MANAR AL-OBAIDI: THE SHADOW ECONOMY IN IRAQ EXCEEDS THE SIZE OF THE FORMAL ECONOMY, 19 FEB

 MANAR AL-OBAIDI: THE SHADOW ECONOMY IN IRAQ EXCEEDS THE SIZE OF THE FORMAL ECONOMY

The parallel banking system in Iraq is one of the major challenges that directly affects the stability of the financial system, as it consists of a group of financial institutions that operate outside the official framework and without supervision from regulatory authorities.

Economic researcher Manar Al-Obaidi said, in a clarification received by “Baghdad Today”, today, Saturday (February 15, 2025), “Institutions play an influential role in the economic scene, and they have gradually emerged over the past twenty years to provide services similar to official banks such as lending, credit facilities, receiving deposits, and transferring money internally and externally.” 

He added, “Among these institutions, there are salary distribution outlets, exchange shops, consumer associations and even some non-profit organizations. These institutions have been able to achieve widespread expansion due to the absence of effective oversight, which has made work procedures easier compared to official banks and attracted many customers looking for flexible and fast alternatives.”

He continued: “One of the main reasons for the spread of this system is the great demand from owners of small and medium enterprises, which constitute about 84% of the informal economy in Iraq, as it is difficult for them to access traditional banking services due to their lack of official registration, which forces them to deal with parallel financial institutions.”

He explained that “the existence of a formal and parallel banking system poses a threat to the Iraqi economy, as it enhances the phenomenon of the ‘shadow economy’ and limits the ability of official bodies to monitor the movement of funds, which opens the way for illegal practices such as tax evasion and money laundering.” 

He pointed out that “to deal with this situation, it is necessary to adopt firm solutions, such as “closing the gap between the two systems”, by preventing unauthorized banking activities, and encouraging small and medium enterprises to join the formal sector by “providing attractive incentives”. Legal frameworks can also be put in place to regulate the work of informal financial institutions under the supervision of the Central Bank to ensure the necessary oversight.”

He stressed that “the Iraqi experience is an example that the ‘shadow economy’ may exceed the size of the formal economy, which represents a major challenge for the relevant authorities. In light of this, this situation requires a balanced strategy between strictly enforcing the laws, while providing legal paths for these institutions to integrate into the formal economy, in a way that ensures the protection of the economy from potential risks.”