When a foreign currency is widely used for everyday payments beside the national one, economists call it currency substitution. Iraq's authorities treat it as something to be reversed rather than accepted. A Council of Ministers decision of 2023 confines the buying and selling of goods and services inside Iraq to the Iraqi dinar, and the Central Bank of Iraq has rebuilt the channels through which dollars legally reach traders, travellers and households.
A foreign currency can do the work of money inside a country without ever being made the legal currency there. In Iraq the US dollar is used in ordinary domestic dealings alongside the dinar, and the authorities have not accepted it. Their answer has been a decision confining domestic trade to the dinar, plus a rebuilt set of channels through which dollars reach the public.
Key Takeaways
- Currency substitution is a foreign currency being used as money at home. The IMF separates it from asset substitution, which is holding foreign currency to manage risk.
- It is unofficial and partial in Iraq. The dinar remains the national currency and the arrangement has no legal status.
- The habit outlives the crisis that started it, which is why it has to be unwound deliberately rather than waited out.
- The Central Bank of Iraq has described a 2023 Council of Ministers decision confining domestic sales of goods and services to the dinar.
- Since January 2025 international transfers run through commercial banks and their correspondent banks, with the central bank funding and auditing rather than executing.
What using two currencies at once actually means
The IMF's own primer on the subject draws a line that is worth having before anything else. In currency substitution, it says, foreign assets are used as money, essentially as a means of payment and a unit of account. Asset substitution is different: it results from risk and return considerations about domestic and foreign assets.
The distinction is between saving and spending. Somebody who keeps savings in a foreign currency because the local one has lost value before is substituting assets. Somebody who is quoted a price in dollars, hands over dollars and takes dollars in change is substituting currency. The second is what makes an economy hard for its own central bank to steer.
Neither requires a law. The Fund notes that most developing countries, and transition economies adopting market mechanisms, already have a limited, unofficial form of dollarisation. Iraq's is unofficial in exactly that sense. The dinar is the national currency and the dollar has not replaced it. People use both, and notes held this way are one of the three ways a currency gets used outside its own country.
Why a second currency arrives, and why it stays
It arrives as insurance. Foreign currency assets, the Fund observes, have provided the opportunity of insuring against macroeconomic risks such as price instability and prolonged depressions. A country that has been through inflation, war, or a banking system that stopped working teaches its own population a lesson about holding the national currency, and the lesson is remembered.
The harder part is that it does not leave when the emergency does. The same paper records dollarisation in some Latin American and Asian countries continuing and accelerating even following successful stabilisation. Stability is necessary for a reversal and it is not sufficient.
Money is a shared convention rather than an individual choice. If sellers quote in dollars, buyers need dollars. If buyers hold dollars, sellers keep quoting in them. Each person behaves sensibly and the outcome holds regardless of what the price index is doing. That is why the measures below are administrative rather than only monetary.
What it costs the central bank that issues the other one
Three costs are worth separating. The sharpest published statement of them concerns the extreme case, a country adopting a foreign currency as legal tender, rather than the partial one.
| Cost | What it is | What substitution does to it |
|---|---|---|
| Seigniorage | The profits accruing to the monetary authority from its right to issue currency | A note costs almost nothing to make and buys real goods, so every payment made in a foreign note earned that revenue for another treasury |
| Monetary control | The reach of the money a central bank issues and the banking system that holds it | The share of activity conducted in another currency is the share those instruments do not directly reach |
| Lender of last resort | The ability to produce currency for a bank in trouble | Limits appear once the ability to print money ceases to exist, so support promised in a foreign currency is capped by reserves |
In Iraq the Fund's 2025 Article IV report identifies a more immediate obstacle than any of the three: excess bank liquidity, which it says has hampered the transmission of monetary policy, as shown by deposit and lending rates not reacting to changes in the policy rate. Substitution is a second constraint on the same problem rather than the whole of it.
Partial substitution does not remove any of these outright. It removes a share of each, and there is no moment at which the loss is announced.
The rule that puts domestic trade back into dinars
In a statement published on 3 August 2023, the Central Bank of Iraq set out both the diagnosis and the remedy.
The diagnosis is unusually direct about who buys dollars in the market. The bank listed four groups. Importers who avoid the official transfer route. Importers of prohibited goods, or goods that do not pass through official border crossings. People moving the proceeds of crime. And, fourth, citizens who pay for goods and services inside Iraq in dollars, who then have to buy those dollars somewhere, which in practice means from an allocation meant for something else.
The remedy named in the same statement is Council of Ministers Decision No. 23026 of 2023, which the bank describes as confining the buying and selling of goods and services to the Iraqi dinar inside Iraq, and which it asked the competent authorities to apply strictly.
The bank also rejects the usual framing. A parallel market, it argues, is one with its own sources of foreign currency, from private exports, tourism or transfers from residents abroad. In Iraq the central bank is the source, so in its view trading outside the licensed channels is not a market but dealing in a currency whose price, purposes and quantities it has already set. It cites Article 3 of Banking Law No. 94 of 2004, which reserves the taking of deposits and other repayable funds from the public to licensed entities.
