Iraq Economy Reels as U.S. Moves Against Money Flows to Iran

Iraqi banks had operated under less stringent rules since shortly after the 2003 U.S. invasion that toppled

Saddam Hussein.

But years of weak governments and crises—from the insurgency during the U.S. occupation to the Islamic State takeover of large portions of the country—led successive administrations to put off bringing Iraq’s banking system into compliance with global money-transfer practices until now, officials said.

Since the procedures went into effect, 80% or more of Iraq’s daily dollar wire transfers, which previously totaled over $250 million some days, have been blocked because of insufficient information about the funds’ destinations or other errors, according to U.S. and Iraqi officials and official Iraqi government data.

With dollars scarce, Iraq’s currency has fallen as much as 10% against the dollar, leading to sharply higher prices for imported goods, including staples such as eggs, flour and cooking oil.

“For 20 years we followed the same system,” said Mahmood Daghir, chairman of Al Janoob Islamic Bank and a former Central Bank of Iraq official. “But the shock policy by the Fed has made a crisis inside the Iraqi economy.”

The turmoil exemplifies the wary but interwoven relationship between Washington and Baghdad. Since the U.S. helped establish the Central Bank of Iraq in 2004, the U.S. dollar has largely…