Fluctuations in the foreign exchange rate of the Iraqi dinar: the challenge of monetary and fiscal policies

I'm an image! 2023 / 20 / Jan

Fluctuations in the foreign exchange rate of the Iraqi dinar: the challenge of monetary and fiscal policies

Dr.  Kamel Allawi Kazem

The value base or value standard is defined as the basic unit that the country adopts in measuring economic values, and financial obligations are fulfilled with it, as well as a comparison between commodity values, as it is the main unit of account in the country's monetary system, and the value standard is set by the state. In general, there are two types of rules: Metal bases and paper bases . The value base forms the axis of the monetary base, which is the basis on which the monetary system is based. The success of the monetary system depends on achieving economic growth and providing an adequate money supply that facilitates the process of commercial exchange.

Money performs the function of "medium of exchange" in the national economy, but the problem is in the payments that take place between the national economy and international economies, as the difference is represented in the unity of the national monetary system and its plurality in other economies, and this is what appears in what is known as the foreign exchange rate policy . The foreign exchange rate is defined as the currency of a country valued in another currency , and the most common concept is “the number of local currency units that are exchanged for one unit of foreign exchange” . Thus, the exchange rate is the basic link between the local economy and the global economies, and it is part of monetary policy and works to raise its efficiency through price stability and optimal allocation of resources. Modern monetary history indicates that the exchange systems, which are meant by the rules that determine the intervention of the monetary authority in the foreign exchange market and then influence the behavior of the exchange rate, have swung between fixation and free floating. In Iraq, the Central Bank of Iraq Law No. 56 of 2004 did not specify the exchange system, but in Article 16 it specified the obligations of the Central Bank in implementing its objectives stipulated in Article / 3 of the aforementioned law, as it came in paragraph (b) of it “formulating policies that would achieve The main objectives of monetary policy, including the exchange rate policy, however, the Council does not have the authority to join a fixed exchange rate system such as a monetary union or a currency council. We conclude from this article that the exchange system in Iraq is floating, and it was not specified whether it is free-floating or managed. However, the behavior of the central bank made the exchange system in Iraq a floating managed exchange system, and the central bank intervenes to defend the foreign exchange rate of the Iraqi dinar in times of crisis. The Central Bank used the exchange rate as a “nominal anchor” to control the high inflation rates after 2003, when they reached 53.1 percent in 2006 , and the bank succeeded in that until inflation became negative in some years (-0.8) percent in 2014, and this is attributed to Success to the exchange rate policy that succeeded in strengthening the Iraqi dinar, i.e. reducing the foreign exchange rate from 1453 dinars / dollars in 2004 to 1190 dinars / dollars in 2019, to rise to 1470 dinars / dollars in December 2020, but stabilizing the exchange rate and defense It led to the emergence of the parallel market, which reached 110 points on January 12, 2023. Table (1) shows the nominal and parallel exchange rate and the difference between them. The foreign exchange rate and the currency sale window: The Central Bank of Iraq was not able to control inflation using its traditional tools, so it introduced one of the indirect tools on October 4, 2003, namely (the foreign currency auction), which was renamed to the (currency sale window). ) to control inflation through the exchange rate because the source of inflation is mostly external, in addition to that because with this tool he succeeded in controlling the foreign exchange rate against the Iraqi dinar . The main objective of the currency sale window was to finance the activity of the private commercial sector, by providing foreign currency at the official rate according to a mechanism set by the official bank ranging from cash sales and remittances, in addition to providing other public requirements such as receipts, treatment, travel, and others. The Central Bank continued to defend the nominal exchange rate through its reserves, but the crisis that afflicted the Iraqi economy, represented by the collapse of oil prices in 2020, gave the government an incentive to pressure the Central Bank to adjust the exchange rate to finance part of the deficit in the general budget, and it succeeded in doing so. As the exchange rate was adjusted from 1190 dinars / dollars to 1450 dinars / dollars on December 19, 2020, and the market did not understand the change in the exchange rate, as the parallel exchange rate was lower than the official exchange rate, and the political factor played an important role in this. However, this difference quickly disappeared after the approval of the general budget, as the difference widened again, and the situation worsened since the last month of 2022, and the difference between the nominal price and the parallel exchange rate reached 110 points on December 12, 2023.