Rebuilding the channels the dollars come through
A rule confining domestic trade to the dinar only works if the legitimate uses of foreign currency have somewhere to go. Most of the machinery is about exactly that.
The 2023 statement describes three routes. External transfers and documentary credits go through an electronic platform that checks each operation and identifies the final beneficiary before it is executed, with no ceiling set by the central bank. Personal transfers abroad, including tuition, medical costs and pensions paid to residents overseas, go through international money transfer companies, alongside payment cards for spending abroad. Cash foreign currency for travellers comes at the official rate through banks and licensed exchange companies, checked through a platform of its own.
The platform itself was meant to be temporary. In a statement of 4 September 2024 the bank explained that it had begun at the start of 2023 as a first stage in reorganising external transfers, so that checks happened before a transfer rather than after, replacing daily review of transfers by the United States Federal Reserve, which it called an exceptional arrangement. The plan from the beginning was a gradual move to direct relationships between Iraqi banks and approved correspondent banks abroad, with an international audit firm doing the checks in advance.
By that statement, 95 per cent of transfers had already moved off the platform during 2024, with thirteen Iraqi banks operating under the agreed pre-check mechanism. The bank also opened transfer channels in euro, Chinese yuan, Indian rupee and UAE dirham, noting that trade with the United Arab Emirates, Turkey, India and China accounts for roughly 70 per cent of Iraq's imports.
The IMF records the end state. Since January 2025, its 2025 Article IV report says, all legitimate international transactions have been processed by commercial banks through their correspondent banking relationships, with the central bank replenishing those balances weekly in line with foreign exchange demand and auditing the banks afterwards for compliance with anti-money-laundering rules. Fund staff classify Iraq's exchange rate arrangement as a conventional peg, in law and in practice.
How anyone would tell whether it is working
Not by any single announcement, which is the honest answer.
Fund staff credited the transfer reform with supporting a decline in the gap between the official rate and the unofficial one, and said a further reduction could be achieved by promoting the use of Iraqi dinars in domestic transactions, including for car and real estate purchases, and by improving border customs checks. Cars and property are named for a reason. They are the large, infrequent purchases where a habit of pricing in a foreign currency is most entrenched and most visible.
The Fund also said stronger monitoring of parallel market volumes was needed to understand the informal sector properly. That is the underlying difficulty. Deposits can be counted and transfers can be logged, but banknotes changing hands are recorded nowhere, so the thing being measured is partly invisible to the institution trying to reduce it.
Where to look next
The AUD to IQD page carries the live reference rate and a short block on what kind of money the Iraqi dinar is. For two currencies circulating together by agreement rather than by habit, what it means to import another country's monetary policy describes countries that hold their currencies at par with an anchor and accept that anchor as legal tender.
Sources
- Central Bank of Iraq, statement on dealing in dollars and the exchange rate, 3 August 2023 - the four groups buying dollars, Decision No. 23026 of 2023, the three official channels, the parallel market argument, and Article 3 of Banking Law No. 94 of 2004
- Central Bank of Iraq, statement on the mechanism for ending the electronic platform, 4 September 2024 - the platform's origin and purpose, the 95 per cent of transfers moved to correspondent banking during 2024, and the additional currency channels
- International Monetary Fund, Iraq: 2025 Article IV Consultation, Country Report No. 25/183, July 2025 - the conventional peg classification, correspondent relationships since January 2025, excess liquidity and monetary transmission, and the recommendations on dinar use and customs checks
- Andrew Berg and Eduardo Borensztein, Full Dollarization: The Pros and Cons, IMF Economic Issues No. 24, December 2000 - currency against asset substitution, the unofficial form most developing economies have, foreign currency as insurance, persistence after stabilisation, and the three costs
General information about currency substitution and how authorities respond to it. Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.
Common questions
What is currency substitution?
It is the use of a foreign currency as money inside a country, as a means of payment and as the unit in which prices are quoted. The IMF distinguishes it from asset substitution, which is holding foreign currency assets for reasons of risk and return. One is about spending, the other is about saving, and a country can have a great deal of either.
Is this the same as adopting a foreign currency officially?
No. Official adoption means the foreign currency becomes legal tender by decision of the state. What is described here is unofficial and partial: the national currency remains the legal one, and the foreign currency is used anyway. The IMF notes that most developing economies already have some limited, unofficial form of it.
Why does it continue after prices have stabilised?
Because the habit outlives the emergency that created it. The IMF has recorded dollarisation continuing and even accelerating in some countries after a successful stabilisation. Prices, contracts and expectations settle into the foreign currency, and each person who uses it gives the next person a reason to keep using it.
What does Iraq's rule on domestic pricing say?
The Central Bank of Iraq has described Council of Ministers Decision No. 23026 of 2023 as confining the buying and selling of goods and services inside Iraq to the Iraqi dinar, and has called for it to be applied strictly. The central bank's own statements treat domestic payment in dollars as a source of the demand it is trying to remove.
What does the IMF say Iraq should do next?
In its 2025 Article IV report the Fund said the gap between the official and unofficial exchange rates could be narrowed further by promoting the use of Iraqi dinars in domestic transactions, including for car and real estate purchases, and by improving border customs checks. It also said stronger monitoring of parallel market volumes was needed.