Fluctuating Iraqi Dinar exchange rates caused a 350% increase in bank share trading value on the Iraqi Stock Exchange from 2020 to 2021. During this period the dinar exchange rate against the US dollar went up from 1,233.944 to 1,474.055, a big depreciation.
These fluctuations have created a big challenge in Iraq’s investment scene. While the declining exchange rate encouraged investment in export sectors, it discouraged investment in import-dependent sectors. Research shows that domestic investments are more sensitive to these exchange rate movements than foreign investments because they are import-dependent and directly impact production costs.
This comprehensive article explores the relationship between Iraqi dinar exchange rates and investment from 2003 to 2025 and the response of local and foreign investment to currency fluctuations.
The Iraqi monetary system was changed in 2003 when the Coalition Provisional Authority introduced new Iraqi dinar notes to replace the Saddam currency. The exchange process created a unified currency system; Saddam dinar notes were exchanged at par, and Swiss dinar notes at 1:150 new dinars.
Iraqi dinar was stable until 2020 when the Central Bank of Iraq (CBI) devalued the dinar by 24% due to COVID-19 and low oil prices. The exchange rate went from around 1,190 dinars per dollar in March 2019 to 1,460 dinars in June 2021.
Major policy reforms:
Several events affected the dinar value:
These events show how external and internal factors affect the currency.
The CBI has actively managed exchange rate stability through various interventions. Furthermore, the bank maintains substantial foreign currency reserves, covering imports for 16 months compared to the global benchmark of three months.
The CBI strategy is now more advanced, and the institution is focusing on reducing dollarization in the economy. So, the CBI introduced new restrictions on dollar transactions, pre-approved transfers, and global payment systems for personal and commercial purposes.
The current framework focuses on price stability and inflation through proper channels, as per international standards. Iraq’s foreign currency reserves reached an all-time high of over $100 billion, backing up the exchange rate management.
Local investment sectors were affected differently by the Iraqi dinar exchange rate fluctuations, each industry has its own adaptation.
The manufacturing sector faced big challenges as exchange rate changes affected production costs. The first thing to remember, the decline in the exchange rate encouraged investment in export oriented industries. However, companies that rely on imported raw materials face increased operational costs, affecting their profit margin and investment decisions.
In summary, the industrial sector response is:
The real estate sector is very resilient and has shown big growth despite currency fluctuations. Property values in Baghdad have increased by 20-50% in the last four years. The market is attractive for investors who want to protect their wealth from currency devaluation.
This shows the sector’s strength and its attractiveness as an investment. The real estate market is valued at over USD 1.10 billion and is expected to reach USD 1.32 billion by 2028, with 4.4% annual growth.
The service sector adapted to exchange rate fluctuations, especially the banking sector. The banking sector introduced a new electronic banking framework and recapitalization. Due to currency transaction restrictions, private banks modified their business models.
The sector witnessed big changes in investment patterns, state owned banks still dominating through implicit state guarantees. New banking regulations and electronic systems introduced opportunities for modernization and growth in financial services.
Recent data showed big growth in Iraq’s foreign investment. FDI reached an all-time high of $24 billion in the first nine months of 2023, more than double the previous record of $24 billion set in 2008.
Exchange rate and foreign direct investment showed clear patterns. Studies showed an inverse relationship between the official exchange rate and foreign investment: a 1% increase in the exchange rate leads to a 0.584% decrease in foreign investment. Instead of scaring investors, this relationship prompted sector-specific investments.
These investments are for long-term opportunities despite currency fluctuations.
A stock market analysis showed a statistically significant correlation between exchange rate and stock trading. The study showed:
International investor sentiment improved but still challenges exist. The Iraqi market has different opportunities across sectors. Oil and gas still dominates, more than 50% of announced FDI. But the investment landscape changed since 2003, 72 companies made greenfield investments.
The banking sector underwent big changes, new electronic framework and recapitalization were introduced as a response to exchange rate fluctuations. So, the government introduced several measures to boost investor confidence:
Iraq signed the Singapore Convention in April 2024, a big milestone to attract foreign investors. With 11.7% of global oil reserves, Iraq is becoming a more attractive investment destination.
The regulatory framework for the Iraqi dinar exchange rate changed through strategic policies. In February 2023, the Central Bank of Iraq revalued the pegged exchange rate from 1,450 to 1,300 per USD.
Central Bank policy showed mixed results in managing currency stability. The introduction of a new cross-border payment platform in November 2022 improved AML/CFT. This allowed wire auction requests to return to previous levels by mid-2023 and the private sector to access foreign exchange at official rates.
