Iraq devalues dinar to ease cash crunch, leaving traders in limbo

Baghdad, Iraq – Sitting anxiously in his small office in Jameela market, one of Baghdad’s main wholesale markets, food trader Hamza al-Rudayni is waiting to see what the coming days will bring.

A decision by the Iraqi government to devalue the country’s currency, the dinar, against the US dollar has left traders like him facing sudden losses and uncertainty over the prices they should charge for their goods.

“I don’t know what to do,” al-Rudayni told Al Jazeera after the devaluation reduced the dollar value of his dinar holdings, leaving him with less money to purchase imported goods.

“All I know is I woke up a few days ago to discover that I had lost 25 million Iraqi dinars (roughly $16,500 at the new exchange rate) because of this decision, while larger merchants lost billions,” he said.

Al-Rudayni entered the wholesale trade market last year after losing his previous job at a private Iraqi bank that he says was sanctioned by the United States Treasury. He sold his car and used his savings to start trading with a larger merchant before recently launching his own business.

With exchange-rate fluctuations making prices unpredictable, al-Rudayni said he and many other traders have chosen to suspend buying and selling until the situation stabilises.

“Market activity has ground to a halt,” al-Rudayni said. “Traders buy goods in dollars but sell them in dinars, as regulations prohibit them from selling in dollars.”

That is the root of the problem for traders: A weaker dinar means they have to pay more in local currency for goods imported in dollars, while making it harder to determine the right price they should charge customers for goods they already have in stock.

Why devalue?

On October 7, the Iraqi government introduced a new official exchange rate against the US dollar, in an attempt to ease a financial crisis triggered by the US-Israeli war on Iran and the  disruption of oil exports through the Strait of Hormuz.

Before the war, Iraq exported around 3.5 million barrels of oil per day through the Strait of Hormuz, accounting for 90 percent of Iraq’s government revenue.

The Central Bank of Iraq decision set the rate at 1,520 dinars per US dollar for cash sales to the public. It was previously set at 1,320 dinars per dollar.

Devaluing the Iraqi dinar by almost 15 percent against the dollar allows the government to receive more local currency for every dollar of oil revenue it converts, helping it cover public spending, including government employee salaries.

“It is my decision and I am responsible for it,” Iraqi Prime Minister Ali al-Zaidi said during a meeting with parliamentary leaders on Thursday.

“I was facing three challenging options to cover salaries and other mandatory expenditures,” al-Zaidi added. “The first is to cut salaries by 35 percent … the second is to pay the salaries every 45 days … while the third is to resort to foreign loans.”

Al-Zaidi, a former banker, also said that his government had inherited public debt exceeding 208 trillion Iraqi dinars ($139bn at the new rate) when it took office in May. He said the government needed approximately 10 trillion dinars ($6.7bn) each month to cover salaries and other essential expenditure.

A shortage of liquidity

The crisis in the Strait of Hormuz had caused a severe financial squeeze for the Iraqi government.

Although the situation has eased somewhat in recent weeks after Iraq’s oil exports partially recovered, they have yet to return to their pre-war levels.

Mudher Mohammed Salih, the Iraqi prime minister’s financial adviser, said in August that the Central Bank of Iraq’s foreign currency reserves had declined from $106bn to approximately $80bn.

To make up for the loss of revenue, the Iraqi government has also turned to borrowing from domestic banks to cover salaries and other expenses.

A Finance Ministry official told Al Jazeera that ensuring salaries were paid on time remained the government’s main priority, describing this issue as a matter of domestic economic stability.

“Our hands are tied regarding the revenue and how to maintain enough money to ensure that we can pay the salaries,” the official, who asked to remain anonymous because he was not authorised to speak publicly, said.

Economists have warned that while adjusting the exchange rate could ease some immediate fiscal pressures, it would not address the deeper weaknesses in Iraq’s economy.

“Nothing in economics is sacred, including the exchange rate,” said Nabil al-Marsoumi, professor of economics at Al Maaqal University in Basra. “It can be adjusted, but only after all other options have been exhausted.”

“In any case, the exchange rate shouldn’t be used as a cover-up for failures in the state’s economic and fiscal policies,” he added.