US suspends dollar shipments to Iraq, but why was it transporting them to Baghdad?

Every few weeks, heavily guarded cargo planes depart from the United States carrying shrink-wrapped pallets of $100 notes destined for the Central Bank of Iraq in Baghdad.

But now the US has halted this, citing “Iraq’s failure to prevent weeks of Iran-backed militia attacks on American facilities in Iraq and neighbouring countries.”

Washington says halting the US dollar shipments and pausing security cooperation programmes with Iraq’s military is an effort to dismantle “Iranian-backed militias”, the Wall Street Journal reported on Tuesday.

This was reportedly the second planned dollar transfer to Iraq’s central bank that Washington had postponed since the US-Israel war began on February 28, and Tehran retaliated with strikes on Israel, and also attacked the Gulf countries hosting US military and financial assets.

Some armed groups in Iraq claimed daily attacks on “enemy bases” in the country and the wider region, but later suspended their actions after the announcement of a ceasefire between the US and Iran.

“The Iraqi government’s failure to prevent these attacks while some elements associated with the Iraqi government continue to actively provide political, financial and operational cover for the militias adversely impacts the US-Iraq relationship,” State Department spokesperson Tommy Pigott said.

When did the US start shipping dollars?

The practice, which dates back to the aftermath of the 2003 US invasion, continues to this day as Iraq remains one of the world’s most dollarised economies.

Oil sales, which fund roughly 90-95 percent of the Iraqi government budget, are paid in US dollars and deposited into accounts at the Federal Reserve Bank of New York.

When Baghdad needs liquidity for salaries, pensions, imports and currency auctions to support the Iraqi dinar, physical banknotes are flown in.

The United States, since its 2003 invasion of Iraq, has held effective control over the country’s oil revenue dollars, giving Washington extraordinary leverage over Baghdad’s affairs.