Baghdad — For months, the United States has restricted access to Iraq’s own dollars, trying to eliminate what Iraqi officials describe as rampant money laundering that benefits Iran and Syria. Iraq is now experiencing a crisis, with its currency falling in value and public anger at the prime minister returning.
The exchange rate for the Iraqi dinar has risen to around 1,750 to the dollar compared to the official rate of 1,460 dinars to the dollar at street exchanges in some parts of the country.
In Baghdad, exchange houses were closed on Thursday, while the Kurdistan Regional Government banned exchange companies in Sulaimaniyah from making transfers.
Mustafa al-Qarawi, a member of the parliamentary budget committee, told the state news agency that the central bank “must meet the requirements of the Federal Reserve to reduce the shortage of hard currency in the country.” He said the new domestic. Policies will be drawn up to improve access to the currency, while a delegation of Iraqi officials will travel to the US for talks next Friday.
There have already been protests against the devaluation. If it continues, analysts say the government’s mandate, established in October after a year-long political deadlock, could be challenged.
The dinar’s decline comes even as Iraq’s foreign currency reserves hit a peak of nearly $100 billion, boosted by rising global oil prices that have brought rising revenues to the petroleum-rich nation.
But accessing that money is a different story.
Since the US invasion of Iraq in 2003, Iraq’s foreign currency reserves have been held at the United States Federal Reserve, giving the Americans significant control over Iraq’s supply of dollars. The Central Bank of Iraq requests dollars from the Fed and sells them to commercial banks and exchange houses at the official exchange rate through a mechanism called a “dollar auction”.
In the past, daily sales through auctions often exceeded $200 million per day.
Directly, most of the dollars sold at the auction go toward Iraqi companies’ purchases of imported goods, but the system has long been porous and easily abused, multiple Iraqi banking and political officials told The Associated Press.
US officials confirmed to the AP that the system is suspected of being used for money laundering, but declined to comment in detail on the allegations or the new restrictions.
Over the years, large sums of dollars have been transferred out of the country to Turkey, the United Arab Emirates, Jordan and Lebanon through “gray market trading, using fake invoices for overpriced goods,” the Iraqi prime minister’s economic adviser said. on condition of anonymity because he is not authorized to discuss the matter publicly.
The inflated invoices were used to launder dollars, most of which were sent to Iran and Syria, which are under US sanctions, prompting complaints from American officials.
In other cases, the currency is smuggled across land borders under the protection of cash-mining armed groups, said Tamkeen Abd Sarhan al-Hasnawi, chairman of the board of Mosul Bank and first deputy of the League of Private Banks of Iraq. He estimated that 80% of the dollars sold through the auction went to neighboring countries.
“Syria, Turkey and Iran benefited from the dollar auction in Iraq,” he said.
A member of Iraq’s Iran-backed militia, who spoke on condition of anonymity because he was not authorized to speak publicly on the matter, said most of Iraqi banks are indirectly owned by politicians and political parties that also use dollar auctions. for their benefit.
Late last year, the Fed began imposing stricter measures.
Among other steps, at the request of the US, the Central Bank of Iraq began using an electronic system for transfers that required the entry of detailed information on the intended end recipient of the requested dollars. The Prime Minister’s Economic Adviser said the Fed had trained 100 central bank employees to implement the new system.
“The system has started rejecting transfers and invoices approved by the central bank,” he said. “About 80% of transactions are rejected.”
The daily amount of dollars sold at auction fell to $69.6 million on Jan. 31, from $257.8 million six months ago, according to central bank records. Even fewer dollars are going toward imports, down from 90% to about 34%.
Hasnavi said that even when transactions are approved, banks take up to 15 days to get funds, rather than two or three days.
Unable to get dollars at the official price through the banks, traders turned to the black market to buy dollars and the price increased, he said.
In November, the Central Bank of Iraq added four new banks to its list of those banned from dealing in dollars. Two US officials have confirmed that the Fed has requested to block four banks because of suspected money laundering. They spoke on condition of anonymity because they were not authorized to comment on the case.
A spokeswoman for the New York Fed declined to discuss specific actions taken regarding Iraq. But the Fed said in a statement that it maintains a “robust compliance regime” for the accounts it holds. The policy “evolves over time in response to new information that we collect in the normal course of monitoring transactions and events affecting the account and in communication with other relevant US government agencies,” the statement said.
After the US-led invasion toppled Iraq’s Saddam Hussein in 2003, the system of keeping Iraq’s oil revenues with the Fed was originally imposed by UN Security Council resolutions. Later, Iraq chose to maintain the system to protect its revenues from potential lawsuits, particularly in relation to Iraq’s 1990s invasion of Kuwait.
The new US sanctions come at a time of heightened tensions between the US and Iran. Negotiations on the nuclear deal are coming to an end. Washington has imposed new sanctions and condemned Iran for cracking down on protesters and providing drones for Russia in Ukraine.
Also, in Iraq, allegations came to light in October that a network of businesses and officials from the country’s tax authority had misappropriated more than $2.5 billion in Iraqi government revenue.
Harith Hassan, head of the Iraq unit at the Emirates Research Center in Abu Dhabi, said the case “brought (US) attention to the level of corruption in Iraq” and how corruption can benefit Iran and other parties opposed to the US. based think tank.
The new Iraqi prime minister, Mohammad Shia al-Sudani, who was brought to power by a coalition of Iran-backed parties, lacks a strong relationship with the US that could soften the implementation of new economic measures, Hassan said.
Al-Sudani dismissed the current devaluation as a “temporary issue related to trade and speculation”. He replaced the governor of the central bank and initiated measures aimed at ensuring the supply of dollars at the official rate.
Al-Hasnawi said the government’s recent measures will not stop the financial bleeding. If the current situation continues, he said, “within a year, many banks will go bankrupt” and mass civil unrest is likely.
“This US pressure affects the Iraqi street in a clear way and we have not seen clear solutions until now,” he said.
AP staff reporters Samya Kullab in Baghdad and Christopher Rugaber in Washington contributed to this report. Sewell reported from Beirut.