Iraq struggles to stop ongoing dinar devaluation against US dollar

Iraq struggles to stop ongoing dinar devaluation against US dollar
The Iraqi dinar continues to lose its value against the US dollar, as the Iraqi government struggles to stop the outflow of much-needed hard currency to the neighbouring countries.
3 min read
05 January, 2023
A street money exchanger counts banknotes at al-Kifah stock market in Baghdad on 27 December 2022 as the value of Iraqi dinar against US dollar drops further. [Getty]

Tens of Iraqis demonstrated outside the Central Bank of Iraq (ICB) in Baghdad early Wednesday to protest against the ongoing devaluation of the Iraqi dinar in exchange for the US dollar, which has caused prices of goods to soar, triggering public anxiety and a recession in the local market.

While the formal rate by the Central Bank of Iraq is 1,470 dinars per US$1, the exchange rate in the black market amounted to around 1,556 Iraqi dinars to US$1 early Thursday.

People across the country are placing blame on the bullish US dollar for the inflation and recession in the local markets that are heavily dependent on foreign imports. 

Economic experts and political observers say the rise in the US dollar exchange rate per dinar is also linked to the US sanctions on Iran, as both countries are fighting to maintain their influence over Iraq - the second-largest crude oil producer in OPEC after Saudi Arabia.

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"The value of the Iraqi dinar is shrinking on a daily basis in exchange to the United States dollar after the Central Bank of Iraq limited the currency auction amount to the private banks to nearly US$100 million from US$250 million in the past," Khalid Haider, professor of economics at the University of Sulaimaniyah, told The New Arab.

"This step came as per a demand from the US Federal Reserve in an attempt to tighten the channelling of dollars into the neighbouring countries of Iraq, mainly Syria and Iran," he added. 

He also stressed that another reason for the hike in the dollar rate per dinar is that the US Federal Reserve has blacklisted nearly fourteen banks believed to be owned by the Iraqi ruling parties and Iran-backed militias, from the hard currency auctions.

According to Haider, the ICB in cooperation with the US Federal Reserve recently launched an online website to register and control who can buy the US dollar in Iraq and the transactions resulted in less cash flow into the Iraqi markets because the Iraqi banks need nearly a fortnight to carry out the online transactions.

He cautioned that the measures by the ICB will likely not stop dollar smuggling into Iraq's neighbouring countries, thus the rate of the dollar in exchange for the dinar is expected to continually rise in the black market.

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The official rate for banks and exchange companies was 1,182 dinars per dollar for years, however, the ICB in December 2020 devalued the country's currency to 1,460 dinars per dollar for banks and 1,470 dinars for individuals. The step was meant to tackle a national liquidity crisis due to dropping oil prices on the international markets.

For his part, Iraqi PM Mohammed Shia' al-Sudani vowed to control the exchange rate, however, with the dinar devaluing steadily, his cabinet is facing increasing political and popular criticism.

Sudani has the backing of "the Coalition for the Administration of the State", an alliance of powerful pro-Iran Shia factions, Sunni factions led by al-Halbusi and two key Kurdish parties.

Late in December, Sudani met the central bank governor to discuss the issue. The central bank has blamed the slump on "temporary pressures" sparked by the "adoption of new mechanisms to protect the banking sector, customers, and the financial system".

Prime ministerial adviser Muzhar Saleh said to Iraq's News Agency that there were "no fears" about Iraq's ability to maintain the exchange rate, noting foreign reserves were at "a high in Iraq's financial history", likely exceeding US$100 billion.