Iraq suspends dollar payments to some Kurdish banks

Iraq’s central bank has stopped selling US dollars and other foreign currency to four banks in the country’s Kurdish region, locally based reporters say.

The Central Bank of Iraq is still selling dollars to the region’s other banks, the reports add. A source at the central bank told a reporter from Reuters that the central bank would be prepared to resume dollar sales to the four affected banks if the banks provide more information on their transactions.

The tightening of currency supply to banks in the region is one of several responses by Iraq’s central government to the decision by leaders of the Kurdish regional government to hold a referendum on seceding from Iraq.

The referendum was held on September 25, and local authorities reported that approximately 93% of votes cast supported independence. The referendum took place both in the three regions of Iraq recognised by the central government as being administered by the Kurdish regional government, as well as in areas where the central government claims jurisdiction.

Kurdish leaders are now calling for negotiations with the Iraqi government on the future status of northern Iraq. The calls have so far been strongly rejected by the Baghdad government.

The future effects of the dispute are so far unclear, but could further complicate the already complex set of economic problems that Iraq faces. “Iraq is facing a double shock arising from the conflict with [the so-called Islamic State, IS] and the plunge in oil prices,” noted a International Monetary Fund staff assessment, published in August.

The IMF is currently supporting Iraq through a three-year Stand-By Arrangement, amounting to special drawing rights of 3.8 billion ($5.4 billion).

The IMF’s executive board in August expressed the hope that Iraq would benefit from an agreement between the central government and the Kurdish regional government on the distribution of revenues from the oil industry. That agreement looks unlikely to be implemented while the current tensions persist between the central government and Kurdish leaders.

Falling world oil prices reduced Iraq’s international currency reserves from $54 billion at the end of 2015 to $45 billion by the end of 2016, IMF staff noted. The fall in oil revenue and the need to increase military and security spending in response to the IS campaign increased the Iraqi government’s deficit from 12% to 14% of GDP over the same period, the report says.

The IMF staff also approved Iraqi policymakers’ actions to bring the official value of the local currency, the Iraqi dinar, closer to its street value. The Iraqi dinar is pegged to the US dollar. “The simplification of documentation requirements implemented by the Central Bank of Iraq led to a decline in the parallel market spread to 6% in June 2017,” IMF staff noted in August.

Kurdish forces have played a significant role in recapturing areas of Iraq overrun by forces loyal to IS. A considerable proportion of the country’s oil and gas reserves is located in the northern regions partly governed by the Kurdish regional government.

The Central Bank of Iraq did not reply to requests for comment before publication.