The current crisis: Insufficient procedures: The Central Bank of Iraq uses a mechanism called N2-20 in the process of transferring and transferring funds. It is a traditional mechanism that allows operations to be conducted without supervision and follow-up from the merchant to the final beneficiary, in addition to being a mechanism that can be exploited in money laundering and other suspicious operations. This prompted the US Federal Bank to inform the Central Bank of Iraq of adopting a new mechanism called N2-20-C0, which is an electronic system in response to the global transfer requirements of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), as it starts from filling out the form by the bank with detailed information about the transaction. The cash transfer is supported by the required documents, including the name of the merchant, the intermediary bank, the correspondent bank, and the destination to which the cash transfer is sent. It also includes detailed information about the goods, their type, and the shipping mechanism from the port of shipment to the port of destination. In this way, the dollar can be tracked from the transfer request process to the entry of the goods, and this guarantee Reducing smuggling and money laundering. The US Federal Bank informed the Central Bank of Iraq that there is a violation of the sanctions imposed on some countries, especially the Islamic Republic of Iran, Russia and Syria, and that there are smuggling and money laundering operations, so it was decided to adhere to the new electronic transfer system (SWIFT) as of January 2, 2023, this The platform was not able Iraqi banks to respond to their requirements, which led to the rejection of many transfer requests for lack of complete information, and this generated pressure on the free dollar, which contributed to raising the foreign exchange rate against the dinar, and on the other hand, the US Treasury imposed sanctions on four major banks ( Al-Ansari, the Middle East, the holding and Asia) , which account for about 40-45 percent of window sales . The control of currency selling operations led to the reluctance of merchants to adopt remittances for fear of tax accountability, because the electronic platform provides detailed information on taxable commercial operations, and this prompted merchants to smuggle operations to finance their trade, and in this regard some argue that smuggling operations will relieve pressure on the cash dollar because Buying and selling operations will take place outside the electronic platform, and this opinion raises the suspicion that smuggling operations may not be to financing trade, but may be to money laundering operations. The exclusion of banks and mediation companies, as well as the four banks, from the operations of the currency sale window. Led to resort to buy Dollars from the market and transferred to the trading countries with it, especially Turkey and Iran, and through the region’s outlets that are not controlled by the federal government.

The operations of the currency sale window were marred by many suspicions of corruption and money laundering, as the extreme fluctuations in cash sales coincided with the fraud that took place in withdrawing tax secretariats amounting to (2.5) billion dollars. The US sanctions on the four Iraqi banks have affected the sales of the currency selling window, as shown in the following table, and that the problem lies in the fact that strengthening balances abroad has decreased from $185 million on 10/5/2022 to $24 million on 1/16/2023, i.e. With a decrease of 87 percent for the aforementioned total period, while cash sales increased from $49.7 million to $54.5 million for the same period, with an increase of 9.7 percent, noting that the Central Bank covers all trade financing requests made by the private commercial sector. This indicates that the problem is in remittances, not in cash sales. The US measures were not limited to sanctions against the four banks and obliging the central bank to work with the new (SWIFT) system, but rather went beyond the transfer of Iraqi revenues from the US side to Iraq. Transferring funds on a daily basis, according to the Iraqi government’s request, from the US Federal Reserve to the Central Bank of Iraq, which is estimated at about 260 million dollars per day. Due to the US measures, it decreased to 30 million dollars per day . With the extension of the verification period to two weeks after requests were met daily. This led to a scarcity of the dollar and generated pressure on the foreign exchange rate of the Iraqi dinar against the dollar.

Exchange rate crisis: monetary policy measures:

The sharp fluctuations in the foreign exchange rate of the Iraqi dinar led the Central Bank of Iraq to take a set of measures, the most important of which are:

1- The Central Bank informed all ministries and entities not associated with a ministry that it meets all requests for financing obligations, transactions and contracts with abroad in foreign currency and at the official rate .

2- Facilitating the financing of private sector trade through Iraqi banks and meeting the demand for foreign transfers by strengthening the balances of banks with their correspondents in other currencies in addition to the US dollar (Chinese yuan, the euro, the Emirati dirham, the Jordanian dinar, and others).

3- Facilitating external transfer procedures for merchants through the electronic platform by approving the commercial list only for transfer, and then the merchant can submit shipping documents for imported goods during the subsequent transfer period.

4- Expanding the number of foreign currency sales outlets from 20 banks to include all banks included and wishing to do so, to enhance the stability of the currency price in the local markets, and to set a maximum limit of (5000) US dollars for travelers .

