Concerns around regional smuggling of US dollars have frustrated US economic ties with Iraq. Tightening the dollar supply in Iraq has weakened the potential for smuggling, but badly damaged Iraq’s economy.
This is a problem Iraq doesn’t need and shouldn’t have. A surging oil trade provides the Central Bank of Iraq with large amounts of US dollars in reserve, but the US is limiting the bank’s ability to import them, making the dinar worth a lot less in trade. That’s causing problems for Iraqis all across the country’s economy.
The crisis has already claimed the job of Central Bank Governor Mustafa Ghaleb Mukheef, who was fired just a week ago. His replacement, Mohsen al-Allaq, met with US Undersecretary of the Treasury Brian Nelson in Istanbul over the weekend.
The meeting was focused on Allaq selling proposals for Iraqi reforms and efforts against dollar smuggling, and trying to convince the US to open up the flow of dollars to Iraq. The post-meeting statement is vague as to what agreements were reached, but the Iraqi dinar did go up on the news, with investors anticipating a helpful outcome.
The US tightened the legal dollar market to try to prevent money laundering. A side-effect of this was a surge in the grey and black market dollar trade, creating all sorts of associated legal problems.
So long as the US dollar remains the de facto global currency of record, dollar smuggling will necessarily continue around the world, especially in places like Iran and Syria, where US sanctions intentionally curb trade. Forcing nations like Iraq to turn to smuggling just makes the process easier for smugglers and harder for the US to restrict.
The US obsession with sanctions on Iran and Syria will likely keep them from opening up Iraq’s economy too much. Clearly the central bank must seek a balance whereby Iraq’s economy isn’t unmanageable. The forex trade suggests many expect that to happen, but US regulatory and sanctions actions are always difficult to predict, and can cause any number of additional concerns.