regional currency depreciation could trigger a domino effect that goes beyond exchange rates and affects multiple sectors of Iraq's economy.

Cross-border economic dependencies

Regional economic ties in Iraq have grown massive, as yearly trade with neighboring countries exceeds USD 20 billion. The trade patterns show clear imbalances:

Trade with Iran: USD 10 billion annually (excluding fuel)

Imports from Turkey: USD 11.1 billion

Trade with UAE and China: 68.8% of total imports

Trade relationship impacts

Regional currency instability sends ripples through trade channels. Iraq's position as a major oil exporter makes it uniquely vulnerable to regional economic changes. Oil revenues make up 99% of exports and 85% of the government budget.

The banking sector's structural limitations make these challenges even harder. Commercial banks hold just 8.3 trillion dinars out of 100 trillion in circulation. This means the financial system struggles to handle external shocks.

Currency market interconnections

The currency market dynamics reveal complex interconnections. Generally, the presence of unsupervised currency markets has resulted in the Iraqi Dinar trading approximately 15% below its official value.

The presence of unsupervised currency markets has led to the Iraqi Dinar trading approximately 15% below its official value. New banking controls have further exacerbated dollar availability, with daily dollar sales plunging from a pre-2023 baseline of USD 250 million to just USD 55 million, marking a 78% decline.

The Federal Reserve's closer scrutiny has changed how transactions happen. New compliance measures rejected 80% of transactions at first, though this number has dropped to about 15% now.

Banks face big hurdles in their push to modernize. State-owned banks dominate the sector, while basic banking infrastructure and ATMs remain scarce. This reduces apparent liquidity. These structural challenges make regional currency depreciation's effect on Iraq's financial stability even more concerning.

Digital Transformation in Currency Markets

The Iraqi financial sector has seen a major change from old-school banking methods through digital revolution. The country's banking scene is going through massive tech upgrades, and seventeen licensed digital payment companies now operate in the market.

Role of electronic trading

Iraq's trading systems started changing in 2006 when the Central Bank rolled out automated clearing and settlement systems. The system rollout brought these notable results:

Real-Time Gross Settlement System implementation

Iraq Retail Payment Infrastructure launch

National Retail Switch integration

Mobile payment system deployment

E-payment transactions hit 18 trillion Iraqi dinars (USD 13.70 billion), which shows the electronic platform's true impact. These numbers point to more people using digital financial services.

Cryptocurrency influence

Notwithstanding the absence of a comprehensive regulatory framework, cryptocurrency interest continues to grow among tech-savvy Iraqis. Key growth factors include increasing individual adoption, which opens up new investment opportunities, and the emergence of DeFi platforms that facilitate cross-border transactions. 

Additionally, some view cryptocurrencies as a hedge against inflation, contributing to greater financial resilience in a region affected by political instability. The Central Bank stays cautious and focuses on developing traditional electronic payment systems instead. Cryptocurrency adoption faces major hurdles in the Iraqi market until proper regulatory frameworks exist.

Banking system modernization

Digital transformation in the banking sector stands as a key priority for Iraq's financial future. The Central Bank of Iraq focuses on these areas with each new initiative:

Integrated Financial Management Information Systems

Digital Payment Regulation No.2 of 2024 implementation

Electronic payment tools infrastructure development

These modernization efforts show promise. About 6 million Iraqi employees and retirees now use digital services. Prepaid cards have become the most popular electronic card type, with almost 10 million cards in circulation.

This change goes beyond just making things digital. The Central Bank actively promotes financial technology to boost inclusion and streamline operations. In 2018, financial institutions were approved to provide digital services, including account opening, money transfers, and bill payments through mobile banking.

Future Scenarios for Iraqi Dinar

Iraq's economic outlook for 2025 shows both challenges and opportunities. The International Monetary Fund anticipates notable growth, with the economy expected to expand by 5.3% in 2025.

Economic projection models

Iraq's fiscal health shows mixed signals ahead. The budget deficit will likely reach 7.6% of GDP, which affects the dinar's stability. Key economic indicators for 2025 include projected GDP growth of 5.3% and an inflation rate of 3.5%, reflecting moderate economic expansion alongside manageable price increases.

