Will Iraqi banks repeat the bankruptcy scenario of Lebanese banks?

Will Iraqi banks repeat the bankruptcy scenario of Lebanese banks?

It appears that Iraqi banks are rapidly declining and heading towards a similar scenario as the bankruptcy of Lebanese banks. This is primarily due to the government’s inability to manage the crisis of the deteriorating dollar exchange rates and the continuous presence of corruption mafias in Aleppo, who smuggle dollars from the Iraqi market to serve certain regional agendas. Despite warnings and concerns, the situation remains alarming.

A recent meeting was held by Prime Minister Muhammad Shiaa Al-Sudani with bank leaders to discuss the rising dollar exchange rate and simplify banking procedures.

The Media Office of the Prime Minister released a statement which mentioned that Al-Sudani led a meeting last Sunday with the Governor of the Central Bank and directors of government banks to discuss the procedures and mechanisms for banking reform. The Prime Minister emphasized that financial reform is not just a slogan, but a series of terms and procedures that the government aims to implement. He also instructed to simplify all banking procedures and identify and address any obstacles that might hinder the banking reform process.

Financial experts had warned of the consequences of the Central Bank of Iraq’s failure to implement necessary procedures and instructions, which were aimed at controlling the continuous increase in the dollar’s exchange rate in the parallel market. In response to this, Al-Sudani made a statement. Additionally, Representative Raad Al-Dahlaki, a member of the Parliamentary Integrity Committee, stated that the government, the central bank, and the parties share responsibility for the dollar crisis. He also expects the exchange rates to continue to rise.

According to Al-Dahlaki, he does not intend to cause frustration on the streets or create a crisis. However, he believes that the current indicators do not suggest a decline in the price of the dollar. On the contrary, he foresees a gradual rise in the price. He justifies this by pointing out the lack of a clear vision to restore the dollar to its previous price. He further explains that the official procedures are inadequate and not being implemented properly.

Several banks in the capital city experienced protests from frustrated customers who were not allowed to withdraw their deposits in dollars. The banks cited instructions from the Central Bank that prevented them from allowing withdrawals in dollars. Instead, customers were being compensated in dinars at the official exchange rate of 1,320 dinars per dollar. However, the current exchange rate in the parallel market is approximately 1,600 dinars per dollar, leading to further discontent among the customers.

Several events took place simultaneously in Baghdad, including a demonstration on Al-Rashid Commercial Street, where exchange company owners gathered in front of the Central Bank building. Their demands were the dismissal of corrupt individuals within the Central Bank, putting an end to the increase in dollar exchange rates and controlling the private bank mafias in the market. As a result of this, many banking companies in Baghdad and other provinces closed their shops and stopped selling operations. The lack of stability in the currency exchange market caused a surge in the dollar exchange rates.

During my tour of various banks in the Iraqi capital with “Al-Quds Al-Arabi,” I observed that some banks only provide US dollars to travelers, while others limit the amount that can be withdrawn from remittances to a maximum of 1,000 dollars. Additionally, TBI bank is only providing external transfers in dollars to a limited number of customers with low ceilings.

High dollar prices in the market

Saad Al-Obaidi, a businessman, has confirmed to Al-Quds Al-Arabi that he withdrew all his dollar deposits from Al-Rafidain and Al-Rashid banks following a statement made by a Central Bank official. Al-Obaidi is concerned about the possibility of a repeat of the Lebanese bank bankruptcy scenario, which he believes is likely to happen. He further expressed the view that merchants and company owners do not trust the procedures of the Central Bank and banks in Iraq as they have been characterized by chaos, lack of planning, and corruption, which have led to a rise in the price of the dollar in the market. Al-Obaidi added that there is strong concern and fear that the banks will seize the deposits of customers and companies, which are in dollars and compensate them in dinars at the official rate. This official rate is much lower than the real parallel market, which would cause a huge loss to depositors, especially merchants and companies. Al-Obaidi strongly believes that what the government banks are doing is killing the citizen’s confidence in them. Preventing citizens from recovering their deposited money is completely unacceptable and will lead to citizens withdrawing all their deposits in dollars from Iraqi banks.

