Limitations onusing USD currency in Iraq
Financial Services Focus
During the second half of 2022, Iraq began experiencing significant instability in the exchange rate of the US dollar. While the Central Bank of Iraq (CBI) official exchange rate at the time was 1470 IQD per dollar.
Law Update: Issue 365 - Financial Services Focus
Jawad KhalafPartner,Head of Litigation - Iraq
Zainab SaadAssociate,Dispute Resolution
During the second half of 2022, Iraq began experiencing significant instability in the exchange rate of the US dollar. While the Central Bank of Iraq (CBI) official exchange rate at the time was 1470 IQD per dollar, the local market for the US dollar reached an unprecedented exchange rate by the end of 2022, reaching 1800 IQD per dollar at some points. This situation led to instability in all financial transactions within the country. In response, at the beginning of 2023, the Iraqi government took action to rectify the situation and minimize the influence of the black market on the usage of the US dollar in Iraq.
On February 2023, the Iraqi government, represented by the Council of Ministers, issued a decision dated February 6th, 2023, to change the official exchange rate of the US dollar to be 1320 IQD per dollar. The CBI, as the financial institution overseeing all governmental and non-governmental financial matters in Iraq, made the decision of the Council of Ministers effective as of February 8th, 2023, in order to rebuild trust in the IQD by reducing reliance on the US dollar and encouraging the Iraqi market to use the national currency.
Following these decisions, the CBI and the Council of Ministers issued several other decisions to limit the use of the US dollar, affecting governmental contracts, non-governmental contracts, and employees and workers in the private sector whose payroll is paid in US dollars. In this article, we will discuss the limitations mentioned above separately and as follows:
On January 10th, 2023, the Council of Ministers issued a decision obliging all governmental entities to conduct their transactions and services in Iraqi dinars, per the official exchange rate determined by the CBI from time to time. However, this decision left a crucial issue unresolved: governmental contracts in cases where the government agreed to pay any financial obligations in US dollars. For a while, contracts of this nature remained effective and were paid in US dollars based on agreements between the parties. The Council of Ministers addressed this issue in a decision dated September 26th, 2023, stating that all governmental contracts shall be in IQD. Furthermore, at the end of the year, on November 27th, 2023, the Council of Ministers outlined exceptions to their previous decision dated September 26th, 2023, for cases such as currently effective external loan agreements and future agreements conditional upon signing in a different currency than IQD. It is noteworthy that any guarantees, letters of guarantee, and letters of credit for governmental contracts concluded in US dollars shall be paid in IQD, per the official exchange rate of 1320, based on the Council of Ministers' decision dated April 18th, 2024.
It is evident that under the numerous decisions issued by the Council of Ministers and CBI, the private sector will be directly affected. Not only are private entities involved in governmental contracts mentioned above, but also the decision of the Council of Ministers dated January 10th, 2023, obligated all companies operating in the private sector similarly. These companies must transition all their transactions, services, and contracts to be in IQD. They are required to announce the shift from accepting the US Dollar as a form of payment to IQD, adopting the official exchange rate announced by the CBI. The authors of this article were also informed that national security officials visited all companies, shops, and markets to have these entities sign an undertaking of such obligation. The undertakings were signed and collected by the national security officials. Therefore, not only did the decision compel companies to comply, but the companies' signatures on the undertakings also rendered it impossible for them to conduct any transactions in US dollars.
Workers and employees in the private sector were heavily affected by the decision as well. All employees who used to receive their payroll in US dollars were obligated to receive it in IQD, per the exchange rate, bearing a significant difference between the market exchange rate and the official exchange rate following the decision of the Council of Ministers dated April 18th, 2023. In most cases, such employees receive their salaries through external bank transfers. However, external bank transfers were exempted from this change, as per CBI's instructions No. 9/3/463 dated August 17th, 2023. Despite this, most banks in Iraq began handing over amounts of transfers and deposits in IQD, in clear violation of the CBI instructions. Employees and individuals forced to collect amounts in IQD filed several complaints with the CBI regarding the issue. Finally, the CBI issued instructions to all banks, stating that any deposit in US dollars shall be handed over/withdrawn in US dollars, while the issue of external transfers remained unresolved. Moving forward, a CBI official announced that starting in 2024, a new mechanism will be implemented regarding external transfers. On December 31st, 2023, the long-awaited mechanism and instructions were issued. The CBI specified the categories allowed to receive their external transfers in US dollars, which include diplomatic missions, international agencies operating in Iraq, NGOs officially registered in Iraq if the foreign entity made it a condition to pay in US dollars, governmental contracts subject to the limitations mentioned above, and 40% of external transfers of Iraqi exporters resulting from their exporting transactions. However, it's noteworthy that employees' salaries were not included in these categories. Nevertheless, the CBI left a small room for banks and employees to work with, allowing banks to hand over US dollars to customers from their own resources and based on agreements between the bank and its client.
The Council of Ministers and CBI are facing a new challenge in rebuilding trust in the Iraqi currency. Although the decisions of the Council of Ministers were not fully implemented and exceptions were made, as seen above, this process achieved, from our perspective, most of its intended goals, considering that the majority of the Iraqi community adapted to the new situation. Additionally, the road regarding the main issues mentioned above is now clearer. Lastly, the only situation remains under discussion is the pervious contractual obligation, due amounts and claims in US Dollar, this matter shall be subjected to litigation and the concerned court shall be the decision maker if a dispute of this nature arose before them.
For further information,please contact Jawad Khalaf and Zainab Saad.
Published in February 2024
