Iraq devalues to fund its budget as a record of resets limits what it achieves

Iraq devalued its currency this week by 15% — a decision without which the government would be unable to fund its own budget. The FX rate the public pays is now set at IQD 1,520, while the Central Bank of Iraq now buys USD from the Finance Ministry at IQD 1,500 and sells it in turn to banks at IQD 1,510. The decision, which the Council of Ministers approved on Tuesday, is the third currency reset Baghdad has pushed through in six years.

That record of resetting the rate will limit what this devaluation will actually achieve, the economists and advisers we spoke to said. While all four of our sources agreed the move was necessary, they all also pointed to the same constraint: A devaluation hands the government more IQD for every USD it earns and gives the economy a rate it can plan against, but that certainty of planning against this rate is only going to come when the market believes it’s the last reset. Instead, the market is now pricing in the next currency reset.

The timing of the reset drew praise. A fixed exchange rate forces the balance of payments to adjust through reserves, and Iraq’s have been falling, Ahmed Tabaqchali, chief strategist at AFC Iraq Fund, tells EnterpriseAM. CBI holdings dropped about 17% in 7M 2026 to USD 80.6 bn. “The positive part of it is the fact that it was a proactive one,” Tabaqchali says. By his reading, Iraq still has close to nine months of cover, which is what made this a decision rather than a capitulation. “There was no waiting until reserves got to the critical 3, 4 months kind of thing.”

Belt tightening would have been on the menu otherwise: Prime Minister Ali Al Zaidi told parliament’s presidency yesterday that the alternatives would have been austerity measures, paying salaries every 45 days, or borrowing against debt that has already passed IQD 208 tn against a monthly requirement of IQD 10 tn.

REMEMBER- Al Zaidi took over as Iraq’s prime minister earlier this year and inherited a fiscal crisis that saw the state treasury drawing down its reserves, and faced the prospect of missing public-sector payroll within months.

While it might be a positive step, the devaluation needs to be followed by structural changes. Ali Hamoudi, a financial markets and banking expert, calls the fiscal improvement an accounting gain: The government books more IQD per USD of oil while imported goods, foreign contracts, medicines, equipment, and construction materials all get dearer, and neither the dependence on oil nor the expenditure commitments move. Tabaqchali puts it as a sequencing problem — it’s a step that remains incomplete until Baghdad addresses the gap between rigid spending on public sector salaries and subsidies and an oil revenue stream that is volatile and, over the long run, declining. “It’s meaningless or incomplete without a structural reform of the budget,” he says.

Frank Gunter, the Lehigh University economist and Iraq specialist, counts three errors, two of them about credibility rather than size. Baghdad should have devalued the day after oil exports stopped in February, when the move would have caught speculators out. “I don’t think any speculators were taken by surprise,” he says, telling us it has been broadly expected for months. The second error is that IQD 1,520 did not clear a market already trading near IQD 1,600. A devaluation works, on his account, by jumping past the market, so that traders come away thinking the currency is undervalued. “I think this sends a message to the speculators that there’ll be another devaluation in 3-6 months, and that’s a bad thing.”

The third error dates to 2023, when the government revalued the IQD to 1,310 after the 2020 devaluation to 1,450. That reversal taught the market that Baghdad moves the rate in both directions according to circumstance, and Gunter expects any recovery in oil exports to revive the expectation of a revaluation.

The street’s reaction this week is confirmation. The USD in Baghdad went from IQD 1,598 per USD 1 on Tuesday to about IQD 1,685 on Wednesday morning, easing to around IQD 1,670 by evening, with Erbil near 1,667, according to Shafaq. Wholesale trade in Shorja and Alwat Jameela shut temporarily because traders couldn’t reprice. The Eco Iraq observatory counted six waves of increases in the street rate this year before this one. Hours before the cabinet moved, Jabar Goran, spokesman for Al Sulaymaniyah’s currency market, said a rate of IQD 1,500 would provoke a very negative market reaction and that he did not expect the government to do it.

Tabaqchali’s explanation for why the official rate cannot reach that market is structural. The premium exists because large parts of the Iraqi economy are informal and can’t access FX at the official window at any level. “So whether we are 1,200, 1,300, or 1,500, that part of the economy can still not get USD at the official exchange rate,” he says. That gap, he notes, closes only as the economy formalizes. Hamoudi arrives at the same conclusion through the list of things the premium is actually pricing — USD shortages, import restrictions, administrative delays, political uncertainty, and the expectation of further devaluation. Another devaluation without improving USD availability, he warns, would worsen confidence and pull more demand into the parallel market.

