The Central Bank of Iraq has introduced a policy shift that's creating ripples across the country's oil sector — and it's the kind of quiet friction that can have outsized consequences for an economy where oil revenues fund more than 90% of government operations.
The issue centres on how contractors working in Iraq's oil industry get paid. Under a new CBI directive, companies owed payments in US dollars are now receiving those funds converted into Iraqi dinars, even when their original contracts explicitly stipulated dollar-denominated settlements. For firms operating in a sector where international supply chains, equipment purchases, and cross-border obligations are denominated in greenbacks, this creates a mismatch that's both financial and operational.
The Mechanics of the Problem
The conversion itself happens at Iraq's official exchange rate — currently around 1,310 dinars per dollar. But Iraq, like many emerging economies managing capital flows, has a parallel currency market where the dinar trades at a different rate, recently sitting closer to 1,550 dinars per dollar. That gap — roughly 18% — becomes a direct loss for contractors who need to convert dinars back into dollars to meet foreign obligations or pay international suppliers.
According to industry representatives speaking to Shafaq News, companies employing over 40,000 Iraqi workers are facing acute financial pressure. Some have warned they're struggling to meet payroll, with the most vulnerable firms at risk of shutting down operations entirely. The oil sector in Iraq relies heavily on secondary contractors — firms that handle logistics, maintenance, transport, and supply chain operations for larger projects. These companies sit between the major international oil producers and the day-to-day realities of field operations, and they're now caught in the crossfire of monetary policy.
Why the Central Bank Made This Move
The CBI's decision isn't arbitrary. Iraq has been working for years to stabilise its currency and reduce reliance on the parallel dollar market, which authorities view as a source of speculative pressure and capital flight. By channelling more transactions through the official banking system and settling obligations in dinars, the central bank aims to tighten control over foreign exchange flows and strengthen confidence in the national currency.
This approach is common in countries managing external imbalances or trying to preserve foreign reserves. The problem arises when blanket policies collide with the operational needs of specific sectors — particularly one as critical as oil.
The Contractual Tangle
From a legal standpoint, the situation is murky. Contracts between oil companies and their service providers typically specify payment terms, including currency. Forcing settlement in a different currency raises questions about contractual compliance. Economists interviewed by Iraqi media have pointed out that affected companies may have grounds to challenge the arrangement in court, though pursuing legal action against a central bank directive is a complicated and often lengthy process.
For foreign firms, the stakes are higher still. Western companies operating in Iraq's oil sector often rely on supply chains that require dollar payments — whether for importing equipment, securing insurance, or paying offshore partners. Being paid in dinars at an official rate, then needing to access dollars at a parallel rate to meet those obligations, effectively imposes a hidden tax on their operations.
What's at Risk
The broader concern is operational continuity. Iraq's oil production depends on a network of contractors that keep fields running smoothly. Maintenance schedules, logistics coordination, and supply deliveries all require financial predictability. If secondary contractors begin pulling back operations or scaling down due to financial pressure, the knock-on effects could reach production levels themselves.
Iraq has been working to raise its crude output capacity to 7 million barrels per day by 2029, part of a broader strategy to maximise oil revenues while global demand remains robust. Disruptions at the contractor level — even seemingly small ones — can cascade into larger inefficiencies that undermine those targets.
There's also the employment dimension. Tens of thousands of Iraqis work for these secondary contractors, and job losses in the oil sector have historically triggered social and political pressures that governments can't easily ignore.
The Balancing Act Ahead
Iraq isn't alone in grappling with these tensions. Emerging economies often face trade-offs between currency stability and sectoral flexibility. The challenge is calibrating policy so that macroeconomic goals — like reducing dollar demand or stabilising the exchange rate — don't inadvertently destabilise the very industries that generate the revenues needed to sustain those goals.
For now, the CBI appears committed to its course, viewing the policy as part of a broader effort to modernise financial flows and bring more transactions into the formal banking system. Whether it adjusts the approach in response to oil sector feedback remains to be seen. What's clear is that the gap between official and parallel exchange rates continues to be a pressure point, and until that narrows, the friction will persist.
The situation is a reminder that in resource-dependent economies, monetary policy and sectoral realities are tightly interwoven. Decisions made in Baghdad's central bank offices don't stay confined to financial institutions — they filter down into oil fields, contractor offices, and the livelihoods of tens of thousands of workers. How Iraq navigates this tension may offer broader lessons for other oil-exporting nations managing similar challenges.
Disclaimer: This content is for informational and educational purposes only and does not constitute financial advice. Currency and economic outcomes are subject to numerous variables, and readers should conduct their own research or consult qualified professionals.