BAGHDAD, Apr 12, 2012 (AFP) - Iraq has seen its currency fall against the dollar despite taking in billions per month in oil revenues, at least in part due to the demand for dollars of its sanctions-hit neighbors Iran and Syria.
After being stable at around 1,160 per US dollar for years, the Iraqi dinar was exchanging hands at a rate of 1,230 last week and 1,320 on Tuesday, before settling at 1,270 against the greenback on Wednesday.
Syria has been sanctioned over its deadly 13-month crackdown on dissent, while Iran has been hit with punitive measures over its suspect nuclear programme, leaving both countries in need of foreign currency, especially dollars.
From the beginning of 2012, "there was a currency attack," with an increase of between 40 and 50 percent in demand for dollars, Iraqi central bank governor Sinan al-Shabibi told AFP.
"The somewhat unstable political situation in Iraq and in the surrounding region led to a large demand for dollars, which is causing a higher exchange rate lately," Shabibi said. Within Iraq, there have been disputes between political blocs and also between the central government and the country's autonomous Kurdistan region.
Asked whether sanctions against Syria and Iran were one of the main causes of the increase in demand for dollars, Shabibi said: "This is one of the reasons, but the region surrounding us in general is not stable." Shabibi said that "financing neighbouring countries with dollars is not something we do on purpose, because Iraq depends on large amounts of imports," for which the central bank's sales of dollars are needed.
However, he noted the demand for dollars seems to exceed what is necessary for imports.
"Iraq is the only country among its closest neighbours (Syria and Iran) which has huge revenues in dollars from oil," Iraqi economist Hilal Tahan told AFP.
Baghdad takes in upwards of $7 billion in oil revenues per month.
"The increase of financial transfers of dollars to outside Iraq and the unstable political situation (in Iraq) are increasing the demand for foreign currency and the exchange rate for dollars," Tahan said.
"Dollars have lately been smuggled outside Iraq, and that is why the auctions (by the Iraqi central bank) should stop for a certain period," he said.
Deputy central bank governor Mudher Mohammed Saleh said on February 4 that the bank had enacted measures to identify those who buy dollars at its auctions amid concern that some traders were buying on behalf of others.
Asked if Iranian and Syrian traders were trying to buy dollars, Saleh said at the time that "this increase in demand for dollars, while the region has serious problems, led us to put the new procedures in place."
Mohammed al-Omari, 40, who owns a money exchange shop in Karrada in central Baghdad, said that "the price of the dollar... was stable from 2008 until the start of this year," when it became increasingly volatile "because of the central bank's procedures."
"The street needs dollars, and when the auction is not pumping out dollars, it is forcing us to go to the black market, which leads to an instability in the prices, and losses" for Iraqi businesses, he said.
Hadi Alwan said his Karrada exchange bureau had stopped dealing in dollars this week.
"I used to exchange between 50,000 and 150,000 dollars per day, but I stopped doing that since the prices became volatile and I began to lose money," the 37-year-old said.
Despite the volatility, the central bank chief sought to play down concerns about the foreign exchange market.
"Iraq is not currently considering stopping the (dollar) auctions, which are part of a financial policy," Shabibi said, adding that "everything is under control."
In a large electronics store in central Baghdad, however, sales manager Bassem al-Shammari said he was worried the shifting exchange rate is hurting sales.
"Iraqi society is afraid to buy things when the exchange rates are... not stable," Shammari said. "The process of decreases and increases is killing the market."
"The instability started a week ago, and this matter did not affect the price of the goods, because we buy in dollars, and we sell in dollars."
But the quantity of goods sold has been affected, the 40-year-old said, noting that "our sales have decreased by 50 percent."