Prof. Dr. Haider Ali Al-Dulaimi On September 19, 2026, the Central Bank of Iraq reaffirmed the adequacy of its foreign reserves and its ability to meet demand related to financing foreign trade, settling bank-card transactions, and providing travelers with cash U.S. dollars at the official exchange rate. This comes at a time when local markets are witnessing a rise in the parallel exchange rate and a slowdown in market activity. This message carries economic significance that goes beyond merely reassuring the market. Foreign reserves represent one of the most important instruments of monetary policy in the Iraqi economy, particularly given the economy’s heavy dependence on oil revenues as its main source of foreign currency. Reserve adequacy is not measured by its size alone It would be incorrect to view foreign reserves as a single figure. Assessing their adequacy depends on a number of indicators, most importantly their ability to cover the currency in circulation, money supply, imports, and external liabilities, as well as the central bank’s ability to use the reserves to intervene in the foreign-exchange market when necessary. Data from the Central Bank of Iraq indicate that net foreign reserves reached IQD 127.99 trillion in the third quarter of 2025, compared with IQD 99.68 trillion in currency issued, meaning that reserves were equivalent to approximately 128.4% of the currency issued. This exceeded the benchmark adopted by the Central Bank, which stands at 100%. Central Bank data also showed that foreign reserves at the end of the second quarter of 2025 amounted to approximately IQD 126.1 trillion, while the ratio of reserves to broad money supply stood at 73.9%, significantly above the benchmark ratio of 20%. The ratio of reserves to currency issued was 128.2%. These indicators add an important dimension to the Central Bank’s latest statement, as the assertion of reserve adequacy is based on measurable quantitative indicators rather than merely on the nominal size of reserves. Reserves are a backing for the dinar and a tool for defending stability The Central Bank of Iraq explains that foreign reserves are not surplus funds that can be treated independently of the monetary system. Rather, they are closely linked to the issuance of the Iraqi dinar and exchange-rate policy. The Central Bank emphasizes that reserves perform several essential functions, including providing backing for the domestic currency, supporting the exchange rate, intervening to address imbalances in the balance of payments, and strengthening Iraq’s creditworthiness. This highlights an important economic relationship between the dinar and foreign reserves: the stronger the external coverage of the domestic currency, the greater the monetary authority’s ability to manage the foreign-exchange market and withstand external shocks—provided that these reserves are readily usable and managed according to principles of liquidity, safety, and diversification. But the more important question is: How do we preserve the reserves? Demonstrating that reserves are adequate at a particular point in time does not mean that the economic problem has been resolved. The more important issue is the sustainability of reserves and the sources of foreign-currency inflows into Iraq. The Iraqi economy depends heavily on oil for generating external revenues. When oil revenues increase, the economy’s ability to build reserves, finance imports, and support monetary stability improves. However, when oil prices decline or exports fall, pressures on public finances, the balance of payments, and the foreign-exchange market can increase. Therefore, the strength of foreign reserves should not be measured solely by what is held in the Central Bank’s accounts. It should also be assessed according to the economy’s ability to continuously rebuild those reserves. The dollar: genuine demand versus speculative demand In an economy that relies heavily on imports, a significant portion of demand for dollars arises from the need to finance foreign trade. Therefore, the Central Bank’s continued provision of foreign currency for commercial purposes through official channels helps secure goods and services and reduce pressure on the market. In its latest statement, the Central Bank attributed the rise in the exchange rate in local markets to speculation and expectations, as well as the exploitation of geopolitical circumstances. It also confirmed the continuation of foreign-trade financing through approved channels. Here, it is important to distinguish between demand for dollars to finance genuine economic activity and demand arising from hedging, speculation, and the accumulation of foreign-currency positions based on expectations about future developments. The different nature of these forms of demand leads to different effects on the foreign-exchange market. From strong reserves to a strong economy The deeper equation that deserves attention is that foreign reserves can provide a monetary safety margin, but they cannot, by themselves, create a diversified economy. Sustainable monetary stability requires an economy that produces goods and services, increases non-oil exports, attracts investment, develops tourism, strengthens industry and agriculture, expands the role of the private sector, and reduces dependence on imports. This is where monetary policy intersects with broader economic policy: the greater the economy’s capacity to generate foreign currency through real economic activity, the more reserves become a result of economic strength rather than merely an instrument for market intervention. Reserves and the dinar: a relationship requiring integrated management The Central Bank’s data indicate the presence of important quantitative indicators of reserve adequacy relative to currency issued and broad money supply. This supports the Central Bank’s ability to manage monetary stability. However, preserving this strength requires balanced management of liquidity, public spending, public debt, imports, and sources of foreign currency. Therefore, the economic debate should not stop at the question: How large are the reserves? It should move toward deeper questions: What is the rate at which reserves are being depleted? What are the sources for replenishing them? How many months of imports can they cover? How do reserves change with oil prices? What is the size of external liabilities? To what extent is the growth in demand for dollars linked to growth in the real economy? Answering these questions provides a more accurate picture of monetary sustainability than simply looking at the reserve figure at a particular point in time. Conclusion Ultimately, the Central Bank’s statement regarding the adequacy of foreign reserves represents an important indication of the monetary authority’s ability to meet legitimate demand for foreign currency under current conditions. However, long-term monetary stability requires more than foreign reserves. It requires diversifying sources of income, strengthening domestic production, increasing non-oil exports, reforming the banking sector, strengthening the private sector, and rationalizing imports and public expenditure. Foreign reserves are a line of defense for currency stability, but a productive and diversified economy is the more sustainable line of defense.