Iraq devalues dinar to ease cash crunch, leaving traders in limbo

Iraq devalues dinar to ease cash crunch, leaving traders in limbo

Baghdad, Iraq – In the heart of Baghdad's Jameela market, food trader Hamza al-Rudayni finds himself in a precarious position, anxiously contemplating the implications of a recent decision by the Iraqi government to devalue the dinar against the US dollar. This move has sparked a wave of uncertainty among traders, such as al-Rudayni, who are now faced with unexpected financial losses and a lack of clarity regarding pricing for their goods.

"I don't know what to do," al-Rudayni expressed to Al Jazeera, noting that the devaluation has significantly diminished the dollar value of his dinar holdings, restricting his capacity to procure imported commodities.

"I woke up a few days ago to find that I had lost 25 million Iraqi dinars (approximately $16,500 at the new exchange rate) due to this decision, with larger merchants incurring losses in the billions," he elaborated.

Al-Rudayni entered the wholesale trade last year after losing his previous position at a private Iraqi bank, affected by U.S. Treasury sanctions. He leveraged his savings and sold his car to commence trading alongside a larger merchant before launching his independent business.

As exchange-rate volatility renders prices unpredictable, al-Rudayni and many of his counterparts have opted to halt buying and selling activities until the market stabilizes.

"Market activity has ground to a halt," al-Rudayni remarked. "Traders buy goods in dollars but sell them in dinars, as regulations prohibit them from transacting in dollars."

This presents a significant challenge: a depreciated dinar necessitates a larger amount of local currency to acquire goods priced in dollars. Thus, it complicates pricing decisions for merchandise already in inventory.

Why devalue?

On October 7, the Iraqi government implemented a revised official exchange rate against the US dollar, aiming to provide relief during a financial crisis exacerbated by the U.S.-Israeli conflict in Iran and disruptions to oil exports via the Strait of Hormuz.

Prior to the conflict, Iraq was exporting approximately 3.5 million barrels of oil daily through the Strait of Hormuz, which constituted 90% of the government’s revenue.

The Central Bank of Iraq established the new rate at 1,520 dinars per US dollar for cash transactions with the public, a notable shift from the previous rate of 1,320 dinars per dollar.

This devaluation of the dinar, close to 15% against the dollar, enables the government to generate more local currency from each dollar of oil revenue, thereby aiding in the coverage of public expenditures, including government employee salaries.

"It is my decision and I am responsible for it," stated Iraqi Prime Minister Ali al-Zaidi during a meeting with parliamentary leaders.

"I encountered three challenging options to manage salaries and other necessary expenditures," al-Zaidi detailed. "The first was to reduce salaries by 35 percent, the second was to delay salary payments to every 45 days, while the third involved seeking foreign loans."

Al-Zaidi, who has a background in banking, also mentioned that his administration inherited a public debt exceeding 208 trillion Iraqi dinars (approximately $139 billion at the new rate) upon taking office in May. He indicated that the government requires around 10 trillion dinars ($6.7 billion) each month to meet salary obligations and other critical expenditures.

A shortage of liquidity

The crisis in the Strait of Hormuz has placed significant financial pressure on the Iraqi government.

Though the situation has shown some improvement recently as Iraq's oil exports saw partial recovery, they have yet to reach pre-war levels.

Mudher Mohammed Salih, the financial adviser to the Iraqi prime minister, reported in August that the Central Bank of Iraq's foreign currency reserves had diminished from $106 billion to about $80 billion.

In response to revenue shortfalls, the Iraqi government has also resorted to borrowing from domestic banks to fund salaries and other essential costs.

A Finance Ministry official emphasized to Al Jazeera that timely salary payments remain the government's foremost priority, characterizing it as pivotal for domestic economic stability.

"Our hands are tied regarding revenue and maintaining sufficient funds to ensure timely salary disbursements," the official, who requested anonymity due to restrictions on public commentary, conveyed.

Economists have cautioned that while the adjustment of the exchange rate may alleviate some immediate financial burdens, it fails to address the underlying vulnerabilities within Iraq's economy.

"Nothing in economics is sacred, including the exchange rate," stated Nabil al-Marsoumi, an economics professor at Al Maaqal University in Basra. "An adjustment can be made, but it should only occur after all other alternatives have been considered."

"In any event, the exchange rate should not be utilized as a band-aid for shortcomings in the state's economic and fiscal strategies," he added.