Also, exchange revaluation in February 2023 strengthened the dinar by 10.3%, and the Central Bank committed to currency stability. By mid-2023, electronic transfers normalized trade finance operations and supported economic activity and the overall stability of the exchange rate system.
The investment framework changed through several legislative reforms. National Investment Law of 2006, amended in December 2015, introduced the main guidelines for foreign investment. Some of the provisions:
However, the regulatory environment is still complex. Investment Law added more constraints on foreign ownership of natural resources. Bureaucratic hurdles also exist, capital deposit requirements before license issuance.
The Iraqi government introduced several measures to address regulatory hurdles. In March 2024, Iraq joined the European Bank for Reconstruction and Development to access infrastructure project financing. Iraq also signed the Singapore Convention on Mediation, a big step to improve dispute resolution mechanisms.
The banking sector has its own regulatory challenges. State-owned banks control 80% of the market, while private commercial banks compete for the remaining 20%. To address this, authorities introduced:
Kurdistan Region has its own investment regulations, with separate incentives such as full property ownership and 10 years tax holidays for foreign investors.
World Bank Group Iraq’s strategy has a comprehensive outlook for 2026 and focuses on reforms and development goals.
Iraq’s real GDP will follow oil market movements in 2024-28. Demand will peak in 2024-25. The International Monetary Fund expects challenges; medium-term sovereign debt risk is high without policy adjustment.
For 2024 the government budgeted oil prices at $70.00 per barrel and emphasized the need for stricter fiscal discipline to maintain stability. Banking assets will reach IQD 19.81 trillion, and the financial sector will grow. Trade volume will also increase to $49.70 billion driven by oil revenues and trade dynamics.
Notably the government introduced several measures to improve the investment climate. Climate Investment Plan 2025-2030 has options for public and private investment. Generally, this initiative focuses on:
The banking sector needs radical transformation. Only 19% of Iraqi adults have bank accounts, compared to 40% in Arab countries. Islamic banking is promising; assets reached 9.7% of the market by the end of 2023.
The International Monetary Fund has several strategic recommendations to strengthen Iraq’s economy:
Ultimately, Chinese investment became a major player in Iraq’s economy, surpassing the Middle East, Arab countries, and Turkey, with more than $34.20 billion invested in various projects. Through the Belt and Road Initiative, bilateral trade reached $49.70 billion last year, with $14.30 billion in Chinese imports and $35.40 billion in Iraqi exports.
The World Bank is mobilizing financial and technical assistance to support Iraq’s economic reforms, focusing on long-term economic stability. Notably, the Iraq Reform, Recovery and Reconstruction Fund (I3RF), funded by Germany, the UK, Canada, and Sweden, is a platform for financing and dialogue.
Fluctuations in the Iraqi Dinar exchange rate can be attributed to factors such as changes in oil revenues, geopolitical instability, and shifts in monetary policy. The transition from the Iraqi Dinar pegged to the USD system to periods of Iraqi Dinar floating exchange rates also played a significant role.
Local investments have been significantly affected by exchange rate volatility. Unpredictable Iraqi Dinar pegged exchange rates have often increased operational costs for businesses, discouraging long-term investments in various sectors.
Foreign investors generally prefer stability, which was partially provided under the Iraqi Dinar pegged to the USD regime. However, the move to Iraqi Dinar floating exchange rates during certain periods created uncertainty, leading to reduced foreign capital inflows.
Exchange rate instability has disrupted trade by affecting the cost of imported goods and export competitiveness. Businesses often struggle with pricing strategies due to fluctuating Iraqi Dinar exchange rates, which reduces their ability to plan effectively.
Investors can hedge against exchange rate risks through financial instruments, diversify their portfolios, and focus on sectors less sensitive to currency fluctuations. A robust understanding of the factors influencing Iraqi Dinar floating exchange rates and policies tied to the Iraqi Dinar pegged exchange rates is essential for minimizing risks.
Exchange rate fluctuations between 2003 and 2025 have shaped Iraq’s investment climate. Data shows remarkable resilience across all sectors, especially in the 350% growth of bank share trading value in 2020-2021. Real estate investment grew while manufacturing sectors adapted by shifting to export markets.
Foreign direct investment reached a record high of $24 billion in the first nine months of 2023 despite currency fluctuations. This growth and policy reforms and central bank interventions show market confidence. Strategic partnerships, especially with Chinese investors worth over $34.20 billion, show Iraq is becoming an attractive investment destination.
Iraq’s economy looks promising with its robust oil reserves and development initiatives. World Bank projections until 2026 show growth potential, but success depends on sustained reforms and modernization. Careful management of exchange rate policies, banking sector transformation, and infrastructure development puts Iraq in a good position for long-term growth and investment opportunities.
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