Iran War Pushes Iraq Into Economic Strain as Oil and Currency Suffer

Iraq relies heavily on imports — ranging from food and medicines to appliances and industrial raw materials — while oil represents its principal export. Revenues from oil sales abroad had historically outweighed import costs, giving the country a positive trade surplus. That balance has been upended since the US-Israeli war on Iran began in late February, which disrupted the movement of goods through the Strait of Hormuz, a critical passage for much of Iraq's international trade.

Iraq is grappling with severe economic pressure stemming from the US-Israeli war on Iran that began in late February, with Prime Minister Ali al-Zaidi saying the country faces "extraordinary economic challenges" after losing roughly $60bn in oil revenues.

Prime Minister Ali al-Zaidi said this week that Iraq had lost approximately $60bn in oil revenues since the conflict began, largely because the country was for a period unable to export around 90 percent of its oil via its customary Gulf routes. Those routes have become central to negotiations between Washington and Tehran, with Iran tying free passage through the strait to an easing of US pressure and the removal of a blockade on Iranian ports. Oil revenues make up more than 90 percent of Iraq's federal budget, making the loss a substantial blow to public finances.

Higher prices and longer delivery times

The breakdown in shipping routes has lengthened transport times and raised costs for Iraqi businesses and consumers while also curbing the volume of imports entering the country. Alaa-Eddin Sulaibi, who owns a supermarket in Baghdad, said imported goods now make up about 70 percent of what he sells, down from 90 percent before the war. "We have no choice but to sell local products, even if they are not of the same quality as imported ones," he said.

Sulaibi noted that prices on imported goods had increased by between 25 and 30 percent. He attributed the rises not only to disruptions in the Gulf but also to longer delivery times for goods from China and higher fuel and transport costs, particularly on trade routes involving Turkiye. Multiple merchants said shipments from China were in some cases taking up to three months to arrive, as importers were forced onto longer alternative routes to avoid the Strait of Hormuz or faced delays at the chokepoint.

Dollar rises against Iraqi dinar

The crisis has also weighed on the Iraqi dinar. On the parallel market, the dollar climbed to around 1,600 dinars last week before easing to approximately 1,575 this week. Before the war, the rate stood at roughly 1,540 dinars to the dollar. The official exchange rate remains at approximately 1,300 dinars to the dollar, but that rate is largely inaccessible to ordinary citizens. The widening gap between the two rates has created uncertainty for businesses and added to the financial burden on consumers, as some firms can obtain dollars at the cheaper official rate while others must pay the higher parallel market rate.

The Iraqi government is simultaneously managing concerns over the availability and transfer of dollars that Baghdad receives through arrangements tied to its oil revenues. After the fall of Saddam Hussein's government following the 2003 US invasion, Iraq's oil revenues were placed in a special US-held account, with funds transferred to Baghdad annually under a renewal by the US president, officially aimed at protecting Iraq's financial resources. The arrangement also grants Washington considerable oversight of dollar flows to Iraq.

In April, the Trump administration stopped shipping physical cash from the account to Iraq, limiting transfers to electronic transactions. Some reports linked the halt to pressure related to the activities of Iran-backed militias in Iraq. Limited physical cash shipments resumed in July, though the US has also accused several private Iraqi banks of involvement in large-scale dollar smuggling to Iran. Local reports have indicated that the Central Bank of Iraq (CBI) is struggling to supply commercial banks with enough dollars to finance imports, a situation that could drive prices higher in domestic markets.

The CBI denied facing a shortage, stating on Saturday that it "has sufficient foreign reserves to meet all demands for foreign currency", including for financing foreign trade. The central bank attributed the rise in the parallel market exchange rate to "speculation, expectations, and the misuse of regional geopolitical conditions by certain parties seeking to disrupt Iraq's economic and financial stability".

'Deep imbalances' in the Iraqi economy

Despite the CBI's assurances, the financial pressure on Iraq is intensifying. Mudher Mohammed Salih, the prime minister's financial adviser, said in a television interview this week that the CBI's foreign reserves had fallen from approximately $106bn before the war to around $80bn by late August.

Ziad al-Hashimi, a PhD researcher in international economics at Anglia Ruskin University, said the crisis had exposed longstanding structural weaknesses, especially Iraq's dependence on oil revenues and imported goods. "This crisis has revealed the deep imbalances within the structure of the Iraqi economy, most notably the absence of safeguards capable of protecting the economy during times of turmoil," he said, adding that "the Iraqi government lacks genuine solutions or effective measures that could bring about the kind of structural change needed to overcome the situation".

Al-Hashimi said the government's immediate options were limited to short-term steps such as borrowing, which he described as "not a genuine solution". He said real remedies — including diversifying oil export markets, managing public spending more systematically to cut unnecessary expenditures, and continuing anti-corruption efforts — would take considerable time to produce results.