Dinar Woes: Iraqi Currency Traders Break Sanctions

In Iraq, where barely anyone has a bank account, the trade in foreign currencies is largely unlicensed. Now money traders are smuggling US dollars to sanctioned Syria and Iran. And the Iraqi govt may well be using the situation for its own political ends too, according to this report from NIQASH.

The Iraqi dinar is at risk. That is the pronouncement made by Khadir Sadoun, who sits on the sidewalk in the upmarket Arasat neighbourhood in central Baghdad. But Sadoun didnt study business or economics, he probably doesnt even know about the sanctions on Iran and Syria that are causing the risks he is talking about. In fact, it is the market place has taught him all he knows.

And my business is flourishing, Sadoun adds, as he wraps a rubber band around a pile of currency. For the first time in years, Iraqis are exchanging their local dinars for US dollars in this way, the trader said, indicating the large piles of cash he was working with.

Over the past few weeks, the market exchange rate has seen the Iraqi dinar plummet against the US dollar. In part this is due to the current, increased demand for the US dollar. This is regional: international sanctions have been imposed on two of Iraqs neighbours, Iran and Syria, and, as local analyst, Basim Antoin, explained: over the past few months theres been an increase in currency smuggling and this has led to an increase in demand for the US dollar.

Both Syria and Iran are suffering from a severe economic crisis because of international sanctions imposed upon them, economic strategist and Iraqs former Minister of Planning, Mahdi Al-Hafez, said. This is why they are coming to the Iraqi market in search of hard currency.

Syria has been sanctioned over violent repression of protestors against the regime and Iran has been sanctioned because of suspicions about the countrys nuclear programme.

The relationships that Iraq has with Syria and Iran, as well as the relatively easy-to-cross borders, mean that it is easy to transfer currency between the countries. Additionally its easy to buy US dollars on the Iraqi market because of the hundreds of unlicensed currency traders all over the country. All of which has a negative impact on the local currency, al-Hafez said.

Abbas al-Araji is one such trader working in the Kadhimiya area of Baghdad. Ive been practicing this profession for five years and up until now, I havent got the licenses from the central bank because its just too complicated to do so, al-Araji said. And nobody from the state or the central bank has ever come to supervise or check on him.

And my customers prefer to buy US dollars from my shop rather than going to big banks, al-Araji continued. In these banks, routine money transfers are really complicated and the cost is high, compared to what customers pay in shops like mine. Also, I take less time. I just call colleagues who work in different countries to make the needed transfers.

There are further reasons as to the ease with which US dollars can be accessed. Ongoing political wrangling as well as the desire of the government, led by Prime Minister Nouri al-Maliki, to control the Central Banks activities.

A controversial decision made at the beginning of 2011 by the Federal Court of Iraq decided appears to give the Prime Minister more opportunity to interfere in the way the Central Bank of Iraq does business. The decision was criticised and analysts predicted that any interference in the Bank would cause further distrust in the dinar.

Additionally opposition politicians have suggested that the Prime Minister wants to use this alleged control of the Central Bank to help the regimes he appears to support in Iran and Syria.

The Prime Minister wants some control over the Central Bank in order to do two things, Maysoun al-Damlouji, spokesperson for the opposition Iraqiya bloc, said in a press release last month. They want to finance government overspending by and they also want to support the economies of the two neighbouring countries who have been sanctioned.

The US dollar has always been popular in Iraq. Because of the low international value of the Iraqi dinar (IQD1,000 is worth around US$0.85), in order to make any large purchases, buyers would need to quite literally bring a bag of money to the sale. Instead of doing this, locals would simply exchange their bags of Iraqi money for a handful of US cash.

Additionally, for quite a long time locals simply didnt trust the Iraqi dinar it had fluctuated so radically during various conflicts and political disasters that they lost confidence in it.

Many employees in Iraq regularly exchange part of their salaries to US dollars in order not to lose the purchasing power of their money. Samir Ahmad is one of these; every time he gets paid he goes to Sadoun to exchange half his salary, paid to him in dinars, for US dollars. You cant trust the dinar, Ahmad, an employee of a government ministry, complains. And actually some of my colleagues buy gold instead of US dollars, he added.

Officials at the Central Bank of Iraq have said that, before the withdrawal of US troops late last year, the Central Bank was selling US$160 million every day. But that demand has increased dramatically over the past few months. On some days, we sell as much as US$400 million.

And the Central Bank of Iraq does seem to be getting worried about the huge, illicit trade in US dollars. Over the past three months it has tried to stymie this by instituting a series of controls, requesting that all banks and licensed traders submit documents that involve transfers of US dollars.

Reuters reported recently that the bank tightened regulations over who can participate in [currency] auctions Merchants participating in currency auctions are now required to be members of the Iraqi Chamber of Commerce, which means they have to register business more formally, and have to obtain licenses from the trade ministry. It also closed some unlicensed exchange shops.

It is only natural for the Iraqi dinar to be affected by the fact that two neighbouring lands are experiencing economic crisis, the deputy governor of the Central bank, Mathhar Saleh, told NIQASH in a phone interview. Iraqs open door policies, the freedom for foreign exchange and the relative economic stability here are all factors that encourage this illicit trade in foreign country.

Saleh said the lack of Iraqi knowledge about international financial transactions had shocked him. Some clients visit the bank to make transfers and theyre carrying millions of dollars yet they dont even have bank accounts, Saleh noted.