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Iraq has devalued its currency by about 20% against the dollar, the biggest drop in history, as the government without money is facing an economic crisis caused by low oil prices and declining oil production.
The central bank reduced the official rate to 1,450 dinars per dollar, the first devaluation since 2003, according to a statement. This is about 1,190 previously. The dollars will be resold to local banks at 1,460 dinars each.
Iraq’s cash is seeking a $ 2 billion advance payment for oil
The world’s third-largest oil exporter is taking steps to avoid depleting its foreign exchange reserves after the coronavirus reduced energy demand and caused prices to plummet. 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
Prime Minister Mustafa Al-Kadhimi, who came to power in May, has warned that the government will fight 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 lamented corrupt politicians, daily power outages, dilapidated hospitals, collapsed roads and joblessness, and urged the government to ignore OPEC cuts.
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.
Iraqi Prime Minister bets on economic reforms: Bobby Ghosh
(Updates with comments from Bloomberg’s chief emerging market economist starting with the fourth paragraph.)