Shafaq News/ In what experts describe as a "misstep," theCentral Bank of Iraq has stopped using the Chinese yuan after the US FederalReserve accused Iraq of "inflating transfers." Economists are warningthis decision could raise the US dollar exchange rate and increase inflation,harming Iraqi families. They suggest three solutions for the Central Bank tokeep remittances flowing to China.
Unannounced Visit
In a recent move by the Iraqi government, Central Bank Governor AliAl-Alaq is on an unannounced visit to the US to discuss the Federal Reserve'sdecision to stop Iraq from using the Chinese yuan, sources told Shafaq NewsAgency. Al-Alaq's visit comes amid a sharp rise in the dollar's exchange rateagainst the dinar, over two months after Prime Minister Mohammed ShiaAl-Sudani's visit to the US.
"Misstep"
Economist Diyaa Al-Mohsen described the Central Bank of Iraq's decisionto stop transactions in Chinese yuan as a "misstep," noting thattrade with China exceeds $65 billion. Al-Mohsen told Shafaq News Agency thatthis decision will negatively impact the local market by increasing demand forthe dollar, which will raise the US dollar exchange rate and boost inflation."This will adversely affect Iraqi families."
He also warned that halting yuan transactions could harm Iraq'srelations with global economic organizations and lead to severed trade ties dueto the Central Bank's inconsistent policies. Iraq has been increasing itsyuan-denominated assets through the Singaporean Development Bank, financingabout $12 billion in annual trade with China. The country is also boosting itsassets in UAE dirhams, negotiating for more euro-denominated assets for tradewith the EU, and opening bank accounts in Indian rupees for several Iraqibanks.
More Political than Economic
Economic researcher Ahmed Eid argued that the US decision to haltChinese yuan transactions in Iraq is more political than economic, reflectingthe power struggle between the US and China. Eid told Shafaq News Agency thatthe reduced US presence in Iraq has left a vacuum that Iran and China quicklyfilled. China has capitalized on this to increase its influence in Iraq, whichhas the world's fifth-largest oil reserves.
He explained that the "US-Iran rivalry allowed China to dominateIraq's trade market with competitive prices. The US, once Iraq's main tradingpartner, now struggles to compete as China captures a larger share of Baghdad'strade, worrying Washington." Eid also mentioned that many Iraqi supply andtransport companies are now controlled by groups linked to "militias andpolitical parties, which smuggle dollars or engage in currency exchanges. Thisled the US to impose more sanctions on Iraqi companies and banks."
Since early 2023, the Central Bank of Iraq has taken steps to stabilizethe economy, manage the dinar's exchange rate against the dollar, and easetrade by partnering with global banks, including Chinese ones. One majordecision was to increase yuan balances in Iraqi banks with Chinese accounts.Direct yuan transactions bypass the dollar, streamline financial operations,lower import costs, and shield Iraq from exchange rate volatility.
Three Options for Iraq's Central Bank
Economist Mustafa Hantoush explained that the US Federal Reserve accusedIraq of "inflating transfers" by sending funds without receivingequivalent goods or any goods at all. "This issue has exposed a flaw inthe Central Bank of Iraq, which has not linked bank transfers to goods enteringthrough border crossings for the past 20 years. This oversight causes an annualloss of at least $5 billion in uncollected customs and taxes and leads tointernational accusations of money laundering and currency smuggling."
Hantoush told Shafaq News Agency that the Central Bank of Iraq hasseveral options to address these accusations: "Quickly establish a systemto link bank transfers to goods at border entries, hire a new company to manageremittances from Iraq to China within the Central Bank, convert dollars insteadof Chinese yuan through Iraqi banks owned by foreign investors with accounts atCitibank and JPMorgan." "This could result in these banks controlling90% of the currency market, potentially crippling the Iraqi banking system,"he added. These steps are essential for the Central Bank to respond to theFederal Reserve's concerns and prevent further economic issues.