5- Determining two working days for executing the transfer requests after it was five working days from the date of submitting the transfer request.

6- Allowing the banks participating in the foreign currency buying and selling window to purchase any amounts in foreign currency and deposit them with this bank in accounts used for external transfer purposes, and to pay interest / returns on those balances according to what this bank decides.

7- Reducing the selling price of the dollar to the beneficiary (the card holder) that he uses while traveling or paying his purchases via the Internet, to be at (1465) dinars to the dollar instead of (1470) dinars to the dollar. The dollar will be sold to electronic payment companies for the above purpose at a price of (1455) dinars to the dollar instead of (1460) dinars to the dollar.

8- Canceling the mechanism of strengthening bank accounts abroad, according to the previously approved classification .

9- Increasing weekly cash sales to exchange companies and banks

10- Reducing the selling price of the dollar allocated for the purposes of documentary credits to (1465) dinars per dollar and (1470) dinars per dollar for transfers to finance the requirements of foreign trade.

11- Not collecting customs duties and tax secretariat amounts in advance, and reducing extra loops to ease procedures and remove costs resulting from prior demarcation problems.

Exchange rate crisis: government measures:

And according to Central Bank Law No. 56 of 2004, Article 24 of it allows the central bank to hold regular periodic meetings with the government to exchange information and opinions about the possibility of coordination of financial and monetary policies, so the governor of the central bank held a meeting with the head of the Iraqi government to study the rise in the exchange rate, as well The Council of Ministers has taken several decisions to contribute to solving the problem of the high exchange rate, namely:

1- Oblige all government agencies to sell all goods and services inside Iraq in dinars and at the Central Bank rate of (1470) dinars to one dollar.

2- What was stated in paragraph (1) above includes sales of goods and services from the private sector, especially the offices of national and foreign airlines, commercial agencies, telecommunications and Internet companies, and sales of investment residential complexes, and it is emphasized that the prices of goods and services are in Iraqi dinars on the price of the Central Bank.

3- The Central Bank sells dollars to the parties mentioned in Paragraph (2) at the price set by the Central Bank at a price of (1460) dinars per dollar for remittances, and (1455) dinars per dollar to cover documentary credits, after undertaking to sell in Iraqi dinars, and this is announced on the official websites of the concerned authorities. on sales outlets.

4- The Central Bank of Iraq issues an easy mechanism, and within one week from the date of the decision, through which the private sector mentioned in paragraphs (2 and 3) above can obtain dollars at the official rate, and the bank also secures private sector transfers outside Iraq and at the official rate to cover their external obligations.


The management of the exchange rate is the responsibility of the Central Bank, and thus it is responsible for setting policies to ensure that the exchange rate plays its role in achieving stability and growth, and this does not mean that other policies, especially fiscal policy, are isolated from confrontational measures, and the current exchange rate fluctuations have cast a shadow over the Iraqi economy. And on society, it has led to a significant rise in inflation rates, and this portends unacceptable social effects, in addition to that it will lead to an increase in societal inequality, so that those who own foreign currency and foreign assets will be richer than those who do not. It may lead to an increase in poverty rates, and this requires exceptional measures by the monetary authority and the executive authority:

1. Accelerating the distribution of complete items for the ration card and activating consumer associations and cooperative unions.

2. Accelerate the application of the requirements of the electronic platform and fulfill its requirements.

3. Emphasis on preventing money smuggling operations to neighboring countries covered by US sanctions.

4. Coordinating with the US Federal Bank on increasing the dollar payments required by the Iraqi market due to the large gap estimated at $100 million.

5. Some argue that allowing Iraq to pay Iran's dues in Iraqi dinars has led to the Iranian side owning a large amount of dinars that could be used in the dollar smuggling process.

6. The main dilemma remains that the Iraqi economy is a rentier economy, dependent on the dollar in its international dealings, and thus any action taken by the US Federal Reserve affects the state of the Iraqi market, and in order to limit the effects of this dependence, it requires diversification of the Iraqi economy.

7. The Central Bank of Iraq deposits its money in central banks other than the US Federal Reserve and in other currencies, and that the bank expands the management of its reserves accounts because maintaining a single source carries disadvantages that the Iraqi economy cannot bear.

8. Reorganizing private banks, even if by force, to establish distinguished relations with international banks, in addition to the government's adoption of a program to develop merchants' skills and raise their efficiency.