BAGHDAD (AP) – For months, the United States has restricted Iraq’s access to its own dollars, trying to stem what Iraqi officials describe as money laundering that largely benefits Iran and Syria. Iraq is now feeling the crunch, with the devaluation of its currency and public anger being blown back against the prime minister.
The exchange rate for the Iraqi dinar has jumped to around 1,750 to the dollar in street exchanges in some parts of the country, compared to the official rate of 1,460 dinars to the dollar.
In Baghdad, exchange houses were closed on Thursday, while the Kurdistan Regional Government banned exchange companies in Sulaimaniyah to move.
Mustafa Al-Karawi, a member of the parliament’s budget committee, told the state news agency that the Central Bank “must meet the requirements of the Federal Reserve to … He said new domestic procedures will be rolled out to improve access to the currency, while a delegation of Iraqi officials will go to the U.S. for negotiations next Friday.
The devaluation has sparked protests. If it persists, analysts say, it could challenge the mandate of the government formed in October after a year of political stalemate.
The decline of the dinar comes even though Iraq’s foreign currency reserves are at an all-time high of around $100 billion, pumped up by spiking global oil prices that have increased revenues for the oil-rich nation.
But accessing the money is a different story.
Since the US invasion of Iraq in 2003, Iraq’s foreign currency reserves have been kept at the United States Federal Reserve, giving America significant control over Iraq’s dollar supply. 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 mechanism known as “dollar auctions.”
In the past, daily sales through auctions often exceeded $200 million per day.
Supposedly, most of the dollars sold at the auction were intended to buy goods imported by Iraqi companies, but the system has long been porous and easily abused, several Iraqi banking and political officials told The Associated Press.
U.S. officials confirmed to the AP that they suspect the system is being used for money laundering but declined to comment in detail on the new charges or restrictions.
For years, large amounts of dollars have been transferred out of the country to Turkey, the United Arab Emirates, Jordan, and Lebanon through “grey market trade, using fake invoices for more expensive goods,” the Iraqi prime minister’s financial adviser said. . on condition of anonymity because he is not authorized to discuss the matter publicly.
Inflated invoices are used to launder dollars, with most of them 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 board of Mosul Bank and first deputy of the Iraqi Private Banks League. He estimated that as much as 80% of the dollars sold through the auction went to neighboring countries.
“Syria, Turkey, and Iran used to profit from the dollar auction in Iraq,” he said.
A member of one 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 owned indirectly by politicians and political parties who have also used dollar auctions. for their benefit.
Late last year, the Fed began imposing tighter measures.
Among other steps, at the request of the US, the Central Bank of Iraq started using an electronic system for transfers that requires entering detailed information on the destination of the recipient of the requested dollar. One hundred Central Bank employees are being trained by the Fed to implement the new system, the prime minister’s financial adviser said.
“This system is starting to reject transfers and invoices that are normally approved by the central bank,” he said. “About 80% of transactions are rejected.”
The number of dollars sold daily at the auction plummeted to $ 69.6 million on January 31, from $ 257.8 million six months earlier, according to Central Bank records. Much more of the dollars are going to buy imports as well, up to about 34% of the 90%.
Even if the transaction is approved, the bank takes up to 15 days to get the funds instead of two or three days, said Hasnawi.
Unable to get dollars at the official price through the bank, he said, traders went to the black market to buy dollars, causing prices to rise.
In November, the Central Bank of Iraq added four new banks to the list of people banned from dealing in dollars. Two US officials confirmed that the Fed had asked the four banks to be blocked for suspected money laundering. They spoke on condition of anonymity because they were not authorized to comment on the case.
A spokeswoman for the New York Fed declined to discuss specific measures being taken regarding Iraq. But the Fed said in a statement that it implemented a “robust compliance regime” for the accounts it holds. The statement said that this regime “evolves over time in response to new information, which we collect in regularly monitoring transactions and events that may affect an account and communicating with relevant US government agencies.”
The system of keeping Iraq’s oil revenues at the Fed was initially implemented by a UN Security Council resolution after the 2003 ouster of Iraq’s Saddam Hussein by a US-led invasion. Later, Iraq chose to maintain the system to protect its revenue from potential lawsuits, particularly those related to Iraq’s 1990s invasion of Kuwait.
The new US restrictions come at a time of rising tensions between the US and Iran. Negotiations on the nuclear deal are in turmoil. Washington has imposed new sanctions and punished Iran for cracking down on protesters and supplying drones to Russia for use in Ukraine.
Also, in Iraq, allegations came to light in October that more than $2.5 billion in Iraqi government revenue was embezzled. by a network of businesses and officials from state tax authorities
The case “brought (US) attention to the scale of corruption in Iraq” and how corruption can benefit Iran and other parties hostile to the US, said Harith Hasan, head of the Iraq unit at the Emirates Research Center, an Abu Dhabi-based think tank.
The new Iraqi prime minister, Mohammed Shiah al-Sudani, who is in power with a coalition of Iran-backed parties, does not have strong ties with the US that could make him soften the implementation of new financial measures, Hasan said. said.
Al-Sudani has downplayed the current devaluation as a “temporary problem of trade and speculation.” He replaced the governor of the Central Bank and instituted measures intended to ensure the supply of dollars at the official rate.
Al-Hasnawi said the new government’s steps will not stop the financial bleeding. If the current situation persists, he said, “within a year, most banks will declare bankruptcy” and there will likely be mass civil unrest.
“This US pressure affects the way of Iraq in a clear way, and we don’t see a clear solution until now,” he said.
AP staff reporters Samya Kullab in Baghdad and Christopher Rugaber in Washington contributed to this report. Sewell reported from Beirut.