Iraq’s domestic debt and the rising dollar: Can creditors legally waive their debts to save the economy?
Iraq’s domestic debt and the rising dollar: Can creditors legally waive their debts to save the economy?
10-9-2026
Researcher Shatha Khalil
The Iraqi economy faces increasing financial and monetary challenges, most notably the rising domestic debt, expanding government spending, and heavy reliance on oil revenues, in addition to the pressure on the dinar against the US dollar. These developments raise an important economic and legal question: Can creditors, particularly state-owned banks, waive a portion of the domestic debt or its interest to alleviate the burden on the budget? And does debt cancellation represent a genuine solution to the financial crisis?
The answer lies not only in the possibility of legal waivers but also in the state’s ability to reduce its obligations without transferring losses to banks or harming the stability of the dinar.
First: Domestic Debt and the Possibility of Legally Waiving It
Domestic debt represents financial obligations of the government to local entities, including state-owned and private banks and other financial institutions, through bonds, treasury bills, and loans.
The figures in the public debt bulletins upon which the draft is based indicate a rise in the domestic debt balance from approximately $34.26 billion in 2019 to $67.29 billion in 2025, reaching $69.68 billion in published data for 2026.
Legally, voluntary waivers of some claims, interest reductions, and rescheduling of payments can be considered, but the government does not have absolute authority to write off its debts through a unilateral administrative decision.
The Federal Financial Management Law No. (6) of 2019 and its amendments, the Central Bank of Iraq Law No. (56) of 2004 and its amendments, along with banking laws and financial contracts, constitute the legal framework that should be consulted to determine settlement powers.
Second: Can state-owned banks waive their debt?
Despite state ownership of state-owned banks, these banks have independent budgets and financial obligations, and their assets cannot be considered voidable without economic repercussions.
If a government bank holds bonds worth ten trillion dinars and relinquishes half of them, the Ministry of Finance’s liabilities decrease by five trillion dinars, but the bank loses assets of the same value.
The government may later be forced to recapitalize the bank to offset the losses, thus shifting the burden from the treasury to the banking sector without any real savings.
Therefore, mutually agreed interest rate reductions, rescheduling of maturities, and gradual repayment from actual financial surpluses are options worth considering before resorting to writing off the principal.
As for the central bank, its legal independence and monetary functions impose additional constraints on any settlement that affects its assets or its ability to manage monetary policy.
Third: How much can debt restructuring save?
The economic impact can be illustrated with a hypothetical example: If a tranche of domestic debt amounts to 20 trillion dinars with an annual interest rate of 6%, its interest payments amount to 1.2 trillion dinars annually.
If creditors legally agree to reduce the interest rate to 3%, the interest payments decrease to 600 billion dinars, achieving a similar theoretical annual savings.
This example does not represent an accurate estimate of Iraqi savings, but it illustrates the possibility of reducing debt servicing without eliminating the principal, provided that settlement costs and their impact on creditors are accounted for.
Fourth: Why is the dollar rising in Iraq?
The rise of the dollar cannot be explained by a single factor, as several economic and monetary reasons intertwine.
First, there is a heavy reliance on oil, where declining revenues or disruptions in exports increase pressure on public finances. Second, there is a widespread dependence on imports, which generates a constant demand for dollars.
Difficulties with banking transfers and financial compliance also contribute to the diversion of some commercial demand to the parallel market, while speculation and negative expectations increase volatility.
Added to this are the widening fiscal deficit and government borrowing, which may indirectly affect liquidity and economic confidence.
The draft indicates an official adjustment to the exchange rate on October 7, 2026, from 1,320 to 1,520 dinars per dollar sold to the public. This information needs to be verified against the Central Bank’s original statement before being adopted.
Economically, raising the official dollar exchange rate increases the dinars the government receives from its oil revenues, but it also raises the cost of imports and puts pressure on purchasing power.
Fifth: What is the economic and legal solution?
Addressing this issue requires a national program that integrates debt reform with fiscal and monetary policy. This includes a comprehensive debt audit, voluntary negotiations to reduce interest rates, rescheduling obligations, and allocating a portion of actual surpluses to repay the principal.
Simultaneously, unproductive expenditures should be controlled, non-oil revenues boosted, state-owned banks reformed, and the accumulation of new liabilities without clear financing prevented.
Stabilizing the dollar requires facilitating legitimate trade transfers, strengthening banking compliance, protecting the independence of the central bank, and supporting domestic production to reduce reliance on imports.
In conclusion
, writing off domestic debt is not impossible in principle, but it requires the approval of the relevant authorities and guarantees that the rights of creditors and depositors are not harmed.
The economic solution does not lie in erasing figures from the state books, but rather in reducing the real cost of debt, addressing the deficit, protecting the banking system, and stabilizing the dinar.
Iraq needs sustainable fiscal reform, not simply shifting losses among its institutions. Economic stability will only be achieved when the need for borrowing decreases, the productive base expands, and the budget becomes less vulnerable to fluctuations in oil prices and the dollar exchange rate.
Economic Studies Unit / North America Office
Links Center for Research and Strategic Studies
rawabetcenter.com