The oil sector is a vital part of the economy. Iraq wants to reach a production capacity of four million barrels per day by early 2025. These developments underscore the critical role of oil revenues in shaping Iraq's fiscal health amidst ongoing challenges.

Risk assessment frameworks

The Central Bank of Iraq has set up a detailed technical framework to manage risks. The main risk factors are:

Currency market volatility affecting exchange rates

Banking sector vulnerabilities with limited penetration

External payment pressures from trade imbalances

Fiscal sustainability challenges

The banking sector's structural weaknesses create the most important risks, as only 19% of adults have bank accounts. The sector's loans-to-GDP ratio is just 20%, that indicates room for growth.

Potential stabilization measures

Iraqi authorities have clear steps to keep the dinar stable. The Central Bank's strategy works to maintain the currency's value through several channels:

Foreign Reserve Management

Preserving adequate foreign currency reserves

Maintaining strategic dollar reserves for market stability

Banking Sector Reform

Implementing structural reforms to optimize efficiency

Increasing transparency in financial operations

Currency Market Controls

Operating the currency sale window without excessive reserve use

Strengthening regulatory measures to prevent currency smuggling

The government wants to vary revenue sources beyond oil. This plan includes boosting the real sector and reviving industry and agriculture to reduce imports. These measures help reduce pressure on foreign reserves and support currency stability.

The Central Bank shows steadfast dedication to keeping the dinar's value stable through interest rate adjustments and currency window operations. These interventions have helped reduce nominal exchange rate fluctuations despite recent challenges from global health crises and oil price changes.

FAQs

Why are neighboring countries' currencies depreciating, and how does this affect the Iraqi Dinar?

Neighboring countries like Iran, Turkey, and Syria are experiencing currency depreciation due to factors like sanctions, fiscal deficits, political instability, and war. This affects the Iraqi Dinar as Iraq shares significant trade relations with these nations, exceeding $20 billion annually, and operates in unsupervised currency markets where the Dinar often trades below its official rate.

What is the role of the Central Bank of Iraq (CBI) in stabilizing the Dinar?

The Central Bank of Iraq plays a critical role by regulating cash dollar issuance, managing remittances, and implementing banking reforms. In 2024, the CBI reduced cash issuance but increased remittances significantly. Despite these measures, the Dinar's market rate fluctuates due to demand dynamics rather than changes in the central bank's cash supply.

What are the potential scenarios for the Iraqi Dinar in 2025?

The Iraqi Dinar's stability depends on several factors: US fiscal policies toward Iraq, the central bank's monetary strategies, and the demand for dollars in local markets. If geopolitical tensions ease and banking reforms succeed, the Dinar may stabilize. Conversely, increased dollar demand or insufficient reforms could lead to further depreciation.

How do fluctuations in the US Dollar impact the Iraqi Dinar and global currencies?

The US Dollar's performance affects global trade and currencies, including the Iraqi Dinar. In 2024, the Dollar appreciated against Middle Eastern currencies like the Turkish Lira and Iranian Rial while depreciating against others like the Euro and Thai Baht. This volatility underscores the interconnectedness of Iraq's economy with global financial markets.

What measures can Iraq take to prevent the Dinar from depreciating further in 2025?

To mitigate depreciation, Iraq can adopt policies such as aligning its currency model with stable Gulf economies, enhancing banking transparency, curbing unsupervised currency markets, and increasing reliance on SWIFT-based transactions. Strengthening domestic production and diversifying trade partnerships can also reduce dependence on neighboring countries' volatile currencies.

What steps is the Central Bank of Iraq taking to stabilize the Dinar?

The Central Bank has implemented changes such as reducing cash issuance, increasing reliance on SWIFT-based transfers, and improving digital payment systems. It also monitors remittances and currency flows more rigorously to manage market demand and supply dynamics.

Will changes in US policies impact the value of the Iraqi Dinar in 2025?

Yes, US fiscal and monetary policies, including decisions on tariffs, inflation, and international relations, play a significant role in influencing the value of the Iraqi Dinar. The central bank's policies alone cannot fully stabilize the currency without considering external influences.

Conclusion

Iraq's economic future faces its biggest problem with regional currency instability. The Iraqi dinar remains strong against neighboring currency drops, but several factors need attention. Trade relationships worth more than $20 billion with regional partners and heavy reliance on oil revenue make Iraq's currency vulnerable to market shifts.

