(February 2, 2023) — Iraq’s foreign exchange rate has steadily declined over recent years, falling to lows which are severely damaging the Iraqi economy. Ironically, this comes at a time when the foreign reserves meant to back the Iraqi dinar’s global position are at a near-term high.

Starting with the 2003 US invasion and occupation, the Central Bank of Iraq has remained closely linked to the US Federal Reserve. This was one of several long-term linkages meant to ensure the US retained strong sway over the future Iraqi economy to react to any tensions, and in the increasingly likely event that the US feels like increased mucking about regionally.

The US regime got it in its head that Syria and Iran were using the relatively free economy of neighboring Iraq for money laundering. That’s not an entirely unreasonable suspicion, as many Iranians are heavily invested in the Iraqi economy after the damage done to Iran’s economy by US sanctions. Trying to rein this in, the US Federal Reserve is keeping a tight grip on the foreign reserves it holds “for” Iraq.

Much of the harm done in Iraq directly appears inadvertent and related to general US policy, as the Central Bank of Iraq’s reserves are not coincidentally mostly US dollars.

Most of the world holds the US dollar as a big part of its reserve currency stores, and as a result the exchange rate with US dollars is an important measure of the health of any given currency. Exchange rate ought to track closely with the reserve backing it, and in most places in the world it does indeed even out to that.

Not so for Iraq. The Federal Reserve’s own data shows Iraq’s reserves surging to a multi-decade high. This is absolutely to be expected, as the Ukraine war is driving up the price of oil, and Iraq’s exports are bringing in a lot of cash, even if that cash ends up in the US and not particularly accessible.

Under ordinary conditions, Iraq’s central bank would strengthen the dinar by selling some of its US dollars to Iraqi financial institutions. Concerns for money laundering make this an exceedingly slow process, and few are willing to exchange their dollars for dinars, knowing how hard it can be to exchange them back. This is making trade with the US difficult, and growing Iraq’s infrastructure all but impossible.

Iraq is sending a team of diplomats to the US to try to negotiate a more open policy. This is no small task, as the US really wants to control the flow of dollars in the region.

Leaving the status quo in place, however, seems no solution, as it is undercutting Iraq’s current government, and fueling domestic unrest in a country the US was hoping to keep as a dependable ally whose policy it could drive.

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