The Iraqi central bank announced on 22 February that, for the first time, it plans to allow trade from China to be settled directly in yuan instead of the US dollar to improve access to foreign currency.

“It is the first time imports would be financed from China in yuan, as Iraqi imports from China have been financed in (US) dollars only,” the government’s economic adviser, Mudhir Salih, told Reuters on 22 February.

According to a statement released by the Iraqi central bank, carrying out transactions in the Chinese currency would boost the balances of Iraqi banks with accounts with Chinese banks.

However, this option depends on the size of the central bank’s yuan reserves.

A second option to boost local banks’ yuan balances would involve converting US dollars held in the central bank’s accounts with JP Morgan and the Development Bank of Singapore (DBS) to yuan before paying the final beneficiary in China.

The Iraqi central bank has been on a mad dash to compensate for a dollar shortage in local markets. This crisis prompted the cabinet to approve a currency revaluation earlier this month.

Last year, the US Treasury and the Federal Reserve Bank of New York began enforcing stricter controls on international transactions by Iraqi commercial banks, forcing them to comply with specific SWIFT global transfer system criteria to access their foreign reserves.

The move was allegedly meant to “curtail money laundering and the illegal siphoning of dollars to Iran and other heavily sanctioned [West Asian] countries.” However, the sudden rules change for Iraqi banks sent the economy reeling as 80 percent, or more of Iraq’s daily US dollar wire transfers could no longer be completed.

Last week, a senior Iraqi delegation visited the US capital to discuss easing the US Treasury measures. Following the trip, Foreign Minister Fuad Hussein denied reports that Washington imposed conditions on Baghdad to help with the dollar crisis.

Hussein added that it is “only a matter of time” before the exchange rate stabilizes.

Since the war in Ukraine started, several nations in the Global South have begun to move away from the US dollar in bilateral trade with China. Many others have chosen to boost their Chinese yuan reserves at a time when the hegemony of the greenback continues to weaken.

This originally appeared on The Cradle.