DE-DOLLARISATION: Iraq to ban dollar cash withdrawals from Jan 1, 2024 to avert US sanctions

Iraq will prohibit cash withdrawals and transactions in US dollars as of January 1, 2024, to implement a significant policy change to curb financial crimes and circumvent US sanctions on Iran, a high-ranking official from the Iraqi central bank said.

Mazen Ahmed, the director-general of investment and remittances at the Iraqi Central Bank (CBI), disclosed that this move is designed to combat the illicit use of approximately 50% of the $10 billion that Iraq imports in cash annually from the New York Federal Reserve. 

This measure will also contribute to broader efforts to reduce the reliance on the US dollar in an economy that has favoured it over local currency since the 2003 US invasion due to the instability in the region.

Notably, individuals who deposit dollars into banks before the end of 2023 will still be able to withdraw funds in dollars in 2024. However, funds deposited in 2024 will only be available for withdrawal in the local currency at the official exchange rate of 1,320 Iraqi dinars per dollar. This rate is significantly lower than the parallel market rate, which currently stands at 1,560 dinars per dollar, representing a roughly 15% difference.

Ahmed emphasised that individuals can continue to make electronic transactions in dollars within Iraq at the official exchange rate, but cash dollar withdrawals will be phased out. A statement from the central bank clarified that the ban on cash dollar withdrawals would solely apply to accounts receiving transfers from abroad.

Iraq has already established a system to regulate wire transfers, in cooperation with US authorities, which has been effective in preventing fraudulent transactions that benefited Iran and Syria, countries subject to US sanctions.

Nevertheless, the issue of dollar shortages and a burgeoning parallel market exchange rate persists. Many local banks have already limited dollar cash withdrawals in response to increased demand, and the CBI has reduced its dollar supply as part of a broader shift towards electronic payments.

While the dinar may experience further devaluation as these measures take effect, Ahmed believes that this is a necessary step toward formalising the financial system and combating illegitimate transactions. He stressed that as long as transparent and legal financing operations take place at the official exchange rate, the parallel market rate is less consequential.

In light of these changes, it remains to be seen how this shift away from the dollar will impact Iraq’s financial stability and its relationships with both the United States and Iran.