American measures on dollar transfers from Iraq cause panic
The Wall Street Journal published a report saying that the Iraqi economy is collapsing at a time when the United States has begun to take action to prevent the flow of funds from Iran. According to the report prepared by David S. Cloud, Baghdad is beginning to feel the pressure of imposing restrictions on contracts in dollars.
He said that the Iraqis feel an unexpected change in the currency, which led to a rise in the prices of foodstuffs and imported goods, which is an unnoticed change in the policy applied by the Treasury and the Federal Reserve in New York.
The Federal Reserve has been imposing heavy restrictions on international dollar contracts run by Iraqi banks since November in an effort to curb money laundering and the misappropriation of dollars and their transfer to Iran and other sanctioned countries in the Middle East, the newspaper quoted US and Iraqi officials as saying.
The newspaper added that Iraqi banks, since the US invasion in 2003, have been operating on less stringent rules. However, years of weak governments and ongoing crises, from the rebellion against the US occupation to the Islamic State group that took control of large areas of the country, led successive US administrations to delay transforming the Iraqi banking system in order to bring it in line with international money transfer practices.
Since the procedures began, 80% or more of daily money transfers in Iraq, which in some days amounted to $250 million, have been prevented due to lack of sufficient information about the destination of the money or other errors, according to US and Iraqi officials and Iraqi government data. Due to the scarcity of the dollar, the value of the Iraqi dinar fell by 10% against the dollar, which led to a sharp increase in the prices of imported materials, including eggs, flour and cooking oil.
“We have followed the same system over the past twenty years,” said Mahmoud Dagher, director of the South Islamic Bank and a former official at the Central Bank of Iraq. “But the shock of the Federal Bank’s policy is responsible for the crisis within the Iraqi economy.”
And the turmoil of the Iraqi market embodies the cautious and intertwined relationship with the United States, which helped in 2004 to establish the Central Bank of Iraq in a way in which the dollar became the currency of exchange, given that most of the economy depends on cash. In order to provide it to Iraq, American planes transport bales of American currency to Baghdad every few months, but there is a larger flow of dollars that is transferred electronically through private bank contracts or processed in Iraqi accounts in New York where oil resources are deposited in the Federal Reserve.
US officials say that the tight restrictions on electronic transfers of dollars by private banks in Iraq did not surprise officials in Baghdad. It was implemented jointly after two years of discussions and planning from the Central Bank of Iraq, the US Treasury and the Federal Reserve Bank. US officials say that the increase in the exchange rate of the dollar has nothing to do with the new measures. But the new scrutiny of dollar transfers led to an increase in the purchase of dollars and a torrent of criticism from Iraqi officials, banks and importers who held the new policy responsible for the unnecessary financial shock that led to the already bad economic conditions.
Prime Minister Mohammed al-Sudani, who took office at the beginning of the local currency’s decline, said the Fed’s move harms the poor and affects the government’s 2023 budget. “This is embarrassing for me,” he said in an interview with the newspaper, as he said he would send a delegation to Washington next month with a proposal. The policy is suspended for six months. Some Iraqi politicians with strong ties to Iran have harshly criticized the policy. “Everyone knows how the Americans use currency as a weapon to starve people,” Hadi al-Amiri, the leader of the Badr Group, told the French ambassador in a January 10 meeting.
Based on the new procedures, Iraqi banks have to submit transfers in dollars on a new platform belonging to the Central Bank, as they are reviewed by the Federal Reserve.
The system aims to limit the ability of the Iraqi banking system to smuggle dollars to Tehran and Damascus and launder money in the Middle East, US officials said.
Dagher, a former official at the Central Bank, says that the Iraqi account holders, based on the old system, were not required to disclose the party to which they were sent until after the money had been transferred.
A spokeswoman for the Federal Reserve in New York said of the accounts it supervises for foreign governments such as Iraq, “We adopt a strong compliance system for these accounts, which evolves over time in response to new information.”
A US official said the new measures “will limit the ability of malicious actors to use the Iraqi banking system.” The US Treasury and the Iraqi Bank refused to comment on the procedures. The Central Bank of Iraq said in a statement issued on December 15th that the new policy requires complete information from customers who want to transfer funds, including the final beneficiary. “There are a number of errors discovered and banks are required to repeat the process,” and “such procedures require additional time before they are accepted and passed by the international system,” the statement said. And the central bank prevented four banks, the Islamic Bank of Asia, the Iraqi Bank for the Middle East, Ansari Islamic Bank, and the Islamic Holding Bank, from conducting contracts in dollars, according to Iraqi officials and court documents. Directors of the Islamic Bank of Asia and Ansari declined to comment.
American officials have pressed the Iraqis for years to strengthen the banking system. And in 2015, the US Treasury and the Federal Reserve stopped the flow of billions of dollars to the Central Bank of Iraq out of concern that the money would reach Iranian banks and possibly the Islamic State. Iraqi officials supported tough measures with private banks.
Hadi al-Salami, a member of Parliament and a member of the Anti-Corruption Committee, said that the Iraqi parties and militias that control most banks use them to smuggle dollars to neighboring countries, “We want to stop this immediately.” The impact of the new operations appeared through the sharp decline in bank transfers to Iraqi banks, which the Central Bank follows up on its website. On October 17, before the start of the new system, bank transfers abroad reached $224.4 million. On January 17, it fell to $22.9 million, a decrease of 90%.
Iraqi officials say the volatile situation will stabilize as clients fulfill orders. Iraqi bankers and currency dealers say that the tight restrictions aim to stop plans that are used to embezzle dollars. Import traders usually forge invoices that pay for goods that do not arrive and go to unknown destinations.
“Iraqi dollars go 100% to Turkey, Yemen, Syria, Iran, Lebanon, and sometimes to Dubai,” said Hamza al-Sarraf, owner of a currency shop in Baghdad’s Karrada district. Restrictions on electronic transfers have led to panic buying of dollars. Importers who were prevented from electronic transfers in dollars were forced to delay their requests until compliance with the new instructions. The exchange rate for the dollar reached 1,470 dinars, but banks and exchange shops sell it at a higher price of 1,620 dinars.