Analysis of Foreign Exchange Mechanisms and Policies in Iraq: Focus on Central Bank Transactions and Market Dynamics for the Period (2004-2023)

This study examines the impact of foreign exchange policies on Iraq's economy and financial markets, with a focus on the role of the Central Bank of Iraq (CBI) in stabilizing the foreign exchange market. The research investigates mechanisms such as the CBI's purchases of foreign currencies from the Ministry of Finance, foreign exchange windows (both remittance and cash-based), and transfers related to documentary credits, and their effects on liquidity, exchange rate stability, and total monetary credit. Statistical analysis showed that all variables are normally distributed (p-values > 0.05) and that exchange operations were stable. Cointegration tests revealed a long-term equilibrium relationship between the policies and financial stability, affirming the effectiveness of CBI interventions. Regarding the impact of these mechanisms, the CBI's purchases from the Ministry of Finance showed a small positive but statistically insignificant effect on total monetary credit (coefficient = 4.32E-06, p = 0.23670). Foreign exchange sales through remittances showed a small negative but statistically insignificant effect on total monetary credit (coefficient = -2.12E-06, p = 0.71480). Cash-based foreign exchange sales showed a small positive but statistically insignificant effect (coefficient = 4.01E-05, p = 0.48520). However, transfers related to documentary credits showed a statistically significant positive effect on total monetary credit (coefficient = 0.000345, p = 0.00740), confirming that these transfers are the key factor in improving liquidity and market stability. Hypothesis testing results indicated that the CBI's interventions in the foreign exchange market have a significant impact on market stability, particularly through transfers related to documentary credits. The model explains a large proportion of the variance in total monetary credit, while the Durbin-Watson statistic (1.215312) suggests no major autocorrelation in the data. The findings underscore the importance of a strong legal and institutional framework to enhance market confidence, regulatory efficiency, and financial resilience. Strengthening Iraq's foreign exchange policies is critical for reducing market volatility, attracting investment, and ensuring sustainable growth. The study provides recommendations for improving monetary policies to achieve long-term economic stability and development.