Iraq to Allow Trade With China in Yuan Amid Shift Away From Dollar

A Chinese yuan note in a file photo. Thomas White/Reuters

The Iraqi central bank plans to allow trade with China to be settled directly in yuan as opposed to the U.S. dollar for the first time, it announced on Feb. 22, as part of efforts to reduce pressure on the falling dinar.

In a statement on its website, the bank said the move will help to “stabilize exchange rates,” The National reported.

Under the plan, the central bank could boost the balances of Iraqi banks that have accounts with Chinese banks in the yuan.

However, this option would largely depend on the size of the central bank’s yuan reserves, Mudhir Salih, the Iraqi government’s economic adviser, told Reuters.

Another option would be to boost the balances of Iraqi banks through the accounts of the central bank to the final beneficiary in the Chinese yuan, via the central bank’s U.S. dollar reserves accounts with J.P. Morgan and Development Bank of Singapore, according to the statement.

The two banks would convert the dollars to yuan and pay the final beneficiary in China, Salih explained.

The latest announcement is “in addition to what was announced in the first package of facilities provided by the central bank to stabilize exchange rates,” the statement said.

“It is the first time imports would be financed from China in yuan, as Iraqi imports from China have been financed in (US) dollars only,” the government’s economic adviser, Mudhir Salih, told Reuters.

Dinar Nosedives

The total bilateral trade value between China and Iraq exceeded $24.8 billion in the first half of 2022, according to China Daily.

The new plan would cover private sector imports and not oil trade in Iraq.

The latest announcement comes after the Iraqi government on Feb. 7 approved a currency revaluation to strengthen the dinar against the dollar, setting the exchange rate at 1,300 dinar per U.S. dollar, down from its previous rate of 1,460 Iraqi dinar to the dollar.

That came as the Iraqi currency shed more than 10 percent of its value in recent months after the U.S. Treasury and the Federal Reserve Bank of New York last year began enforcing tighter controls on dollar transactions by Iraqi commercial banks in an effort to stamp out money laundering and the funneling of dollars to countries under U.S. sanctions, such as Iran and Syria, from Iraq.

Under those tighter controls, which were rolled out in November, Iraqi commercial banks had to comply with certain SWIFT global transfer system criteria in order to access their foreign reserves, according to Al-Monitor.

Iraqi banks have an estimated $100 billion in funds held at the U.S. Federal Reserve, where they have been since the U.S. invasion of Iraq in 2003, marking an all-time high.

Tamkeen Abd Sarhan al-Hasnawi, chairman of the board of Mosul Bank and first deputy of the Iraq Private Banks League, told The Associated Press that an estimated 80 percent of dollars sold via a process known as “auction”—through which Iraq’s central bank requests dollars from the Fed and then sells them to commercial banks and exchange houses at the official exchange rate—went to neighboring countries.

Countries Shifting Away From Dollar Trades

The stricter rules reportedly saw about 80 percent of transfer requests to Iraqi banks blocked due to doubts or concerns over the final destinations of the transfers and subsequently sent Iraq’s currency on a sharp downward trajectory.

The current devaluation also sparked widespread protests amid fears of further economic woes and soaring inflation.

A senior Iraqi delegation, headed by Foreign Minister Fuad Hussein, visited Washington to discuss easing those measures involving U.S. dollars to Iraqi banks.

In a joint press conference with Hussein on Feb. 9, U.S. Secretary of State Antony Blinken said that Washington and Baghdad have a “strategic framework agreement,” adding that the administration is now “focused on the economic dimension of that agreement and the work that we can do together, the United States and Iraq, to continue to strengthen Iraq’s economy, its integration, reintegration in the region, in ways that make a material difference in the lives of the Iraqi people and Iraqi citizens.”

A number of nations have started to move away from the U.S. dollar when it comes to trading with China in recent months, particularly following Russia’s invasion of Ukraine.

Earlier in February, China’s central bank signed a memorandum of understanding with the Central Bank of Brazil establishing yuan clearing arrangements in the nation, similar to those signed in recent months with Pakistan, Kazakhstan, and Laos.