Iraq Economic News And Points To Ponder Friday Morning 4-17-26
Gold is heading for its fourth weekly gain amid anticipation of a deal on Iran
Money and Business Economy News — Follow-up Gold is on track for its fourth weekly gain after US President Donald Trump expressed optimism that the United States and Iran could reach a permanent ceasefire to end the war that has shaken markets and increased inflation fears.
The precious metal settled near $4,795 an ounce in early trading on Friday, after rising about 1% this week, according to Bloomberg. https://www.economy-news.net/content.php?id=67984
The Closure Of The Strait Of Hormuz: A Double Stranglehold On The Stability Of The Iraqi Economy
Dr. Haitham Hamid Mutlaq Al-Mansour Economy News — Baghdad With the continued closure of the Strait of Hormuz, the repercussions on the structure of the Iraqi economy are becoming increasingly apparent. The stability of the national economy is now almost entirely dependent on a single route for vital revenue flows: oil exports through the southern ports and then via the Strait of Hormuz.
This situation represents a dual dependence on both a single commodity and a single transport route simultaneously, creating a double bottleneck that exacerbates economic fragility.
In normal economies, risks are distributed across multiple sources of income and diverse export channels. However, in Iraq, over 90% of the general budget revenues come from oil, and more than 85% of these exports pass through a single maritime outlet.
With no alternative routes to the Strait of Hormuz, this structure places the economy in a vicious cycle, where production, revenue, and financial stability are tied to the security of a single geographical point outside the state's complete control, effectively making it an external variable that dictates the revenue side of the budget. The danger of this point lies not only in its potential to cause a partial decline in economic activity but also a comprehensive shock.
If the closure of Hormuz continues, Iraq's oil export capacity will plummet, potentially resulting in losses exceeding 2.5 to 3 million barrels per day. Assuming an average price of $90 per barrel, this translates to a direct loss of approximately $245 million daily, or roughly $7 to $9 billion monthly.
This loss is not confined to the oil sector but is immediately transferred to the general budget, which relies on these revenues for nearly 90% of its funding.
The deeper impact of the double bottleneck manifests in what is known in macroeconomics as shock transmission. Following a halt or decline in dollar inflows from oil, a cascade of contractions will occur, beginning with the public budget, then government spending, then the labor market, and finally aggregate demand.
Due to the weakness of the private sector, there is no natural shock-absorbing mechanism, which will amplify the impact of the crisis rather than mitigate it. For this reason, the transmission shock can transform into an economic contraction exceeding 35% of total economic activity.
This bottleneck will not only affect current flows but also investment prospects. Increased risk in one direction raises what is known as the geopolitical risk premium, leading to higher insurance and transportation costs, exchange rate volatility in the absence or scarcity of foreign currency, and consequently, decreased investor confidence.
This means that the mere existence of a single source of revenue imposes a continuous economic cost on the Iraqi economy, further diminishing the contribution of non-oil sectors, which, at best, do not exceed 30% of GDP.
The most serious problem with this model is that it operates in a vicious cycle. The meager oil revenues are not expected to lead to significant diversification of economic activity; rather, they will undoubtedly reinforce reliance on government spending for resource allocation and redistribution, thus exacerbating the weakness of the productive sector and making it even more difficult to break free from this cycle.
Consequently, the bottleneck is no longer a geographical problem (the Strait of Hormuz), but a structural one within the economy itself, which has become stuck at a point where its stability is contingent on external factors.
One of the repercussions of this economic crisis on the monetary sector is its direct impact on the implementation of inflation targeting policies in Iraq, making them more of a theoretical objective than a practical and achievable framework.
Inflation targeting presupposes a central bank capable of controlling the money supply and interest rates within a relatively stable environment in terms of foreign currency inflows. However, in the Iraqi case, monetary stability is primarily determined by oil dollar inflows, not by traditional monetary policy tools.
Following the disruption of oil exports, the central bank faces a double shock: a contraction in the foreign exchange supply coupled with upward pressure on the general price level.
The decline in dollar inflows—which normally range between $8 and $9 billion per month—leads to an immediate imbalance in the exchange market, making the defense of the dinar's value more costly and forcing the central bank to draw on its reserves, estimated at $100 to $110 billion.
As the shock persists, the exchange rate transforms from a stabilizing tool into a source of imported inflation, especially since more than 70% of Iraq's consumption basket is directly or indirectly dependent on imports.
In this context, inflation targeting loses its fundamental requirement: the ability to guide expectations. Inflation in Iraq does not primarily stem from excess domestic demand, which can be curbed by raising interest rates, but rather from external supply shocks linked to the exchange rate and import costs.
When prices rise due to currency depreciation, raising interest rates does not address the underlying cause; instead, it exacerbates the recession, as the economy relies more on government spending than on private credit.
Since government spending itself is shrinking due to declining oil revenues, the economy enters a state of stagflation that is difficult to address with traditional monetary policy tools. This leads to a slowdown in economic growth, which can, in turn, fuel economic recession, higher unemployment rates, and a decline in real GDP.
