Reinforcing the Iraqi Dinar: A Shift in Iraq's Monetary Policy

In a decisive move to strengthen the local currency, the Iraqi Council of Ministers has mandated that all local contracts be denominated in Iraqi dinars. This decision is a notable departure from the previous norm of executing contracts in US dollars. However, an exemption is made for contracts established through external bank-issued “documentary credits.”

The Ministry of Planning has been entrusted with the task of compiling a comprehensive list of former state contracts initially denominated in US dollars. This list will be shared with the Ministry of Finance and the Central Bank of Iraq in an effort to ensure a smooth transition to the new policy.

Limitations on Dollar Coverage

As part of this shift, the Ministry of Planning will also set a maximum monthly limit for the coverage of contracts in US dollars. The Central Bank of Iraq is tasked with guaranteeing coverage at an exchange rate of 1,320 dinars per US dollar. To facilitate monthly payments for these contracts, the allocated funds will be deposited into the Ministry of Finance's account, adhering to all necessary release controls.

The new policy also introduces a significant change for Iraqi borrowers from government banks who have taken loans in US dollars. These borrowers are now obliged to repay their loans in Iraqi dinars. The Central Bank of Iraq will cover these loans in US dollars, which will subsequently be used to reimburse the lending banks. Notably, this procedure is only applicable to loans issued before the Council's recent decision.

Strengthening the Iraqi Dinar amid Devaluation

This strategic move comes in response to the devaluation of the Iraqi dinar over the past year, largely attributed to measures taken by the United States in late 2022 to prevent money laundering and the flow of dollars to Iran and Syria. These actions led to a significant drop in the street value of the Iraqi dinar, which fell to nearly 1,750 dinars per US dollar. Through the new policy, the Iraqi government aims to stabilize and strengthen the local currency by increasing its use in internal transactions.

The shift in Iraq's monetary policy is a significant step towards reinforcing the local economy. By increasing the use of the local currency in internal transactions and setting strict parameters for the use of US dollars, the government is taking active measures to curb the devaluation of the Iraqi dinar. However, the effectiveness of these measures will depend on their implementation and the response of the local and international market.