Iraq to allow trade with China to be settled in yuan

The move is intended to stabilise the dinar and improve the central bank's access to US dollars

The Chinese yuan is gaining importance as an international currency. Reuters

The Central Bank of Iraq plans to allow trade with China to be settled directly in yuan for the first time to improve its access to foreign currency.

The settlement of trade in the Chinese currency instead of the US dollar will help the Iraqi central bank to “stabilise exchange rates”, it said in a statement on its website.

The move is part of a series of measures by the central bank to address a dollar shortage in local currency markets that forced Iraq’s cabinet to allow a currency revaluation earlier this month.

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

The central bank said it has options, the first being measures to boost the balances of Iraqi banks that have accounts with Chinese banks in the yuan.

“The second option: strengthening the balances of Iraqi banks through the accounts of the central bank to the final beneficiary in the Chinese yuan, through our accounts with JP Morgan and the Development Bank in Singapore,” the regulator 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,” Reuters quoted the government’s economic adviser, Mudhir Salih, as saying on Wednesday.

The first option would depend on the central bank’s yuan reserves while the second would rely on the bank’s US dollar reserves at JP Morgan and DBS.

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

Although the move is aimed at tackling dollar shortages and stabilising the Iraqi dinar, it also signifies the growing importance of the Chinese currency in international markets.

On February 7, the Iraqi government approved a currency revaluation to strengthen the dinar against the dollar.

The cabinet set the official exchange rate at 1,300 Iraqi dinar per US. The revaluation plan was submitted by the central bank after the Iraqi dinar shed more than 10 per cent of its value in recent months.

For years, the official rate for banks and exchange companies was 1,182 dinars per dollar while the rate on the street was about 1,200 dinars.

Amid a liquidity crisis due to plummeting oil prices on the international market, Iraq’s central bank devalued the dinar in December 2020 to 1,460 dinars per dollar for banks and 1,470 dinars for individuals.

But since December, the Iraqi dinar has wavered against the dollar as the Federal Reserve Bank of New York introduced measures to stop the flow of dollars to sanctioned countries, mainly Iran, through a state-run currency auction.

The US has blacklisted several Iraqi banks over suspicious foreign transactions. New measures have been brought in to scrutinise the process of releasing money from the US to cover imports and other needs.