Iraq sacks central bank governor as dinar slides in value

Iraq has dismissed the governor of the Central Bank of Iraq and replaced him with the monetary authority’s former chief as the government tries to stem a big decline in the country’s currency.

Prime minister Mohammad Shia al-Sudani sacked Mustafa Ghaleb Mukheef, who had been in the post since 2020, “at his request”, said an adviser to the premier on Monday. Mukheef had ties to Shia cleric Moqtada al-Sadr, whose party has been boycotting Sudani’s government since its formation last October.

Ali Mohsen al-Allaq, the previous incumbent, was named as acting governor. A senior figure in Dawa, a Shia Islamist party led by former premier Nouri al-Maliki, Allaq governed the central bank from 2014 to 2020. He is known to be closely associated to Maliki, who still wields considerable influence over Sudani’s government.

Allaq’s appointment follows a trend by Sudani of replacing officials appointed by his predecessor with ones closer to the Co-ordination Framework, the largest parliamentary bloc which is linked to Iran and formed mostly of Shia groups opposed to Sadr’s influence.

Iraq’s cash-based economy relies heavily on the US dollar. The official exchange rate is fixed at ID1,460 to the dollar, but the currency began fluctuating in mid-November, trading at up to ID1,600 on parallel markets before settling at around ID1,570 after Baghdad tightened rules around international dollar transactions. It reached a record low on Friday of about ID1,670 — a loss of about 7 per cent since mid-November.

The pressure on Iraq’s currency is increasing fears among Iraqis of a decline in purchasing power as prices rise for imported goods. Authorities have introduced measures to stabilise the dinar, including opening foreign exchange outlets at state-owned banks for Iraqis travelling abroad.

Experts say the depreciation is partly a byproduct of stringent regulations to make Iraq’s banks more compliant with the Swift international transfer system — essential for Iraq to access its dollar reserves held at the US Federal Reserve, but only recently implemented by Iraq’s central bank.

US regulators began implementing the tighter controls in mid-November, in an effort to curb surreptitious cash flows to Iran and Syria stemming from the central bank’s provision of dollars, according to two sources with knowledge of the discussions.

The implementation coincided with the uncovering of Iraq’s “heist of the century,” in which $2.5bn in dinars was allegedly spirited away from the country’s tax authority between September 2021 and August 2022. Some of the stolen cash was used to buy US currency through the daily “dollar auction” — a process in which Iraq’s central bank provides dollars to a commercial bank in exchange for dinars. Four banks were barred from participating in the auctions.

Sources told the Financial Times at the time that the corruption scandal implicated officials at the central bank. It also helped the US persuade Baghdad to introduce the measures, which current finance minister Taif Sami Mohammed recently told parliament were due to be implemented in 2018.

Government officials and politicians say the moves reflect punitive action by Washington. Paramilitary strongman Hadi al-Ameri, who has close ties to Iran’s Revolutionary Guards, recently accused the US of using the dollar “as a weapon to starve nations”. A team of officials from Baghdad was to visit Washington in “the coming days” to discuss the dollar auction and Iraq’s banking system, said Madhar Muhammad Salih, Sudani’s fiscal policy adviser.

“There’s no evidence of US pressure on the Iraqi government,” said Ahmed Tabaqchali, a visiting fellow at London School of Economics’ Middle East Centre. “Iraq is simply being asked to implement what other countries did years ago.

Since the measures were introduced in mid-November, there had been an 80 per cent decline in transactions because of doubts over the final destination of these transfers, Salih said.

“The new regulations require high levels of disclosure and transparency and was therefore a shock to many Iraqi banks not used to this level of scrutiny,” said Baghdad-based Tabaqchali. “After a number of transfers were rejected, many banks began self-censoring [blocking requests] to avoid further rejections.”

The combination of new rules and banks’ caution had resulted in transfers dropping from a daily average value of $180mn in 2022 to a daily average of $75mn this month, Tabaqchali said, citing government data.

“It’s now a simple supply and demand issue: there are just fewer dollars in the market until the banks get used to the new regulations. Only then, will we see the currency start to stabilise — probably at under ID1,600 but higher than November levels.”