Iraq to Cease Dollar Cash Withdrawals: A Bold Attempt to Curb Illicit Financial Activities
This substantial measure will attempt to quell the misuse of a substantial portion, approximately 50%, of the $10 billion that Iraq imports in cash from the New York Federal Reserve annually.
De-Dollarization: A Strategy Against Monetary Misuse
This is also a strategic move in the nation’s broader campaign to de-dollarize an economy where the U.S. dollar, rather than local notes, is the go-to currency for a populace wearied by recurring wars and crises since the 2003 U.S. invasion.
The policy, however, exempts dollar deposits made before the end of 2023, which can still be withdrawn as dollars in 2024. Deposits made in 2024, however, will only be accessible in local currency at the official rate, currently set at 1,320. In contrast, the parallel market rate for the Iraqi dinar is around 1,560, approximately 15% below the official rate.
Curtailing Misused Dollar Withdrawals
This dynamic policy decision does not plan to target all dollar transactions, as it would only affect those accounts receiving transfers from abroad. In previous efforts to regulate its dollar demand, Iraq established a platform to oversee wire transfers, a system that was notorious for fake receipts and fraudulent activities. These past transactions diverted dollars to Iran and Syria, both under U.S. sanctions. That system had since been nearly sealed off, directing dollars at the official rate to those involved in legal trade such as food imports and consumer goods.
Iraq’s Tricky Balancing Act: Washington’s Goodwill and Iran’s Interests
Caught in a balancing act between Washington’s goodwill and Iran’s interests, Iraq relies heavily on U.S. compliance to keep its oil revenues and finances uncensored. Simultaneously, the current government, backed by potent factions close to Iran, aims to placate Tehran, but also avoid upsetting local groups with vast interests in Iraq’s informal economy.
The Looming Dollar Shortage
Local banks have already begun curtailing dollar cash withdrawals in recent months, exacerbating a cash scarcity that has made the parallel market exchange rate on an upward trajectory. A multitude of reasons, including public unease over the financial system and dollar-denominated loans being repaid in dinars, have led to these measures and corresponding shortages.
Managing the Parallel Market Rate
With the impending rules, the Iraqi dinar could devalue further — a plausible side-effect of formalizing the financial system that the Central Bank of Iraq deems as tolerable. Striving to function optimally, the bank continues to provide dollars at the official rate for all legitimate purposes, showing little concern for the parallel market rate, which they portray as a hotbed for illicit transactions. To this effect, the central bank contends that the impending steps should reduce the parallel market exchange rate, suggesting there’s no indication it would reach 1,700.
Public Dissatisfaction Surfaces as Dollar Shortage Intensifies
Signs of public frustration are already showing as dollar shortages grow. Circulating social media postings show a Baghdad bank depositor threatening to burn down the building unless he receives his dollar deposit in cash — a scene eerily echoing the desperation demonstrated during Lebanon’s banking catastrophe.