Iraq implementing the principle of monetary sovereignty - What does this mean?

Central Bank of IRAQ

Monetary policy in Iraq faces many challenges, especially in light of the presence of an irregular currency exchange market run by networks that manipulate the prices of the dollar against the dinar, according to local media reports. In the face of the "monetary dualism" that has harmed the country's economy, Iraq is moving toward applying the principle of "monetary sovereignty," according to what the financial advisor to the Prime Minister, Mazhar Muhammad Salih, revealed in statements to the Iraqi News Agency, "INA." By applying the “principle of monetary sovereignty,” according to Saleh, “the Iraqi dinar becomes the only resort for exchange, pricing, and coverage of internal transactions.”

The Iraqi authorities are struggling in an attempt to control the exchange rate of the Iraqi dinar against the US dollar, which is witnessing fluctuations that have led to a decline in the value of the dinar, accompanied by compliance with international rules in financial transfers, which has affected the supply of the dollar in the market.

Understanding the Monetary Sovereignty

The economic advisor, Saleh, explains in a research paper published by the Iraqi Economists Network last October that monetary sovereignty is called “Westphalianism,” which expresses “the state’s authority to exercise exclusive legal control over its currency through the functions of the central bank, as it is the exclusive authority to determine the quantities of the transaction and its value as a means of payments.” .

He added that the name "Westphalianism" comes from the "Westphalian system, which represents a principle in international law that every state has exclusive sovereignty over its territory," which is explicitly stipulated in the United Nations Charter. The research states that this “Westphalian monetary” sovereignty is based on: the independence of monetary management, issuance, and exchange system. Why now does Iraq need to implement such a principle? According to the research paper, Saleh believes that Iraq needs to apply the principle of monetary sovereignty in order to enhance the ability of monetary policy to “control local liquidity levels through the strength of the central bank’s intervention in the monetary market.”

Challenges and Solutions

He warned of the continuation of what he called “the reality of colored noise that allows the survival of the black market for the monetary dollar” and its ability to influence the price system, not to mention greater availability of the state’s ability to manage inflation by influencing it through interest rates. Saleh stressed that the Iraqi state’s adoption of the principle of monetary sovereignty will lead to “maintaining a fixed exchange rate that allows free capital flows and confronting cheap money.” The Iraqi General Directorate of Intelligence and Security had announced the overthrow of a network that manipulated the dollar exchange rates in Baghdad, according to a report published by the "INA" agency.

Last August, Prime Minister Muhammad Shia al-Sudani announced the arrest of a network of currency “speculators” who collect dollars and send them to the Kurdistan region in northern Iraq, and then smuggle them abroad, without specifying the destination, according to an Agence France-Presse report. Factors for applying the principle of monetary sovereignty? The Iraqi economist, Salam Sumaisem, identified the most important factors that allow the application of the principle of “monetary sovereignty,” stressing that it is not linked to the existence of a political decision to implement it, but rather to economic factors and determinants. In an interview with Al-Hurra website, Sumaisem laid out a package of factors that must be present, including: “the strength of the economy, the stability of exchange rates, the strength of the national currency itself, and the existence of a truly productive economy that does not rely solely on imports.”

Despite the authorities' attempts to control exchange rates, trading in the informal market still represents about 10 percent of the trading rate, in what Counselor Saleh described as "an uncontrolled market controlled by speculators and adding noise to the Iraqi economy as a whole." Will it affect deposits in foreign currencies? The Iraqi economist, Mahmoud Dagher, explains that the principle of monetary sovereignty “does not mean that the savings of citizens or any legal entity that has funds deposited in foreign currencies will be affected, as they remain able to deposit and withdraw funds in dollars or other foreign currencies that may be deposited in them.” In response to Al-Hurra website's inquiries, he pointed out that the majority of countries seek or aspire to reach "monetary sovereignty" by making "their national currency the primary currency to be used in payments and transactions within the country."

Applicability of the principle of monetary sovereignty in Iraq? Iraqi economists unanimously agreed that applying the principle of monetary sovereignty requires the availability of several factors, the most important of which is “bridging the gap between the exchange rate of the national currency against the dollar.” Expert Dagher, a former official in the Central Bank of Iraq, said, “Whenever the exchange rates of the national currency stabilize against foreign currencies, the principle of monetary sovereignty becomes applicable,” which must be accompanied by “the absence of a gap or differences between the exchange rates in the official market and the parallel market, and preventing what happens.” Of speculation in this field.”

Expert Sumaisem confirms that every country has the right to resort to the principle of “monetary sovereignty” in order to control the “money market,” adding that “this matter is not only related to desire or ambitions, but rather to the strength of the national currency in real terms, as the currency is not just paper, it is “It must express a value corresponding to the GDP, and its ability to truly store value, while being coupled with various indicators of strength at several levels.” Iraq began applying the standards of the international transfer system "SWIFT" since mid-November of 2022 to access Iraq's dollar reserves in the United States, which are estimated at tens of billions of dollars, according to Agence France-Presse.

​Iraqi banks must currently register their transfers in dollars on an electronic platform, which checks the requests, and the US Federal Reserve examines them, and if it has doubts, it stops the transfer.

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