New restrictions by Central Bank of Iraq affecting trading in US dollars

Recovery Advisers would like to share a heads-up that may affect all companies, banks and insurers currently managing exposure in Iraq.

The Central Bank of Iraq (CBI) has implemented new measures aimed at limiting the flow of hard currency, particularly US dollars, from Iraq. This initiative is part of a broader plan to de-dollarize the Iraqi economy by the end of 2023 and transition to a more digitized and regulated financial system.

Key aspects of these measures include:

Banning cash withdrawals and transactions in US Dollars: Starting 1 January 2024, cash withdrawals and transactions in US dollars will be prohibited. This step is intended to curb the misuse of hard currency reserves in financial crimes and evade US sanctions on countries like Iran and Syria.

Focus on the Dinar and other currencies: The CBI has declared that internal trade and transactions will be restricted to the Iraqi Dinar starting in 2024. However, foreign trade can be settled in other currencies like the Euro, Emirati Dirham, Turkish Lira, and Indian Rupee.

Regulation of wire transfers: The Central Bank of Iraq (CBI) has established a platform to regulate wire transfers as part of its efforts to modernize the payment system and enhance financial security. This system is designed to automate the exchange of payment orders between banks and to manage settlement accounts effectively, ensuring the safety and efficiency of payment systems and clearing operations. The Iraqi payment systems comprise several components, including a real-time gross settlement system, an automated clearing system, and a system for recording government securities. The CBI’s focus on reducing cash usage in the country is a response to the challenges posed by geography and security issues that make cash transportation across the country difficult and risky. Thus, efforts are being directed towards automating settlement operations and activating electronic card systems to maintain more liquidity in bank accounts. This system is also designed to prevent fake receipts and fraudulent transactions that previously siphoned off dollars to sanctioned countries.

Impact on the general economy: The restriction measures have been causing a notable impact on the Iraqi economy, particularly due to the de-dollarization plan. This plan includes banning cash withdrawals and transactions in US dollars, which is expected to stamp out illicit uses of hard currency. The shortage of US dollars in the local market has already been causing issues, with the parallel/black market exchange rate continuing to rise. This situation has led to increased demand for US dollars on the black market and a decline in the value of the Iraqi dinar against the dollar. The CBI anticipates that the dinar could lose more value as the new measures go into effect, but views this as an acceptable side-effect of formalizing the financial system.

Impact on the banking system: The US Treasury and the Fed have banned 14 Iraqi banks from conducting US dollar transactions due to concerns over the redirection of US currency to sanctioned individuals, particularly in Iran. This move, along with the tightening of wire transfer controls, has had a significant economic impact, causing a decrease in daily dollar sales conducted through the Central Bank of Iraq. Local banks have been limiting dollar cash withdrawals in recent months, contributing to the shortage.

Impact on importing companies: For import-dependent economies like Iraq, the restrictions are particularly challenging. The limited access to US dollars complicates the process of importing goods, which often require transactions in dollars. The CBI’s plan to restrict internal trade and transactions to the Iraqi dinar, while allowing foreign trade to be settled in other currencies, is an attempt to manage this issue. However, the practical implications for import companies may include increased costs and logistical challenges due to currency exchange issues and restricted access to dollars.

Public reaction and challenges: There has been growing public frustration over these measures, particularly among those businesses who depend on access to US dollars. The ongoing depreciation of the Iraqi dinar has led to numerous protests, and the government and central bank have faced scrutiny for their inability to address the issue. The hardship is expected to particularly affect impoverished families, who make up over 40% of the population in Iraq.

These measures reflect the Iraqi government’s efforts to stabilize its economy, reduce dependence on the US dollar, and comply with international financial standards. However, they also pose significant challenges and have stirred public discontent due to the immediate impact on people’s access to funds and the broader economic implications.

For information, please see below the current disparity between the official exchange rate and the parallel or black market rate: