Iraq’s Central Bank Limits Dollar Provision to Local Banks: Economic Implications and Repercussions, 5 OCT

 Iraq’s Central Bank Limits Dollar Provision to Local Banks: Economic Implications and Repercussions, 5 OCT

Banking Shift: Iraq Limits Dollar Access

The Central Bank of Iraq (CBI) has made a notable shift in its policy, officially confirming a decision to limit the provision of cash dollars to local banks. This change is set to become effective from January 1, 2024, as part of an effort to curb financial crimes and the evasion of U.S. sanctions on Iran, according to Mazen Ahmed, director-general of investment and remittances at the CBI.

Each year, Iraq imports $10 billion in cash from the New York Federal Reserve. However, it’s estimated that around 50% of this hard currency reserve has been misused, leading the CBI to take decisive action. This move also aligns with a broader push to de-dollarize an economy that has increasingly favored the U.S. dollar over local notes, due to recurrent wars and crises that have plagued the country since the 2003 U.S. invasion.

Implications for Banks and Individuals

While this policy change is expected to help curtail illicit activities, it also has significant implications for local banks, businesses, and individuals who rely heavily on these banks. Individuals who deposit dollars into banks before the end of 2023 will still be able to withdraw funds in dollars in 2024. However, dollars deposited in 2024 can only be withdrawn in local currency at the official rate of 1,320. This change could potentially impact the liquidity of the banks, their ability to conduct transactions, and the overall financial stability in the country.

Moreover, the parallel market rate of the Iraqi dinar sat at 1,560 on Thursday, roughly 15% percent below the official rate. This discrepancy could cause significant financial strain for individuals and businesses, particularly those that rely heavily on U.S. dollars for their transactions.

International Impact and Responses

This policy change is also likely to attract the attention of international entities dealing with these banks. The United States Treasury and Federal Reserve Bank of New York, for instance, have already banned 14 Iraqi banks from conducting US dollar transactions due to concerns that US currency could be redirected to sanctioned individuals and possibly benefit Iran. This restriction is part of an attempt to stem the flow of United States currency to Iran and other sanctioned jurisdictions, demonstrating increased scrutiny of Iraq’s financial practices.

Looking Ahead: The Future of Iraq’s Economy

The exact future implications of this policy change are uncertain. However, it’s clear that it could significantly alter the economic landscape in Iraq, potentially affecting everything from the day-to-day transactions of individuals to the international financial relations of the country. As the country navigates this change, the focus will likely remain on maintaining financial stability, curbing illicit activities, and managing the delicate balance of international relations.