Professor Frank Gunter of Lehigh University provided an explanation of the causes and consequences of Iraq’s dual exchange rate during a recent webinar that was hosted by the Iraq Britain Business Council (IBBC).
Iraq has two exchange rates for three reasons:
Excessive International Demand for US Dollars:
Countries like Iran and Syria, where the local currencies have significantly devalued, have a high demand for US dollars. These nations’ entities are desperate for dollars, which are widely accepted and difficult to trace.
There are a number of factors that contribute to the worldwide excessive demand for US dollars:
Currency Devaluation in Countries Nearby:
Sanctions imposed by the United States and other nations have reduced the value of the Iranian rial by 75%.
The Syrian pound has lost the vast majority of its worth fundamentally because of the continuous nationwide conflict.
These critical debasements have driven elements in Iran and Syria to look for additional steady monetary standards like the US dollar.
Preference for Real Money:
Compared to electronic funds transfers (EFTs), there is a particular demand for physical US dollars, also known as paper currency. Actual dollars are favored on the grounds that they are acknowledged all over the place and are difficult to follow, making them more attractive for exchanges that might have to stay away from examination.
In Iraq, a Cheaper Source of Money:
Iran and Syria find it easier to obtain dollars from Iraq because of these devaluations and economic instability. When compared to other regions, the Iraqi market requires fewer actual resources and provides a cheaper source of dollars.
These variables all in all spur a critical worldwide interest for US dollars, which thus influences Iraq’s conversion scale elements by pressing its cash framework and adding to the presence of double trade rates.
Demand for Dollars Within:
Inside Iraq, the dollar has overwhelmed the dinar both as a vehicle of trade and as a store of significant worth. Even though recent regulatory changes have diminished this dominance, there is still a strong demand for dollars.
The inside interest for dollars in Iraq is driven by a few key variables featured in the text:
Dollar’s dominant position:
As a currency and a store of value, the Iraqi dinar has historically been dominated by the US dollar. This strength implies that individuals like to utilize and hold dollars over the nearby money, adding to the interior interest for dollars.
Changes to regulations:
Demand is still strong, despite recent regulatory changes designed to lessen the dollar’s dominance. These progressions have not been adequate to essentially move the inclination from dollars to dinars.
Monetary Practices:
The economy of Iraq is still largely based on cash. The extensive use of cash is evidenced by the Central Bank of Iraq’s estimate that there are 90 trillion dinars outside of financial intermediaries. The preference for a stable currency like the dollar is further emphasized by the reliance on cash.
Problems with the banking system:
Iraq’s banking system is not fully developed. Major banks like Rafidain and Rasheed face difficulties because the state-owned banks are not focused on the private sector. Additionally, Iraq is severely underbanked; for every 100,000 Iraqis, there are only four bank branches and five ATMs, compared to the average of 14 branches and 37 ATMs in the Middle East and Northern Africa.
The preference for holding dollars is influenced by the absence of a universal core banking system, which makes it challenging to withdraw funds from a branch other than the one where the deposit was made.
Weakness of Stores:
The demand for dollars has increased as a result of the perception that deposits have become less secure. For instance, the fact that people will no longer be able to withdraw dollars beginning on January 1, 2024, has probably made people more concerned about the safety and accessibility of their funds, leading them to prefer to hold dollars.
Iraq’s efforts to manage the exchange rate and stabilize the economy are made more difficult by the strong internal demand for dollars created by all of these factors.
The New York Fed’s Efforts to De-Dollarize:
To cut down on the flow of dollars to Iran and Syria, the New York Federal Reserve has restricted the transfer of dollars. They have additionally avoided north of two dozen Iraqi banks from exchanges, which has expanded the intricacy and interest for dollars in Iraq.
The New York Federal Reserve (New York Fed) is working on de-dollarization as part of a larger strategy to control the flow of US dollars, especially to sanctions-hit nations like Iran and Syria. Here are the central issues from the text:
Transfers of dollars are restricted:
The New York Fed has imposed restrictions on the physical transfer of dollars to Iraq. Previously, Iraq could receive both electronic and paper dollars via electronic funds transfer (EFT). The New York Fed currently restricts the shipment of actual paper dollars while primarily allowing only electronic transfers.
Absence of Iraqi Banks:
The Iraqi banks have been barred from doing business with the New York Fed for more than two dozen years. The New York Fed will not honor these banks’ transactions or transfer funds to them. This exclusion is part of the effort to control the flow of money and make it less likely that it will go to places like Iran and Syria.
De-Dollarization aims to:
The reduction of dollar flows to Iran and Syria is the primary objective of these restrictions. The New York Fed wants to make it harder for these nations to get US dollars, which are in high demand because of economic sanctions and the devaluation of their own currencies. It does this by restricting certain banks and limiting access to actual dollars.
Iraq’s impact:
The efforts to de-dollarize have significant ramifications for Iraq. The complexity and demand for dollars in Iraq have increased as a result of the prohibition on physical dollar transfers and the exclusion of particular banks. These actions are essential for the more extensive test confronting the Iraqi government as it attempts to deal with its double trade rates and balance out its economy.
The New York Fed’s efforts are part of a larger strategy to use financial controls to put economic pressure on countries like Iran and Syria and try to lessen the impact on the Iraqi economy.
