The decision to reduce the dinar: to treat treatment or to stop the collapse
Riot police were sent to protect the headquarters of the Central Bank of Iraq in central Baghdad, before the announcement of the devaluation of the local currency, fearing the outbreak of popular protests. The Iraqi government’s decision to reduce the value of the dinar against the US dollar by nearly 20% caused an uproar in the Iraqi street.
The Central Bank of Iraq statement regarding this reduction indicated, “It must be emphasized here that this change (reduction) in the value of the Iraqi dinar will be one-time only and will not be repeated. “The central bank will defend this rate and its stability by supporting its foreign exchange reserves, which are still at stable levels,” the statement added .
The bank blamed poor economic policies over the past decade. He said that he “has no choice but to intervene” because poor economic planning and financial policies on the part of Iraqi politicians have led to the transformation of Iraq into an oil-exporting country only, with the bulk of state expenditures directed to pay money to the bloated public sector.
Unofficial estimates indicated that the successive Iraqi governments that followed the formation of the first Iraqi authority after the invasion in 2003 were responsible for the disappearance of about a quarter of a trillion dollars, which were allocated to reforming the health, education, electricity and public services sectors.
The Iraqi government reached this decision after it was unable to pay the salaries of its employees for two consecutive months, and had to borrow from the Central Bank of Iraq and other internal parties . The government sells oil in US dollars, which it uses to buy Iraqi dinars from the central bank to finance salaries and public services. Reducing the value of the local currency against the dollar means that it will get more Iraqi dinars from the central bank.
Years ago, the Central Bank of Iraq fixed the exchange rate of the Iraqi dinar against the US dollar, which is 1119 Iraqi dinars per dollar. Despite the emergence of a parallel black market selling dollars at a higher price, the difference was within the permissible margin of economic maneuver. However, recent months have witnessed many fluctuations in the exchange rate, due to the Coronavirus pandemic and the accompanying global financial crisis, and the decline in Iraq’s oil revenues after reducing the volume of its oil exports .
Although the CBI is independent, the government pushed for the cut, the largest in Iraq since 2003, to enable it to pay dinar-denominated salaries to more than four million government employees. The decision to devalue the currency angered public sector workers. Many fear that the weakening of the dinar, as well as the proposed budget plans to cut salaries and impose taxes, will amount to harsh wage cuts.
The decision of the Central Bank of Iraq to reduce the value of the dinar sparked a state of panic among Iraqis, many of whom rushed to exchange offices to buy dollars, and to supermarkets to buy and store supplies .
Several hundred demonstrators gathered in the famous Tahrir Square in Baghdad, to protest against the sudden decline in their purchasing power and urged the government to reconsider its decision. A young protester held up a banner reading “Before the dinar, the government must collapse.” Particularly among the demonstrators were numbers of seniors and retirees critical of the measure that greatly reduced the value of their pensions .
Hundreds of protesters also gathered on Monday in the city of Kut, where merchants said they would now have to reduce imports because they are paying in US dollars for the products they buy from abroad. Agri-food dealers and wholesalers in the city of Nasiriyah raised their prices by 20%, according to an AFP correspondent. In Basra, the head of the local branch of the High Commissioner for Human Rights, Mr. Mahdi Al-Tamimi, confirmed that the price hike came as a shock to consumers.
The curse of oil or its blessing:
The second-largest producer of crude oil in OPEC is completely dependent on oil exports, and Baghdad’s revenue has in fact been cut in half due to the collapse in oil prices. This left the government unable to cover its costs. The International Monetary Fund expects that Iraq’s fiscal deficit will widen to 20% of GDP this year .
The decline in oil revenues has put pressure on the Central Bank of Iraq’s foreign currency reserves, which the World Bank said had fallen to about $ 50 billion by last September, forcing the government to borrow heavily to pay salaries. The size of the public sector in Iraq has more than quadrupled since the invasion in 2003, and the government has simply become the largest employer in the country. But she was late in paying the salaries of employees and retirees in November, causing social unrest .
With the World Bank predicting that the poverty rate will rise sharply with the shrinking of the oil-dependent economy, the financial situation of Iraq, exhausted by wars and corruption, is so dangerous that Iraq is in talks with the International Monetary Fund for support . Sajjad Jiyad, a fellow at Century Research Institute from its office in Baghdad, says that the devaluation “sends a signal to the International Monetary Fund and others about the extent of despair the situation has reached and that Iraq is ready to take some of these painful steps,” meaning the march towards more financial austerity. .
But with Iraq dependent on imports, a weakening of the dinar is likely to lead to inflation. Prices have remained low so far, in part because Iraq’s two largest trading partners, Iran and Turkey, have seen a significant depreciation of their currency. “For the general population, there is concern that food prices will rise, as the country still imports most of the foodstuffs,” says Mr. Sajjad.
