Riot police were dispatched outside the central bank headquarters in central Baghdad prior to the announcement on Saturday, in case news of the devaluation sparked protests.

A leaked draft of the state budget law for 2021 caused furore on the streets of the Iraqi capital last week as it confirmed plans to devalue the dinar.

It is the first reduction in exchange rates that the Iraqi government has made in decades.

In a statement, the Central Bank set the new rate for the dinar, which is pegged to the US dollar, at 1,450 IQD when selling to the Iraqi Finance Ministry. The dinar will be sold to the public at 1,470 IQD and to other banks at 1,460 IQD.

The devaluation raised the prospects of the dinar weakening further on the street. The rate has already risen to 1,400 IQD per US dollar on Saturday, up from 1,300 IQD last week, at currency exchange agents.

Since an oil price crash earlier this year, Iraq has been grappling with an unprecedented liquidity crisis.

The crude-exporting country has had to borrow from the bank's dollar reserves to pay the nearly $US5 billion ($A6.6 billion) in monthly fees for public salaries and pensions.

Oil revenues, which account for 90% of the budget, have brought in an average of $US3.5 billion ($A4.6 billion).

The bank justified the devaluation saying it was the product of "intense deliberations" with the prime minister, finance minister and lawmakers, and stressing the reduction in the dinar's value would be a one-time occurrence.

"It must be emphasised here that this change in the value of the Iraqi dinar will be one-time only and will not be repeated," an official statement said.

The devaluation drew the ire of public sector workers. Many fear a weakened dinar, as well as plans proposed in the budget to cut salaries and impose taxes, will amount to pay cuts.

Australian Associated Press