Iraq's shadow economy is expanding as millions of workers and businesses operate outside formal government oversight, depriving the state of revenue and complicating efforts to reduce its dependence on oil.
Informal activity ranges from unregistered small businesses and undocumented employment to tax and customs evasion.
Officials and analysts also warn that some financial channels outside formal oversight can be exploited for smuggling, corruption and money laundering.
The issue has taken on greater importance as Baghdad seeks to increase non-oil revenues and strengthen public finances.
Finance Ministry figures show Iraq collected about 8.74 trillion dinars in non-oil revenues during the first seven months of 2026.
That accounted for around 22% of total public revenues of 39.09 trillion dinars, compared with about 30.36 trillion dinars from oil.
The scale of Iraq's informal economy is particularly visible in the labour market.
OECD figures based on Iraq's 2021 labour force survey showed about 5.73 million people were in informal employment, representing 66.6% of the country's workforce.
About 4.72 million of them worked in the informal sector, while the rest held informal jobs within formally registered organisations.
The figures do not measure the total financial value of the shadow economy, but indicate how deeply informal employment is embedded in Iraq's labour market.
The government established a committee in 2023 to examine the issue, with a mandate covering tax reform, improved data collection and the relationship between tax evasion and money laundering.
The Central Bank, Integrity Commission and anti-money laundering authorities were among the bodies involved.
Iraq has also tightened oversight of foreign-currency transactions in recent years, including through new systems monitoring bank transfers and dollar flows.
Concerns over corruption and illicit finance
Anti-corruption specialist Saeed Yassin said the government needed to look beyond bringing small businesses into the tax system.
He said authorities should investigate networks that benefited from keeping economic activity outside formal scrutiny and examine the origins of funds entering markets without clear financial records.
Yassin said particular attention should be paid to so-called economic offices and their possible involvement in government contracts, border crossings, imports and trade.
Some parts of the informal economy could also be used to disguise proceeds from corruption, smuggling or money laundering through front companies and transactions whose real value was difficult to verify, he said.
Previous audits have exposed schemes involving hundreds of millions of dollars channelled through fraudulent transactions involving banks, exchange companies and other intermediaries.
He called for stronger systems to track financial flows, identify the real owners of companies, scrutinise high-risk contracts and link government databases.
Iraqi MP Youssef al-Kallabi said the scale of unregulated economic activity was weakening government efforts to raise non-oil revenues.
He said administrative and financial loopholes meant the state was failing to collect some revenues it was entitled to receive.
Parliament had previously proposed more than 16 measures to increase non-oil income, he said, but some had not been implemented.
Kallabi said exemptions and some government decisions had also disadvantaged legitimate private-sector companies while allowing well-connected economic groups to benefit from unequal conditions.
The wider problem comes as Iraq's government pursues a renewed anti-corruption drive aimed at recovering public funds and strengthening oversight.
A shortage of reliable data made it harder for the government to estimate how much revenue it should be collecting and to assess whether reforms were working, he added.
Economist Ziad al-Hashemi said many small and medium-sized businesses remained informal because operating outside the official system was cheaper and easier.
Complicated bureaucracy, weak public services and limited access to bank financing reduced the incentives to register formally, he said.
But remaining outside the system also restricted companies' ability to obtain loans, attract investment and expand into larger businesses.
Iraq's long dependence on cash and parallel-market currency trading has also helped sustain a highly informal financial system outside conventional banking channels.
Hashemi said reforms should make formal registration economically worthwhile.
He called for lower start-up costs, simpler procedures, easier access to bank finance and stronger legal and social protection.
The challenge, he said, was to make joining the formal economy an opportunity for businesses to grow rather than simply another tax and administrative burden.