Iraq has worsened its financial crisis and contributed to its currency depreciating by paying its debts to Iran in Iraqi dinars. Their currency has been struggling for months against the dollar since new restrictions were imposed by the US Federal Reserve on how the country’s central bank trades the dollars it receives from oil sales.
The subsequent liquidity crisis has meant the government is failing to pay the salaries of millions of public servants, as well as pensions and payments to other beneficiaries of social welfare programmes. Iraq has been one of the largest importers of Iranian goods over the last two decades, in particular gas, electricity, food, and construction materials.
Official trade exchange between the countries amounts to approximately $14bn. Because of US sanctions imposed on Iran in 2018, Iraq has struggled to pay Iran for its purchases from 2019-2021. At times, Iran has cut electricity and gas supplies in midsummer – when temperatures rise to 50 degrees Celsius – to pressure Iraq into paying these debts. Baghdad accrued a debt of more than $1.6bn for its Iranian gas and energy purchases alone between 2019-2021.
Sources suggest most or all of that debt has been settled, with the last payment going through in October 2022. But rather than the dollars Iran received pre-sanctions, Baghdad has used Iraqi dinars instead. Since November, the US Federal Reserve, which holds the money Iraq makes from oil sales and delivers it to Baghdad by request, has imposed restrictions aimed at stopping Iran from accessing these dollars and combatting money laundering.