Why it is not the best for Iraq to have two different Iraqi dinar exchange rate
Did you know the Central Bank of Iraq (CBI) has been operating with two Iraqi dinar exchange rate? The first one is the Iraqi dinar exchange rate, also known as the fixed commercial exchange rate, this is the rate that the Iraq private banks are offered daily from the CBI. The commercial exchange rate is a fixed rate at 1166. This can be verified by going to the CBI web site. The other exchange rate for everyone else is called the floating exchange rate. This Iraqi dinar exchange rate can be anywhere from 1178 to 1220. Unfortunately, the Iraqi people do not get the benefit or offering of the CBI discounted Iraqi dinar exchange rate.
Dual Iraqi dinar exchange rates misguided by the Central Bank
Operating with two exchange rates is called Dual and Multiple Exchange Rates (DMER) and only a handful of countries use this system. Dual exchange rates are associated with currency exchange controls and lead to creating black markets for foreign exchange.
During his time serving as CBI governor, Dr. Sinan al-Shabibi imposed daily limits with a 5k limit on individuals. At the time the dinar exchange rate had a cap at 1,189 IQD for cash transactions and wire transfers. Private banks had a daily limit of $8 million to 15 million dollars per day depending on which group you were in. Foreign bank branches had a daily limit of $5 million dollars. Dr. Shabibi continued this monetary policy for three months and the Iraqi dinar gained in value against the usd. One would think that Dr. Shabibi would have kept up with this monetary policy since the Iraqi dinar had finally gained in value against the dollar. Dr. Shabibi then changed the monetary policy again and removed all daily limits and removed the daily price cap of 1,189 IQD.
Iraq Government removed CBI governor over the Iraqi dinar exchange rate
After removing the limits there was a rapid increase in the use of dollars in the markets and the capital flight of dollars out of the country for non-commercial purposes. In October 2012, Dr. Shabibi was removed from the position of CBI governor and the Chairman of the Board of Supreme Audit, Dr. Abdul Basit al-Turki was named the new CBI governor. When Dr. Turki reviewed the CBI operations he quickly made decisions to get the CBI back on track. Dr. Turki restricted the supply of dollars and began investigations of several banks and currency exchange companies. Dr. Turki also demanded more reviews and audits of documents when banks performed the daily currency auction. This included all private banks, state banks and currency exchange companies.
When the capital flight decreased the Iraqi dinar increased in value
Dr. Turki and the CBI were able to show progress in the capital flight of dollars out of the country. The dollars sold at the daily auctions declined for the banking industry from about $268 million dollars per day to approximately $190 million per day. The Iraqi dinar exchange rate stood at about 1,270. This was in April of 2013.
The CBI issued new regulations on setting the limit at $500k a day of currency per customer when purchasing dollars for wire transfer. The banks must sell the currency to bank customers who are verified to be importing goods to Iraq. The banks selling price should be 10 Iraqi dinars above the CBI selling price to the banks. This would limit the amount of dollars for wire transfers and move to using letters of credit (LC). This would also make it more difficult to smuggle currency out of the country. In 2011, private banks LC accounted for 6.9 trillion Iraqi dinars.
The CBI has advised the banking industry to have their capital paid up to 500 billion by 2015. There are five Iraqi banks that will have the required paid up capital. They are Kurdistan International, Mansour Bank, United Bank, North Bank and Mosul Bank. The banks need the additional capitalization Iraqi dinar to support the fast growing economy. The Central Bank needs to stop using the dual currency for their Iraqi dinar exchange rate.