Iraq's Economy Strained as Regional War Cuts Oil Revenues and Drives Up Prices

Iraq is heavily reliant on imports, ranging from food and medicines to appliances and industrial raw materials. While its massive oil reserves traditionally generated enough export revenue to offset imports and maintain a trade surplus, the US-Israeli war on Iran that began in late February has severely disrupted this balance. The resulting closure of trade through the Strait of Hormuz has choked off vital shipping routes, prompting Prime Minister Ali al-Zaidi to warn that the nation is facing extraordinary economic hurdles.

Al-Zaidi recently reported that Iraq has suffered approximately $60bn in oil revenue losses due to its inability to export roughly 90 percent of its oil through standard Gulf pathways. These routes have become a focal point in negotiations between Washington and Tehran, with Iran tying free passage through the strait to reduced US pressure and the lifting of blockades on Iranian ports. Because oil sales constitute over 90 percent of Iraq's federal budget, the export collapse represents a severe fiscal shock.

Shipping disruptions have also crippled supply chains, driving up transport costs and delivery times while reducing import volumes. Alaa-Eddin Sulaibi, a Baghdad supermarket owner, noted that imported goods now comprise 70 percent of his inventory down from 90 percent before the conflict, with prices surging by 25 to 30 percent. Merchants dealing in goods from China report shipment delays lasting up to three months as carriers are forced to take longer routes around the Strait of Hormuz or face severe bottlenecks.

The economic strain has additionally impacted the Iraqi dinar, which weakened against the US dollar on the parallel market. Last week, the dollar climbed to about 1,600 Iraqi dinars before settling near 1,575, widening the gap with the official rate of approximately 1,300 dinars and creating financial uncertainty for both businesses and consumers.

Adding to these pressures, the United States exercises significant oversight over Iraq's oil revenue funds held in US accounts. Following restrictions introduced by the Trump administration on physical cash shipments—reportedly tied to concerns over Iran-backed militias—and subsequent allegations of dollar smuggling involving private Iraqi banks, the Central Bank of Iraq (CBI) has faced hurdles in supplying commercial banks with foreign currency. While the CBI maintains it has sufficient foreign reserves to finance foreign trade and dismissed the parallel market surge as the result of speculation, financial adviser Mudher Mohammed Salih confirmed that foreign reserves dropped from $106bn to roughly $80bn by late August.

Economists argue that the crisis has exposed deep structural vulnerabilities in Iraq's economy. Ziad al-Hashimi, a PhD researcher in international economics at Anglia Ruskin University, emphasized that the state lacks the safeguards needed during periods of turmoil and that current government options are largely limited to short-term measures like borrowing. True recovery, experts contend, demands long-term structural reforms, including diversifying export markets, systematically managing public spending, and intensifying anti-corruption efforts.