Whenever conflicts between Iraq’s political forces intensify or revenues decline—as seen recently due to the closure of the Strait of Hormuz—reports often emerge about dollar flows to Iraq and the dealings of the Federal Reserve Bank of New York (FRBNY) with the Central Bank of Iraq (CBI). However, the US bank’s procedures have remained unchanged.
It has become clear that a range of internal factors, along with a weak financial system, are behind the decline in dollar holdings at the Central Bank of Iraq. This time, five main reasons caused the bank’s cash reserves to fall from $1.16 billion to $687 million in the first three months of this year.
The FRBNY holds Iraq's dollar reserves and oil revenues; one could say the FRBNY acts as a custodian/intermediary bank for the CBI. Oil export revenues (in dollars) are deposited at the FRBNY. Iraq must use the FRBNY as a clearinghouse for all dollar transactions, including imports, debt repayments, and government expenditures. Briefly, between 2007 and 2023, approximately 91 percent of Iraq's reserves and dollar capital were held at this bank, but in recent years, this has decreased and shifted toward gold.
Iraq’s reliance on the FRBNY—and the continued renewal by successive US presidents since the 2003 invasion of the requirement that Iraq’s oil revenues first return to this bank—has made the country uniquely vulnerable to decisions by the US Treasury Department and Office of Foreign Assets Control.
Mechanism
The mechanism for returning dollars from the FRBNY to the CBI takes two forms:
1. Iraq's State Organization for Marketing of Oil (SOMO) sells oil, and buyers pay in dollars to the FRBNY. This money is then deposited into the Iraqi Ministry of Finance's account named "ORRA." Subsequently, the funds are transferred to the "Iraq2" account managed by the Central Bank.
2. The funds are placed in the Ministry of Finance's dollar account at the CBI. Then, the process of buying and selling dollars and dinars takes place between the Ministry of Finance and the CBI. The ministry converts its revenue into dinars, and the Central Bank handles expenditures in dollars.
The Ministry of Finance provides the monthly dollar revenue to the central bank, which in turn provides dinars to cover government expenditures. If there is a surplus, it goes into Iraq's foreign currency reserves according to the CBI's monetary policy. However, if there is a deficit in revenue compared to expenditures, the CBI covers it through internal and external loans, later reclaiming it from the foreign currency reserves.
The gap between revenue and expenditure is a burden on the government and the Ministry of Finance, rather than on the Central Bank of Iraq. If the deficit increases, foreign reserves decrease, or the government puts more currency into circulation, leading to inflation and currency devaluation. Currently, oil revenue has dropped to $1.9 billion according to the Ministry of Oil. In a normal month, this covers only one-third of Iraq's expenditures (which are approximately $6.8 billion), meaning the other $4 to $5 billion must be drawn from reserves.
Factors behind the drop in dollar cash holdings in Iraq
Between 2023 and 2026, five fundamental changes led to a decrease in the flow of dollars from the United States to Iraq, particularly the physical cash shipments arriving via aircraft. These factors include the sanctioning of 14 private Iraqi banks in 2023 by the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury, the restructuring of the cash currency auction window, and the digitalization of the process for all foreign transactions. Additionally, budget deficits, the strategic increase in gold reserves, rising compliance costs, and extended auditing periods for Iraqi financial transactions played a major role.
Collectively, as shown in the table below, these factors caused Iraq’s foreign currency reserves—comprising cash, financial securities (bonds), and gold—to drop to approximately $96.9 billion by March 19. This represents a total decline of $31.1 billion in Iraq's foreign exchange reserves between December 2023 and March 2026.
Table 1: Factors behind the drop in dollar cash holdings in Iraq (2022–2026).jpeg)
Recent reports about the non-shipment of dollars to Iraq are more closely linked to the country’s “disease” of overreliance on oil, rising spending, and a widening deficit than to claims that the United States is withholding dollars as a penalty for delays in government formation.
Furthermore, while the Central Bank of Iraq denies the process has stopped and says it remains “normal,” the reality appears otherwise. Digital allocations and physical cash shipments arriving by aircraft have fallen sharply, dropping by $475 million in less than three months to their lowest level between 2023 and 2026. This suggests that the latest cash shipment of roughly half a billion dollars has not reached Iraq.
If United States-Iraq relations deteriorate or new OFAC sanctions are imposed, the Federal Reserve Bank of New York (FRBNY) could seize or restrict Iraq’s dollars without prior notice. This is why the Central Bank of Iraq has turned increasingly to gold. Since 2024, Iraq has pursued a diversification strategy by raising gold holdings from 8.5 percent to 27 percent of reserves, launching a domestic platform for treasury bonds at 4 percent, seeking to reduce reliance on the dollar, and expanding direct trade agreements with China and Turkey. Meanwhile, the pricing of oil in dollars remains a major obstacle to full de-dollarization.
Ultimately, since 2003, the relationship between the FRBNY and the CBI has seen great fluctuations. However, when there is no revenue, how can a bank pay you? As they say, "there is no such thing as a free lunch," or more simply: when your account has no balance, how can your card work?
Ultimately, since 2003, the relationship between FRBNY and the CBI has gone through major ups and downs. But if there is no incoming revenue, how can a bank keep paying out? Put simply, if your account is empty, your card will stop working.
