KTFA
From Peak to Below Trillion: The Journey of Freefall
Returning to the official financial data we analyzed, we find that the Central Bank of Iraq’s reserves of local currency (the dinar) were at their peak in February of last year, stabilizing at 2.278 trillion dinars. However, since then, the trend has been downward, only stopping at the “red zone.”
In March of this year, reserves recorded a historic decline, reaching only 0.916 trillion dinars. This figure is not merely a statistic; it is a clear indication of a decrease in reserves exceeding 50% within a single year, which casts serious doubt on the “fiscal sustainability strategy.”
Why is Baghdad depleting its reserves?
The problem lies in a simple but terrifying equation: Iraq spends twice as much as it earns.
On-the-ground observations reveal that the gap between government revenues and expenditures has widened to an unprecedented degree. While the oil export artery via the Turkish Ceyhan pipeline has been disrupted due to political and legal complexities, operating expenses and salaries have continued to inflate, forcing the central bank to draw on its reserves to cover the resulting deficit.
Lack of alternatives and entering the tunnel of borrowing
The Iraqi economy remaining hostage to a single barrel of oil is “slow s-----e”. In the absence of any other real sources of income, and with the cessation of northern exports, the Iraqi state is left with two bitter choices:depleting what remains of the reserves, which threatens the purchasing power of the dinar (which is currently trading in the markets at levels of 153,000 to 100 dollars).
Throwing ourselves into the arms of domestic loans, which means mortgaging the future of upcoming budgets to burdensome domestic bank debts.
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What we are witnessing today is a final “wake-up call” for decision-makers in Baghdad. The economy doesn’t lie, and the numbers don’t lie; the dinar’s reserves falling below one trillion represents a direct threat to the state’s ability to fulfill its basic obligations to its citizens.
The solution does not lie in withdrawing more money, but in reforming the financial structure and immediately opening the disrupted export channels, before we find ourselves facing a deficit that even borrowing cannot solve.
Prepared and presented by: Hazh Ghafoor – Head of the Economics Desk – Kurdistan 24 (LINK)
Iraq, which leads the world in the number of banks, is the weakest in terms of economic influence.
April 21, 2026
Despite having more than 70 banks, Iraq’s banking sector remains among the weakest in the region in terms of economic impact, financing capacity, and level of trust, while countries like the UAE and Saudi Arabia have successfully transformed their banks into key drivers of growth and investment. The paradox here lies not in the number of banks, but in the nature of the role they play within the economy.
Reading the banking reality in Iraq reveals that the main problem does not lie in the lack of financial institutions, but rather in the absence of the actual economic function of the bank, as a large part of these banks does not work as a financier of projects or a supporter of productive activity, as much as they are linked to limited activities that revolve around the state, liquidity and foreign currency.
In Iraq, oil revenues constitute approximately 90 percent of the state’s resources, making the economy fundamentally rentier rather than production-based. Within this model, the central bank became the primary source of dollars, while private banks, to a large extent, remained more like financial intermediaries profiting from the money and currency cycle than institutions that channeled financing into industry, agriculture, and productive services.
According to this equation, Iraqi banks have, in many cases, become institutions that depend more on the state than they contribute to the economy, which explains their weak role in stimulating investment or expanding the private sector. In healthy economies, banks have a clear function: mobilizing savings and converting them into loans, investments, and projects. In Iraq, however, this process remains weak and fragmented.
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In contrast, the experience in the UAE and Saudi Arabia presents a completely different picture. While fewer banks operate within a more diversified and dynamic economic environment encompassing energy, real estate, tourism, aviation, technology, and sovereign wealth funds, the bank’s role extends beyond mere financial intermediary to include direct participation in growth. This is achieved through financing major projects, supporting the private sector, and integrating with both domestic and international investment flows.
The difference isn’t limited to the nature of the economy; it extends to the level of trust between citizens and the banking system. In Iraq, the cash economy remains dominant, and a large number of citizens still prefer to keep their money outside of banks. This is a result of accumulated factors related to weak legal protections, a lack of transparency, and declining confidence in the banking system’s ability to protect savings and provide stable and secure services.
In the UAE and Saudi Arabia, increased financial inclusion, the expansion of bank card use, and widespread reliance on electronic payments have helped to boost confidence in banking institutions and connect individuals and businesses on a daily basis to the formal financial system, giving banks greater social and economic depth.
Governance and oversight stand out as another crucial factor in explaining this disparity. The Iraqi banking sector suffers from a relative weakness in internal audit systems, inconsistencies in compliance, and political and economic interferences that have affected the efficiency of some institutions. In the view of many observers, some banks appear to be more like limited-functional financial fronts than integrated banking institutions capable of managing credit and risk according to modern standards.
In contrast, the banking systems in the UAE and Saudi Arabia are based on stricter oversight and higher levels of compliance with international standards, including capital adequacy requirements, risk management, anti-money laundering, and corporate transparency, which has given those markets a greater ability to attract investment and enhance financial stability.
Digital transformation is also one of the most important differences between the two models. While banking services in Iraq still suffer from a clear slowness in development, a relative weakness in technological infrastructure, and the instability of some payment systems, banks in the Gulf have been able to move to advanced levels of digitalization, through smart applications, instant transfers, and electronic services that have become part of the daily lives of individuals and companies.
From a risk and liquidity perspective, Iraq faces additional challenges related to high levels of non-performing loans, weak risk management in some institutions, and a heavy reliance on government or non-productive liquidity, while Gulf banks typically enjoy higher levels of capitalization, reserves, and liquidity, giving them a greater ability to absorb shocks and deal with economic fluctuations.
In conclusion, the crisis in Iraq’s banking sector is not one of quantity, but rather one of function, structure, and trust. Iraq does not suffer from a shortage of banks, but from the absence of a genuine developmental role for them, and from the fact that a large portion of them are linked to a rentier economy and the dollar, instead of being directly linked to a productive economy and long-term investment.
In this sense, banks in the UAE and Saudi Arabia act as an engine for economic growth, while a large part of the Iraqi banking sector is still far from this role, which makes its impact limited despite its large size.
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Source: Dinar Recaps
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