CONTROVERSY OVER THE DOLLAR IN IRAQ.. EXPECTATIONS OF A PRICE INCREASE AND THE GOVERNMENT REASSURES! , 13 FEB

 CONTROVERSY OVER THE DOLLAR IN IRAQ.. EXPECTATIONS OF A PRICE INCREASE AND THE GOVERNMENT REASSURES! 

The exchange rate is volatile and the dollar is rising against the dinar, which is putting the Iraqi economy in great challenges, raising fears of a possible financial crisis. While the government confirms the stability of monetary policy, experts warn of the impact of financial restrictions and increased spending on market stability, stressing the need for urgent reforms to ensure the sustainability of the economy. 

The advisor to the Iraqi Prime Minister, Dr. Mazhar Muhammad Salih, said that “the government is not currently considering amending the exchange rate equation or what is known as “monetary adjustment”, denying the speculations circulating in this regard. Salih explained, in an interview with (Al-Mada), that these rumors are not based on realistic foundations within the current monetary policy, stressing that the monetary sector in Iraq enjoys clear stability.

Salih pointed out that “this stability is due to the strong foreign reserves possessed by the Central Bank of Iraq, as the dollar coverage rate for the dinar exceeds 100%, which contributes to controlling the financial market and reducing the impact of the black market for the currency, despite the price difference that reaches about 13% from the official price.” The advisor explained that foreign reserves are a major tool for controlling the level of cash liquidity within Iraq through open market operations, which is one of the mechanisms adopted by monetary policy to control the economy. He also confirmed that the Central Bank meets more than 95% of the local market’s needs for dollars, at an exchange rate of 1,320 dinars per dollar, which enhances the stability of the monetary market.

Regarding financial policy, Salih confirmed that it has effective tools to control expenditures and increase revenues without compromising With the stability of the macroeconomy, stressing that resorting to financing the fiscal deficit through inflation, or what is known as inflationary taxes, is one of the worst financing policies due to the price fluctuations it causes and the negative repercussions on the purchasing power of the general budget and citizens’ cash income.

Member of the Parliamentary Finance Committee, Hussein Mounes, had warned of the danger of expanding government spending, stressing that the operating budget is largely consumed on luxury issues, which necessitates reducing it in the 2025 budget.
Mounes explained that the Ministry of Finance faces major challenges in providing salaries, as it enters a state of financial warning on the twentieth of each month, due to limited tax revenues, as only 3 trillion dinars are collected annually out of an expected 9 trillion. He also pointed out that there are daily transfers of up to $250 million, but tax revenues do not reflect this amount, which constitutes an imbalance in the financial system.

Mounes expressed his concerns about the lack of a clear economic plan to confront any potential decline in oil prices, stressing that Iraq could face a serious financial crisis if oil revenues decline, which could push the government to raise the exchange rate again as a necessary measure.

In the same context, economic expert Ziad Al-Hashemi criticized the measures taken by the government and the Central Bank, considering that they were not sufficient to achieve stability in the dollar exchange rate. He pointed out that “the ongoing gap between the official rate and the parallel market continues to negatively affect the Iraqi economy,” stressing that the government and the Central Bank have not been able to achieve the target exchange rate of 1,300 dinars per dollar over the past year and a half, which has led to significant economic losses.

Al-Hashemi explained to Al-Mada that “the Iraqi financial system suffers from the concentration of foreign transfer operations in a limited number of banks, as the state relies on only four to five banks through the system of strengthening balances using foreign correspondent banks,” which he described as “a bottleneck that threatens the stability of the markets.” He stressed that the lack of banks capable of executing foreign transfers leads to a decline in the amount of dinar available to the government to cover salaries and subsidies, and contributes to a decrease in the supply of the dollar, which prompts traders to resort to the parallel market, thus increasing its value.

Al-Hashemi criticized the slow response of the Central Bank of Iraq in expanding the base of banks that can execute foreign financial transfers, considering that this delay leads to the continuation of the exchange rate crisis. He also warned of the potential repercussions of US restrictions and sanctions on some Iraqi banks and economic entities, noting that any new measures by the US Federal Reserve may increase the level of demand for the dollar and raise its prices. Al-Hashemi stressed the urgent need for urgent banking reforms, calling for taking more effective measures to ensure the stability of the exchange rate and prevent the exacerbation of the economic crisis in the country.

WHY IS THE DOLLAR STILL RISING ?
Dr. Nawar Al-Saadi, professor of international economics at the University of Bucharest in Romania, believes that one of the main factors behind the rise in the value of the dollar against the Iraqi dinar is the continued US restrictions on dollar flows to Iraq. He explained that the US Treasury Department imposed strict control measures on financial transfers, which made obtaining dollars more complicated and forced Iraqi banks to comply with strict auditing requirements, which led to a reduction in the supply of dollars in the official market.
Al-Saadi added to (Al-Mada) that “the demand for the dollar in Iraq is witnessing a continuous increase, especially from traders and importers who need hard currency to complete their foreign trade transactions. This increasing demand has prompted many of them to resort to the parallel market, where prices are much higher than the official price, which has exacerbated the gap between the two markets.”

The problem did not stop there, as Al-Saadi pointed to the phenomenon of smuggling dollars to neighboring countries, especially those suffering from international sanctions, which imposes additional pressure on the Iraqi exchange market. He explained that a large portion of the available dollars are smuggled instead of remaining in the local market, which further complicates the economic crisis.

Regarding the procedures followed by the Central Bank of Iraq, Al-Saadi explained that “the bank has pumped large quantities of dollars through the currency sales window, but the problem does not lie only in the availability of the currency, but in the mechanism for distributing it and ensuring that it reaches the parties that actually need it.” He also stressed the need to improve the efficiency of the Iraqi banking system and accelerate the procedures for legitimate financial transfers to reduce the bureaucratic complications that affect the flow of hard currency.

Al-Saadi pointed out that “the current economic crisis is not limited to monetary aspects only, but extends to broader structural challenges, which requires the implementation of comprehensive economic reforms, including reducing reliance on the dollar and enhancing local production.”

He added that the continued gap between the official and parallel price may exacerbate the crisis, which makes expectations of a rise in the dollar against the Iraqi dinar valid under the current circumstances.