New economic crisis looms: US dollar vs. Chinese yuan war in Iraq market

Shafaq News/ In what experts describe as a "misstep," the Central Bank of Iraq has stopped using the Chinese yuan after the US Federal Reserve accused Iraq of "inflating transfers." Economists are warning this decision could raise the US dollar exchange rate and increase inflation, harming Iraqi families. They suggest three solutions for the Central Bank to keep remittances flowing to China.

Unannounced Visit

In a recent move by the Iraqi government, Central Bank Governor Ali Al-Alaq is on an unannounced visit to the US to discuss the Federal Reserve's decision to stop Iraq from using the Chinese yuan, sources told Shafaq News Agency. Al-Alaq's visit comes amid a sharp rise in the dollar's exchange rate against the dinar, over two months after Prime Minister Mohammed Shia Al-Sudani's visit to the US.

"Misstep"

Economist Diyaa Al-Mohsen described the Central Bank of Iraq's decision to stop transactions in Chinese yuan as a "misstep," noting that trade with China exceeds $65 billion. Al-Mohsen told Shafaq News Agency that this decision will negatively impact the local market by increasing demand for the dollar, which will raise the US dollar exchange rate and boost inflation. "This will adversely affect Iraqi families."

He also warned that halting yuan transactions could harm Iraq's relations with global economic organizations and lead to severed trade ties due to the Central Bank's inconsistent policies. Iraq has been increasing its yuan-denominated assets through the Singaporean Development Bank, financing about $12 billion in annual trade with China. The country is also boosting its assets in UAE dirhams, negotiating for more euro-denominated assets for trade with the EU, and opening bank accounts in Indian rupees for several Iraqi banks.

More Political than Economic

Economic researcher Ahmed Eid argued that the US decision to halt Chinese yuan transactions in Iraq is more political than economic, reflecting the power struggle between the US and China. Eid told Shafaq News Agency that the reduced US presence in Iraq has left a vacuum that Iran and China quickly filled. China has capitalized on this to increase its influence in Iraq, which has the world's fifth-largest oil reserves.

He explained that the "US-Iran rivalry allowed China to dominate Iraq's trade market with competitive prices. The US, once Iraq's main trading partner, now struggles to compete as China captures a larger share of Baghdad's trade, worrying Washington." Eid also mentioned that many Iraqi supply and transport companies are now controlled by groups linked to "militias and political parties, which smuggle dollars or engage in currency exchanges. This led the US to impose more sanctions on Iraqi companies and banks."

Since early 2023, the Central Bank of Iraq has taken steps to stabilize the economy, manage the dinar's exchange rate against the dollar, and ease trade by partnering with global banks, including Chinese ones. One major decision was to increase yuan balances in Iraqi banks with Chinese accounts. Direct yuan transactions bypass the dollar, streamline financial operations, lower import costs, and shield Iraq from exchange rate volatility.

Three Options for Iraq's Central Bank

Economist Mustafa Hantoush explained that the US Federal Reserve accused Iraq of "inflating transfers" by sending funds without receiving equivalent goods or any goods at all. "This issue has exposed a flaw in the Central Bank of Iraq, which has not linked bank transfers to goods entering through border crossings for the past 20 years. This oversight causes an annual loss of at least $5 billion in uncollected customs and taxes and leads to international accusations of money laundering and currency smuggling."

Hantoush told Shafaq News Agency that the Central Bank of Iraq has several options to address these accusations: "Quickly establish a system to link bank transfers to goods at border entries, hire a new company to manage remittances from Iraq to China within the Central Bank, convert dollars instead of Chinese yuan through Iraqi banks owned by foreign investors with accounts at Citibank and JPMorgan." "This could result in these banks controlling 90% of the currency market, potentially crippling the Iraqi banking system," he added. These steps are essential for the Central Bank to respond to the Federal Reserve's concerns and prevent further economic issues.