The Central Bank of Iraq (CBI) is opening letters of credit (L/Cs) with Iraqi banks as part of its efforts to stem the decline of the Iraqi currency against the US dollar.

Measures to encourage the proper use of L/Cs are also a priority for the CBI in its efforts to crack down on currency speculation that is damaging the Iraqi economy.

L/C terms

The CBI has revealed that during May it opened L/Cs with Rafidain Bank and Rasheed Bank, which are respectively Iraq's largest and second largest banks.

The terms of the L/Cs have not been disclosed, but they have replaced what one central bank official described as trade credits previously provided by the CBI, which enabled Iraq's banks to obtain foreign currency.

Currency concerns

The CBI has been concerned that support it has provided for the purpose of obtaining foreign currency to facilitate trade between Iraq and international counterparties has instead been used for speculative purposes.

Such speculation has driven the value of the Iraqi dinar down bankers say.

Genuine trade

In this respect, analysts say the L/C terms may require banks to use CBI support only for the purpose of obtaining currency for genuine internationaltransactions.

This would fit with the CBI's plans to draft new payment terms under which Iraq's international traders will be required to do business on bank guarantee or L/C terms (DC World News, 24 August 2012) and to make L/Cs more available to Iraq's banks. (DC World News, 27 December).

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