The Impact of Sanctions on the Iraqi Dinar

September 8th, 2023

In the complex world of global currencies, the Iraqi dinar has often found itself at the center of attention due to various factors, one of which is the impact of sanctions it has undergone multiple times.

Understanding how the most recent sanctions affect the Iraqi dinar requires delving into the intricacies of international politics, financial systems, and currency exchange dynamics.

In this blog post, we will explore the recent events and their consequences, offering insights into the relationship between sanctions and the value of the Iraqi currency, the Iraqi dinar.

Background: Why Does Iraq Have Sanctions?

Iraq has been no stranger to international sanctions over the years. These punitive measures are often imposed by the United States and its allies due to political tensions, concerns about weapons proliferation, or human rights violations. Sanctions serve as a means to pressure governments into changing their policies or behavior.

Although significant focus has been placed on the destructive consequences of the US-Iraq war, there has been limited awareness of the sanctions regimen imposed on the Iraqi population well before the invasion of 2003, spanning more than a decade. For example, in 1990, sanctions were imposed in response to Iraq's invasion of Kuwait.

The sanctions remained predominantly in effect until May 22, 2003, following Saddam Hussein's removal from power. While the United Nations Security Council (UNSC) has lifted a number of sanctions measures implemented during Saddam Hussein's rule, certain sanctions remain in effect concerning Iraq.

What Sanctions Are on Iraq Today?

Sanctions on Iraq have taken various forms over the years, including restrictions on trade, financial transactions, and arms exports. One significant aspect of these sanctions is control over the flow of dollars to Iraq, which plays a pivotal role in the country's economy. The pathway that led to the current sanctions imposed on Iraq is intricately tied to the nation's oil revenue.

When Iraq sells its crude oil, the proceeds are channeled into an account held at the Federal Reserve Bank of New York. This account serves as a reservoir of hard currency for the Iraqi government's various financial needs. Upon request, the Federal Reserve Bank of New York facilitates the provision of this hard currency to the Iraqi government, which, in turn, allocates some of these funds to commercial banks for various official purposes.

However, Iraq has faced longstanding allegations of corruption and being involved in the illicit transfer of dollars to Iran and Syria, both of which are countries subjected to US sanctions. In response to these concerns, the Federal Reserve Bank of New York introduced more stringent regulations and measures governing the manner in which the nation's central bank handles the dollars obtained from oil sales.

These changes resulted in delays in the transfer of dollars to Iraq, compounding the existing challenges. Moreover, several Iraqi banks faced sanctions, restricting their ability to engage in US dollar transactions. The cumulative effect of these factors was a shortage of the US dollar within Iraq, and this scarcity contributed to the devaluation of the Iraqi dinar.

What Is the Relationship Between Iraq and the US?

The United States has significantly shaped Iraq's economic landscape through sanctions and financial regulations. The Iraqi dinar has a unique connection to the US dollar, as it is pegged to it. This means that the value of the Iraqi dinar is directly influenced by fluctuations in the US dollar.

Sanctions on Iraq's Financial System: How Do Sanctions Affect the Economy of Iraq?

Recent events in the financial world have highlighted the impact of sanctions on the Iraqi dinar. The Federal Reserve Bank of New York introduced stricter measures to control dollar flow to countries under US sanctions, including Iraq. This led to delays in the transfer of dollars and a subsequent shortage of the US dollar in Iraq.

In a move that sent shockwaves throughout Iraq, the US Treasury Department and the Federal Reserve Bank of New York blacklisted 14 Iraqi banks in July 2023 due to suspicions of engaging in money laundering activities and conducting transactions with questionable intent, consequently raising the exchange rate. This was a temporary ban on conducting dollar transactions due to violations; the banks were still free to use Iraqi dinars and other foreign currencies.

This action was part of a wider crackdown on dollar smuggling on the black market to combat the illicit dollar transactions to Iran through the Iraqi banking system, as indicated by statements from Iraq's central bank officials. The Iraqi Central Bank's (CBI) Governor, Ali al-Allaq, mentioned that the transactions linked to the sanctions occurred in 2022 before the CBI implemented stricter dollar transfer rules. These regulations mandated that individuals use an online platform and furnish comprehensive details regarding the ultimate beneficiaries.

