Iraq’s central bank governor fights black market and massive corruption linked to dollar shortage
Baghdad, Iraq/London-UK, November 28, 2025
BAGHDAD’S FINANCIAL BATTLE:
US Dollar Restrictions Fuel Massive Black Market Loophole and Corruption, Driving Inflation for Ordinary Citizens
A financial tug-of-war is gripping the Iraqi capital, as Iraq’s Central Bank Governor Ali al-Alaq continues a protracted battle against a booming US Dollar Black Market and the Massive Corruption in Baghdad that feeds it.
The crisis presents a damaging paradox:
Iraq holds over $100 billion in foreign currency reserves, yet a severe US dollar shortage plagues its domestic market, driving up inflation and harming ordinary citizens.
This critical gap is not due to a lack of funds, but rather the result of stringent monitoring and restrictions imposed by the US Federal Reserve (FRBNY), intended to curb illicit financial flows to neighbouring sanctioned countries, primarily Iran and Syria.
These necessary controls have inadvertently created a lucrative loophole that well-connected individuals and fraudulent banks are exploiting for billions of dollars in profit.
The core of the problem lies with the exchange rate disparity. The Central Bank of Iraq (CBI) maintains an official rate of approximately 1,320 Iraqi Dinars (IQD) per US Dollar (USD).
However, on the unregulated parallel—or black—market in Baghdad’s money changers, the rate floats significantly higher, reaching up to 1,600 IQD/USD.
This spread, which has persisted since late 2022, is the financial engine of corruption, allowing illicit actors to buy dollars cheaply from the CBI through fraudulent means and sell them instantly at a premium on the street, pocketing huge, untaxed profits.
The root cause of the dollar shortage is Washington’s enforcement of international anti-money laundering and counter-terrorism financing (AML/CFT) standards.
As Iraq’s oil revenues flow through the FRBNY system, the US Treasury and the Federal Reserve have tightened scrutiny over dollar transfers made by the CBI to commercial banks. This involves a rigorous electronic system that vets all outgoing transfer requests.
Initially, these enhanced controls led to a massive failure rate, with reports of nearly 80 per cent of dollar transfer requests being rejected due to suspicious documentation or lack of compliance.
This swift reduction in the legitimate supply of dollars to Iraqi importers and businesses immediately funnelled demand into the black market, driving the dinar’s value down and prices for imported goods up.
The scale of corruption exploiting this loophole is stunning. One major scandal revealed that over $600 million was lost in a scheme where private banks and corrupt CBI employees sold subsidized dollars to more than 150,000 individuals under the false pretext of “travel.”
These individuals would receive the cheap dollars, sell them on the parallel market, and never leave the country.
Furthermore, in an attempt to comply with US demands, the CBI has been forced to ban a growing list of commercial banks—totaling over 32 institutions—from accessing dollar transactions entirely, including five more in a recent February 2025 announcement, all suspected of acting as conduits for money laundering and dollar smuggling to sanctioned regimes.
Governor al-Alaq and Prime Minister Mohammed Shia al-Sudani have acknowledged the severity of the crisis, stressing that the instability threatens to undermine broader economic recovery efforts.
The CBI has implemented drastic counter-measures to stabilize the dinar, including a controversial de-dollarization plan that mandates all internal commercial transactions and cash withdrawals be conducted in Iraqi dinars starting 2024.
While designed to reduce demand for the US dollar domestically and regain monetary control, these measures have caused friction and confusion in a highly dollarized economy.
For London-UK based analysts, the ongoing financial struggle in Baghdad illustrates the complex, often unintended, consequences of geopolitical pressure.
While the US monitoring successfully restricts funds to Iran and its proxies, the resulting pressure on the currency exchange disproportionately harms ordinary Iraqis through inflation.
The ability of the Iraqi government to close the black market gap and restore confidence in the Iraqi dinar is crucial, not just for economic stability, but for proving that the government can successfully navigate the tightrope walk between its vital security relationship with the US and its regional political ties.
Headline Points
Dollar Shortage Paradox:
Despite Iraq holding over $100 billion in foreign reserves, a severe domestic shortage of US dollars persists due to international financial controls.
Exchange Gap Corruption:
The gap between the official rate (1,320 IQD/USD) and the black market rate (up to 1,600 IQD/USD) is exploited by corrupt actors for massive, illicit profits.
US Federal Reserve Role:
The FRBNY stringently vets all dollar transfers from the CBI to curb money laundering and the smuggling of dollars to sanctioned entities (Iran and Syria).
CBI Counter-Measures:
Governor al-Alaq has banned over 32 Iraqi banks from dollar transactions and implemented a domestic de-dollarization plan to restrict the use of cash US dollars.
Impact on Citizens:
The dollar shortage and currency fluctuation drive up the cost of imported essential goods, causing inflation and economic hardship for ordinary Iraqis.