Both would rather Baghdad spend its credibility on a framework than on another number. Hamoudi’s prescription is a managed system built on a transparent reference rate, a limited intervention band, reliable access to official USD for legitimate trade, faster banking procedures, and clear communication on reserves and intervention policy, with gradual convergence as the goal. “The objective should be market unification, not repeated devaluations,” he tells us.

Tabaqchali wants the budget reform to come with external discipline attached, and points to Egypt’s 2016 Extended Fund Facility as the model — not only for the USD 12 bn disbursed, but for what it did to Cairo’s access to the international debt markets. Gunter’s version lands on spending: With salaries and pensions effectively untouchable, he thinks the adjustment has to come from subsidies, where fuel, electricity, and water are priced among the lowest in the world and consumed accordingly, and he would pair market pricing with direct transfers to poor households rather than across-the-board support.

The sequencing of costs and benefits is the political problem. Gunter expects the benefits to show up in non-oil exports, domestic industry, and international tourism, helped by a USD or EUR that now stretches further in Iraq, and he puts the timeline at a couple of years. But the impact on costs is already here: Food staples rose by as much as 15% on Thursday, with sugar up 15.4%, rice 10.8%, eggs 10.7% and cooking oil 9.1%. Al Zaidi responded the same day by postponing customs duties and taxes on imports of live animals for red meat, chicken and eggs. “Will the prime minister be willing to ride through the protests that he’s going to face over the next 3 months until the benefits arrive?” Gunter asks.

For companies, the exposure is contractual: Any receivable from a ministry or state company priced in IQD is worth about 13% less in USD today — a loss that sits with the contractor unless the contract carries a currency, price-adjustment, or change-in-law clause, Mohammed Khalaf, principal legal adviser at Iraq Gate Legal Consulting, tells us. Nothing has been published on transitional treatment for existing IQD-denominated government contracts. His broader point is that the fuel pricing measures of August and the exchange rate now have both moved costs onto contractors through decisions that take effect within days, with the fuel decision still unpublished in the official gazette and under cabinet review five weeks on.

Gunter remembers what the 2020 move produced: Four classes of contract, USD-denominated and IQD-denominated in various combinations, and courtrooms full of disputes over which one governed. “I think the courts are going to be buried in this for three years plus,” he said. The Iraqi Contractors Union has asked Al Zaidi to delay implementation, noting dues from the 2020-21 adjustment that remain unpaid.

Real estate is where the currency question gets concrete for regional investors. A unit priced at USD 100k now costs an Iraqi buyer about IQD 152 mn against IQD 132 mn last week, Hamoudi said, which weakens affordability for households earning in dinars while a developer pricing in dinars watches imported construction costs climb against its margin. Previous devaluations, on his read, produced mixed results, with demand from USD holders sometimes rising as demand from dinar-based households weakened.

Tabaqchali treats the hit to Egyptian developers active in Iraq, such as Talaat Moustafa Group, as a one-off translation loss rather than a running cost, and notes the exposure that matters is the cross rate against the currencies they source materials and labor in. Hamoudi’s point for foreign investors generally is the one that connects back to credibility: The decisive risk is not the one-time devaluation but uncertainty about future exchange-rate changes, access to FX, and the ability to repatriate profits.

The liquidity Baghdad is pushing alongside the devaluation goes through institutions the sources rate unevenly. The IQD 3.5 tn stimulus directs money to housing finance, the Trade Bank of Iraq and the Industrial Bank, which Hamoudi sees as an attempt to stop the currency adjustment from turning into a credit and employment crisis, with the test being whether the funds reach productive investment rather than consumption or more USD demand. Gunter approves of the choice of TBI, which he has long argued is the only well-run state bank, and notes that Iraqi governments more often put money where the trouble is than where the competence is. Tabaqchali frames the CBI’s lending initiatives as development banking carried out by a central bank because no other institution in the country can do it, which is itself a statement about the financial system these measures have to work through.

The 2027 budget, due in parliament next Thursday, 15 October, is the test of whether IQD 1,500 is a reset or a financing tool. The draft sets spending at IQD 217 tn with a deficit of IQD 50 tn, assumes oil at USD 58 per barrel and exports of 4 mn bbl / d, and is built on the new rate, Finance Committee member Abbas Hayal told Shafaq.

The oil pricing may be realistic, but the volumes are looking more dubious: Gunter had expected Baghdad to reach for USD 75-80 per barrel in its budget assumption. Hamoudi argues a conservative price does not make a budget conservative and that the volume assumption may be the more important of the two. Oil expert Hamza Al Jawaheri told the press that 4 mn bbl/d of exports is unreachable even if the Strait of Hormuz reopens, putting the realistic ceiling at 3.5 mn. With Hormuz still effectively closed, Iraq’s oil exports are now at 600k bbl /d, down from around 3.3 mn bbl /d before the conflict.