Abdulrahman Fathollahi – International Affairs Expert
This crisis, highlighted in a recent statement by Iraq’s Ministry of Finance (March 2025), appears to result from a combination of domestic mismanagement, excessive reliance on oil revenues, and external pressures, particularly from the United States. While Washington pressures Baghdad to implement structural reforms by controlling Iraq’s foreign reserves and monitoring financial flows, Iraq struggles to balance financial sovereignty by meeting domestic needs.

U.S. Pressures: Financial Tools as Political Leverage
Donald Trump’s return to the White House in January 2025 has intensified financial pressure on Iraq. According to Bloomberg, in March 2025, the new U.S. administration, leveraging its control over Iraq’s reserves at the Federal Reserve Bank of New York, pushed Baghdad to implement reforms aligned with Washington’s regional objectives. These pressures stem from 2023 sanctions against 14 Iraqi banks accused of money laundering and illegal dollar transfers, which the U.S. Treasury deemed necessary to curb illicit financial activities.

The February 2025 meetings between Iraq’s Central Bank, the U.S. Treasury, and the Federal Reserve in Dubai—attended by international auditing firms—marked a turning point. Iraq’s national news agency (NINA) reported that these meetings focused on revising the dollar distribution system, enhancing cross-border transfer processes, and reforming the banking sector. The U.S. firm K2 Integrity, overseeing Iraq’s dollar payments since November 2024, has the authority to reject payment requests. While justified as anti-money laundering measures, this level of oversight has raised concerns over Iraq’s financial sovereignty.

U.S. political and sometimes arbitrary control over Iraq’s reserves has weakened the government’s ability to address domestic needs, including salary payments and infrastructure investments. Reuters reported in February 2025 that these restrictions and reduced dollar access severely depleted liquidity in state banks like Rafidain and Rasheed (Iraq’s two leading banks). This strategy, seemingly part of a broader U.S. regional policy, jeopardizes Iraq’s economic independence and raises questions about Washington’s profound influence over its financial system. However, these pressures have pushed Iraq toward diversifying financial tools, such as non-dollar currencies, which could be a long-term opportunity to reduce reliance on the U.S. dollar.

Internal Challenges and Structural Reforms
Alongside external pressures, domestic structural challenges have exacerbated Iraq’s liquidity crisis. According to the U.S. State Department, in 2024, state banks, mainly used for public salary payments, suffered from outdated processes, bloated staffing, and widespread corruption. A 2024 World Bank report showed that only 23% of Iraqis have bank access, a warning sign. This, combined with Iraq’s 90% budget dependence on oil revenues, leaves its economy highly vulnerable to external shocks, like oil price fluctuations.

Iraq’s Central Bank, led by Ali Al-Alaq, has tried to reduce dollar reliance and strengthen the banking system. Per Al Jazeera (March 2025), about 20 Iraqi banks now conduct direct transfers in currencies like the Chinese yuan, Indian rupee, euro, and UAE dirham. This move has increased Iraq’s financial flexibility against U.S. pressures. Despite progress, structural hurdles—corruption, lack of tech infrastructure, and cultural resistance to digital payments—have slowed reforms.

Digitizing the banking system, including electronic payments and mandating private firms to pay salaries via bank cards, could boost financial inclusion. However, public distrust in banks, rooted in decades of economic and political instability, hinders widespread adoption. Iraq’s 2024 contract with an international consultancy to restructure Rafidain Bank is a positive but insufficient step; without comprehensive reforms in financial transparency and anti-corruption trends, such measures cannot ensure sustainable transformation.

The role of international institutions like the UN (UNDP), World Bank, and IMF is notable. The 2024 Digital Payment Regulation No. 2, implemented with USAID and UNDP support, aims to reduce cash dependence and enhance financial transparency. Iraqi delegations’ April 2025 meetings with the World Bank and IMF—focused on infrastructure, renewable energy, and debt management—reflect Baghdad’s commitment to sustainable development. Yet, IMF conditions like public spending cuts may strain vulnerable groups, especially amid bank liquidity constraints.

Future Outlook: Balancing Reforms and Financial Sovereignty
Iraq’s liquidity crisis stems from external pressures and internal weaknesses. The U.S., using financial leverage like reserve control and oversight by firms like K2 Integrity, seeks to align Iraq’s fiscal policies with its interests. While justified as combating money laundering and terrorism financing, this approach undermines Iraq’s financial sovereignty and limits its ability to meet domestic needs. Meanwhile, overreliance on oil revenues and structural corruption have made Iraq’s economy more vulnerable.

However, recent reforms—currency diversification in financial transfers and banking digitization—show Iraq’s potential to reduce dollar dependence and strengthen financial independence. Collaboration with international institutions like the World Bank and UNDP offers opportunities for infrastructure development and financial transparency. World Bank-backed projects (e.g., railways, renewables) could diversify Iraq’s economy and reduce oil reliance. However, reform success depends on the government’s ability to curb corruption, upgrade infrastructure, and restore public trust.

Iraq’s long-term economic outlook hinges on a delicate balance between adopting reforms and preserving financial sovereignty. A World Bank report warns that Iraq’s economy will remain vulnerable to external shocks—oil price drops or heightened U.S. pressures- without structural reforms. Meanwhile, Iraq can benefit from partnerships with international bodies and trade diversification (e.g., China, India) to reduce U.S. dependence. With smart management, this strategy could transform Iraq from a fragile economy into a more stable regional player.