The recent statements made by the Director of Foreign Remittances at the Central Bank, Mazen Sabah Ahmed, regarding dollar deposits have sparked anger in the public. Ahmed announced that people who deposit dollars in banks before the end of 2023 will be able to withdraw their money in dollars until 2024. However, any dollars deposited in 2024 can only be withdrawn in the local currency at the official exchange rate of 1,320 dinars to the dollar. Additionally, Ahmed stated that the Central Bank is not obliged to convert incoming transfers into cash dollars. These measures are in place to prevent the dollar from falling into the hands of unauthorized parties or being used for speculation.

The Central Bank has implemented several measures to regulate the price and movement of the dollar in the parallel market. It has stopped the use of certain financial institutions such as Western Union, MoneyGram, and Zain Cash. Additionally, three months ago the bank prohibited banks from dispensing dollars to their customers through ATMs.

In April of last year, the Iraqi Council of Ministers made it mandatory for all companies and banks to use the dinar as the only currency in their transactions. This includes paying the salaries of foreign company employees, which were previously in dollars, in dinars. The official exchange rate is 1,320 dinars, except for diplomatic missions who are still paid in dollars.

Failure of central bank measures

Economists unanimously agreed that the Central Bank’s measures to combat the rise in the dollar exchange rate in the parallel market were counterproductive.

According to economist Dr. Nabil Al-Marsoumi, the recent increase in the dollar exchange rate is a complicated economic and political issue that the Central Bank of Iraq cannot address alone. Its main objective is to hamper trade between Iraq and Iran. The US Treasury has a representative stationed at their embassy in Baghdad, who oversees dollar exchange operations to ensure that the money does not end up in Iran. It is worth noting that the volume of trade between Iraq and Iran amounts to approximately $10 billion per year. Iran wants to receive its payments in dollars via banks in the Emirates and other countries, in addition to the fact that tourists, patients, and travelers require dollars. Iraqi tourists make up roughly 55% of tourism in Iran and spend about $3 billion annually.

Al-Marsoumi has warned about the growing gap that exists between the official and the parallel prices of the US dollar, which is having negative consequences on the Iraqi economy. He revealed that there is an external variable that is affecting the exchange rate, namely the American restrictions on the movement of the dollar in Iraq to prevent its arrival in Iran. He also stated that the widening gap between the official and parallel prices of the dinar against the dollar poses a danger to the political system and the Iraqi government, if it is not neutralized or reduced. Al-Marsoumi expects the crisis of the large difference in exchange rates to continue when the government launches the budget disbursement, which will lead to a significant increase in spending and trade, and will lead to an increase in the demand for the dollar in the market. As for the prospects for resolving the crisis, he stressed that the solution lies in two directions: cutting off Iraq’s trade with Iran or Washington abolishing the sanctions on Iran. Both of these solutions are currently unthinkable, so the crisis will continue now and in the future. He also acknowledged that the smuggling of dollars from Iraq has been continuing since 2003.

According to Sudanese government advisors, the United States warned them eight times to stop selling large quantities of dollars through the Central Bank’s currency auction window. The US provided evidence that many buyers of the dollar were smuggling it to Iran, Syria and Lebanon. Consequently, Washington imposed sanctions on 18 Iraqi banks and prevented them from dealing in dollars. This is because these banks have become a crucial financial link for Iran, which is currently under US sanctions.

Economic experts agree that the government of Muhammad Shiaa al-Sudani failed to control the dollar exchange rate, which is a crucial aspect of the economy. Despite numerous statements, promises, and changing the governor of the Central Bank, these measures had a negative impact on the Iraqi dinar’s value and caused a rise in the dollar’s value. The Baghdad government claims to Washington that it has control over the smuggling of dollars to Iran, but this claim is unreasonable since the US has the ability to detect the movement of the dollar in the world. Therefore, the parties in power in Baghdad are endangering the Iraqi economy for the benefit of their allies in Tehran. Experts predict that Iraq will face American sanctions, which will lead to the same fate as the Lebanese economy that collapsed due to a similar scenario, way out, and tools.