Dealing with the informal economy will require the reform of the financial system, which in Iraq is primarily cash-based. Most households do not have bank accounts and the transfer of money between cities happens by the movement of physical cash or through money transfer companies. According to some estimations, almost 70 percent of banknotes are saved in households, rather than banks.[14] The banking system is also dominated by state-owned banks, leaving very narrow space for private banks to compete. Notably, the lack of competition is one reason that the bank system has been very slow in developing its methods and becoming a trusted channel for financial transactions and savings. For this reason, the IMF demanded that the government reform the banking system and encourage private investment in this sector. Recently, the government introduced electronic payment to state employees, which could be the first step toward modernizing the banking system. This must be followed by further measures to encourage private banks, attract savings that are frozen in households, and formalize the transactions of the informal sector.

Most economists agree that the Iraqi government needs to do more to support medium and small companies through loans and other incentives. In fact, the government has already adopted some of these measures but there are no guarantees that these loans will not be consumed by clientelist and corrupt conduct or governed by an efficient system of monitoring and performance measurement. Additionally, the weakness of the rule of law, the unfriendly legal and regulatory frameworks, the lack of security, and the obsolescence and vulnerability of infrastructure will continue to discourage economic activities in productive sectors rather than bolster the provision of services and importation.

In this respect, a considerable part of Iraq’s foreign currency travels abroad to fund imports of almost everything, due to the decline of Iraqi agricultural and industrial products and their inability to compete on the global market. Today, the percentage of agriculture and industry in Iraq’s GDP does not exceed 6 percent. The agricultural sector is facing further problems because of increasing water shortages, mainly caused by water projects constructed in Turkey and Iran’s decision that reduced the flow of water to Iraqi territory. If this problem is not resolved, a further decline in agricultural production and new waves of migration from the countryside to the already congested and depleted urban centers is expected. Clearly, this will be a destabilizing phenomenon, as demonstrated by the disputes and frequent security problems happening in the southern city of Basra as a result of tribal migration.