BAGHDAD, Iraq – One year ago, the US decided to limit access to its own currency within Iraq in an attempt to stem the flow of dollars into neighboring Syria and Iran.

The Iraqi dinar has since then suffered repeated bouts of volatility. The government under Prime Minister Mohammed Shia al-Sudani - sworn in shortly before in October 2022 after a yearlong political stalemate - has brought in a number of measures to try to strengthen the Iraqi economy and wean it off its dependence on the US dollar.

The decision that all salaries should be paid in Iraqi dinars from the beginning of 2023 has however sparked a headache for many throughout the country, who say as a result they will have access to a much lower amount of money to provide for their needs.

The official rate of the Iraqi dinar to the United States Dollar (USD) used by the Central Bank of Iraq (CBI) is 1,320. This is the rate also used by money transfer companies and commercial banks throughout the country. 

However, on the country’s longstanding parallel market, USD sold for a much higher rate of 1,670 as of early November 2023. 

The government’s move will also force foreign and local institutions to sell real estate and vehicles in dinars instead of dollars in the hope of reducing the “dollarization” of the economy, a decision many have railed against. 

Amid the government’s crackdown on the illicit trade in dollars, the Federal Intelligence and Investigation Agency issued a statement on November 9 that over $800,000 had been “seized, which were in the possession of smuggling gangs and speculators in the price of the dollar through a network between Baghdad and a number of other provinces”.

of involvement had been arrested and provided a toll-free hotline for “honorable citizens to report all outlaws throughout Iraq”.  

Local employees of foreign companies not exempt 

“Before the crisis, we would have accepted” the decision to receive their wages in local currency, an employee of a foreign oil company in Iraq’s southern Basra province opined to The New Region in early November.

The man - who asked that only his first name, Ahmed, be used – noted that, “today the dollar exchange rate is however witnessing a huge difference between the official and the parallel markets.”

“Most employees refuse to receive their salaries in dinars,” he said, expressing concern about what will happen when the decision comes into force. 

A number of correspondents working for foreign television channels in Iraq have also submitted requests to the Iraqi government to be granted an exemption from the decision to receive their salaries in Iraqi dinars at the official exchange rate. However, only employees of foreign diplomatic missions and the United Nations have thus far been granted the possibility to receive their salaries in USD.

Banks and bans 

Since the U.S. invasion of Iraq 20 years ago, the US’s Federal Reserve Bank has provided at least 10 billion USD in cash every year to Baghdad via cargo flights. The money is from Iraqi oil sales proceeds deposited at the Federal Reserve. 

The US Federal Reserve Bank has since 2003 housed Iraq’s foreign currency reserves. The US has thus retained key control over how many dollars Iraq has at its disposal. The CBI requests dollars from the Federal Reserve and then in turn sells them to other banks and exchange companies through a “dollar auction”.

This “dollar auction” has over the years gained a reputation for its alleged use in money laundering.

It is also common for Iraqi traders to obtain USD at the official rate but then price their goods at the parallel rate, resulting in significantly higher profit margins. 

Iraqi officials told The New Region that the Iraqi government must abide by the restrictions placed on the USD to prevent isolation of the Iraqi economy and consequent serious repercussions on Iraqi citizens. 

In July, the US banned 14 Iraqi banks from conducting dollar transactions. As of early November, sources in Baghdad said that a total of 21 Iraqi banks had been barred from doing so as part of attempts to crack down on smuggling the currency to Iran.

Repercussions at the national level

Local residents of the Iraqi capital say it has become very difficult to get dollars. Some government services have in recent years required payment in USD, such as visas and residency permits for foreigners, and until recently many businesses would prefer to be paid in USD rather than dinars. 

The real estate market meanwhile seems to be experiencing a recession due to the instability of the dollar exchange rate, those working in the sector say. 

One director of a company involved in renting out properties, Rahim Ali, told The New Region that prices in the sector had begun to drop and noted that lowering prices may “affect quality”. 

He also claimed that the real estate market is the sector favored by those seeking to launder money and embezzle public funds. 

There are currently no reliable statistics available on repercussions of the instability of the dollar exchange rate in Iraq. However, many Iraqis have complained of losing their jobs due to a reduction in operations or complete closure of businesses.  

CBI officials past and present weigh in

An economic expert and former CBI director-general of financial operations and administration, Mahmoud Dagher, told The New Region in early November that the Iraqi economy had entered a recession due to the gap between the official and unofficial price of the dollar. 

He claimed the rise in the unofficial rate for dollars was due to rising demand for its use in funding illicit trades such as drugs as well as imports from “unknown” companies and from “prohibited” countries. 

He expressed doubts over whether it would be possible to eliminate the parallel market due to what he said were “border crossings not controlled by the state”. 

Dagher added that businessmen price their goods at parallel market prices despite importing at the official rate. He claimed that this had resulted in stagnation in the economy and contributed to layoffs.

CBI governor Ali Mohsen Al-Alaq told The New Region that, “The Central Bank is currently working to meet requests for dollars from banks but on the condition that they comply with international standards in combating money laundering and terrorist financing.” 

He stressed that “the Central Bank of Iraq possesses foreign currency reserves capable of covering the demand” and that “the pressure on the dollar exchange rate comes from people who do not import goods legally”.

Alaq added: “The Central Bank does not currently place restrictions on banks in obtaining dollars, unlike previously when there were classifications of banks on the basis of which quotas were determined. However, now all of these have been removed and we cover the demand for all banks.”

The statistics and research department of the CBI noted on Nov. 9 that inflation in the country had dropped from 4.4% in August 2022 to 3.7% in August 2023. It said that this was within “acceptable limits”, especially as compared to some other countries in the region such as Iran, where it noted the inflation rate currently stands at 46%.