Iran war squeezes Iraq’s economy as oil revenues fall and prices rise

Iraq’s trade patterns and public finances have come under pressure since the start of the US-Israeli war on Iran in late February, with interruptions to traffic through the Strait of Hormuz curbing seaborne exports and forcing importers onto longer, costlier routes. Prime Minister Ali al-Zaidi has said the country lost roughly $60bn in oil revenues after it was for a period unable to export about 90% of its oil through its usual Gulf channels. Oil receipts account for more than 90% of Iraq’s federal budget, so the disruption represents a major fiscal shock. Supply-chain effects have translated into higher prices and delays for Iraqi businesses and consumers. A Baghdad supermarket owner told Al Jazeera imported goods at his store fell to about 70% from 90% before the war, and that imported items have become 25-30% more expensive. Merchants reported shipments from China taking as long as three months because carriers are avoiding the Strait of Hormuz or being delayed at the chokepoint, and trade with Turkey has become costlier due to higher fuel and transport fees. The crisis has also weighed on the Iraqi dinar and foreign-exchange availability. On the parallel market the dollar rose to about 1,600 dinars last week before easing to roughly 1,575; before the war it was about 1,540 on the parallel market. The official rate remains near 1,300 dinars to the dollar, creating a widening gap that complicates transactions for businesses and consumers. The Central Bank of Iraq (CBI) has denied a shortage of foreign reserves and said it can meet demands for foreign currency to finance trade, calling the parallel-market moves the result of “speculation” and misuse of regional conditions. Officials say foreign reserves have declined since the conflict began. Mudher Mohammed Salih, a financial adviser to the prime minister, stated that CBI reserves fell from about $106bn before the war to roughly $80bn by late August. The US has also altered some aspects of the mechanism used to transfer Iraq’s oil revenues, halting shipments of physical cash from a special US-held account in April and resuming some shipments in July while continuing electronic transfers; some reporting links the halts to US pressure over militia activity. The developments have intensified scrutiny of Iraq’s long-standing economic dependency on oil and imported goods and prompted warnings from economists about structural imbalances and inadequate safeguards for times of turmoil.