Wednesday, September 11, 2024

DINAR REVALUATION REPORT: Understanding Iraq's Exchange Rate and Current Account Balance in 2024, 11 SEPT

 Understanding Iraq's Exchange Rate and Current Account Balance in 2024

In the realm of economics, the external value of a currency is significantly influenced by the balance or surplus in the current account of the balance of payments relative to the gross domestic product (GDP).  As of September 11, 2024, Iraq's economic landscape is characterized by a dual exchange rate system and a current account balance that has been fluctuating due to various economic and geopolitical factors. 

Iraq's Dual Exchange Rate System

Iraq operates with two exchange rates: the official rate and the market rate.

As of 2024, the official exchange rate stands at approximately 1,310 Iraqi dinars per US dollar, while the market rate is higher, around 1,460 dinars per dollar, marking a 12% gap between the two.  This dual rate system was established in response to the fiscal crisis of 2020 and the subsequent devaluation of the dinar by 23%. In February 2023, the dinar was revalued, increasing its value to 1,310 per dollar from 1,450, benefiting importers but negatively impacting exporters of non-oil goods. 

Impact of Dual Exchange Rates

The existence of two exchange rates has several negative impacts on Iraq's economy. It disrupts existing contracts, discourages trade and investment, both domestically and internationally, and complicates fiscal policy. Moreover, it fosters corruption by allowing individuals to profit from the difference between the official and market rates. 

Current Account Balance

The current account balance of Iraq has been subject to significant changes over recent years. In 2021 and 2022, high hydrocarbon prices generated a large current account surplus. However, in 2023, oil prices began to decline, leading to a projected move into deficit in 2024 due to the decrease in oil exports and the increase in import volumes to meet the rise in private consumption and the need for capital goods.  

Factors Influencing Current Account

The current account deficit in 2024 is influenced by the OPEC decision to maintain production cuts, Iraq being the second-largest producer, along with oil prices moderated by a sluggish global economy and the revaluation of the dinar in February 2023. 

Economic Outlook

Iraq's economic activity in 2024 is projected to remain moderate. The growth rate is expected to be driven by investment projects, particularly those related to infrastructure and reconstruction, as well as by significant current public spending, such as raising the minimum wage, which will support private consumption. Inflation is anticipated to return to a moderate level due to easing global food prices and the revaluation of the dinar, which should limit imported inflation. 

Conclusion

Iraq's economic situation in 2024 is a reflection of its dual exchange rate system and the challenges it faces in maintaining a stable current account balance. The country's reliance on oil exports and its efforts to diversify its economy will continue to be key factors in shaping its economic future.

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