Iraq and the assumptions of the full float of its currency 2021
- 15 hours elapsed [4/5/2021]
The decision to reduce the value of the Iraqi dinar by the end of 2020 has raised some concerns that this decline in value is a prelude to floating the entire local currency.
And last December, the Central Bank of Iraq reduced the exchange rate of the local currency (dinar) against the dollar by 24 percent, with the aim of better management of payments and the economic crisis in the country.
The dollar exchange rate reached 1470 dinars to the public, and 1460 dinars for banks operating in the country, compared to 1182 dinars before the reduction.
The Iraqi economy suffers from a contraction of 11 percent in 2020, which has exacerbated the economic weaknesses that it has suffered for a long time, according to what the International Monetary Fund said in a recent report.
Iraq depends for 92 percent of its income on oil revenues.
The last time the dinar devalued was in December 2015, when it raised the selling price of the dollar to 1182 dinars, compared to 1166 dinars previously.
With the increasing economic difficulties that the world is witnessing as a result of the Corona pandemic and the emergence of new strains, some believe that Iraq's resort to flotation is an acceptable option.
The economic expert, Manar Al-Obaidi, confirmed that the floating policy is not of real benefit in the economy of Iraq, which is a rentier economy that relies heavily on oil revenues.
Al-Obaidi pointed out that the full floating policy requires diversifying the economy to create a state of balance in supply and demand, but this is difficult in Iraq because there is only one player in this equation, which is the Central Bank of Iraq.
He stressed that the recent devaluation of the dinar led to an increase in the level of inflation to 4 percent, due to the reflection of the differences in exchange rates and import costs on the final consumer.
The annual inflation rate increased in December 2020, by 3.2 percent on an annual basis, affected by the change in the dollar exchange rate.
“I expect the consumer prices to continue to rise for the following months,” Al-Obaidi said.
"The future of the dinar is expected to maintain its price in the range of 1500 for a period that may reach more than a year.
If the economic situation improves, it is possible to raise the value of the dinar."
In turn, the consultant industrial development and investment, Amer Al-Jawahiri, ruled out the occurrence of a full float until 2022, because of its political and social repercussions that are difficult for the Iraqi economic and political reality to bear now.
Al-Jawahiri added that the full float will have negative repercussions on the purchasing power of the Iraqi consumer, especially the middle and poor groups.
On whether the country resorted to a float, Al-Jawahiri believes that it will be a managed float again and not free, especially since the central bank is the one that gives foreign currencies to those who wish, and therefore it is the only one capable of preserving the value of the dinar.
In February, the Central Bank of Iraq’s foreign currency reserves exceeded $55 billion, according to him.
The reality of financial and administrative corruption makes it more difficult to implement the full float and achieve its goals, which leads it to failure and even further deepening the troubled economic scene.
According to the economist Osama Al-Tamimi, the float should lead to stimulating domestic production and reducing dependence on imports, "but the corrupt gangs will face this mechanism by raising the prices of local commodities."
He pointed out that it is difficult to move towards a comprehensive float, because of what is needed by the existence of a state that has the force of law, "and this is not available now."
He stressed that the devaluation enabled the government to overcome a major crisis that Iraq could have faced.
He continued, "Through this reduction, the government was able to provide salaries, run state affairs, and limit money smuggled abroad, as the dinar achieves a weak economic margin for smugglers."