DINAR REVALUATION REPORT: Increased Demand for US Dollars in Iraq: 2024 Overview, 2 OCT

 Increased Demand for US Dollars in Iraq: 2024 Overview

In 2024, Iraq has experienced a significant surge in the demand for US dollars, influenced by regional geopolitical events and illicit trade activities. This heightened demand has implications for the country's economy and currency stability, as well as its role in the global financial system. 1  3

Geopolitical Impact: Lebanon's Escalating Conflict

The escalating conflict in Lebanon has driven individuals and groups with connections to Iraq to prepare for potential departure. Fearing Israeli military action that could target sites, figures, or factions within Iraq, these parties are increasing their demand for dollars to facilitate their exit from the country. 2 This trend is exacerbated by Iraq's status as a rentier economy, heavily dependent on oil exports and dollar revenues.

Any disruption to the broader economic framework could directly influence the value of the Iraqi dinar against the dollar, potentially driving up the cost of goods and services. 2

Parallel Market Dynamics: Illegal Imports and Currency Smuggling

Another factor contributing to the increased demand for dollars in Iraq is the rise in illegal imports, primarily from sanctioned countries such as Iran and Syria. 1 These imports, facilitated through direct transfers or currency smuggling, bypass the scrutiny of the US Federal Reserve and the US Treasury, creating a parallel market for dollars. As a result, the Iraqi dinar has faced fluctuations in its exchange rate against the dollar, with rates exceeding 150,000 IQD in the markets of Baghdad and Erbil.  2

Central Bank of Iraq's Response

To combat the illicit trade and stabilize the currency, the Central Bank of Iraq (CBI) has taken measures to limit the flow of hard currency, particularly US dollars. 3Starting January 1, 2024, cash withdrawals and transactions in US dollars were prohibited, and internal trade and transactions were restricted to the Iraqi Dinar. Foreign trade, however, could be settled in other currencies like the Euro, Emirati Dirham, Turkish Lira, and Indian Rupee. 5

Impact on Iraq's Economy

These measures have had mixed outcomes. On one hand, the CBI's move to regulate wire transfers through an electronic platform for internal and external transactions has helped in reducing the misuse of hard currency reserves and curbing financial crimes. 1 On the other hand, the restrictions have led to a drop in the value of the Iraqi dinar, impacting the economy and causing public discontent. 3

Conclusion

The increased demand for US dollars in Iraq during 2024, driven by Lebanon's escalating conflict and illicit trade activities, has posed challenges for the country's economy. The Central Bank of Iraq's measures to regulate the flow of hard currency have led to both positive developments in financial oversight and negative consequences for currency stability and public sentiment. Understanding the dynamics of these factors and their impact on the Iraqi dinar is crucial for stakeholders involved in the region's economic activities.