Iraq’s decision to devalue its currency has exposed the competing interests of households and the state, as residents warn of rising living costs while economists argue the move could help protect public finances amid a sharp fall in oil revenue.
The Central Bank of Iraq raised the official dollar selling rate from 1,320 to 1,520 dinars on October 7, a devaluation of about 15 per cent. The move came as disruption to oil exports through the Strait of Hormuz exerted additional pressure on government revenue and its capacity to finance public spending.
“The situation is very bad,” one market owner in Erbil lamented. He said the price of goods has been rising since the Iran war broke out in February, particularly due to higher transport costs as most items come from Turkey and Iran.
Iraq imports a substantial share of the products it uses, including food, medicine and consumer goods.
For Iraqis paid in dinars, the weaker currency threatens to erode purchasing power. But the effects are not uniform, as those earning in dollars may receive more dinars when converting their salaries, while people with dollar-denominated expenses face a different calculation.
In Erbil, where rent is often set in dollars, the exchange-rate change can have a direct effect on tenants paid in dinars. The measure places economic pressure on tenants who need to buy dollars with their dinar salaries, although the actual cost depends on the exchange rate available to them and how rent is paid.
The gap between the official and parallel-market rates adds another layer to the pressure on households. While the official public rate is 1,520 dinars to the dollar, people and businesses seeking cash dollars often turn to exchange shops, where the price fluctuates according to supply and demand.
In Erbil, the capital of the semi-autonomous Iraqi Kurdistan region, the dollar was selling for about 166,350 dinars per $100 this week, around nine per cent above the official rate. The parallel-market rate rose sharply after the devaluation was announced on October 7, when exchange shops in the city quoted selling prices as high as 180,000 dinars per $100. The rate subsequently eased, although it remained above the official figure.
The National visited several exchange shops in the Eskan neighbourhood of Erbil, where many dollar shops can be found, but employees declined to comment on the fluctuations.
Dollar-denominated rents are part of a wider pattern in Iraq, where the dollar plays a prominent role in parts of the property market and some business dealings, even though most salaries and everyday purchases are made in dinars. The result is that households can be exposed on several fronts – rent may become more expensive in the national currency, while imported food, household goods and other products may also rise in price as businesses face higher costs for dollars.
The use of the US dollar for some expenses while the majority of salaries are in Iraqi dinar “is what is fundamentally wrong with us”, Ahmed Tabaqchali, non-resident senior fellow at the Atlantic Council, told The National.
Those paid in dollars may benefit from converting their income into more dinars to cover expenses. But the advantage is less straightforward for people who also pay rent or other bills in dollars, since those costs do not become cheaper simply because the exchange rate changes.
Ahmad Abbas, who receives his income in dollars, said: “It’s safer to be paid in dollars because it’s unstable when it comes to the currency here. My rent is in dollars and my bills are in Iraqi dinars but I expect prices to go higher, so at the end of the day it will kind of be the same.” He had observed prices rising during the war earlier this year but said they were “even higher now”.
“I went to the market the other day and bought the same detergent for 20,000 Iraqi dinar and before it used to cost 9,000,” he said.
The decision has prompted criticism from residents and political factions, with legislators demanding explanations from the government and proposing measures to contain price increases. Others argue the adjustment was necessary to help Baghdad meet its financial obligations.
“There is no denying the affect is there but it’s not as dramatic as people make it out to be,” Mr Tabaqchali said. “The country had to do something,” he said, before adding he was “surprised it was proactive”.
“In the past we didn’t act but we acted while the reserves are still healthy,” he added.
At the Meri Forum in Erbil on Tuesday, Samir Fakhri, director general of the Statistics and Research Directorate at the Central Bank, defended the devaluation, arguing it was necessary to protect the country's foreign currency reserves following the decline in oil revenue.
He highlighted Iraq's dependence on oil, which accounts for more than 90 per cent of government revenue, leaving public finances particularly vulnerable to disruptions in exports.
He explained the scale of government spending and the pressure it places on the Central Bank of Iraq to supply dollars, arguing the exchange-rate adjustment must be considered alongside the country's wider financial difficulties.
The argument in favour of devaluation is that Baghdad receives more dinars for every dollar earned from oil exports, helping it finance salaries and other domestic spending even as oil income comes under pressure. But that fiscal benefit does not necessarily translate into greater purchasing power for households.
The government led by Prime Minister Ali Al Zaidi has said it needs to maintain public spending and ensure salaries can be paid despite the loss of oil income. But opposition has grown within parliament, with politicians questioning why the measure was adopted and whether alternative options were adequately considered.
The Co-ordination Framework, the main alliance of Shiite political parties that backs the government in Baghdad, has called for measures to limit the burden on citizens.
“We can’t catch a break from them,” said Rizgar Ali, a taxi driver in Erbil, referring to the Iraqi government. “I have relatives who are public servants and their salaries are always delayed because Baghdad doesn’t send us our budget and now they’re weakening the money.” The recurring delays, amid disputes between Baghdad and Erbil over oil revenue and budget allocations, leave many households with limited financial flexibility to absorb higher prices and currency costs.
Mr Ali complained about the rise in petrol prices and said he has to refuel his car frequently, making driving passengers around the city a much more difficult source of income – he turns the engine off at most traffic lights.
Devaluation precedence
Mr Tabaqchali said the current situation reminds him of the devaluation in 2020 when Iraq faced a similar dilemma during the Covid-19 pandemic, when a collapse in oil prices and a decline in revenue left the government struggling to finance its budget.
The adjustment was intended to generate more dinar revenue from oil sales, ease the budget deficit and help the government meet its spending obligations.
In January 2023, the government of prime minister at the time, Mohammed Shia Al Sudani, moved in the opposite direction, strengthening the dinar and setting the public exchange rate at 1,320 per dollar after the currency weakened on the parallel market amid tighter US restrictions on dollar transfers and increased scrutiny of Iraqi banks. That decision, too, was met with concern by residents because the dollar continued to trade at a higher value on the parallel market.
The latest devaluation reverses that strengthening.
Whether the devaluation achieves its intended financial objectives will depend not only on oil revenue and foreign currency reserves, but also on the government's ability to prevent unjustified price increases, protect lower-income families and pursue reforms that reduce Iraq's reliance on oil.
Mr Tabaqchali also highlighted government subsidies as a means of cushioning the impact on lower-income Iraqis. Subsidies on fuel and some basic services, alongside the public distribution system that provides subsidised staple foods, can help shield poorer households from some of the immediate effects of a weaker currency.
The government has also pledged to maintain fuel and basic-service subsidies following the latest devaluation, while considering customs relief for food and essential goods.
However, subsidies do not cover all household expenses, such as rent, and imported goods can still become more expensive. “The worst is over for us as long as we continue shipping through the [Strait of] Hormuz,” Mr Tabaqchali said.
“This doesn’t mean we have passed the crisis because the damage has been done and we have to adjust. The devaluation is part of a bigger thing, like structural changes to our budget services.”