Photographer: Ahmad al-Rubaye / AFP / Getty Images
Photographer: Ahmad al-Rubaye / AFP / Getty Images
Iraq has devalued its currency by almost 20% against the dollar, the highest record as a cashless government faces an economic crisis caused by low oil prices and declining oil production.
The central bank on Saturday cut the official rate to 1,450 dinars per dollar, the first devaluation since 2003. It is about 1,190 previously. The dollars will be resold to local banks at 1,460 dinars each.
The devaluation of the world’s third-largest oil exporter threatens to place some goods beyond the means of ordinary Iraqis and trigger unrest in a country that imports heavily and is still embroiled in last year’s anti-government protests.
Go Fiscal
Iraq’s budget deficit will increase the most since 2004 this year
Source: IMF
Finance Minister Ali Allawi said one of the main reasons for this action was the activation of the private sector and local production, while avoiding a severe budget deficit.
“What has been done is a precautionary step,” Allawi said in a televised interview on the Iraqi state channel. Without movement, he said, inflation will rise and “we will hit the wall.”
Iraq’s cash is seeking a $ 2 billion advance payment for oil
Iraq is taking steps to avoid depleting its foreign exchange reserves after the coronavirus affected energy demand and caused prices to fall. Without devaluation, reserves would be depleted in six to seven months, and the budget deficit could reach 100 trillion dinars ($ 84 billion) by 2021, Allawi said.
The International Monetary Fund expects the Iraqi economy to shrink by 12% this year, more than any other OPEC member below a share of production, and that its budget deficit will reach 22% of gross domestic product. Last month, the government requested advance payments in exchange for a long-term oil supply contract to help alleviate its dire financial situation.
What Bloomberg Economics says …
“The devaluation was inevitable, given the fall in oil prices and the budgetary pressures facing Iraq. The government says this is a once and it will not be repeated, but we shall see if it will be so. It is also important to follow the popular response to the resulting increase in living costs and the government’s austerity program. “
– Ziad Daoud, chief economist of emerging markets
The economic crisis adds pain to a chaotic nation for most of the period since the 2003 US-led invasion that toppled Saddam Hussein, suffering a civil war, an Islamic State insurgency and pressure from the Kurds to independence in the north, a major oil-producing region.
Tough times
Iraq’s economy will shrink the most among OPEC members below one quota
Source: IMF forecasts
All major oil producers have been affected by the sinking oil prices caused by the coronavirus. But Iraq, where oil accounts for almost all government revenue, is in a worse position than most.
Quotas agreed with other oil exporters in an effort to stabilize the market mean that the number of barrels Iraq can pump is restricted. Prime Minister Mustafa Al-Kadhimi, who came to power in May, has warned that authorities will therefore struggle to pay civil servants without increasing more debt. This threatens a repeat of the riots that toppled the government last year and saw hundreds of protesters killed.
Iraq’s collapsed economy is becoming a threat to OPEC
Demonstrators at a rally in Tahrir Square in late October denounced corrupt politicians, daily power outages, dilapidated hospitals, collapsed roads and joblessness, and urged the government to ignore OPEC cuts.
– With the assistance of Abeer Abu Omar
(Updates with political context, graphic from the third paragraph)