Iraq will prohibit cash withdrawals and transactions in US dollars beginning on January 1, 2024, in the latest effort to reduce the exploitation of its hard currency reserves in financial crimes and the violation of US sanctions against Iran, according to a top Iraqi central bank official.

In a move to double down on sanctions against Iran and other heavily sanctioned Middle Eastern countries, the New York Fed began enforcing tighter controls on international dollar transactions in commercial Iraqi banks in November, US and Iraqi officials said. 

According to the report, Iraqi banks had been operating under laxer regulations since shortly after the 2003 US invasion. However, years of US-sponsored weak governments and crises—from the insurgency during the US occupation to the ISIS takeover of large portions of the country—have led successive administrations to postpone bringing Iraq's banking system into 'compliance' with US money-transfer practices until now, according to officials.

The measure intends to eliminate the so-called "illegitimate" use of around half of the $10 billion in cash that Iraq buys from the New York Federal Reserve each year, according to Mazen Ahmed, director-general of investment and remittances at the Iraqi Central Bank (CBI).

The move is also inching towards de-dollarizing the economy after the people of Iraq suffered intense losses following the 2003 US invasion.

According to Ahmed, those depositing dollars in banks before the end of the year will be able to withdraw them in 2024 and those deposited after the new year begins can only withdraw their funds with the local currency at the official rate of 1,320.

On Thursday, the parallel market rate of the Iraqi dinar was 1,560, or around 15% less than the official rate.

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Banks restrict dollar cash withdrawals

Some local banks have already restricted dollar cash withdrawals in recent months, creating a scarcity that has caused the secondary market exchange rate to soar.

According to Ahmed, some banks were short on dollars because many individuals were attempting to withdraw dollars all at once amid a sense of concern about the financial system, while others were short on dollars because they offered dollar-denominated loans that were ultimately repaid in dollars.

He also stated that the CBI had reduced the number of dollars it was delivering as part of an agreement with the Fed to minimize cash and migrate toward e-payment. He rejected allegations of a halt in Fed cash transfers to Iraq, saying that the most recent normal cargo had arrived on Wednesday.

Ahmed stated that the CBI expected the dinar to lose more value as the new measures took effect, but that this was a desirable side consequence of formalizing the financial system, and that the CBI was supplying dollars at the official rate for all lawful uses.

According to a subsequent central bank statement, Ahmed stated that the central bank was making efforts to decrease the parallel market exchange rate and that there was no sign that the market rate would reach 1,700.

On Thursday, a video surfaced on social media showing a depositor at a Baghdad bank threatening to burn it down if his deposit was not returned in cash dollars.

"I swear I will burn it down. I swear I will enter the safe and take my money" the man threatened.