A report published by the Wall Street Journal on Thursday highlighted the "dollar" crisis in Iraq and the accompanying rise in the prices of food and imported goods.
Iraqis attribute this to a marked change in policy by the US Treasury Department and the Federal Reserve Bank of New York over the past weeks.
The newspaper quoted U.S. and Iraqi officials as saying that the Federal Reserve began last November to impose stricter controls on Iraqi commercial banks' dollar transactions, in a move aimed at curbing money laundering.
Since 2003, Iraqi banks have operated under less stringent rules, but nearly two decades later, U.S. and Iraqi officials say it is time to make Iraq's banking system more compliant with global controls on money transfers.
Since the new measures came into effect, about 80 percent of daily international financial transfers to Iraq, which previously totaled more than $250 million per day, have been banned.
This is due to insufficient information about the destination of the final funds or other errors, according to U.S. and Iraqi officials and official government data.
With dollars scarce, the value of the Iraqi currency has depreciated by as much as 10 percent, leading to a sharp rise in the prices of imported goods, including basic commodities such as eggs, flour and cooking oil.
Mahmoud Dagher, chairman of the Board of Directors of the South Islamic Bank and former official of the Central Bank of Iraq, said: "For 20 years, we have followed the same system. But the Fed's shock policy has caused a crisis within the Iraqi economy."
To supply Iraq with dollars, U.S. Air Force planes deliver dollars to Baghdad every few months, according to the newspaper.
But most flows of U.S. currency flow electronically through transactions conducted by private Iraqi banks, which are processed through Iraq's official account at the Federal Reserve Bank where revenues from oil sales are deposited.
U.S. officials say strict electronic transfer rules imposed on Iraqi private banks came as no surprise to officials in Baghdad.
They said they were jointly implemented in November after two years of discussions and planning by the Central Bank of Iraq, the U.S. Treasury Department and the Federal Reserve.
U.S. officials noted that the dollar's appreciation was not due to the new measures.
The increased scrutiny of dollar transactions has led Iraqis to rush to the parallel local market to buy the US currency, amid a torrent of criticism by Iraqi officials, bankers and traders of the new regime, who said that it caused an unnecessary financial shock and exacerbated their already existing economic problems.
Iraqi delegation to Washington
The newspaper quoted Prime Minister Mohamed Shia al-Sudani as saying that the Fed's action harms the poor and threatens his government's 2023 budget.
Sudani said in an interview that "this is embarrassing and crucial" for him, and said he would send a delegation to Washington next month with a proposal to suspend implementation of the new measures for six months.
Under the new procedures, Iraqi banks must use a new electronic platform linked to the Central Bank of Iraq in order to apply for dollars, after which the application will be reviewed by the Federal Reserve.
U.S. officials say the new system aims to limit the use of the Iraqi banking system for dollar smuggling and money laundering havens across the Middle East.
Dagher says that under the old rules, Iraqis were not obliged to disclose details of who the money was being sent to until after the transfer had been made.
A spokeswoman for the Federal Reserve Bank of New York, commenting on the accounts held by foreign governments, including those of Iraq, said: "We have a strong compliance system for these accounts that speaks over time in response to new information."
A U.S. official said the new measures would limit "the ability of malign actors to use the Iraqi banking system."
The U.S. Treasury Department and Iraq's central bank declined to comment.
Iraq's central bank said in a Dec. 15 statement that the new online platform required "full details of customers who want to transfer funds," including end beneficiaries.
"A number of errors are discovered, forcing banks to re-carry out the process. These procedures will take additional time before they are accepted and passed by the international system."
Four Iraqi banks were barred from participating in the currency auction supervised by the Central Bank of Iraq: Asia Islamic, Asharq Al-Awsat, Al-Ansari Al-Islami and Al-Qaida Al-Islami, according to Iraqi officials and court documents.
Executives at Asia and Al Ansari declined to comment, while the other two banks could not be reached.
U.S. officials have been pressing Iraq for years to tighten its banking controls. In 2015, the Federal Reserve and the Treasury Department temporarily halted the flow of billions of dollars to Iraq's central bank over concerns that they were being diverted to Islamic State terrorists, officials said at the time.
Some Iraqi officials have supported tighter controls on Iraqi private banks, including Hadi al-Salami, a member of parliament's integrity committee, who said: "We need to stop this immediately."
The impact of the new strict controls on Iraqi banks' dollar transactions can be seen, which have fallen sharply since they came into force last November, according to data published on the Central Bank of Iraq website.
For example, on Oct. 17 last year, before the new rules went into effect, daily transfers from Iraq's official accounts at the Federal Reserve and other offshore institutions amounted to $224.4 million, compared to $22.9 million on Jan. 17, down about 90 percent.
U.S. officials say the financial turmoil will ease as Iraqis comply with disclosure requirements required by the new procedures.
Iraqi bankers and currency traders say the new rules are aimed at stopping dollar smuggling. For example, they say, importers used to forge invoices for goods that did not originally arrive in Iraq, but were paid for in dollars to unknown destinations outside the country.
Hamza al-Sarraf, owner of an exchange shop in Baghdad's Karrada district, said: "Dollars certainly go to Iran, Turkey, Syria, Yemen, Lebanon and sometimes Dubai."
Due to new compliance requests and being prevented from using banks, Iraqi importers have had to delay placing orders or finding other ways to pay suppliers such as using informal money transfer networks known as hawala. Al-Sarraf said some traders load dollars and ship them out of Iraq in cars.