Moaz Fraihat – Washington
November 30, 2023
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Monetary policy in Iraq faces many challenges, especially in light of the existence of an irregular currency exchange market managed by networks that manipulate prices for a dollar against the dinar, according to local media reports.
In the face of “monetary doubleness” that has harmed the country’s economy, Iraq is moving to apply the principle of “monetary sovereignty”, according to what the Prime Minister’s financial adviser Mazhar Mohammed Saleh revealed, in statements to the Iraqi News Agency “Wa“.
Applying the “principle of monetary sovereignty,” according to Saleh, “the Iraqi dinar becomes the only refuge for exchange, pricing and coverage of internal transactions.”
The Iraqi authorities are struggling in an attempt to adjust the exchange rate of the Iraqi dinar against the US dollar, which is witnessing fluctuations that led to the decline in the value of the dinar, accompanied by compliance with international rules in financial transfers, which affected the presentation of the dollar in the market.
What does the application of the principle of “monetary sovereignty” mean?
In a research paper published by the Iraqi Economists Network last October, economic adviser Saleh explains that monetary sovereignty is called “Westphone,” which expresses “the state’s authority to exercise exclusive legal control over its currency through the functions of the central bank as the exclusive authority to determine the quantities and value of the process as a means of payments.”
He added that the name “Westphalia” comes from the “Westphalia” system, which represents a principle in international law that each state has exclusive sovereignty over its territory, which is explicitly stated in the UN Charter.
The research states that this sovereignty is based on: the independence of cash management, its issuance and the exchange system.
Why now Iraq needs to apply such a principle?
According to the paper, Saleh believes that Iraq needs to apply the principle of monetary sovereignty in order to enhance the ability of monetary policy to “adjust the levels of domestic liquidity through the strength of the central bank’s intervention in the monetary market.”
He warned against the continuation of what he called the “real reality of the colored noise that allows the black market to remain for the cash dollar” and its ability to affect the price system, not to mention the greater availability of the state to manage inflation by influencing it through interest rates.
Saleh stressed that the Iraqi state’s adoption of the principle of monetary sovereignty will lead to “maintaining a fixed exchange rate that allows free capital flows and countering cheap cash.”
The General Directorate of Iraqi Intelligence and Security had announced the overthrow of a network that manipulated the exchange rates of the dollar in Baghdad, according to a report published by the “Wa’a” agency.
Last August, Prime Minister Mohammed Shia al-Sudani announced the arrest of a network of “majorators” in currency that collects dollars and send them to the Kurdistan region in northern Iraq, and then smuggled abroad, without specifying the destination, according to an AFP report.
Factors of applying the principle of monetary sovereignty?
The Iraqi economist, Salam Simsim, identified the most prominent factors that allow the application of the principle of “monetary sovereignty”, stressing that they are not linked to the existence of a political decision to implement it, but economic factors and determinants.
In an interview with Al-Hura website, Simsim outlined a package of factors that must be available: “the strength of the economy, the stability of exchange rates, the strength of the national currency itself, the existence of a truly productive economy that is not only dependent on imports.”
Despite the attempts of the authorities to control exchange rates, the irregular market has been accounting for about 10 percent of the trading rate, in what adviser Saleh described as “the uncontrolled market and controlled by speculators and adds noise to the economy of Iraq as a whole.”
Will it affect deposits in foreign currencies?
The Iraqi economist, Mahmoud Dagher, explains that the principle of monetary sovereignty “does not mean that the savings of citizens or any legal person who has funds deposited in foreign currencies will be affected, as they can still deposit and withdraw funds in dollars or other foreign currencies that may be deposited in them.”
In a response to Al-Horra’s inquiries, he pointed out that the majority of countries seek or aspire to reach “monetary sovereignty” by making “their national currency the base currency to be used in payments and transactions within the country.”
Applicability of the principle of monetary sovereignty in Iraq?
Iraqi economists agreed that the application of the principle of monetary sovereignty needs to be provided several factors, the most important of which is “bridge the gap between the exchange rate of the national currency against the dollar.”
“Whenever the exchange rates of the national currency against foreign currencies stabilize, the principle of monetary sovereignty is applicable,” said expert Dagher, a former official in the Central Bank of Iraq, which should be accompanied by “the absence of a gap or differences between exchange rates in the official market and the parallel market and preventing speculation in this regard.”
Expert Semmism confirms that each country has the right to resort to the principle of “monetary sovereignty” in order to control the “monetary market”, noting that “this is not only related to desire or ambitions, but also to the strength of the national currency in real, as the currency is not only paper, it must express a corresponding value to the GDP, and its ability to store value in real, with it is associated with different strength indicators on several levels.”
Iraq has begun applying the standards of the international transfer system “Swift” since mid-November 2022 to reach Iraq’s reserves of dollars in the United States, which are estimated at tens of billions of dollars, according to AFP.
Iraqi banks should currently register their dollar transfers on an electronic platform, scrutinize requests, and the US Federal Reserve examines them and if it has doubts it is stopping the transfer.