Iraq central bank governor says compliance is vital but hard balancing act

Stringent US regulations to stop the flow of dollars to Iran and Syria from Iraq has exacerbated inflation

Ali Al Alaq, Governor of the Central Bank of Iraq. Antonie Robertson / The National

The Central Bank of Iraq faces a complicated mission to achieve balance between maintaining a favourable exchange rate for Iraqis and compliance with international standards to stop money laundering, Governor Ali Al Alaq said on Thursday.

He said that the bank also had to limit the flow of hard currency abroad.

Since early December, the Iraqi dinar has fluctuated sharply after a tightening of procedures for international transfers.

The US has long complained that dollars purchased from the Central Bank are being funnelled to Iran, Syria and Lebanon through the foreign currency auction run by the bank. Iran and Syria are under strict US sanctions.

The Federal Reserve Bank of New York has applied strict scrutiny measures on requests for international transactions from Iraq, rejecting many and delaying others, leading to increased demand for dollars in Iraqi markets.

While the official exchange rate is fixed at 1,300 dinars against the dollar, the currency was trading at up to 1,570 to the greenback on the black market on Thursday morning.

In an attempt to control the exchange rate at the parallel market, the CBI has been introducing a series of measures to make the hard currency available at the official rate to traders and ordinary Iraqis willing to travel abroad.

On the other hand, the government cracked down on exchange companies who do not sell dollars at the rate set by the CBI, but that has only exacerbated the situation.

“The Central Bank has been in the middle of a complicated balancing process to protect the exchange rate and [comply with] international standards,” Mr Al Alaq said.

The Iran-backed government blames the US for applying the measures, but the US charge d’affaires in Baghdad said “there is no relationship” between the timing of the implementation of new measures and the new government.

"We had seen, unfortunately, a growing number of suspicious transactions, large amounts of transfers leaving the country on a fraudulent basis,” said David Burger, deputy US chief of mission at the US embassy in Baghdad.

Together with the exchange rate, the inflation rate jumped to more than 7 per cent or 8 per cent this year from less than 1 per cent in 2020, Mr Al Alaq said.

“These [exchange rate and inflation] hugely impact the economic situation as well as the social situation as they lead to more pressure on the purchasing power of the citizen,” he said.

He was speaking at an annual forum organised by the Institute of Regional and International Studies at the American University of Iraq, Sulaymaniyah. It brings together international Iraq experts and academics to discuss Iraq's future and how the country can overcome decades of systemic problems.

This week, Iraq’s cabinet approved a draft budget law for 2023, standing at an all-time high of 197.82 trillion Iraqi dinar, about $152.17 billion. It will also be applied for 2024 and 2025, although parliament reserves the right to push for amendments.

The budget will run with a deficit of 63.27 trillion dinars, or about $48.67 billion, more than the 3 per cent required by the General Financial Management Law.

To finance the deficit in the budget, the Iraqi government depends on the Central Bank reserves, Mr Al Alaq said.

“It has been a phenomenon that the government depends on the Central Bank to cover the deficit and that is a very dangerous phenomenon,” he told the forum. “This gravely threatens financial stability.”

Foreign reserves were about $100 billion as of early this year, according to the CBI, thanks to the rise in oil prices and devaluation of the Iraqi currency in December 2020.

Iraq's monthly oil revenue hit a historic high last year, exceeding $10 billion in some months. The country is Opec's second-largest oil producer after Saudi Arabia.