The banking sector's digital transformation shows promise. Iraq's market now has seventeen licensed digital payment companies, and e-payment transactions have hit 18 trillion Iraqi dinars. These changes have built a reliable financial system that can better handle external pressures.

The Central Bank's steadfast dedication to currency stability through strategic actions is significant. Smart foreign reserve management, banking reforms, and market controls serve as vital safeguards. The projected economic growth of 5.3% in 2025 points to positive momentum, even with ongoing challenges from oil price swings and regional currency shifts.

Iraq needs to broaden its revenue sources beyond oil and build a stronger digital banking system. The mix of smart financial policies, tech advances, and strategic economic planning will shape the Iraqi dinar's stability through 2025 and beyond.

Source:- Dinarit

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De-dollarization of Iraqi Dinar. Iraqi Dinar Speculations.

Iraq’s recent banking reforms mark a significant shift in its monetary policy as the country pursues the de-dollarization of Iraqi Dinar. The nation’s central bank implemented strict new transaction regulations in early 2024, consequently reshaping the relationship between the local currency and the US dollar.

Furthermore, these changes affect not only Iraq’s domestic financial operations but also its international trade relationships and regional economic stability. This article explores the historical context, current implementation strategies, market responses, and potential future scenarios of Iraq’s currency transformation while considering the broader implications for regional trade and economic stability.

Historical Context of Iraqi Dinar’s Dollarization

The Iraqi dinar’s journey began in 1932 when it replaced the Indian rupee as the nation’s official currency. Initially pegged to the British pound, the dinar maintained remarkable stability until 1959 when it switched to a US dollar peg at a rate of 1 dinar to USD 2.80.

Pre-2003 Iraqi dinar status

The period between 1960 and 1980 marked the golden era for the Iraqi dinar. During this time, the country experienced substantial economic growth, with real GDP expanding at approximately 8% and per capita growth reaching 4.7%. Subsequently, the dinar’s value strengthened to USD 3.38 by 1973.

Impact of Gulf Wars on Currency

The onset of the Iran-Iraq War in 1980 marked a turning point for the Iraqi economy. The situation deteriorated further when Iraq invaded Kuwait in 1990, carrying a foreign debt exceeding USD 70 billion. Accordingly, the United Nations imposed economic sanctions, preventing Iraq from accessing high-quality currency printing services.

The currency crisis deepened as:

The government resorted to printing lower-quality notes

Hyperinflation rapidly eroded the dinar’s value

By late 1995, one US dollar traded for 3,000 Iraqi dinars

Emergence of dollar dominance

The extensive dollarization process intensified in the early 1990s. The Iraqi government faced significant budget imbalances after losing oil export revenues, therefore resorting to printing money to fund expenses. A table highlighting the currency’s decline shows:YearExchange Rate1980USD 3.221995USD 3,0002000GDP less than half of 1980

Following the 2003 invasion, the Coalition Provisional Authority introduced new Iraqi dinar notes between October 2003 and January 2004. Nevertheless, the dollar’s dominance persisted as Iraqis typically used dollars for significant purchases, given that large amounts of dinars would be needed for substantial transactions.

The extensive dollarization resulted from various factors, including the banking system’s fragility and the public’s diminished confidence in the local currency. Moreover, the Iraqi economy became predominantly cash-driven and dependent on US dollars.

Current De-dollarization Implementation

In late 2023, the Central Bank of Iraq (CBI) unveiled extensive measures to limit the flow of US dollars, specifically as part of its de-dollarization of Iraqi Dinar initiative. The implementation of these reforms marks a significant transition in Iraq’s monetary policy landscape.

2024 banking reforms

Beginning January 1, 2024, the CBI implemented a comprehensive ban on cash withdrawals and transactions in US dollars. In essence, this strategic move aims to curtail the misuse of approximately 50% of the USD 10 billion that Iraq imports annually from the New York Federal Reserve.

