Iraq is set to implement a significant policy change by banning cash withdrawals and transactions in U.S. dollars starting January 1, 2024.
According to Mazen Ahmed, the director-general of investment and remittances at the Central Bank of Iraq (CBI), the new policy will curb the misuse of approximately 50 percent of the $10 billion in cash Iraq imports annually from the New York Federal Reserve.
It is also part of a broader effort to "de-dollarize" the Iraqi economy, a preference that emerged as the population grew distrusting of local currency after the 2003 U.S. invasion and subsequent crises.
Dollar deposits made before the year's end can still be withdrawn in 2024. However, deposits made in 2024 will only be available in the local currency at the official rate of 1,320. The cash dollar withdrawal ban will also affect accounts receiving foreign transfers.
"You want to transfer? Transfer. You want a card in dollars? Here you go, you can use the card inside Iraq at the official rate, or if you want to withdraw cash, you can at the official rate in dinars," Ahmed said, as quoted by Reuters.
In addition to restricting dollar use, the CBI also plans to allow foreign trade to be settled in other currencies, such as the euro, Emirati dirham, Turkish lira and Indian rupee.
In collaboration with U.S. authorities, Iraq has established a platform to regulate wire transfers that make up the majority of its dollar demand. It ensures access to Iraq's $120 billion in reserves from oil sales at the official rate for legitimate trade, such as importing food and consumer goods.
This system is closely monitored to prevent fraudulent transactions and dollar diversion to sanctioned countries like Iran and Syria.
Analysts say Iraq is caught in a delicate balancing act between its reliance on the U.S. and a close tie with Tehran. Iraq needs the U.S. to keep its oil revenues and finances flowing. On the other hand, it must maintain good relations with Iran and its allies within Iraq to avoid instability.
Dollar shortage in Iraq
According to reports, many local banks in Iraq have been restricting dollar cash withdrawals for months. This has contributed to a shortage of dollars and driven up the exchange rate on the black market.
A combination of factors has led to the dollar shortage in the nation, say analysts. The uneasiness over the country's financial system causes people to withdraw in dollars. Then, many banks provide dollar-denominated loans but get paid back in dinar.
The third factor is the CBI limiting its dollar supply as part of an agreement with the Fed to shift toward e-payment.
There is a risk of the Iraqi dinar devaluing further as these new measures are implemented, but the central bank argues that the action is necessary to formalize the financial system and combat illegal transactions.
According to Ahmed, as long as transparent and legal financial operations occur at the official exchange rate, the black market rate is less important.
"We don't have a problem with the (parallel) exchange rate hitting 1,700. If they tell me the rate is 1,700, I tell them: 'you want to import from Iran. You want to smuggle. You have corrupt money that you want to get out,'" he said.