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Tishwash: The devaluation of the dinar is the beginning .. “painful” steps and a difficult year for the Iraqis

A report published by “Bloomberg” agency, Thursday, (December 24, 2020) warned that the devaluation of the Iraqi currency may not save the country and extricate it from its current crisis unless it is accompanied by more painful measures that include a significant reduction in government spending .

“Failure to make spending cuts will lead to severe economic consequences, in a country whose citizens are already suffering from many difficulties,” the report said.

So far, the devaluation has not caused massive popular protests like the one that took place in October 2019, but economists expect this to be only the beginning of more painful measures .

The report quotes the economist Ziad Daoud as saying that “the devaluation will be painful for ordinary people, but it is unlikely that it will be a one-time”. It is expected that the decrease in foreign exchange reserves expected in the next budget will lead to more adjustment in the currency, either officially. Or more likely on the black market. ”

Last Saturday, the Iraqi government announced a devaluation of 23 percent for the first time since 2003, in order to reduce pressure on the budget in light of its attempts to secure billions of dollars in foreign aid .

And Bloomberg notes that “the draft state budget for 2021, which was approved by the government last Sunday and sent to Parliament, expects another difficult year for Iraq . ”

Oil exports were estimated in the next budget at an average of 3.25 million barrels per day, at an assumed average price of 42 dollars, with a deficit of about 45 billion dollars .

Many analysts said that “the devaluation was necessary to show Iraq to international lenders that it is serious about reforms,” but pointed out that “this is not sufficient for the country to obtain the financial assistance that the Iraqi government hopes to obtain . ”

Mark Pohlund, senior credit research analyst at the  “REDD Intelligence” platform ,  said, “Iraq needs to cut its budget further in order to obtain substantial financial support.”

And the central bank set, at the end of last week, a new exchange rate for the national currency, to raise the dollar to 1450 dinars compared to 1190 dinars before the decision, which is the first in half a decade .

The decision sparked panic among Iraqis, many of whom rushed to exchange offices to buy dollars, and to supermarkets to store supplies .

Finance Minister Ali Allawi said that these measures are the only ones capable of preventing a complete collapse .

He told reporters Sunday, “If we do not change the exchange rate or adjust our spending, our reserves (of foreign currency) will be depleted within six or seven months.”

In particular, the draft 2021 budget includes the introduction of an income tax. And according to the budget proposal, Iraq is also seeking to increase its non-oil revenues in the face of declining crude revenues .

Iraqi officials who worked on preparing the bill say that their goal is to “withstand an unprecedented financial crisis resulting from the emerging Corona virus pandemic and the collapse of oil prices, which Iraq relies on sales to finance 90 percent of its budget . ”

Baghdad is expected to end this turbulent year, with GDP growth shrinking by 11 percent and the poverty rate rising to 40 percent of the country’s 40 million people   link