Iraq’s central bank said it’s under a “currency attack” as traders buy U.S. dollars in daily auctions and resell them on the black market in Syria and Iran, which face hard currency shortages due to sanctions.
Demand for the greenback at the central bank auctions has risen since November to about $200 million to $300 million a day, compared with about $160 million in the prior 12 months, the deputy central bank governor, Mudher Salih, said in an interview in Baghdad Jan. 10.
“Now we are checking the applications to buy dollars from the auctions more closely. We are afraid that some of it may be related to money laundering,” Salih said. “We are now under a currency attack because of the regional situation.”
Iranians are having trouble accessing foreign currencies due to the rial’s plunge, U.S. Treasury Undersecretary David Cohen said Dec. 1. The Iranian currency weakened this year after the U.S. and allies prepared for further sanctions that may include an oil embargo, the state-run Mehr news agency reported on Jan. 2. The allies accuse Iran of a covert plan to build nuclear weapons, a charge Iran’s government denies.
Syria, Iran’s regional ally, has also come under greater U.S., European and some Arab sanctions over a violent crackdown on pro-reform protests that began early last year. A European oil embargo is affecting Syria’s revenues and giving the state far less access to foreign exchange, David Butter, regional head for the Middle East at the Economist Intelligence Unit, said Dec. 14.
Pressure on Reserves
Rising demand for dollars “is affecting our dollar-sale auction,” Salih said. “This isn’t in the interest of the Iraqi economy and it will suck foreign currency reserves.” Foreign exchange reserves in Iraq, holder of the world’s fifth-largest crude deposits, touched $60 billion this year, the most in its history, he said.
At its Jan. 11 auction, the central bank sold $252.25 million in notes at a fixed selling price of 1,170 Iraqi dinars for each U.S. dollar, data on its website show. “A lot of money in dollars and also deposits which are supposed to be invested in Iraq are being exchanged to U.S. dollars to fund the trade in neighboring countries,” Salih said.
Iraq’s revenue is on the rise after crude oil production jumped to the highest in at least 20 years, or more than 3 million barrels a day, deputy prime minister for energy affairs Hussain Al Shahristani said last month. The country, which unveiled a 2012 federal spending plan of almost $100 billion in December, is seeking foreign investment and expertise boost energy exports and rebuild an economy and infrastructure destroyed by conflict, economic sanctions and sabotage.
The country will reduce its budget deficit to 11 percent of economic output this year from 14 percent in 2011, Salih said. In 2013, the central bank will cut three digits from the currency, reversing a policy it introduced in the 1980s to address the government’s budget deficit.
The yield on the country’s six-month treasury bills fell 110 basis points, or 1.1 percentage points, to 8.2 percent at the last auction on Dec. 13, according to data compiled by Bloomberg. That was the lowest yield since August 2010.
Iraq plans to reduce international debt to $38 billion in 2012 from $40 billion last year and $135 billion in 2003, Salih said. It owes between $23 billion and $25 billion of this total to Persian Gulf countries Saudi Arabia, Kuwait and Qatar, he said, adding Algeria had written off a debt two months ago.
With yields above 8 percent, Iraq has no plan to issue sovereign bonds this year, the deputy governor said. Iraq last sold $2.7 billion of bonds six years ago to restructure debt accumulated during the era of former President Saddam Hussein, who was ousted from power by a U.S.-led military invasion in 2003. The last U.S. combat troops left Iraq in December.
By Khalid Al-Ansary and Nayla Razzouk for Bloomberg