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

What Happened

Since the start of the US-Israeli war on Iran in late February and the disruption of free trade through the Strait of Hormuz, Iraq is facing severe economic pressure. Prime Minister Ali al-Zaidi said Iraq had lost about $60bn in oil revenues because it was unable to export about 90 percent of its oil through usual Gulf routes for a period; oil revenues account for more than 90 percent of Iraq's federal budget. Shipping disruptions reduced imports and raised costs: Baghdad supermarket owner Alaa-Eddin Sulaibi estimated imported goods at his store fell from 90 percent pre-war to 70 percent, and prices of imported goods rose by 25 to 30 percent due to longer delivery times from China, higher fuel costs, and disrupted Gulf routes. Merchants reported China goods taking up to three months to arrive as importers used more circuitous routes bypassing the Strait of Hormuz.

Key Actors

Why It Matters

The crisis exposes Iraq's structural dependence on oil revenues and imports, giving external actors leverage over Baghdad. With oil revenues funding more than 90 percent of the federal budget and CBI foreign reserves reportedly falling from about $106bn to roughly $80bn by late August, the dinar's parallel market depreciation and rising import prices risk domestic instability. The US-held oil revenue account gives Washington direct oversight over dollar flows, while Iran's ability to disrupt Hormuz passage ties Iraq's economy to US-Iran negotiations.

Watch For

Monitor whether the Strait of Hormuz reopens or remains disrupted as part of US-Iran talks, any further halts or resumptions of US physical cash transfers from Iraq's oil revenue account, CBI statements and parallel market exchange rate movements against the official rate, and any Iraqi government announcements on budget adjustments or alternative oil export routes. Also watch for US accusations or sanctions against additional private Iraqi banks over dollar smuggling to Iran.