ERBIL, Kurdistan Region of Iraq - In a move aimed at addressing liquidity crisis, the Central Bank of Iraq is working to introduce a digital currency as an alternative to cash. This transition could reshape the payments landscape and the national economy entirely.

This step comes in response to growing challenges in managing cash, amid a global shift toward financial digitization. 

However, it raises questions among the Iraqi public: Will this digital currency be the ultimate solution to end the liquidity crisis? How will it affect banking transactions and the future of the economy?

Last week, Central Bank Governor Ali al-Alaq revealed plans to establish a digital currency to replace cash.

During a speech at the ninth Finance and Banking Services Conference, Alaq said the financial and banking system will undergo fundamental transformations, including the decline of cash, which will be replaced by digital payments for central banks. 

He added that the Central Bank is moving toward creating its own digital currency, which will gradually replace paper currency, similar to what is happening in some central banks around the world.

The Iraqi government faces challenges in managing dinar liquidity, suffering from a chronic shortage of the currency. This issue impacts its ability to meet financial obligations, including paying salaries, settling debts, and funding projects.

Government perspective on the benefits of digital currency

Mazhar Mohammed Saleh, economic advisor to the Iraqi prime minister, said issuing a national digital currency would represent a fundamental transformation in the financial system, as it would contribute to developing the digital payments system and enhancing financial transparency.

Speaking to The New Region, Saleh said “the move would lead to several key benefits, including reducing cash leakage from the economy and controlling financial flow, minimizing the circulation of paper money outside the banking system to enhance financial inclusion, and reducing the need for frequent printing of money, thereby lowering operational costs.” 

“The transition would also enhance financial oversight by enabling tracking of liquidity flows and spending trends, as well as improve capital control and external transfers, supporting efforts to combat money laundering and terrorism financing,” he added.

He further explained that digital currencies “will enhance financial inclusion, especially for segments not integrated into the banking system, contributing to economic and social integration.”

“However, transitioning to a digital monetary system requires advanced technological infrastructure, including strong and secure internet networks, advanced cybersecurity systems to protect financial transactions, and strengthened societal acceptance of digital currencies, starting with government institutions adopting them for tax collection and official transactions,” he said.

According to Saleh, digital cash will retain its traditional functions as a unit of account, a way of payment, and a store of value while being accessible via the internet and smartphones. 

This transition is expected to contribute to building a more stable and efficient financial environment, he said.

However, on December 16, 2024, the Central Bank of Iraq announced that it does not grant licenses to companies trading in stocks, metals, and cryptocurrencies. 

It confirmed its commitment to taking all legal measures against fraudulent companies, amid warnings about fake electronic trading companies falsely claiming to be licensed by the bank.

Advantages of a digital currency

The world’s first digital currency, Bitcoin, was introduced in 2009 as a reaction to the global financial crisis, which initially paralyzed the US banking system and later spread to the global financial system. Bitcoin’s creator claimed that this currency operates independent of central banks.

Earlier this year, the American magazine CEO World reported that Iraq is among ten countries worldwide that prohibit dealing in cryptocurrencies. 

The report stated that despite the global rise in cryptocurrency adoption, many countries continue to enforce strict regulations or outright bans. 

Some governments cite concerns over financial stability and fraud prevention, while others express fears about money laundering and economic control.

Ali al-Furaiji, a financial affairs specialist, said issuing a digital currency is “an important step toward modernizing Iraq’s financial and economic system.” 

This move, he argued, could help enhance financial inclusion and update the payment system.

According to the International Monetary Fund and Furaiji, central bank digital currencies could improve financial inclusion and payment efficiency in the Middle East by reducing transaction costs and increasing the speed of financial transfers. 

However, he cautioned that issuing a digital currency alone will not fully resolve the liquidity crisis, which stems from excessive and unregulated government spending.

Furaiji pointed out that the potential benefits mainly revolve around boosting financial inclusion and improving the efficiency of the payment system. 

However, challenges include an unbalanced banking infrastructure, cybersecurity risks requiring advanced security systems to protect users, and the need for financial awareness and education.

He also highlighted additional challenges, such as public distrust in the banking system. 

Iraq’s banking sector suffers from a low level of confidence among citizens due to past financial crises, delayed transactions, and difficulties withdrawing funds from some banks.

Citing a United Nations Trade and Development (UNCTAD) report, Furaiji said “risks and challenges must be addressed before issuing a central bank digital currency. This includes improving access to digital infrastructure and addressing risks related to data privacy and financial security.”

Analyzing Iraq’s Central Bank data, Furaiji stated that “the total issued money supply exceeded 102.6 trillion Iraqi dinars by the end of November 2023, while the capital of operating banks in Iraq amounted to about 9.1 trillion dinars by the end of 2023.” 

“This means that deposited funds account for only 8.8 percent of the total issued money supply,” he said.

Furaiji further noted that Iraq’s estimated monthly budgetary needs range between 18 and 20 trillion dinars, yet the country lacks sufficient financial liquidity to meet these needs. 

“This reflects significant challenges in ensuring adequate cash flow to sustain the budget and financial system,” he said.

In 2018, the Supreme Fatwa Authority of the Kurdistan Regional Government (KRG) issued a ruling against One Coin, reinforcing the country’s cautious stance toward digital assets. However, unofficial cryptocurrency trading continues in Iraq despite restrictions.

Digital currency will not gain widespread acceptance

The Iraqi government decided to change the exchange rate of the Iraqi dinar against the US dollar in 2020, adjusting it from 1,182 dinars per dollar to 1,450 dinars per dollar.

This decision sparked widespread public discontent, particularly as food prices and overall market prices surged following the devaluation. 

The change was solidified in the federal budget approved by Iraq’s parliament on March 31, 2021.

The Central Bank's recent move toward digital currencies aligns with global financial developments, as Iraq aims to officially and systematically adopt digital currencies, similar to internationally recognized cryptocurrencies like Bitcoin.

However, economic expert Abdul-Adil Naem believes that although digital currency already exists informally, it will be more effective if implemented within a legal and regulated financial framework.

Speaking to The New Region, Naem noted that “Iraq’s banking system is still in its early stages of development, especially following the introduction of salary localization, expanded financial transfers, ATMs, and point-of-sale systems.”

Naem acknowledged that digital currency may be beneficial for certain segments, but it will not gain widespread acceptance in Iraq at this stage, given the unstable exchange rate of the dollar and the economic challenges facing the country. 

He emphasized that it is currently impossible to fully replace cash with digital currency given the existing challenges.

The Iraqi economic expert stressed the need “to strengthen banking infrastructure before transitioning to digital financial transactions.”

Over the past two weeks, Rafidain and Rasheed banks warned against using electronic payment tools for trading digital currencies and Forex, stating that the decision aligns with the Central Bank of Iraq’s directives. 

They also urged customers to avoid using electronic payment tools, including cards and digital wallets, for these transactions.