The Minister of Finance, Mr. Ali Allawi, warned that Iraq must take serious measures to reform the expenditures, which were amplified with the use of politicians using public employment to buy votes and loyalties. This month, the International Monetary Fund advised the Iraqi government, in building its budget for 2021, to give priority “to reversing the unsustainable expansion of the cost of salaries and pensions, reducing ineffective energy subsidies, and increasing non-oil revenues .” The Minister of Finance added, “One of the main reasons for the devaluation of the dinar is to push the economic cycle forward and revitalize the private sector and domestic production to avoid severe budget deficits . ” He also said, “What has been done is a preemptive step. Without this step, huge inflation will occur. We will encounter problems that we will not accept .”
The minister says the country’s foreign reserves could be depleted within six to seven months if government spending remains on the current track without changing the exchange rate. Without this step, the budget deficit in 2021 could reach 100 trillion dinars (84 billion dollars) . The International Monetary Fund expects Iraq’s economy to contract by 12% this year, more than any other OPEC member state.
“The devaluation was inevitable in light of the low oil prices and budgetary pressures facing Iraq,” said Ziad Daoud, an economist who specializes in emerging market studies at Bloomberg. “It is also important to monitor the popular response to the resulting increase in the cost of living and the government’s austerity program, ” he adds .
Since the collapse of oil prices earlier this year, Iraq has been suffering from an unprecedented liquidity crisis. The state has had to borrow from the bank’s dollar reserves to pay nearly $ 5 billion a month in public sector salaries and pensions. But oil revenues, which make up 90% of the budget, come in, on average, at $ 3.5 billion .
In a move toward austerity, the state’s proposed budget for 2021 also calls for record spending, projecting a deficit of nearly $ 40 billion. The Cabinet voted on the budget and sent it to Parliament, where it is expected to face strong opposition. But those familiar with the insights of Iraqi politics say that it will eventually pass according to the desire of the leaders of the blocs and the influential political parties.
Over the past two decades, corruption has created a double-edged problem for Iraq. Weak, totalitarian Iraqi governments built on the basis of sectarian quotas mean that every major political party runs one or more ministries. They run these bureaucracies not in the interest of the country but as huge patronage networks: corruption machines that suck oil revenues from the treasury and pass them on to their public in the form of jobs, contracts, and other perks. The spread of graft has stifled what was previously owned by the small private sector in Iraq, which means that there are not many alternatives to public sector jobs .
Therefore, it is not surprising that there has been a more than fourfold increase in the number of workers in the public sector since 2004, and the government pays 400% more salaries than it was 15 years ago. Thus, the government and its oil revenues became the main engine of the Iraqi economy, which gives the Iraqi people the opportunity to live.
The Iraqi economic expert, Mr. Munir Al-Obaidi, said in an interview with Al-Hurra channel that the effect of the devaluation will be negative at the beginning of the stage, which “will continue for six months or a year”, and after that “it will contribute to improving the GDP from different sectors such as the industrial, agricultural and service sectors, because it will increase the activity of these sectors.” “.
But Iraqi industrialists say that the talk that the decision to devalue the Iraqi currency will lead to the encouragement of local industry “is too simplistic .” The Iraqi industrialist, Mr. Moataz Kamouneh, said in an interview with the same channel, that “the industry needs infrastructure such as electricity, sewers, water lines, transmission lines, import and export facilities, and all of these are not available .” And he adds that “the raw materials have increased in value after the devaluation of the dinar because it is imported, which means high costs, and the years of Iraqi industrial unemployment have made Iraq lose the advantage of keeping pace with other countries with technology and destroying the old infrastructure .”
Is there a hand that extends into Iraq :
The devaluation of the currency, without accompanying economic reforms that the political forces in Iraq refuse to consider, will paralyze imports, undermine savings and increase hardship. If the United States government is willing to provide some aid, it is likely that many other countries will also participate. International financial institutions such as the World Bank, the International Monetary Fund, the Gulf states, and even some European and East Asian countries are expected to provide some funds .
Iraq crisis is a liquidity crisis. Iraq will need money to prevent the collapse of its financial system, which may lead the country into a spiral of violence that its borders do not contain. If the United States pledges to provide a certain amount, perhaps one billion dollars, it will be possible to assemble a package of up to 5 billion dollars to help Iraq in cooperation with other countries. The idea of providing one billion dollars to support the emergency budget for Iraq may seem very difficult at the moment. But this should not be seen as such. The United States should have learned over the past 20 years two important lessons about this part of the world. First of all, what happens in the Middle East does not stay there. And second, one ounce of prevention is better than a pound of cure, as Washington’s tragic policies toward Iraq, Syria and Libya have shown. Source
* Professor of Economics and Political Science, Kansas State University, USA.