A must read - heavy reading...."Overview of Situation in Iraq"

I stole this from somewhere a year or so ago....very interesting about our investment if you call it that...lol

The economy or markets are controlled by supply and demand. The Growth of the FX reserves were reduced because of the demand for dollars. The CBI knows the exact amount of the dinar it issues into circulation and buys out of circulation everyday which is a requirement of the IMF and this information is posted on the CBI web site. A central bank could not function if they did not know their exact FX reserves and the amount of money issued and the amount in circulation. There would be no way to determine the monetary base, foreign exchange assets, liabilities, rates or exchanges. Modern monetary policy is based on financial statistics and factual data. Its purpose is a stable currency.

Here is how the Iraqi system works. They have a elected Govt and a independent Central Bank of which the GOI and the MoF have oversight. Also they have elected to have their own currency rather than a international currency. Their main source of GDP (~90-95%) or income is the export of oil to the international market for which they are paid in dollars (some call them petro dollars). Each year the GOI passes a budget based on the oil income projected from exports and OPEC allowances. If the income does not meet the budgeted amount they have a deficient and borrow the difference, if the income exceeds the budgeted amount they have a surplus and they do a supplementary budget to spend or allocate the excess. Exceptions from the budget is 5% of oil export revenue as mandated by the UN to pay off Iraqi debt to other countries. In addition the IMF requires a 10% reserve in the case of a crises if they were unable to export any oil.

All of Iraq's export oil income is deposited in a GOI account in the NYFRB. From this account they pay the foreign mandated debt, foreign purchases of the GOI in dollars and allocate the 10% required reserve for crises. The rest of the petro dollars are used to buy dinar to fund the budgeted items by the GOI inside Iraq. How is this done? At the same NYFRB that the GOI has a account the CBI also has a account to manage their FX reserves. The GOI under the management of the MoF simply transfers dollars from its GOI account to the CBI FX reserve account at the NYFRB. For every dollar received in the CBI FX account the CBI deposits (sells) 1166 dinar in a GOI bank account as designated by the MoF in government bank accounts inside Iraq. The dollars in the CBI FX account remains at the NYFRB as FX assets of the CBI. FX assets except for some vault cash are kept out of country to prevent looting in the case of a takeover or economic collapse. The dinar in the Iraq GOI bank accounts is then used by the MoF to pay any govt salaries, expense, pensions, contractors, army, equip, and any other budgeted items by the GOI. The law in Iraq is that any govt accounts, contracts, salaries, or Govt business inside Iraq is required to be paid in dinar. Also any fines, penalties, taxes or other domestic GDP must be paid in dinar. This poses some problems since the dinar is a a in county currency rather than a international currency. They use a currency auction to resolve these problems. If you open a bank account in Iraq you send them dollars which the bank sells to the CBI for dinar to fund your account with dinar. When you wish to close your account in Iraq the bank sells dinar to the CBI for dollars which are wired to your account. If you are a business man in Iraq and buy a million dinar worth of goods out of county you deposit the dinar in your bank , the bank then buys dollars from the CBI at the 1166 rate and the dollars are wired to pay for your purchase. Likewise if you were a trader from Iran and in Iraq and received dinar for your goods you could go to a money changer and get $1 for 1200 dinar or a bank and get $1 for 1170 dinar. In Iraq money traders are often more trusted than banks and also have access to the CBI auctions. As long as the economy was stable they were content to buy dinar at a 1170 rate and sell it at a 1200 mark rate making ~ 2.5% a transaction. However as the US increased sanctions on Iran and withdrew troops from Iraq things became unstable. Nobody in Iraq wants any Iran or Syria currency as it has lost 1/2 of the value in the past year. Nobody in Iran or Syria wants any Iraq dinar as it is not legal tender and they remember the last redenomination where nothing was honored.

So here is what happens, Iranian traders take their goods to Iraq to sell and are paid in dinar. Since Iran has been sanction and the ICB can no longer get dollars the traders have to cash their dinar in Iraq. In Kurdistan they flooded the banks demanding the dollars at the 1170 which the banks did not have on hand since the dollars have to be transported from the CBI. so then they were forced to the money changers and a market rate that soared to as much as 1260 because of the lack of dollars on hand. Now the changers were buying dinar for 1170 and selling it in excess of 1230. This greatly increased liquidity and inflation (7%). In turn the CBI liquidated excess reserves and appreciated the rate. This was necessary because the ratio of outside banks currency and bank reserves VS FX reserves was changed because of the speculation. The CBI also took other action and stopped selling dollars for a day and passed new requirements that a bank account is necessary for currency exchange at a bank. There have been some calls in Parliament for the CBI to stop selling dollars all together as they maintain dollars are not needed in country. In Iran the death penalty is being considered for any speculation in currency other than the Rial.