Iraq’s adoption of Artificial Intelligence (AI) and digital transformation is progressing but faces significant obstacles, including outdated infrastructure, a shortage of skilled workers, and weak regulations. This study examines AI’s potential in Iraq, identifies key challenges, and explores its economic impact. Through qualitative interviews with tech leaders, quantitative surveys, and literature analysis, the research highlights sector-specific gaps and opportunities in healthcare, education, and energy. While digital transformation offers economic diversification and innovation, Iraq’s low digital readiness (e.g., 48% internet penetration) and lack of a national AI strategy hinder progress. The study recommends a comprehensive AI policy, infrastructure investment, public-private partnerships (PPPs), and workforce development to accelerate Iraq’s technological advancement.