On January 1, 2024, Iraq will ban all transactions involving the US dollar. The primary objective behind this decision is to wrest control over a fluctuating black market exchange rate and bolster the utilisation of the Iraqi dinar. The catalyst for this transformation has been an extended bout of currency instability, culminating in escalating prices and waves of civil unrest over the past half-year. The dinar’s precarious trajectory has been further exacerbated since November 2022, largely attributed to stringent US regulations governing international money transfers. These measures stem from deliberations in Washington regarding the diversion of US dollars to Iran, Syria and Lebanon via Iraq’s Central Bank foreign currency auction. This strategic transition raises pertinent questions about the future standing of the US dollar as the predominant global reserve currency, hinting at the dawn of a more multipolar world order.
Iraq’s historical attachment to the US dollar for international dealings, reserve holdings and oil trading has been a longstanding tradition, but it comes with its set of complications. Iraq possesses over $100 billion in reserves parked in US banks, rendering it highly dependent on US officials’ goodwill to avert economic catastrophe. Since 2003, all revenues from Iraqi oil have been channeled into an account under the purview of the US Federal Reserve, effectively granting Washington a lever to influence Iraq’s economic landscape and exert political pressure. Furthermore, the capricious nature of the US dollar, combined with shifts in US fiscal policies and economic sanctions, has rendered Iraq susceptible to considerable financial vulnerabilities, eroding its monetary sovereignty and obstructing the pursuit of economic diversification.
Iraq’s shift towards de-dollarisation holds promise on multiple fronts. Firstly, diversifying currency reserves helps mitigate the risks associated with the oscillating value of the US dollar, bolstering economic stability. Additionally, the adoption of alternative currencies can pave the way for expanded trade prospects and draw investments from non-US quarters, fostering economic expansion and reducing susceptibility to geopolitical influences. Iraq’s de-dollarisation strategy is intrinsically tied to its pursuit of greater economic self-reliance and enhanced sovereignty. As it stands, the local currency, the Iraqi dinar, maintains an exchange rate of approximately 1,300 dinars per US dollar.
Iraq’s move to de-dollarise reflects a global trend where nations aim to reduce reliance on the US dollar in international trade. China and Russia spearhead this effort, advocating for the use of their currencies, the yuan and ruble, in global transactions. China’s recent purchase of LNG using the yuan from the UAE, and India’s agreement with the UAE to settle trade in rupees, exemplify this shift. Furthermore, the Brics New Development Bank is advancing de-dollarisation by welcoming new members such as the UAE, Saudi Arabia, Egypt, Argentina, Iran and Ethiopia and initiating a 3-year de-dollarisation plan, with a focus on fostering local currency lending, diminishing dependence on the dollar and further challenging its global reserve currency status.
China’s expanding economic influence in Iraq, closely linked to its BRI, plays a pivotal role in Iraq’s de-dollarisation journey. The BRI presents opportunities for trade, infrastructure growth and investments in Iraq. China actively promotes the internationalisation of the yuan which could assume a more substantial role in Iraq’s economy. However, it’s important to note that the yuan faces certain limitations, particularly due to capital controls that currently restrict fund transfers in and out of China. Despite Beijing’s ongoing efforts to enhance the international use of its currency, the yuan’s share in global trade transactions remains relatively modest at approximately 4.5%.
However, the question of whether the US dollar can maintain its status as the world’s primary reserve currency can no longer be disregarded. Despite the uncertainties that lie ahead, Iraq’s shift away from the dollar offers a glimpse into a changing world order, where the dollar’s supremacy encounters growing obstacles.
Published in The Express Tribune, November 14th, 2023.
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