On October 7, the Central Bank of Iraq lowered the value of the Iraqi dinar by 13.3% against the US dollar, changing the official exchange rate from 1,300 to 1,500 dinars per dollar. This means the dollar now costs more dinars, but it also increases the dinar value of Iraq’s oil income.
The timing could help Iraq’s economy because oil exports have been recovering after major disruptions caused by the closure of the Strait of Hormuz in March. Before the conflict, around 95% of Iraq’s oil exports passed through the strait, while about 90% of government revenue came from oil.
Oil exports dropped sharply between March and May, leading to lower government income in the following months. However, exports began recovering in June, reaching around 68% of pre-war levels in August and 75% in September. This recovery is expected to improve oil revenues, while the lower value of the dinar could bring in more dinars from each dollar earned through oil sales.
Iraq has also seen growth in non-oil revenue. Income from these sources increased by 24% during the first eight months of 2026 compared with the same period in 2025, partly because of a new automated customs tariff system introduced at the end of last year.
Despite these improvements, the government continues to face a budget deficit. Most government spending goes toward salaries, pensions, social security, benefits, and subsidies. These expenses are difficult to reduce, even when oil income falls. To manage the shortfall, the government has cut some costs, delayed payments to contractors and international oil companies, and frozen new investment projects.
Iraq’s foreign reserves have also come under pressure. The Central Bank has been using dollars from its reserves to meet demand for imports and other cross-border payments. By the end of September, reserves had fallen 23% compared with the end of 2025. However, the report says they remain at a healthy level and can cover at least 12 months of imports.
The recent dinar devaluation could help ease this pressure. As oil exports recover, the government is expected to receive more dollar revenue and exchange more of it for dinars through the Central Bank. This could help rebuild reserves, while the higher cost of imports may reduce domestic demand for foreign currency.
Looking ahead, Iraq’s financial outlook depends heavily on whether oil exports continue to recover and the pause in attacks between the United States and Iran holds. Expectations for oil prices have also increased. The report projects an average Brent crude price of $92.50 per barrel in 2026, $95.10 in 2027, and $81.20 in 2028. However, the prices Iraq receives for its oil are expected to remain below Brent prices.
Higher oil prices, recovering exports, and the dinar devaluation could improve government finances and give Iraq more time to address its financial problems. But these factors alone will not solve the country’s deeper budget issues, including heavy government spending and its dependence on oil revenue.
The report says Iraq may need support from the International Monetary Fund (IMF) to carry out financial reforms and manage future borrowing. The IMF’s managing director confirmed on October 17 that Iraqi authorities had requested a program, with the Fund offering financial assistance and policy support.
Such a program could face strong opposition from political groups and the public, as previous reform efforts have struggled to gain support. Still, the recent currency decision suggests the government may be taking the financial situation more seriously.
In the short term, Iraq could use domestic borrowing to cover its budget deficit without putting too much additional pressure on foreign reserves. However, larger financing needs in the coming years may require foreign borrowing.
Overall, Iraq has gained some breathing room from recovering oil exports, higher expected oil prices, and the dinar devaluation. But lasting stability will depend on whether the government can control spending, increase non-oil revenue, and make difficult financial reforms.
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