By: Shatha kalel
In Iraq, exchange companies play a crucial role in the foreign currency market, particularly in selling U.S. dollars. This practice emerged in response to the growing need for foreign currency by businesses and individuals, including travelers. With Iraq being a dollarized economy, where the U.S. dollar is commonly used alongside the Iraqi dinar, exchange companies have become key intermediaries in ensuring the availability of foreign currency for various purposes.
The Role of the Central Bank of Iraq (CBI)
The Central Bank of Iraq (CBI) regulates these exchange companies, overseeing their participation in the currency market through the foreign currency window. This window allows exchange companies and banks to buy dollars at a fixed rate determined by the CBI, which helps stabilize the exchange rate in the local market. The CBI has established rules to govern how these companies operate, including setting a fixed commission fee for selling dollars to citizens.
A recent directive by the CBI highlighted issues with the compliance of exchange companies regarding commission charges. According to the bank, some companies were charging citizens 50,000 Iraqi dinars as a commission for purchasing dollars, whereas the official commission is only 25,000 dinars. The CBI emphasized the importance of adhering to this regulation and warned that non-compliance could result in these companies being excluded from future participation in the foreign currency window.
How Exchange Companies Work
Exchange companies in Iraq operate by purchasing U.S. dollars through the CBI’s window and then selling them to individuals and businesses. The demand for dollars in Iraq is driven by several factors:
Imports: Iraq heavily relies on imports, and dollars are used to pay for goods purchased from foreign markets.
Travel: Iraqis traveling abroad require foreign currency, particularly the dollar, to cover expenses such as accommodations, transportation, and other needs.
Savings: Some Iraqi citizens prefer holding their savings in dollars as a hedge against the volatility of the Iraqi dinar.
The CBI ensures that dollars are available to meet these needs, and exchange companies serve as intermediaries, providing citizens with a smooth process for acquiring foreign currency. Citizens approach these companies to exchange their dinars for dollars, paying a small commission fee, which is regulated by the CBI.
Economic Impacts of Exchange Companies
Exchange companies have both positive and negative effects on the Iraqi economy:
Positive Impacts:
Stabilizing the Exchange Rate: By selling dollars at a fixed rate determined by the CBI, exchange companies help prevent wild fluctuations in the exchange rate. This stability is crucial for businesses and individuals who rely on a predictable exchange rate to plan their expenditures.
Supporting Trade: Exchange companies ensure that businesses can easily access foreign currency needed for import transactions, which is vital for Iraq’s economy given its dependency on imported goods.
Facilitating Travel and Consumption: For Iraqi citizens traveling abroad, exchange companies provide an accessible way to obtain the necessary currency, which promotes international mobility and spending.
Negative Impacts:
Market Manipulation: Non-compliance with CBI regulations, such as charging higher commissions than allowed, can undermine efforts to stabilize the currency market. When companies deviate from official guidelines, it leads to higher costs for citizens, which can fuel dissatisfaction and reduce confidence in the financial system.
Black Market Risks: The controlled nature of the CBI’s foreign currency window can sometimes drive people to the black market, where dollars are sold at higher rates, creating parallel markets that distort the official exchange rate.
Economic Disparities: The availability of dollars mainly benefits businesses and individuals with enough dinars to participate in the exchange, potentially widening the gap between those who have access to foreign currency and those who do not. This disparity can exacerbate economic inequalities in the country.
Conclusion
The regulation of exchange companies by the Central Bank of Iraq is a critical component in managing the country’s foreign currency needs. While these companies provide necessary services, such as stabilizing the exchange rate and supporting trade, strict adherence to CBI guidelines is essential for maintaining economic balance. Failure to follow these regulations can lead to increased costs for citizens and distortions in the market. As Iraq continues to navigate its complex economic challenges, exchange companies will remain integral to the country’s financial landscape, but their role must be carefully monitored to ensure they contribute positively to the economy.
Economic Unit/North America Office
Al Rawabet Center for Research and Strategic Studies