DINAR REVALUATION REPORT: CBI TALK OF PEG THE IQD TO A BASKET OF CURRENCIES, 14 DEC

 DINAR REVALUATION REPORT

The governor pointed out that "the Central Bank's continued opening of multiple external channels in foreign and Arab currencies achieves continuous stability in the exchange rate and gradually eliminates the black market."

LINK OF NEWS: https://dinarevaluation.blogspot.com/2024/12/cbi-opening-external-channels-with.html

The statement We’ve referred to highlights the Central Bank of Iraq's efforts to stabilize its currency exchange system and reduce the influence of the black market by opening multiple external channels for foreign and Arab currencies. 

By diversifying its access to foreign exchange sources, the Central Bank aims to ensure a steady supply of foreign currencies, thereby stabilizing the official exchange rate and discouraging the use of unofficial or black market channels.

This strategy is significant because Iraq has faced challenges with currency instability and the depreciation of the dinar in the past, with black market trading often exacerbating these issues. 

By increasing the availability of foreign currencies through official channels, the Central Bank hopes to increase trust in the formal banking system, reduce speculative activities, and gradually phase out parallel market activities.

The move aligns with broader monetary policies that central banks often use to combat exchange rate volatility and inflation, promoting greater confidence in the national currency.

 However, the success of this policy will depend on factors like consistent foreign exchange inflows, effective regulation, and broader economic stability within the country.

----

The Central Bank of Iraq (CBI) is working to stabilize the exchange rate of the Iraqi dinar (IQD) through various measures, including efforts to diversify its foreign currency reserves. The exchange rate of the Iraqi dinar is influenced by several factors, such as oil revenue, geopolitical conditions, and inflation expectations. Since Iraq's economy is highly dependent on oil exports, the CBI's strategy for stabilizing the currency involves increasing its foreign exchange reserves and diversifying these reserves to reduce reliance on a single currency, particularly the U.S. dollar.

Key strategies the CBI uses for currency diversification and stabilization include:

1. Diversification of Foreign Currency Reserves

• Currency Basket: By holding reserves in a range of foreign currencies, including the U.S. dollar, the euro, the British pound, and potentially other major currencies, the CBI reduces the risk associated with fluctuations in any single currency. If the value of the dollar drops, for example, the value of reserves denominated in euros or other currencies may increase, helping to buffer the impact on the dinar's exchange rate.
• Stabilizing Effects: This diversification helps insulate the dinar from external shocks, such as a sudden depreciation of the U.S. dollar or global economic crises that might affect the dollar-based assets.

2. Building Up Foreign Exchange Reserves

• Increasing Reserves: The CBI's effort to build up foreign exchange reserves, especially through foreign investments and oil revenue inflows, gives it a stronger buffer against short-term volatility in the exchange rate. Having more reserves enables the central bank to intervene more effectively in the foreign exchange market when needed to stabilize the dinar.
• Oil Revenue and Foreign Reserves: Since Iraq's economy is largely oil-dependent, oil price fluctuations can impact the availability of foreign currency. The CBI works to manage these fluctuations by ensuring it has a reserve cushion in other currencies to maintain exchange rate stability.

3. Active Intervention in the Foreign Exchange Market

• Market Operations: The CBI frequently intervenes in the foreign exchange market by buying and selling foreign currencies. These interventions help to smooth out short-term volatility in the exchange rate of the dinar and maintain confidence in its stability.
• Currency Auctions: One common tool used by the CBI to manage the exchange rate is the currency auction, where the CBI sells foreign currencies (mainly U.S. dollars) to commercial banks. By adjusting the amount of foreign currency sold, the CBI can influence the dinar's exchange rate.

4. Monetary Policy and Interest Rates

• Interest Rate Adjustments: The CBI can adjust interest rates to influence inflation, attract foreign capital, and stabilize the exchange rate. By raising interest rates, it can make the dinar more attractive to investors, increasing demand for the currency and strengthening its value.
• Inflation Control: Managing inflation is crucial for exchange rate stability. By maintaining low and stable inflation rates, the CBI can prevent the dinar from losing value in real terms, which would otherwise lead to depreciation.

5. Supporting Non-Oil Exports and Foreign Investments

• Diversification of the Economy: To reduce its reliance on oil, the CBI encourages diversification by supporting other sectors of the economy, such as agriculture, manufacturing, and services. By boosting exports from these sectors, Iraq can generate foreign currency inflows that will help stabilize the exchange rate.
• Foreign Direct Investment (FDI): The central bank and government policies aim to attract foreign investment, which would bring in foreign currency and help strengthen the dinar. Ensuring a stable exchange rate makes Iraq more attractive to investors, who prefer a predictable currency environment.

6. Managing External Debt and Fiscal Policies

• Debt Management: The CBI works with the Iraqi government to manage external debt and ensure that it does not become a burden on the foreign exchange reserves. By keeping debt levels manageable and ensuring that Iraq's fiscal policies are sustainable, the central bank can help maintain the dinar's value.
• Balanced Fiscal Policy: Coordination between the CBI and the Iraqi government is key to maintaining a sound fiscal and monetary policy. Avoiding excessive deficits and ensuring efficient management of public finances contributes to overall macroeconomic stability and helps to prevent devaluation pressures on the dinar.

Conclusion

The diversification of foreign currency reserves by the Central Bank of Iraq is one element of a broader strategy aimed at stabilizing the exchange rate of the Iraqi dinar. By reducing dependence on a single foreign currency (such as the U.S. dollar), increasing reserves, and promoting sound monetary policies, the CBI helps cushion the Iraqi economy from external shocks and contributes to the long-term stability of the dinar. This, in turn, enhances confidence in the currency, reduces inflationary pressures, and creates a more predictable environment for businesses and investors. However, the success of these policies also depends on the broader political and economic stability of Iraq, as well as global factors such as oil prices and geopolitical events.