The banking sector has experienced notable improvements, as evidenced by:

Daily regulated dollar transactions increasing from USD 50 million to USD 200 million

Implementation of the SWIFT system for enhanced transparency

Establishment of stringent compliance measures for international transfers

New transaction regulations

The CBI has established a centralized electronic platform to regulate wire transfers, particularly focusing on preventing fraudulent transactions. As opposed to previous systems, banks must now provide comprehensive documentation, including:Transaction ComponentRequired InformationCustomer DetailsIdentity verification and source of fundsBeneficiary DataComplete profile and purpose of transferTrade ParticularsSupporting documentation and contracts

In particular, any bank found transferring funds to sanctioned individuals faces permanent exclusion from the foreign currency sale window.

Digital payment initiatives

The Digital Payment Regulation No.2 of 2024 represents a cornerstone in Iraq’s financial modernization strategy. The regulation introduces advanced infrastructure for electronic payment tools and financial services specifically designed to reduce cash dependency.

The CBI anticipates reaching 3 million digital payment users by year-end, with implementation focusing on:

Streamlined operations through POS systems and e-wallets

Enhanced data visibility for transaction monitoring

Improved financial security measures

The transformation extends beyond mere technical upgrades, as Iraqi banks wanting to access dollar reserves held in the United States must now process transfers through the electronic system. The Federal Reserve examines these requests and maintains the authority to block suspicious transactions.

International Relations and Currency Control

The relationship between Iraq and the United States remains central to the ongoing de-dollarisation of Iraqi Dinar, with significant implications for regional economic stability.

US-Iraq financial relationship

The United States maintains its position as Iraq’s most significant partner in economic development. Above all, since 2014, the US has invested nearly USD 3.50 billion in humanitarian and development assistance. A comprehensive breakdown of recent US assistance includes:YearEconomic DevelopmentHumanitarian Aid2023USD 150.00 millionUSD 114.20 million

The bilateral trade relationship continues to expand, with two-way trade in goods reaching USD 4.60 billion in 2021. Coupled with this, Iraq has emerged as one of the largest trading partners for the US, with Iraqi exports to America totaling USD 3.80 billion.

Iran sanctions impact

It is important to realize that Iraq’s banking sector faces significant challenges due to US sanctions on Iran. In light of these restrictions, the US Treasury has implemented powerful tools to protect Iraqi and international financial systems from illicit activities.

The banking sector has experienced notable changes:

The US Federal Reserve examines all dollar transfer requests

Iraqi banks must provide complete transparency for international transactions

Several Iraqi banks face restrictions on dollar transactions

Regional economic implications

The de-dollarization efforts have created ripple effects across the region. Iraq has become an essential economic partner for neighboring countries, although this has created challenges in maintaining compliance with international sanctions.

The International Monetary Fund notes that Iraq’s fiscal and external positions have improved, with external current account surpluses reaching 17.3% of GDP. At the same time, the Central Bank of Iraq’s foreign exchange reserves rose to USD 97.00 billion, equivalent to 11 months of imports.

Under those circumstances, Iraq faces the challenge of balancing its regional relationships while maintaining compliance with international financial regulations. The World Bank reports that despite record oil revenues, the country’s non-oil sectors have shown limited growth, highlighting the need for continued economic diversification and structural reforms.

Market Response and Exchange Rates

The Iraqi financial markets have experienced significant volatility as the government implements its de-dollarization strategy. Meanwhile, the gap between official and parallel market rates has created notable economic challenges for businesses and citizens alike.

Official vs parallel market rates

The disparity between official and parallel market rates has reached significant levels. The Central Bank of Iraq maintains an official exchange rate of 1,296.48 dinars per dollar, whereas the parallel market rate has climbed to approximately 1,600 dinars. This disparity represents an estimated inflation rate of 23.41% in the black market.Exchange Rate TypeRate (IQD per USD)Official Rate1,296.48Parallel Market1,600+

Banking sector challenges

Iraq’s banking infrastructure faces substantial hurdles in implementing the de-dollarization reforms. Straightaway, several key challenges have emerged:

The US Treasury and Federal Reserve have banned 14 Iraqi banks from conducting dollar transactions

Financial access remains amongst the lowest globally, with merely 19% of adults owning bank accounts

The private commercial banking sector struggles with limited capacity to support financial intermediation

Public reaction to reforms

The implementation of new financial measures has triggered widespread public response. Altogether, the reforms have particularly affected businesses dependent on dollar access. Citizens have expressed their concerns through various means, including protests over the declining value of the Iraqi dinar.

