Iraq tries again to buoy dinar, stem dollar flight

Wednesday, 06 June 2012 - Last Updated: Wed Jun 06, 2012 18:54 pm (KSA) 15:54 pm (GMT)
Iraq is recovering from decades of war and sanctions, and its economy is still very centralized. (File photo)

Iraq’s central bank, struggling to stem an illicit tide of dollars into sanctions-bound Iran and Syria, has had some success in steadying its own dinar by pumping dollars to Iraqis through two state-run banks, traders and officials say.

For months, the bank has been grappling with an increase in demand for the dollar at its daily auctions as traders snapped up the greenback for sale in neighboring Syria and Iran, where international sanctions have spurred demand for hard currency.

Iraq is recovering from decades of war and sanctions, and its economy is still very centralized. Oil accounts for 95 percent of government revenues.

Late last month the central bank allowed U.S. dollars to be sold at a fixed rate through two state-run banks, helping to push the dollar from 1,280 dinars to 1,210 dinars and closing the gap between the official rate and the market price.

The central bank has started channeling $6 million a day through the country’s biggest state banks Rafidain and Rasheed for them to sell to Iraqis planning to travel overseas, Mudher Kasim, deputy governor of the Central Bank of Iraq (CBI), said.

"The difference in the value of the Iraqi dinar between the central bank price and the market was seven percent but now it is less than four percent," said Kasim.

"We are expecting it to drop below two percent in a few weeks."

The CBI holds a daily auction at which it sells the dollar for 1,166 dinars. The selling price through Rafidain and Rasheed is 1,189 dinars to a dollar while the market price is around 1,210 dinars to a dollar.

The central bank usually sells about $250,000 to private banks and $75,000 to currency exchange and money transfer shops on a weekly basis.

For months, traders have been snapping up dollars at the central bank’s daily auctions for sale in neighboring Syria and Iran, buying up to $400 million on some days in December from a previous average of $150 million, according to central bank data.

Seeking to clamp down, the central bank tightened rules in April over who could participate in these auctions, requiring merchants to be members of the Iraqi Chamber of Commerce and to obtain trading licenses from the Trade Ministry.

It also revalued the auction price of the dinar slightly higher to 1,166 per dollar from 1,170.

But the moves pushed up the value of the U.S. currency in the Iraqi market, hurting local businesses reliant on dollars to buy foreign imports.

Traders said the measures - which included getting clearance within 30 days in order to send money overseas to pay for imports - were time-consuming and had forced them to turn to the local market to source dollars at a higher price than the CBI.

Kasim said the CBI had since extended the clearance period to six months to allow for more flexibility in the importing process. Four private banks have also asked the CBI for permission to sell dollars at a fixed rate.

The CBI has said Iraq’s large foreign reserves, which have risen to a record $60 billion on the back of high oil prices, will shield its financial system from damage.

However, some economic analysts say the measures may not sustain dinar stability in the long run.

"We are still importing more than 85 percent of our needs and there is still pressure from Syria and Iran," said economic expert Majid al-Souri.