Home
MENASource February 21, 2023
Iraq needs to address the economy’s structural imbalances to halt the dinar’s volatility
By Ahmed Tabaqchali
A planned implementation of global procedural requirements for cross-border payments by the Central Bank of Iraq (CBI) in mid-November 2022 had a detrimental effect on the volumes of the CBI’s daily “Foreign Currency Selling Window,” better known as the CBI’s US Dollar (USD) auction.
The decreased volumes versus the continued high demand for USD led to a supply-demand mismatch and, consequently, to a depreciation of the market price of the Iraqi Dinar (IQD) versus the USD.
…
The Iraqi government and the CBI subsequently introduced a series of measures to create domestic demand for the IQD and to accelerate the adoption of banking in the economy—crucial measures to de-dollarize the economy and accelerate its evolution away from the dominance of cash and informality, which are the structural causes behind the currency’s turmoil.
As crucial as these measures are, their full effectiveness will take place over several years, and so the IQD has continued to depreciate.
…
Pressured by the public’s furor for immediate solutions from the authorities, the CBI, spurred by populist rhetoric, and with the government’s blessing, opted for a 10 percent revaluation of the IQD exchange rate against the USD in the hope that the IQD would reverse its depreciation.
Fundamentally, the revaluation in nominally lowering the official exchange rate does not change the current relationship between the market and the official exchange rates.
…
Nevertheless, the procedural requirements implemented by the CBI in mid-November 2022 were the latest stages of a process that started over two years ago, which were the product of extensive planning by the CBI and the Ministry of Finance on the Iraqi side and the Federal Reserve and the Treasury Department on the US side.
The aim was to bring Iraqi banking technical procedures for cross-border payments fully in line with global standards, which themselves evolved over the last two decades.
…
As such, the new procedures, unlike the old ones, require full disclosure of the details of cross-border payments—including those of the ultimate beneficiary and the sender—before the payment takes place.
Crucially, they do not involve the provision of new information by Iraqi banks.
Instead, they lead to a digitized, effective, and electronically verifiable means of transmitting the same information they provided in the past.
…
The effect was immediately transmitted through a decline in the market price of the IQD versus the USD.
…
These decreased volumes in the CBI’s USD auctions versus the continued high demand for USD to satisfy the need for imports—amplified by an expansionary budget—will continue to pressure the market price of the exchange rate of the IQD versus the USD.
As such, the triggers for the exchange rate volatility are technical.
Nevertheless, the underlying causes are fundamental and due to the structural fault lines of the Iraqi government’s processes and the economy.
...
All of these create the perfect environment for the prevalence and persistence of corruption and fraud on a large scale with impunity.
As a result, this makes the country vulnerable to becoming a conduit for money laundering and sanctions evasion schemes.
The top priority for Iraq and its international partners and stakeholders should not be a narrow focus on addressing the symptoms of corruption, money laundering, and sanctions evasion.
Instead, it should be a multi-year collaboration on addressing their structural enablers along three broad fronts:
the modernization of the government’s outdated bureaucratic paper-based processes;
increasing adoption of banking in the economy by accelerating its evolution away from the dominance of cash and informality; and
furthering the government’s new measures to de-dollarize the economy.
Ahmed Tabaqchali is a nonresident senior fellow with the Atlantic Council’s Middle East Programs. He is an experienced capital markets professional with over 25 years’ experience in US and MENA markets, and the Chief Strategist AFC Iraq Fund.
https://www.atlanticcouncil.org/blogs/menasource/iraq-needs-to-address-its-structural-fault-lines-to-halt-its-currencys-exchange-rate-volatility/
