In a statement, the government said that aid agencies the Swedish International Development Cooperation Agency (Sida) and the Folke Bernadotte Academy (FBA) had been instructed to begin the phase-out with the aim of concluding operations by June 30, 2025.
"Conditions have changed and Iraq is now a middle-income country with adequate resources to look after its own population," International Development Cooperation Minister Johan Forssell said in the statement.
The minister added the decision presented "an opportunity to broaden our relationship with Iraq through cooperation within areas such as trade, the environment and migration".
Over the past 10 years, development aid to Iraq amounted to almost three billion kronor ($284 million).
In the summer of 2023, relations between the countries were strained over several protests in Sweden involving desecrations of the Koran.
Iraqi protesters stormed the Swedish embassy in Baghdad twice in July 2023, starting fires within the compound on the second occasion, and Iraq expelled the Nordic country's ambassador.
Forssell told reporters that in general, Swedish development aid was too fragmented as it was distributed to over 100 countries.
"When aid is distributed to so many countries at the same time it makes control and evaluation of it more difficult. We will work in fewer countries than before and expand the work in the countries where we actually are," Forssell said, according to local media.
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