BAGHDAD (AP) — For months, the United States has blocked Iraq’s access to its own dollars, trying to prevent what Iraqi officials describe as rampant money laundering that benefits Iran and Syria. Iraq is now experiencing a crisis, with its currency falling in value and public anger against the prime minister.
The exchange rate of the Iraqi dinar jumped to around 1,750 to the dollar at street exchanges in some parts of the country, compared to the official rate of 1,460 dinars to the dollar.
In Baghdad, exchange offices were closed on Thursday, while the Kurdistan Regional Government banned exchange companies from making transfers in Sulaymaniyah.
Mustafa al-Qarawi, a member of parliament’s budget committee, told the state news agency that the central bank “must meet the requirements of the Federal Reserve to reduce the shortage of hard currency in the country.” He said new domestic mechanisms would be rolled out to improve access to the currency, while a delegation of Iraqi officials would travel to the US for talks next Friday.
The devaluation has already sparked protests. If it continues, it could challenge the mandate of the government formed in October after a year of political instability, analysts said.
Although Iraq’s foreign currency reserves are at an all-time high of nearly $100 billion, the dinar’s deterioration comes as rising global oil prices have brought rising revenues to the petroleum-rich nation.
But accessing that money is a different story.
Since the US invasion of Iraq in 2003, Iraq’s foreign currency reserves have been held at the Federal Reserve of the United States, giving the Americans significant control over Iraq’s supply of dollars. The Central Bank of Iraq requests dollars from the Fed and then sells them to commercial banks and exchange houses at the official exchange rate through a procedure known as a “dollar auction”.
Previously, daily sales through auctions exceeded $200 million per day.
Ostensibly, most of the dollars sold at the auction go to the purchase of imported goods from Iraqi companies, but the system has long been porous and easily abused, multiple Iraqi banking and political officials told The Associated Press.
US officials confirmed to the AP that they suspect the system was used for money laundering but declined to comment in detail about the allegations or the new sanctions.
For years, large amounts of dollars were transferred from the country to Turkey, the United Arab Emirates, Jordan and Lebanon for “gray market trading, using fake invoices for overpriced goods,” said an economic adviser to the Iraqi prime minister. He was not authorized to discuss the matter publicly on condition of anonymity.
The inflated invoices were used to launder dollars, most of which were sent to Iran and Syria, which are under US sanctions, leading to complaints from American officials, he said.
In other cases, the currency is smuggled across land borders under the protection of armed groups that take a cut of the cash, said Tamkeen Abd Sarhan al-Hasnawi, chairman of the Mosul Bank board and first deputy of the Iraq Private Banks League. He estimated that 80% of the dollars sold through the auction went to neighboring countries.
“Syria, Turkey and Iran were benefiting from the dollar auction in Iraq,” he said.
A member of Iraq’s Iran-backed militias, who spoke on condition of anonymity because he was not authorized to speak publicly on the matter, said most Iraqi banks are indirectly owned by politicians and political parties. For their benefit.
Late last year, the Fed began imposing austerity measures.
In other steps, at the request of the US, the Central Bank of Iraq began using an electronic system for transfers that required entering detailed information about the intended end-recipient of the requested dollars. A hundred central bank employees have been trained by the Fed to implement the new system, the Prime Minister’s Economic Adviser said.
“The system started rejecting transfers and invoices approved by the central bank,” he said. “About 80% of transactions are rejected.”
The dollar amount sold daily at auctions fell to $69.6 million on Jan. 31 from $257.8 million six months ago, according to central bank records. Fewer dollars are going to buy imports, down from 90% to about 34%.
Hasnavi said that even when transactions are approved, it takes up to 15 days for banks to receive funds instead of two or three days.
Unable to get dollars at official prices through banks, traders have turned to the black market to buy dollars, leading to price hikes.
In November, the Central Bank of Iraq added four new banks to the list banned from dealing in dollars. Two US officials confirmed that the Fed has requested four banks be blocked because of suspected money laundering. He spoke on condition of anonymity because he was not authorized to comment on the case.
A spokeswoman for the New York Fed declined to discuss specific actions taken regarding Iraq. But the Fed said in a statement that it will implement a “robust compliance regime” for the accounts it holds. This regime “evolves over time in response to new information that we collect in the regular course of transactions and events that affect the account and interact with other relevant US government agencies.”
The system of keeping Iraq’s oil revenues in the Fed was originally imposed by UN Security Council resolutions after the US-led invasion ousted Iraq’s Saddam Hussein in 2003. Later, Iraq decided to maintain the system to protect its revenues against potential lawsuits, particularly in connection with Iraq’s 1990 invasion of Kuwait.
The new US sanctions come at a time of heightened tensions between the US and Iran. Negotiations on a nuclear deal are underway. Washington has imposed new sanctions and condemned Iran for providing drones to Russia for use in suppressing protesters and in Ukraine.
Also, in Iraq, allegations of misappropriation of more than $2.5 billion in Iraqi government revenues came to light in October. From a network of businesses and officials of the country’s tax authority
Harith Hassan, head of the Iraq unit at the Emirates Research Center in Abu Dhabi, said the case had “brought (US) attention to the extent of corruption in Iraq” and how corruption could benefit Iran and other parties hostile to the US. based think tank.
The new Iraqi prime minister, Mohammad Shia al-Sudani, who came to power through a coalition of Iran-backed parties, does not have strong ties with the U.S. that could have enabled him to soften the implementation of the new financial measures, Hassan said.
Al-Sudani downplayed the current devaluation as a “temporary problem of trade and speculation”. He replaced the Central Bank Governor and established measures intended to ensure the supply of dollars at the official rate.
Al-Hasnawi said the government’s latest measures will not stop the financial bleeding. If the current situation continues, “within a year, most banks will declare bankruptcy” and mass civil unrest is likely, he said.
“This US pressure has an obvious impact on the Iraqi street, and we don’t see clear solutions so far,” he said.
AP staff reporters Samya Kullab in Baghdad and Christopher Rugaber in Washington contributed to this report. Savel reported from Beirut.