Iraq's economy is heavily reliant on imports for goods such as food, medicines, and appliances, while oil exports are the primary source of revenue. The country has experienced significant changes since the onset of the US-Israeli war on Iran in late February, which disrupted trade through the Strait of Hormuz, a crucial route for Iraqi exports. Prime Minister Ali al-Zaidi reported a loss of approximately $60 billion in oil revenues due to the inability to export about 90 percent of oil through Gulf routes, which are now central to negotiations between the US and Iran.
Oil revenues constitute more than 90 percent of Iraq's federal budget, making this disruption a substantial economic setback. The shipping route disruptions have also impacted supply chains, leading to increased transportation costs and longer delivery times for businesses and consumers. Alaa-Eddin Sulaibi, a supermarket owner in Baghdad, noted that the percentage of imported goods sold at his store has decreased from 90 percent to 70 percent since the war began, with prices of imported goods rising by 25 to 30 percent.
Merchants have reported significant delays in goods imported from China, with some shipments taking up to three months due to increased transportation costs and the need for circuitous routes to avoid the Strait of Hormuz. The Iraqi dinar has weakened against the US dollar, rising to about 1,600 dinars on the parallel market last week, before easing to around 1,575 this week, compared to approximately 1,540 dinars before the war.
The gap between the official exchange rate of about 1,300 dinars to the dollar and the parallel market rate has created uncertainty for businesses and consumers. The Iraqi government is also facing challenges regarding the availability of dollars linked to oil revenues, as the US has oversight over these funds. Following the 2003 US invasion, Iraq's oil revenues were placed in a special account in the US, with annual transfers to Baghdad.
In April, the Trump administration halted physical cash shipments from this account, leading to reliance on electronic dollar transfers. Some shipments resumed in July, but the US has accused certain Iraqi banks of dollar smuggling operations to Iran. The Central Bank of Iraq (CBI) has denied facing a shortage of dollars, stating it has sufficient reserves to meet foreign currency demands. However, it attributed the rise in the parallel market exchange rate to speculation and geopolitical conditions.
Mudher Mohammed Salih, financial adviser to the Prime Minister, indicated that the CBI's foreign reserves have decreased from about $106 billion before the war to roughly $80 billion by late August. Economists have pointed out that the crisis has highlighted structural weaknesses in Iraq's economy, particularly its dependence on oil and imports. Ziad al-Hashimi, an economics researcher, stated that the crisis has revealed imbalances in Iraq's economic structure and a lack of effective government solutions. He emphasized that while short-term measures may mitigate impacts, genuine solutions require long-term strategies, including diversifying oil export markets and managing public spending more effectively.