Even more concerning is the inherently weak transmission channel of monetary policy via interest rates. Bank credit to the private sector barely exceeds 15% of GDP, meaning that interest rate changes do not effectively impact investment or consumption.
Given this limitation, the exchange rate has become the only viable tool, but this tool itself depends on dollar inflows from oil revenues, effectively tying monetary policy back to the cycle of external geopolitical constraints. In other words, the central bank's primary objective is not inflation control, but rather maintaining exchange rate stability, which is itself dependent on an external variable.
Thus, economic and monetary stability in Iraq are no longer separate entities, but rather a single, interconnected system dependent on a crucial external factor: the uninterrupted flow of oil through the Strait of Hormuz.
Any disruption to this flow leads to a rapid economic contraction, while the monetary system loses its ability to simultaneously stabilize prices and the exchange rate, revealing a structural fragility at the very foundation of stability.
Thus, inflation targeting in Iraq transforms from a policy based on internal tools into a variable dependent on the stability of external conditions, thereby losing its independence and undermining its effectiveness.
The problem lies not in the design of the monetary framework, but in the economic structure that makes inflation control contingent on the flow of a single resource through a single channel. Under this structure, sustainable price stability can only be achieved by addressing the root cause of the bottleneck: decoupling monetary stability from the oil export trajectory, diversifying sources of foreign currency, and expanding the productive base.
Otherwise, inflation targeting will remain a fragile objective, vulnerable to collapse with every external shock.
Here, the performance of monetary policy tools in Iraq is organically linked to the Strait of Hormuz, making monetary policy essentially a reflection of the stability of this external geopolitical trajectory rather than a product of independent domestic instruments.
The interest rate, which is supposed to be the primary tool for controlling aggregate demand, loses its effectiveness in an environment where bank credit to the private sector does not exceed 15% of GDP.
Even with an interest rate increase of 2 to 3 percentage points, the impact remains limited because inflation in this case does not stem from excess demand, but rather from the depreciation of the exchange rate and the increased cost of imports. Conversely, this increase leads to higher financing costs in an economy largely dependent on government spending, thus deepening the deflationary effect instead of containing it.
Consequently, the exchange rate becomes the central tool, but simultaneously the most vulnerable. Stabilizing the dinar requires injecting between $200 and $300 million daily into the market, a sum previously covered by current oil revenues.
With these revenues declining, the central bank is forced to finance this injection of funds from its foreign reserves, which range between $100 billion and $110 billion. If withdrawals continue at a rate of $5 billion to $8 billion per month, the reserves could be depleted by up to 30% within six months and by about 50% within a year.
This weakens the ability to defend the exchange rate and opens the door to a depreciation of the currency that could exceed 20% to 30% in a prolonged scenario.
On the other hand, open market operations become less effective in an environment where domestic liquidity is directly linked to oil revenues. Following a decline in these revenues, the central bank no longer faces a cash surplus to withdraw, but rather a shortage of resources, thus diminishing its ability to manage the money supply.
With the economy heavily reliant on government spending, which constitutes more than 45% of GDP, any 30% contraction in this spending translates into an economic contraction that could reach 35%, fundamentally undermining any attempt to use traditional monetary policy tools.
The repercussions of the Strait of Hormuz closure are also evident in Iraq's declining foreign currency reserves, reflecting their transformation from a stabilizing force into a means of financing the deficit amidst a widening gap between revenues and expenditures. Reserves fell by approximately 4.5 trillion dinars ($3.4 billion) in the first two months of 2026, and by 14.2 trillion dinars over four years, indicating a continuous decline.
As a result of the ongoing war, the closure of the Strait of Hormuz, and the lack of an alternative outlet for oil exports, revenues now cover only 25% of the minimum monthly expenditure and less than 13% of the maximum, forcing reliance on reserves to cover a deficit that could reach 8 trillion dinars per month.
Thus, the trajectory of reserves is now determined more by external geographical factors than by price fluctuations, making them vulnerable to rapid depletion and revealing a structural fragility in the economy, which depends on a single resource and a single channel for its flow.
Given these circumstances, the shock quickly translates into price levels, as over 70% of domestic consumption relies on imports, meaning any currency devaluation directly impacts inflation. Without effective monetary policy tools, inflation rates could rise rapidly, not due to monetary expansion, but rather to disruptions in foreign currency flows.
In this sense, monetary policy tools in Iraq not only lose their effectiveness but also become dependent on a single external variable: the continued flow of oil through a limited geographical route.
When this route is disrupted, the ability of monetary policy to perform its traditional functions is also disrupted, transforming it from a tool for regulation and stability into a tool for crisis management.
This occurs in an economy that relies heavily on a single resource for its revenues and on a single outlet for over 85% of its exports, making its monetary stability hostage to a geopolitical equation rather than a product of economic policy. Therefore, policymakers must work to develop flexible oil export policies at the short, medium, and long-term levels, each according to its specific timeline, to diversify oil export routes and reduce dependence on the Strait of Hormuz.