BAGHDAD | Sun Apr 15, 2012 12:11pm EDT

BAGHDAD (Reuters) - At Alaa Radhi's currency exchange shop in central Baghdad, a board showing the rate of Iraqi dinars to the dollar has three question marks next to the price.

For weeks now, Iraqi businesses say they have been struggling as the dinar has become increasingly volatile due to fallout from sanctions imposed on neighbouring Iran and Syria and to Iraq's own political turmoil.

"The price keeps changing so quickly," Radhi says, counting a wad of dinars at the counter of his exchange. "That's why I can't write a fixed price."

The Central Bank of Iraq (CBI) this month imposed new measures to curb demand for the dollar after a spike at its daily auctions as local traders bought greenbacks to sell them on to Iran and Syria.

In a bid to stem the flow of dollars from Iraq, the bank tightened regulations over who can participate in auctions and sent a message that it was still in control of the market by revaluing the auction price of the dinar slightly higher to 1,166 per dollar from 1,170.

Merchants participating in currency auctions are now required to be members of the Iraqi Chamber of Commerce, which means they have to register business more formally, and have to obtain licenses from the trade ministry.

But the bank's crackdown has pushed up the value of the U.S. currency in the local market, throttling local businesses who rely on dollars to purchase foreign imports.

"This the first time it has increased this much ... it definitely affects citizens because people deal in dollars," said civil servant Abu Mohammed, who sold $300 dollars at a rate of 1,280 dinars per dollar at an exchange shop.

He had bought dollars at a rate of 1,240 dinars per dollar less than a month ago.

Currency traders say the market is at a standstill.

"It's stagnated because people say they won't sell (the dollar) as it may keep increasing, while others say they won't buy it as the value may drop," Radhi said.

Iraq is recovering from decades of war and sanctions, and its economy is still very centralised, which is a chief complaint of foreign investors starting to do business in the OPEC nation. Oil accounts for 95 percent of government revenues.

With Iran and Syria under Western sanctions, Iraq is becoming an important source of dollars for them as residents and businesses in both countries seek hard currency to escape their weakening local money.

The central bank says 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.

But it says its recent measures were needed to bring more discipline to the local market.

"We don't want currency going to finance terrorists, going to finance illegal (activities). We have to work carefully in this matter and move swiftly. We're under pressure," Mudher Kasim, a deputy central bank governor, told Reuters.

"We intervene in the market with this auction to stabilise the Iraqi dinar and to keep the exchange rate stable ... The main thing is to make the Iraqi dinar safe. That's a priority."


Sinan al-Shibibi, Iraq's central bank governor, said at a conference with businessmen last week political infighting in Iraq's power-sharing government and a failure to develop the economy beyond the oil sector had aggravated the dinar's volatility.

Political tensions have been high since U.S. troops withdrew in December and after the Shi'ite-led government sought the arrest of Sunni Vice President Tareq al-Hashemi on charges he ran death squads and the removal of Sunni Deputy Premier Saleh al-Mutlaq.

Ties between the central government and the Kurdistan Regional Government (KRG) in the north have also been strained over oil exports and the KRG's decision to let Hashemi take refuge in the autonomous region.

For traders, the new central bank requirements for the dollar purchases are hurting business.

They are required to produce legal documents and obtain clearance within 30 days in order to send money overseas to pay for imports. They also must produce a certificate from the country of origin of the goods, which has to be endorsed by the Iraqi consulate in that country.

Traders say these measures are time-consuming, and many have been forced to turn to the local market to source dollars at a higher price than the CBI to secure their goods overseas.

"I have needed to transfer money for the past four months in order to import goods, but I cannot cope with these new measures," said businessman Dawood Abed Zyer. "Who is going to cover the difference in price?"

Businessmen say the measures are unrealistic and should have been brought into the market gradually.

At least one Iraqi cabinet official agrees.

"These measures were too late and too sudden," cabinet secretary Ali al-Alaq told Reuters.