Analysis
Salary distribution process for civil servants at a public Erbil bank on August 19, 2020. Photo: Bilind T. Abdullah/Rudaw
In recent weeks, the Iraqi dinar has witnessed a notable decline against the US dollar, reaching a peak of 1,650 dinars before settling at 1,550. To address this volatility, the Central Bank of Iraq (CBI) has taken measures to bolster the dollar reserves of ten private Iraqi banks, held in US banks, including esteemed institutions like JPMorgan and Citibank.
The objective is to enhance their capacity for international money transfers. Additionally, Iraqi private banks are now authorized to utilize various foreign currency reserves beyond the US dollar, such as the Euro, United Arab Emirates Dirham, Chinese Yuan, and Indian Rupee, to facilitate international trade transactions.
The oscillation in the value of the Iraqi dinar against the US dollar is primarily linked to Iraq's oil-dependent economy and trade imbalances with neighboring countries, particularly those restricted by US sanctions, such as Iran. To address these challenges, the CBI is actively seeking permission from the US Federal Reserve to streamline the timely transfer of oil revenues within the country and establish mechanisms for transactions with neighboring Iran in currencies other than the US dollar. These strategic measures are anticipated to lead to the appreciation of the Iraqi dinar against the US dollar, aligning with the targets set by the CBI.
A comprehensive analysis of the supply and demand dynamics of the US dollar in Iraq sheds light on the depreciation of the Iraqi dinar against the dollar. Iraq's oil revenues, constituting 90 percent of the country’s revenue, are predominantly earned in dollars, forming the foundation for the reserves. However, the demand for dollars in Iraq is fueled by the widespread import of goods, services, and domestic necessities, with the US dollar and Euro being the preferred international currencies for these transactions.
Recent initiatives implemented by the CBI, in collaboration with the US Federal Reserve, include the introduction of an electronic platform for foreign remittances, connecting Iraqi banks to the international interbank network, SWIFT. This platform aims to monitor the movement of dollars transferred from the US to Iraq and subsequently to other countries for commercial purposes. The Federal Reserve’s concerns center around preventing the flow of dollars from Iraq to countries sanctioned by Washington, such as Iran, Syria, and Lebanon.
The activation of electronic platforms, coupled with the stringent scrutiny of remittances, has led to an increased demand for the US dollar in the free or parallel market. Delays in the approval process for money transfers through the electronic platform have created challenges for merchants, even those with legal transactions and necessary documentation, resulting in rejections. This has prompted some traders to explore alternative means of transferring dollars, contributing to the demand in the parallel exchange market.
Despite the CBI’s restrictions on dollar remittances to Iran, imports from Iran to Iraq have seen an increase. Hamid Hosseini, a board member of the Iran-Iraq Joint Chamber of Commerce, told Rudaw earlier this month that in 2022, Iran's total exports to Iraq reached $11 billion, with $6.5 billion going toward goods imported by the Iraqi private sector. The funds for these goods are often transferred in US dollars through currency exchange offices or to a third country before reaching Iran, further driving the demand for the dollar in the Iraqi parallel exchange market.
Iraq's trade balance has remained positive in recent years due to high oil prices, covering both government expenditures and the costs of daily imports. In years when oil prices fell, the Iraqi government has typically devalued the dinar against the US dollar to address budget deficits. The recent move by the CBI to enhance private banks’ dollar reserves and facilitate direct remittances under the supervision of the Federal Reserve could potentially stabilize the Iraqi dinar by increasing the supply of dollars on the domestic market. Conversely, strained relations between the CBI, the Iraqi government, and the US government, along with increased sanctions on Iran, could further depreciate the Dinar against the US dollar.
It is noteworthy that the CBI plans to discontinue the use of the US dollar in domestic transactions from the beginning of the next year, marking the initiation of the removal of the currency from the domestic market and weakening the parallel exchange market in Iraq. The CBI considers the exchange rate of the US dollar in the parallel market as deceptive and contends that it has adequately supplied the necessary dollars in the local market for all legal transactions.
Omer Ahmed is the Editor-in-Chief of Rudaw Media Network's Economy Desk
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