How did Iraqi exchange companies start selling dollars? Mechanisms and economic impacts

How did Iraqi exchange companies start selling dollars? Mechanisms and economic impacts

9-30-2024

Researcher Shaza Khalil
Exchange companies in Iraq play an important role in the foreign exchange market, especially in selling the US dollar. This practice emerged in response to the growing need for foreign currency by individuals and businesses, including travelers. Since the Iraqi economy is heavily dependent on the dollar, which is used alongside the Iraqi dinar, exchange companies have become key intermediaries in ensuring the availability of foreign currency for various purposes.

The role of the Central Bank of Iraq
The Central Bank of Iraq (CBI) supervises exchange companies and regulates their participation in the currency market through the foreign exchange window. This window allows exchange companies and banks to buy dollars at a fixed price determined by the Central Bank, which helps stabilize the exchange rate in the local market. The Central Bank has also set rules governing how these companies operate, including setting a fixed commission on selling dollars to citizens.

In a recent directive, the Central Bank pointed out that there are problems with exchange companies’ compliance with commission instructions. It was noted that some companies impose a commission of 50,000 Iraqi dinars on citizens when buying dollars, while the official commission is only 25,000 dinars. The Central Bank stressed the need to adhere to these regulations and warned that non-compliance may lead to these companies being excluded from participating in the foreign currency buying and selling window in the future.

How do exchange companies work?
Exchange companies in Iraq buy dollars through the Central Bank window and then sell them to individuals and companies. The demand for dollars in Iraq depends on several factors:

Imports: Iraq relies heavily on imports, and the dollar is used to pay for goods imported from foreign markets.
Travel: Iraqis traveling abroad need foreign currency, especially dollars, to cover travel expenses such as accommodation, transportation, etc.
Savings: Some Iraqi citizens prefer to keep their savings in dollars as a protection against the fluctuations of the Iraqi dinar.
The Central Bank ensures the availability of dollars to meet these needs, and exchange companies act as intermediaries to provide a smooth process of obtaining foreign currency. Citizens visit these companies to exchange dinars for dollars and pay a small commission, which is regulated by the Central Bank.

Economic impacts of exchange companies
Exchange companies have positive and negative impacts on the Iraqi economy:

Positive effects:
Exchange rate stability: By selling dollars at a fixed rate set by the central bank, exchange companies help prevent large fluctuations in the exchange rate. This stability is important for businesses and individuals who rely on a fixed exchange rate to plan their expenses.

Supporting trade: Exchange companies ensure that businesses can easily access the foreign currency needed for foreign trade transactions, which is essential for Iraq’s economy, which relies on imported goods.

Facilitating travel and consumption: Exchange companies provide an easy way for Iraqi citizens to obtain the currency needed to travel abroad, which enhances international movement and consumption.

Negative effects:
Market manipulation: Failure to comply with central bank regulations, such as charging higher than permitted commissions, can undermine efforts to stabilize the currency market. When companies deviate from official guidelines, this increases costs for citizens, which creates resentment and reduces confidence in the financial system.

Black market risks: The restrictive nature of the central bank’s foreign exchange window can push some individuals into the black market, where dollars are sold at higher rates, creating parallel markets that distort the official exchange rate.

Economic inequality: The availability of dollars primarily benefits businesses and individuals who have enough dinars to participate in the exchange, which can widen the gap between those who have access to foreign currency and those who do not. This disparity can increase economic inequality in the country.

Conclusion
The regulation of exchange houses by the Central Bank of Iraq is an essential part of managing the country’s foreign exchange needs. While these companies provide essential services, such as exchange rate stability and support for trade, strict adherence to Central Bank regulations is essential to maintaining economic balance. Failure to comply can increase costs for citizens and distort the market. As Iraq continues to address its complex economic challenges, exchange houses will remain an important part of the country’s financial landscape, but their role must be carefully monitored to ensure they continue to contribute positively to the economy.

Economic Studies Unit / North America Office
Links Center for Research and Strategic Studies

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