Iraq to Protect Its US Dollar Reserves From Iran and Syria
Just last June 6, 2012, Baghdad (News) released a report telling that some Iraqi dinar traders and Iraqi officials affirmed that (for the very least) the Central Bank of Iraq has achieved success in maintaining stability on its Dinar currency with the help of state-run banks in the country.
So, why do these traders and officials have to tell us this? Well, one could understand the reason behind the affirmation if we check the situation of Iraqi Dinar last March and April of 2012.
March and April of 2012 were struggle months for CBI because they needed to protect their US dollar reserves from the illicit flow of the US dollar to Syria and Iran. There even came to a point where in the demand for US dollar from traders, who wanted to sell US dollar to Syria and Iran by trading in their Iraqi Dinar notes, reached a worth of almost 400 million US dollars.
Why is this hard to cope for the Iraqi Central Bank? It is simple. If the reserves of their US dollars would run out, chances are potential foreign investors (that would most likely include international speculators who are legitimate to participate on the banks daily auction) might not be able to trade on the succeeding dinar to dollar auctions. It would cause imbalance on their part and might sacrifice some of legitimate foreign investments.
To attend to this issue, CBI decided to sell their US dollar reserves only at a fixed price to legible Iraqi dinar traders. The Central Bank lowered the exchange rate from 1280 IQD to 1210 IQD for 1 USD. This gave ground to fill in the gap between the market price and the official selling exchange rate.
Deputy Governor of CBI, Dr. Sinan Al-Shabibi, even noted that the difference in the dinar value of the CBI and that of the market was 7%. However, when CBI managed to control the stem the illicit flow of its hard currency to Iran and Syria, he was confident and, expected that the gap would fall to 4% in the weeks to come.
With the current daily auction, the selling price of US dollar to IQD in Rasheed and Rafidain has reached 1189 IQD to 1 USD while that of the market price is only 1210 IQD to 1 USD. Is this good news or another threat to the Dinar play? Usually, CBI sells 250,000 USD to private banks every week and another 75,000 USD in exchange for Iraqi Dinar, to exchange companies and money transfer transactions. So, who can participate to the daily auction? How would CBI differentiate from an illegitimate trader to reputable IQD dealers?
Iraq strictly practiced the rules on who can participate in the daily auction. Started on April 1 2012, traders are bound on the members of the Iraqi Chamber of Commerce to obtain the proper licenses to freely participate in the auction, similar to the licensing required to import and export Dinar to and from Iraq. This simply means that they have to formally register their businesses from the Iraq Trade Ministry.
Unfortunately, not all traders are happy about the imposed requirements of the Iraqi Chamber of Commerce. They said that the permit will make them wait for 30 days to let them send money to foreign countries. In short, it consumes time and will force them to rise at a higher price in the local market than that of CBI’s. However, will this effectively crack down the illicit movements of the USD reserves of Iraq to Iran and Syria? Will any of the members of the Iraqi Chamber of Commerce dare to tolerate the illegal outflow of Iraq’s property to these countries?
Since Syria and Iran are still under Western sanctions, Iraq is becoming a great source of US dollars for some of its neighboring countries and to businesses who seek hard (stable) currency to support their weakening local banknotes. How Iraq officials respond to this will play out into the value of the Iraqi Dinar, so far, it looks like Iraq has a big dog in the fight.
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