Foreign currency particularly the US dollar plays a central role in Iraq’s economy, driven by oil revenues denominated in USD and the dollarisation of significant portions of the private sector. Yet the Central Bank of Iraq imposes important restrictions and requirements on foreign currency lending that both Iraqi banks and their borrowers must navigate carefully. This article examines the CBI’s foreign currency lending framework, cross-border loan requirements, and the practical implications for structuring USD and other foreign currency financing arrangements in Iraq.

The Role of the US Dollar in the Iraqi Economy

Iraq’s economy is heavily dollarised. Oil revenues which account for the vast majority of government income are received and managed in US dollars. Large commercial transactions, real estate dealings, and significant portions of trade finance are conducted in USD. The Iraqi dinar (IQD) is pegged to the USD at a rate set and maintained by the CBI. This dollarisation creates both opportunities and regulatory complications for lenders: while USD lending is natural in the Iraqi market, it is subject to CBI foreign currency management requirements designed to maintain the exchange rate peg and control capital outflows.

CBI Foreign Currency Lending Restrictions

The CBI regulates foreign currency lending by Iraqi licensed banks through a series of instructions addressing: the purposes for which USD loans may be extended, CBI instructions specify eligible purposes for foreign currency lending, typically including import financing, trade finance, and specific investment purposes; foreign currency lending limits banks are subject to open position limits restricting their net exposure to foreign currency assets and liabilities; foreign currency reserve requirements , banks maintaining USD deposits must hold specified reserves; and reporting requirements, banks must report their foreign currency loan portfolios and exposures to the CBI on a periodic basis.

Cross-Border Loan Requirements

When an Iraqi borrower receives a loan from a foreign lender whether a foreign bank, development finance institution, or international capital market, CBI requirements apply to the cross-border flow of funds. Key requirements include: CBI registration or notification of cross-border loans above specified thresholds; compliance with foreign exchange regulations governing the remittance of loan proceeds into Iraq and repayment of principal and interest to foreign lenders; AML documentation requirements on the source of the lender’s funds; and compliance with sanctions screening requirements particularly given US sanctions implications for USD transactions.

OFAC Sanctions and USD Transactions

Any transaction involving US dollars including foreign currency loans denominated in USD, is subject to OFAC jurisdiction because USD transactions are cleared through the US financial system. For Iraqi borrowers and lenders, this has direct practical implications: USD lending transactions involving Iraqi parties require OFAC sanctions screening of all transaction parties; any involvement of individuals or entities on the OFAC Specially Designated Nationals list will block the transaction; and Iraqi banks must implement OFAC-compliant sanctions screening programmes as a condition of maintaining US dollar correspondent banking access. The US Department of the Treasury has in recent years taken enforcement action against Iraqi banks for OFAC violations, resulting in the loss of USD correspondent banking access for affected institutions.

Practical Structuring Considerations

Foreign lenders extending USD loans to Iraqi borrowers should consider: the governing law of the loan agreement, English law is commonly chosen for international loan transactions but Iraqi law implications of security enforcement must be considered; remittance of repayment, ensuring the loan agreement contains mechanisms for the borrower to obtain necessary CBI approvals for remitting USD repayments offshore; security structuring, security over Iraqi assets must comply with Iraqi law regardless of the governing law of the loan agreement; and dispute resolution, international arbitration (ICC, LCIA, or DIFC-LCIA) is commonly chosen to avoid reliance on Iraqi courts for disputes with international lenders.

Exchange Rate Risk Management

Borrowers taking on USD-denominated loans while generating revenues in Iraqi dinars face significant exchange rate risk. The IQD/USD peg reduces but does not eliminate this risk devaluation of the dinar against the USD directly increases the IQD cost of USD loan repayments. Borrowers should consider: revenue dollarisation where possible, structuring commercial arrangements to generate USD revenues that naturally hedge USD debt service; hedging, limited hedging instruments are available in the Iraqi market; and maintaining adequate foreign currency liquidity buffers.

How Etihad Law Firm Assists

Etihad advises on the structuring and documentation of foreign currency loan transactions involving Iraqi parties, advises on CBI foreign currency requirements and approval processes, assists with OFAC sanctions compliance in USD transactions, and advises international lenders on Iraqi law requirements applicable to cross-border lending arrangements.