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Explainer: What is behind Iraq's Central Bank shuffle and what is next?

The economic crisis in Iraq as a result of the ongoing rise in the value of the US dollar against the dinar resulted in the prime minister sacking the heads of the Central Bank of Iraq and the Trade Bank of Iraq. 
Iraqi Prime Minister Mohammed Shia al-Sudani and the German chancellor (not in picture) give a joint press conference at the Chancellery, Berlin, Germany, Jan. 13, 2023.

Iraqi Prime Minister Mohammed Shia al-Sudani removed on Monday Central Bank of Iraq Gov. Mustafa Ghaleb Mukheef and head of the Trade Bank of Iraq Salem Chalabi.

Sudani appointed Ali Mohsen al-Allaq as the head of the central bank and Bilal al-Hamdani as the head of the Trade Bank of Iraq.

This comes at a critical time as the exchange rate of the US dollar to the Iraqi dinar reached 1,670, the highest price since 2004. The rise of the US dollar affects the Iraqi economy significantly as the majority of goods and products are imported from overseas, based on the value of the dollar.

How did Iraq get here?

The rise of the US dollar started a few weeks after the new government came to office last October. The previous government had kept the exchange rate of the dollar to the dinar between 1,145 and 1,147, after it raised the official exchange rate from 1,182 to 1,460 dinars in December 2020, to address the economic crisis that resulted from the coronavirus pandemic and a drop in the price of oil. 

Sudani had set measures previously to control the price of the US dollar, including banning four Iraqi banks from participation in a currency auction due to their violation of the regulations, and setting a daily limit on the amount of dollars citizens could withdraw. However, none of these measures had a positive result as the price of the dollar kept rising significantly.

The reason for the dollar price increase is due to several technical issues that the Sudani government has failed to address so far.

First, the lack of sufficient transparency in the Iraqi banking system has led the Central Bank of Iraq to set restrictions for banks using the US dollar in order to comply with the US Federal Reserve regulations. This has limited the access to dollars in the country's banking system.

Second, the banking system in Iraq has not been developed into a full electronic system that allows the central bank to monitor and track all the money movements in and outside the country. This allows individuals and companies to transfer US dollars illegally overseas, which raises the price of the dollar due to the increase in its demand. In order to stop this, the banking system needs to develop the process and adopt a full electronic system that complies with the global banking system.

Third, the high level of corruption in Iraq, which has resulted in money laundering practices that require large amounts of money to appear to have come from a legitimate source, also created high demands for the US dollar to be withdrawn and used for purchasing properties inside and outside Iraq. In the recent corruption case known as “heist of the century,” about $3 billion was taken from the Iraqi tax commission’s account with the majority of the funds transferred to properties and other assets. The Iraqi government removed the ban from the main convict’s company last week, a short time after releasing Noor Zuhair Jassim.

In an interview with Al-Taghier TV on Monday, US Ambassador to Iraq Alina Romanowski said that the United States will continue the mechanism that helps the Iraqi banking sector to comply with the international banking system, to restrict the use of the global banking system by criminals and malicious parties in order to curb money laundering.

“These measures that we took began about two years ago and were gradually implemented by the banks and were agreed upon between the US Federal Reserve and the Central Bank of Iraq,” Romanowski noted.  

What are Sudani's options?

By replacing the head of the Central Bank of Iraq and the head of the Trade Bank of Iraq, Sudani hopes to address these issues.

Allaq, who also served as central bank governor from 2014 to 2020, is close to former Prime Minister and head of the State of Law Coalition Nouri al-Maliki.

In an interview with Al Rasheed TV last Saturday, Maliki said the solution for the currency crisis is twofold: The dollar movement needs to be controlled and the easing of the mechanism and regulations of providing dollars to Iraqi banks needs to be negotiated with the United States.

Leaders and members of parliament from the Coordination Framework, which is an umbrella bloc of Iraqi Shiite parties that nominated and supported Sudani for the premiership, have accused the United States of putting pressure on the government by using a fanatical mechanism that has led to the dinar plummeting against the dollar.

Aqeel al-Fatlawi, Shiite lawmaker from the State of Law Coalition that is part of the Coordination Framework, was interviewed on Rashid TV in regard to the currency regulations. "Americans are using the rigid dollar transfer restrictions as a warning to Prime Minister Sudani to stay in line with the American interests. 'Working against us could lead to bringing down your government' is the American message," he said.

Hadi al-Amiri, head of the Badr Organization and Fatah Alliance that is also part of the Coordination Framework, had accused the United States of using the exchange rate of the dollar to the dinar in order to starve the Iraqi people, calling for economic independence from the United States. 

Romanowski, however, responded to such accusations in her recent interview. “These measures [financial measures about the dollar movement in Iraq] were not designed to be political, but instead they were designed, in particular, to prevent money laundering and corruption,” she said.

It seems Sudani is caught between a rock and a hard place, as he is facing opposite demands from the United States on the one hand and his political allies on the other.

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