The banking sector’s transformation has faced resistance from the public. An estimated 90 trillion dinars are stored at home rather than in banks, which significantly reflects deep-seated distrust in financial institutions, even among business owners.

The impact on daily operations has been substantial, with many local banks limiting dollar cash withdrawals. In one notable instance, video evidence emerged showing a depositor threatening to burn down a Baghdad bank after being denied access to cash dollars.

The reforms have created additional pressure on Iraq’s impoverished families, who constitute over 40% of the population. The situation has intensified as businesses increasingly turn to the parallel market for their dollar needs, thereby driving up costs for essential goods and services.

Future Scenarios for Iraqi Currency

Looking ahead, the Central Bank of Iraq’s ambitious de-dollarization initiative presents both opportunities and challenges for the nation’s economic future. The transformation of Iraq’s monetary landscape hinges on several critical factors that will shape its success in the coming years.

Economic stability prospects

The Central Bank of Iraq expects some initial volatility in the dinar’s value as new measures take effect. Certainly, the bank’s commitment to providing dollars at the official rate for legitimate purposes suggests a strategic approach to maintaining stability. The economic outlook shows promising signs, with:

Non-oil GDP growth reaching 4.4% to 87.7 trillion dinars in 2023

Foreign reserves rising to USD 64 billion in 2021

Implementation of renewable energy programs worth 1 trillion dinars

Banking system modernization

The Iraqi banking sector is undergoing substantial structural changes. Generally, state-owned banks dominate 88% of banking sector investments, indicating the need for comprehensive reform. The modernization efforts focus on several key areas:Reform AreaImplementation FocusDigital ServicesElectronic payment systems and platformsRegulatory FrameworkEnhanced compliance and security standardsPrivate SectorIncreased competition and efficiency

The Central Bank has granted licenses to 17 companies for digital wallet operations, analogous to successful implementations in other developing economies. Additionally, e-payment transactions have reached 18 trillion Iraqi dinars, demonstrating the growing adoption of digital financial services.

Regional trade implications

Iraq’s economic relationships are evolving rapidly, as evidenced by its strengthening ties with various international partners. The country has emerged as China’s top importer in Western Asia, with bilateral trade reaching USD 49.70 billion last year. In addition, Chinese investments in Iraq have surpassed USD 34.20 billion, establishing a strong foundation for future economic cooperation.

The banking sector’s transformation presents notable opportunities:

Enhanced international trade capabilities through modernized payment systems

Improved compliance with global financial standards

Greater integration with regional economic partners

The Islamic banking sector shows particular promise, with assets growing to a 9.7% market share by end-2023. As a result of these developments, Iraq’s financial system is positioned for significant evolution, notwithstanding current challenges in banking penetration rates, which remain at 81% of the adult population without bank accounts.

The World Bank’s involvement through various development initiatives suggests sustained support for Iraq’s financial modernization. In concert with the International Monetary Fund’s guidance, their technical assistance programs provide crucial frameworks for implementing these ambitious reforms.

Conclusion

Iraq’s journey toward de-dollarization represents a pivotal transformation in its economic history. Though the path presents significant challenges, particularly with exchange rate disparities and banking sector reforms, the country shows promising signs of financial evolution.

Recent developments demonstrate Iraq’s commitment to modernizing its financial infrastructure. Digital payment initiatives, stricter transaction regulations, and enhanced compliance measures signal a determined push toward a more stable economic future. Meanwhile, the nation maintains crucial international partnerships while pursuing greater monetary independence.

The success of these reforms depends largely on public trust and participation in the formal banking sector. Despite current challenges, Iraq’s growing foreign reserves, expanding non-oil GDP, and strengthening regional trade relationships point toward positive economic prospects. The combination of banking modernization efforts and strategic international partnerships positions Iraq for potentially significant economic growth.

Looking ahead, Iraq’s financial transformation extends beyond simple de-dollarization. The country stands at a crossroads, balancing traditional economic structures with modern financial innovations. This careful approach, supported by international financial institutions and regional partners, suggests a thoughtful strategy for long-term economic stability and growth.

Source:- Dinarit