Iraq mulls cutting two zeros from the IQD in a bid to pull IQD 70 tn of informal cash back into the banking system

Iraq is dusting off a plan to lop two zeros off its currency — an idea first floated in 2003 under US occupation, and revived and shelved multiple times since.

Government officials sent conflicting messages about how serious the discussions are. Ahmed Rasheed, a member of Parliament’s Finance Committee, described them as “serious” but preliminary, while Communication Minister Mustafa Sanad went further to say “the decision to delete the zeros and change the currency has been made.” Sanad floated a 2027 start and rollout timeline of three years or more, the National reports. Meanwhile, the government’s spokesperson denied that a decision has been made just yet.

The central goal is to flush out cash from the informal sector into banks. Iraq is one of the most cash-dominated economies in the region, with the Central Bank of Iraq (CBI) estimating that more than half of all IQD in circulation moves outside the formal banking system — or about IQD 70 tn out of IQD 125 tn.

So many birds, one stone: Cash outside the system means banks can’t intermediate it, limiting liquidity for lending and the CBI’s ability to conduct monetary policy. It also feeds into the parallel-market bid for USD that has repeatedly forced the CBI to draw into reserves to defend the peg. The plan, if enforced right, could also be a way for the government to reclaim corruption money — look at it as a de facto compliance event for a banking sector the CBI has been trying to modernize.

Undeclared cash in Iraq is estimated to stand around IQD 8 tn, Sanad says. “If this IQD 8 tn is not handed in, it’s as if the government is printing a new 8 tn of the new currency and taking it for itself,” he explains.

Two macro drivers explain why a 23-year-old proposal is live now. One, the Hormuz-driven fiscal squeeze — oil revenues have collapsed from USD 6.8 bn in February to USD 2.3 bn in May against a USD 6.5 bn monthly salary bill, and Baghdad already missed July payroll for parts of the public sector. Two, dollarization pressure — with oil USD scarce, closing the informal FX channel is now a monetary policy priority for Iraq.

What now? The move may require a draft law reaching parliament, but going that route also risks disclosing sensitive currency reform plans that can botch the rollout by moving the market before the policy is final. Sensitive and radical currency reforms like this usually die exactly in that gap between disclosing political intent and execution.