BAGHDAD (Agencies): Iraq is set to prohibit cash withdrawals and transactions in US dollars starting from January 1, 2024. The move is aimed at curbing the misuse of its hard currency reserves for financial crimes and circumventing US sanctions on Iran.
Around 50% of the $10 billion that Iraq imports in cash from the New York Federal Reserve each year has been illicitly used, according to Mazen Ahmed, Director-General of Investment and Remittances at the Iraqi Central Bank (CBI).
The decision is also part of a broader effort to reduce reliance on the US dollar in Iraq’s economy, where the greenback has been preferred over local currency due to a history of wars and crises. People 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 will only be available for withdrawal in the local currency at the official rate.
The parallel market rate for the Iraqi dinar currently sits at 1,560, approximately 15% lower than the official rate.
A statement from the Central Bank clarified that the ban on cash dollar withdrawals would only apply to accounts receiving transfers from abroad. Iraq has already established a platform to regulate wire transfers, which constitute the bulk of its dollar demand, and has been prone to fraudulent activities and fake receipts that channeled dollars to Iran and Syria, both under US sanctions.
This system, set up in coordination with US authorities, has significantly improved the flow of dollars for legitimate trade, such as food and consumer goods imports.
Despite these efforts, cash withdrawals have continued to be misused, including by individuals seeking to exploit the system, such as travelers granted a state quota of $3,000. Iraq relies on favorable relations with the United States to ensure uninterrupted oil revenues and financial stability, but it also maintains close ties with Iran, which wields significant influence in the country.
Many local banks in Iraq have already restricted dollar cash withdrawals in recent months, contributing to a shortage that has driven up the parallel market exchange rate.
The CBI has also limited its supply of dollars as part of an agreement with the US Federal Reserve to reduce cash usage and promote electronic payments. While the new measures are expected to result in a further devaluation of the dinar, the CBI sees this as an acceptable consequence of formalizing the financial system.
The Central Bank will continue to provide dollars at the official rate for all legitimate purposes. The goal is to ensure that transparent and legal financial operations are conducted at the official rate while curbing illegitimate transactions carried out at the parallel market rate.
Iraq’s Central Bank anticipates that these steps will reduce the parallel market exchange rate, and there are no indications that it will reach 1,700, a rate used mainly for illegitimate transactions.
However, there have been signs of frustration with dollar shortages, with reports of depositors at Iraqi banks expressing discontent over their inability to access their funds in cash dollars.
The move is part of Iraq’s efforts to better manage its hard currency reserves, improve financial transparency, and reduce misuse of funds, particularly in the context of international sanctions.
As the implementation date approaches, there may be further developments in Iraq’s financial policies and regulations to support the transition away from cash dollar transactions.