In a move “aimed at confronting the liquidity crisis,”
This step comes in response to “growing challenges in traditional cash management”, amid a global trend towards financial digitization, but it raises many questions in the Iraqi street “Will this digital currency be the perfect solution to end the liquidity crisis? And how will it affect banking and the future of the economy?”
The Governor of the Central Bank, Ali Al-Alak, revealed earlier last week, the trend to create a digital banking currency, to replace banknotes.
Al-Alak said, in a speech during the ninth Finance and Banking Services Conference and Exhibition, that “the financial and banking system will witness fundamental transformations, including the decline of paper currencies to be replaced by digital payments to central banks,” noting that “the Central Bank is moving to create its own digital currency, to gradually replace the paper process as is done in some central banks in the world.”
The Iraqi government faces challenges in managing cash liquidity in dinars, as it suffers from a chronic shortage of this currency, which affects its ability to meet its financial obligations to pay employees’ salaries, pay debts and finance projects.
Currency benefits from a government perspective
In this regard, the Economic Advisor to the Prime Minister, Mazhar Mohamed Saleh, says that “the issuance of a national digital currency will represent a fundamental transformation in the financial system, as it will contribute to the development of the digital payments system and enhance financial transparency.”
Saleh pointed out during his speech to the “Al-Jabal” platform that “this step will lead to several essential benefits, including (reducing cash leakage from the economy and controlling financial flows, limiting the circulation of paper currency outside the banking system, which enhances financial inclusion, reducing the need to print money frequently, which reduces the operational costs of producing and distributing it, strengthening financial control through the possibility of tracking liquidity flows and spending trends, and improving control over capital and external transfers, which supports efforts to combat money laundering and terrorist financing.”
Saleh adds that “cryptocurrencies will enhance financial inclusion, especially for non-banked categories, which contributes to promoting economic and social integration,” explaining that “the successful transition to a digital monetary system requires an advanced technical infrastructure, including (strong and secure Internet networks, advanced cyber security systems to protect financial transactions, and enhancing community acceptance of digital currencies, starting from government institutions through their use in letion and official transactions.”
According to Saleh, Digital Cash will maintain its traditional functions as an account, payment and savings unit, while making it available for use via the Internet and smartphones, which contributes to building a more stable and efficient financial environment.
But on December 16, 2024, the Central Bank of Iraq announced that it would not be granted a license to companies trading stocks, metals and cryptocurrencies, stressing that it was proceeding with all legal measures against fictitious companies, amid warnings of the existence of fictitious companies for electronic trading in shares claiming to be licensed by the bank.
Benefits and benefits of digital currency
The world’s first digital currency was issued in 2009, Bitcoin, and came in response to the global financial crisis that initially paralyzed the American banking system and then moved to the global financial system, where the founder of the currency claimed that “this currency works away from central banks.”
Earlier this year, the American magazine “CEO world” said that “Iraq is one of ten countries in the world that ban the dealing of cryptocurrencies,” stressing that despite the global rise of cryptocurrencies, many countries continue to impose strict regulations or an outright ban, and while some governments cite financial stability and fraud prevention, other governments raise concerns about money laundering and economic control.
Ali Al-Friji, a specialist in finance, says that issuing a digital currency is an important step towards modernizing the financial system in Iraq economically and financially, as this step can contribute to enhancing financial inclusion and modernizing the payment system.
According to the International Monetary Fund, the digital currencies of central banks can enhance financial inclusion and payment efficiency in the Middle East, which may reduce transaction costs and increase the speed of remittances. However, it must be borne in mind that issuing a digital currency may not be the only solution to the crisis of cash scarcity resulting from wasteful uncontrolled or programmed spending.
According to Al-Freji, the potential benefits revolve around enhancing financial inclusion and improving the efficiency of the payments system, while the expected challenges go towards the unbalanced banking infrastructure, and cybersecurity because cryptocurrencies need advanced security systems to protect users, as well as financial awareness and education.
There are also many additional challenges expected, such as the public’s lack of confidence in the banking system, as the banking sector in Iraq suffers from a low level of trust among citizens, due to previous financial crises, delayed implementation of transactions, difficulty in withdrawing funds from some banks, and speaking to the Iraqi expert.
Al-Friji continued his speech by saying that “the United Nations Conference on Trade and Development (UNCTAD) pointed out that there are risks and challenges that must be taken into account before issuing a central bank digital currency, including improving access to digital infrastructure and addressing risks related to data privacy and financial safety,” adding that “a review of the figures of the Central Bank of Iraq showed that the volume of the issued monetary mass reached more than 102.6 trillion Iraqi dinars until the end of November 2023, while the volume of capital of banks operating in Iraq reached about 9.1 trillion Iraqi dinars at the end of 2023, which means that the percentage of funds deposited does not exceed 8.8% of the volume of the monetary mass Exported.”
Al-Fariji points out that “the monthly budget needs according to economic estimates, the Iraqi government need between 18 and 20 trillion dinars per month to cover budget expenses, with insufficient financial liquidity to meet this need,” adding that “these figures indicate that there are great challenges in providing the necessary cash liquidity to meet the needs of the budget and the financial system in Iraq.”
In 2018, the Kurdistan Regional Government’s Supreme Fatwa Authority issued a ruling against “One Coin”, which reinforced the country’s cautious attitude towards digital assets, but unofficial cryptocurrency trading continues in Iraq despite the restrictions imposed on it.
Issuing digital currency will not be accepted
The Iraqi government decided to change the exchange rate of the Iraqi dinar against the US dollar, in 2020, as the price was adjusted from 1182 dinars per dollar to 1,450 dinars per dollar.
This decision aroused widespread popular discontent, especially after the prices of food and all goods in the markets witnessed a significant rise, as this change in the federal budget approved by the Iraqi House of Representatives on March 31, 2021.
This step of the Central Bank on “electronic currencies” comes within the framework of keeping up with global developments in the financial system, as the state seeks to adopt digital currencies officially and systematically, similar to international currencies such as “Bitcoin”.
In this context, economic expert Abdel Adel Namel believes that “the digital currency, although it exists informally, will be more effective if applied within a legal framework and a tight financial system.”
“The Iraqi banking system is still in its early stages of development, especially after the adoption of salary localization and the expansion of the use of money transfers, ATMs and points of sale (POS),” Sofem said in a special interview with the mountain platform.
He talks softly about that “digital currency may be useful for some segments, but it will not enjoy wide vocacy and acceptance in Iraq at the moment, given the instability of the dollar exchange rate, and the critical economic conditions that the country is going through,” stressing that “it is not possible to completely replace the paper currency with digital currency in light of the current challenges.”
The Iraqi economist concluded his speech to the mountains by stressing “the need to strengthen the banking infrastructure before moving to this type of financial dealings.”
A few days ago, the banks of “Rafidain and Al-Rashid” warned against the use of electronic payment tools in the trading of “digital currencies and forex”, while stressing that the decision came in line with the directives of the Central Bank of Iraq, and called on customers to refrain from using electronic payment tools, including cards and electronic wallets.
https://aljeebal.com/posts/4055
