Iraq is facing a deep hole in its public finances due to the crackdown on corruption and dollar smuggling by the US Federal Reserve since the “theft of the century,” Iraqi officials told Middle East Eye.
The British website said that the crisis – which is expected to worsen in the next few weeks – caused the collapse of daily trade in dollars through the currency auction run by the Central Bank of Iraq, as the government relies on the auction to convert the dollars it earns from oil revenues into the local currency (the dinar).
And “Middle East Eye” stated that last year witnessed the sale of about $ 200 million per day on average through the auction to banks and private companies, but this number decreased sharply in the last two months of last year, as it fell to a daily average of $ 56 million by late December. December, according to the data he reviewed.
According to the same source, the government is facing a crisis in paying public sector salaries and fulfilling its other monthly obligations. “The problem we are facing now in Iraq is the scarcity of dinars, not dollars,” a senior central bank official told Middle East Eye, who requested anonymity.
The crisis affected the broader economy, so the dollar exchange rate in informal markets rose from 1480 dinars to 1630 since late November, and the price of consumer goods rose, as the price of rice rose this week to 2350 dinars per kilo from 1850 dinars, and the cost of cooking oil increased by more than Double from 1250 dinars per liter to 3 thousand.
The Iraqi officials whom Middle East Eye spoke to denied any direct link between the current crisis and the so-called “theft of the century”, in which about $2.5 billion was stolen from the Tax Authority through state-owned banks between September 2021 and August 2022, but they acknowledged The US Federal Reserve imposed stricter measures on private banks buying dollars through auction two months ago, just weeks after details of the theft were disclosed by the Treasury Department on October 10.
An adviser to the prime minister – who spoke to Middle East Eye on condition of anonymity – said that the Federal Reserve began checking foreign financial transfers in November in an attempt to track stolen funds, and added that this caused delays in the release of the money. Transfers and led to a decrease in dollar sales through the auction, indicating that the Reserve Bank also presented checks on the source of funds held by the private banks participating in the auction, which prompted many of them to withdraw and increase the unofficial exchange rate.
Middle East Eye indicated that in late December, the Coordination Framework (the largest political coalition in the Iraqi parliament) held a meeting in Baghdad to discuss the high cost of the dollar and the crisis in the Iraqi markets. Central Bank Mustafa Ghaleb, who said at the meeting that the Reserve Board has “dangerous indications” of dollar smuggling operations.
Ghaleb said that the “Central” stopped dealing with 4 private Iraqi banks in November, after directives from the Federal Reserve Board.
According to a document – seen by Middle East Eye – the Central Bank also ordered banks and other financial institutions to stop dealing in dollars with the four banks for “audit purposes” on November 6, which in turn challenged these decisions in lawsuits filed by these banks. Banks against the Central Bank, but their case was rejected by the Financial Services Court, which confirmed the right of the Federal Reserve to prevent them from dealing in dollars.-
Oil sales revenue
Middle East Eye pointed out that the Iraqi government needs about 8 trillion dinars ($5.5 billion) per month to pay the salaries of government employees, retirees and social welfare beneficiaries, and this is largely secured through the currency auction, most of which comes from oil revenues.--
The decline in dollar sales caused a shortage of dinars for the central bank. Even at its peak, the auction usually does not collect enough to meet the $275 million that the government needs every day. This shortage of currency shares held by the “Central” was usually covered by internal loans. between the bank and the government, by printing more currency, or other financial activities.
According to the British website, foreign currency auction data for the past four years that it reviewed shows that the amount of dollars in circulation has remained stable, at an average of about $200 million per day during 2019 and 2020. In the first three months of 2021, the amount traded at auction fell to historic lows as only $3 million was traded on some days, but in the second week of April, the daily amount suddenly jumped to an average of $190 million traded per day until the end of the year. And in 2022, dollar sales did not fall below an average of $200 million per day for the first 10 months of the year.
The source explained that since the collapse of auction revenues, the Central Bank opened new outlets to sell dollars directly to citizens through the currency auction system, in an attempt to collect more dinars, but the data that shows foreign currency sales during the past few weeks shows that the bank is still selling on average. Less than 90 million dollars a day.
According to “Middle East Eye”, Iraqi officials expect the situation to deteriorate further during the next few weeks, especially after the “Central” launched a new electronic platform for currency auction earlier this month, as the bank said in a statement that it had launched the platform “in coordination with international bodies.” For the purpose of governing and organizing effective operations to buy and sell foreign currencies and to ensure effective control over them.
The new platform connects all banks with the Central Bank and requires banks to disclose information about their customers requesting money transfers, beneficiaries, correspondent banks, and other details.
The article quoted one of Al-Sudani’s advisors as saying, “The new platform has complicated matters further, as the real owners do not want to reveal their identity or the source of their money, so we do not expect auction sales to improve soon.” He added, “The pressure is increasing and the situation will get worse if the government does not take action.” Crucial to contain the crisis, but the problem is that the available options are very limited and it takes time.
The central bank official said that the situation does not bode well, pointing out that if auction sales remain low, the central bank will have to issue a new edition of the local currency.
currency devaluation risk
Iraqi officials warned – according to “Middle East Eye” – against issuing a new edition of the local currency because this would reduce the value of the dinar and increase the inflation rate, which was rejected by the leaders of the coordination framework, and instead they urged the Sudanese and Ghalib to go to Washington seeking to negotiate a period A grace period of 6 months before the implementation of new measures, to allow the government and the central bank to “get ready”.
The leaders of the framework called for easing the audits imposed by the US Federal Reserve, for faster external financial transfer procedures, increasing the number of official dollar sales outlets, and tightening controls on dollar smuggling.