Liquidity crisis and expenditure financing: Does the lack of dinar liquidity pose a serious threat to the Iraqi economy?
The national currency is an integral part of a country’s sovereignty. Every independent state exercises its own policies in line with its circumstances and national interests. Among the most important of these is fiscal policy, through which governments seek to regulate their finances via various strategies. These begin with the issuance of a national currency, its introduction into the market, and control of its volume in circulation, followed by linking it to other international currencies, determining the inflows and outflows of national liquidity in relation to foreign liquidity, and assigning the competent public authorities to manage and invest the currency in the most beneficial manner.
Iraq’s situation is no different from that of other nations. The Iraqi government constantly strives to preserve the value of the Iraqi dinar by balancing two main factors: the volume of dinars in circulation on one hand, and the currency’s backing in international currencies and precious metals on the other. At the same time, the government seeks to control both the inflows and leakages of currency to maintain near-equilibrium. Maintaining such balance is crucial; any distortion between the volume of currency issued and its backing could lead to collapse, while a significant mismatch between currency inflows and outflows could push the state and its economy into deficit.
A careful observer of Iraq’s current economic and financial conditions will note a number of macro-indicators suggesting that the country’s fiscal policy has entered a state of deficit. This does not refer solely to a shortfall of revenues against expenditures, but also to a deficit in managing the supply of local currency, ensuring sufficient dinar liquidity, and meeting the government’s domestic obligations such as salaries and other operating expenses. Such a situation serves as an early warning of potential adverse impacts that could affect the entire national economy in the future.
This paper therefore examines the causes and implications of the dinar liquidity crisis for the national economy. However, before addressing the possible reasons behind the shortage of dinar liquidity and its economic consequences, it is necessary first to review the fundamentals of fiscal policy management in Iraq.