Impact of Sanctions on Iraq’s Central Bank

The Central Bank of Iraq found itself in a challenging position as it struggled to navigate the impact of these sanctions. With the flow of dollars disrupted, the central bank faced significant challenges in managing the country's monetary policy and faced higher exchange rates.

Effect of Sanctions on Private Iraqi Banks

Private banks in Iraq also bore the brunt of the sanctions, as they faced restrictions in their dealings with the US dollar, which had a cascading effect on the broader Iraqi economy. The fourteen Iraqi private banks, which the United States has sanctioned for their alleged involvement in siphoning U.S. dollars to Iran, have expressed their readiness to contest these actions.

They have welcomed the prospect of audits and are urging Iraqi authorities to offer their support in this regard. Banker Haider Al Shamma, speaking on behalf of the 14 banks, urged the Iraqi government to leverage all possible avenues for rectifying the harm inflicted on them and the broader Iraqi banking landscape in his critique of sanctions.

He emphasized the repercussions of imposing sanctions on a third of Iraq's private banks, extending beyond just the Iraqi dinar's value against the US dollar – raising awareness that it could significantly disrupt foreign investments, too.

Impact of Sanctions on Iranian Banks in Iraq

The sanctions imposed by the US also affected Iranian banks operating in Iraq, further complicating the financial landscape and contributing to the challenges faced by the Iraqi dinar. Iraq has stood out as one of the key importers of Iranian products for the past twenty years. According to Iraqi officials, the financial crisis in Iraq has been exacerbated, and the depreciation of its currency has been hastened by settling its debts to Iran using Iraqi dinars.

As Iran and other entities are presently refraining from exchanging dinars through auctions, Iraq has found itself incapable of converting its dollars into the necessary local currency to fulfill its requirements. Consequently, this ongoing situation keeps exerting stress on the dinar and the Iraqi market

The Effect of Sanctions on Iraqi People

As a result of the ensuing currency liquidity crisis due to the imposed regulations on dollar transfers, the government has been struggling to fulfill its financial obligations to Iraqi citizens, including the disbursement of salaries to numerous public employees, pensions, and benefits for recipients of social welfare initiatives.

What Are the Effects of Sanctions on the Iraqi Dinar? Revaluation & Currency Fluctuations

Iraq boasts abundant oil reserves, constituting its primary income source through exports. Yet, its economic expansion has been hampered by the persistent challenges of political turbulence, corruption, and other ongoing struggles – all factors that have substantially influenced the Iraqi Dinar's valuation.

Before the currency devaluation, the government found itself compelled to secure loans against its dollar reserves to address a deficit of $1.5 billion in dollars. To counter the later devaluation of the Iraqi dinar, the Iraqi government chose to revalue the currency in February 2023. The aim was to strengthen the dollar against the dollar, but as of August 2023, the success of this policy remains uncertain.

While the official exchange rate remains at 1,3089 dinars per dollar, the market rate paints a different picture, with the dollar fetching approximately 1,570 dinars by the end of July due to the recent actions taken by the US Treasury Department and the Federal Reserve Bank of New York. The currency's value has been on a decline over the past year, reflecting the challenges it's currently confronting.

It remains to be seen how these developments will unfold in the days ahead.

Government Intervention and Recovery Strategies

Iraqi authorities have been proactive in addressing the financial crisis triggered by Iraq-related sanctions. News conferences and official platforms have been established to facilitate financial transactions, offering a degree of stability in turbulent times.

It's worth noting that the United States has offered support to help Iraq stabilize its economy. Discussions between Iraqi Prime Minister Mohammed Shia' al-Sudani and Central Bank Chief Ali al-Allaq have centered on measures to strengthen the dinar against the dollar.

What Is the Forecast for the Iraqi Dinar?

The impact of sanctions on the Iraqi dinar is a multifaceted issue with far-reaching consequences for Iraq's economy and citizens. The recent revaluation attempt underscores the challenges faced by the country in managing its currency in a complex global financial landscape.

As events continue to unfold, the future of the Iraqi dinar remains uncertain, swayed by a multitude of factors both within and beyond Iraq's borders, and vigilance is required to navigate these turbulent waters.

We will keep you updated.

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