Iraq has seen the biggest devaluation of its currency since the 2003 US led invasion with the Central Bank announcing on Saturday that it was devaluing the dinar by 22 per cent. The desperate measure, undertaken in response to a severe liquidity crisis brought on by low oil prices, has sparked public outrage.
According to the AP, riot police were dispatched outside the central bank headquarters in central Baghdad prior to the announcement in the event news of the devaluation sparked protests. A leaked draft of the state budget law for 2021 caused furore on the Iraqi street last week as it confirmed plans to devalue the dinar.
The new rates represent a dramatic reduction from the previous official rate of 1,182 IQD (Iraqi dinar). It is the first reduction in exchange rates that the Iraqi government has made in decades.
In a statement, the Central Bank set the new rate for the dinar, which is pegged to the US dollar, at 1,450 IQD when selling to the Iraqi Finance Ministry. The dinar will be sold to the public at 1,470 IQD and to other banks at 1,460 IQD.
Since an oil price crash earlier this year, Iraq has been grappling with an unprecedented liquidity crisis. The crude-exporting country has had to borrow from the bank’s dollar reserves to pay the nearly $5 billion in monthly fees for public salaries and pensions. Oil revenues, which account for 90 per cent of the budget, have brought in an average of $3.5 billion.
Iraq’s public sector has trebled in size since the 2003 invasion, and the government is easily the country’s biggest employer.
The World Bank is expecting poverty to rise sharply as its oil-dependent economy shrinks, said a report in the Financial Times. War-fatigued Iraq’s financial situation is said to be so grave that Baghdad is in talks with the IMF for support.
Devaluation “sends a signal to the IMF and others about how desperate the situation has become and Iraq is ready to take some of these painful steps” towards more fiscal austerity, Sajad Jiyad, a Baghdad-based fellow with the Century Foundation, is reported saying in the FT.
With Iraq relying on imports, Jiyad warned of the pain the potential inflation would cause. “For the general population there’s a worry that food prices will increase, we still import most of our foodstuff,” said Jiyad.
Iraq’s Finance Minister Ali Allawi has warned of the wider corruption fuelling the financial crises saying that Iraq must take serious measures to reform its spending, which has ballooned as politicians used public hiring to buy votes and loyalty.