Photographer: Ahmad al-Rubaye / AFP / Getty Images
Photographer: Ahmad al-Rubaye / AFP / Getty Images
Iraq devalued its currency by nearly 20% against the dollar, the highest on record as the government faces a shortage of money from an economic crisis caused by low crude oil prices and cuts in oil production.
The central bank on Saturday lowered the official rate to 1,450 dinars per dollar, the first devaluation since 2003, previously from about 1,190. Dollars will be resold to local banks at 1,460 dinars each.
The devaluation of the world’s third largest oil exporter threatens to move some goods out of the reach of ordinary Iraqis and cause unrest in a heavily importing country still reeling from deadly protests against the government of Iraq. last year.
Tax woes
Iraq’s budget deficit is expected to increase the most since 2004 this year
Source: IMF
Finance Minister Ali Allawi said one of the main reasons for the move was to activate the private sector and local manufacturing while avoiding a severe budget deficit.
“What has been done is a preventive step,” Allawi said in a televised interview on the state-run Iraqiya channel. Without the move, he said, inflation will rise and “we’ll hit the wall.”
Iraq with a lot of money is asking for upfront payment of $ 2 billion for oil
Iraq is taking steps to prevent its foreign exchange reserves from being depleted after the coronavirus has undermined energy demand and caused prices to fall. Without the devaluation, reserves would be depleted within six to seven months and the budget deficit could reach 100 trillion dinars ($ 84 billion) by 2021, Allawi said.
The International Monetary Fund expects Iraq’s economy to shrink by 12% this year, more than any other OPEC member under a production quota, and that its budget deficit will be 22% of gross domestic product. The government last month sought upfront payments in exchange for a long-term crude oil supply contract to help mitigate its dire financial situation.
What Bloomberg Economics Says …
“The devaluation was inevitable given the fall in oil prices and the budgetary pressures Iraq is facing. The government says this is one one-off and will not be repeated, but we will see if that will be the case. It is also important to consider the response of the population to the resulting rise in the cost of living and the government’s austerity program. “
– Ziad Daoud, chief emerging markets economist
The economic crisis adds pain for a nation that has been in chaos for most of the period since the 2003 US-led invasion that toppled Saddam Hussein, suffered a civil war, an Islamic State uprising and pressure from the Kurds. for independence in the north. , an important oil-producing region.
Rough times
The Iraqi economy will fall the most among OPEC members below a quota
Source: IMF forecasts
All major oil producers have been hit by the coronavirus-induced drop in crude oil prices. But Iraq, where oil represents almost all government revenue, is in a worse position than most.
Quotas agreed with other oil exporters to stabilize the market mean that the number of barrels Iraq can pump is limited. Prime Minister Mustafa Al-Kadhimi, who came to power in May, has warned that the authorities will therefore struggle to pay officials without accumulating more debt. That threatens a repeat of the unrest that toppled the government last year, killing hundreds of protesters.
Iraq’s crumbling economy is becoming a threat to OPEC
Protesters at a rally in Tahrir Square in late October denounced corrupt politicians, daily power cuts, dilapidated hospitals, crumbling roads and a lack of jobs, and urged the government to ignore OPEC’s production restrictions.
– With the help of Abeer Abu Omar
(Updates with political context, third paragraph graph)