Iraqis woke on Wednesday to a sharp loss in their currency’s value after authorities devalued the dinar to 1,520 per dollar from 1,320, triggering widespread anger and forcing markets and shops in several provinces to close. The dollar, meanwhile, climbed to around 1,900 dinars on the parallel market. The devaluation hit households already under financial strain, quickly driving up prices for food and imported goods. Citizens feared higher costs would spread to transportation and services, particularly amid reports that the government was considering raising regular gasoline prices to 850 dinars per liter from 450 dinars per liter. The move cuts the dinar’s value against the dollar by about 13%, increasing the cost of buying foreign currency for importers and individuals in an economy heavily dependent on imports to meet domestic demand. Lawmaker Ahmed al-Shammari called on parliament’s leadership to convene an emergency session and summon the finance minister and central bank governor to discuss the consequences of the exchange rate increase and what he described as “market disruption.” The Central Bank of Iraq said it would continue taking measures that it said served the economy and citizens and safeguarded the financial system’s soundness and stability. Public and political criticism nevertheless intensified, amid fears of another wave of price increases and an erosion of incomes. The government of then-Prime Minister Mustafa al-Kadhimi devalued the dinar by nearly 20% in late 2020, setting the rate at 1,450 per dollar after collapsing oil prices triggered a severe financial crisis. The government of former Prime Minister Mohammed Shia al-Sudani later strengthened the currency to 1,320 per dollar, a decision experts and analysts described as “political and ill-considered.” The government of current Prime Minister Ali al-Zaidi recently had to approve another devaluation under pressure from a crippling financial crisis. Iraq’s oil exports had been suspended for several months because of the US-Iranian war and the closure of the Strait of Hormuz. Higher import costs, limited export gains Economics professor Siham Youssef told Asharq Al-Awsat that devaluation would not deliver the same benefits in Iraq as in industrial economies. Iraq relies on oil to generate dollar earnings and heavily on imports to meet domestic demand. A weaker currency “does not make exports more competitive as it does in industrial economies,” she said, because Iraq lacks a diversified export base that could benefit from the devaluation. “The dollar becomes more expensive for importers, the cost of imported goods and production inputs rises, and some of that cost may be passed on to prices,” she added. Converting dollar revenue into more dinars increases treasury receipts. But Youssef said that would only help resolve public finance problems if the additional funds were used to reduce the deficit and borrowing. Making the economy absorb the cost of devaluation without addressing underlying fiscal imbalances could intensify inflationary pressures, she warned. Reports of possible fuel price increases have compounded concerns over living costs. According to accounts circulating among lawmakers, regular gasoline could rise to 850 dinars per liter from 450, raising transport costs and adding pressure to goods and services prices. Higher spending leaves a 43 trillion dinar deficit The fiscal pressures extend beyond the exchange rate. The new draft budget sets expenditure at 217.239 trillion dinars ($142.9 billion) against revenue of 174.234 trillion dinars ($114.6 billion), leaving a deficit of 43.005 trillion dinars ($28.3 billion). The draft assumes oil exports of 4 million barrels per day at $58 per barrel and an exchange rate of 1,500 dinars per dollar. Youssef said the deficit’s decline from the 2023 budget reflected higher projected revenue, rather than spending restraint. Proposed expenditure rises 9.2%, while revenue increases 29.5%. The government offsets a reduction in the assumed oil price to $58 from $70 by projecting higher exports of 4 million barrels per day. Oil revenue therefore remains dependent on prices, export volumes and the exchange rate, particularly amid regional turmoil and disruptions to Iraqi oil exports. Budget needs oil well above $58 to break even Youssef said the oil price needed to balance the budget was a key measure of the fragility of its assumptions. According to the published tables, Iraq needs about $77.6 per barrel at an exchange rate of 1,500 dinars per dollar to cover all budget expenditure without a deficit. The required price rises to around $90.8 if revenue is calculated at 1,300 dinars per dollar. The budget’s assumed oil price of $58 therefore falls well short of the level needed to balance public finances. Additional financing would still be required even if the draft’s production and export assumptions were met. The gap “means that the budget, despite assuming an oil price of $58, still needs a much higher price to break even,” Youssef said. Recurring commitments squeeze fiscal flexibility Employee compensation, social welfare and debt servicing together account for about 54.4% of total spending, underscoring the weight of current expenditure. Employee compensation totals 68.1 trillion dinars ($44.8 billion), social welfare 33 trillion dinars ($21.7 billion) and debt servicing 17 trillion dinars ($11.2 billion). Youssef said those commitments limited the government’s ability to cut spending quickly when oil revenue fell. Rising debt servicing also reflected the growing cost of past borrowing. Investment spending, meanwhile, falls 11.7% to 47.9 trillion dinars ($31.5 billion), raising questions about the budget’s capacity to support growth and diversify the economy. Youssef said financing the 43 trillion dinar ($28.3 billion) deficit remained the central challenge. More domestic borrowing would raise future debt servicing costs at the expense of investment spending, she warned. Oil dependence persists despite devaluation Economist Ziad al-Hashimi said the devaluation and draft budget showed that the current crisis had not prompted a fundamental reconsideration of public spending. In a post on X, he said the government had raised expenditure despite financial pressures and a lower assumed oil price of $58 per barrel. Operating expenditure remained high at 78% of the budget, leaving 22% for investment. Hashimi pointed to continued expansion in government hiring and contract employment, rather than efforts to rein in the government workforce and operating expenditure. Those costs consume about 78% of the budget, leaving investment spending less able to support growth. Moving the exchange rate to 1,520 dinars per dollar gives the treasury more dinars for its dollar revenue, “but out of citizens’ pockets,” he said. It does not address the underlying fiscal imbalance: the deficit still amounts to about 20% of total expenditure. Oil revenue remains about 145 trillion dinars ($95.4 billion) out of total receipts of 174 trillion dinars ($114.5 billion), or roughly 83%, leaving public finances highly exposed to fluctuations in oil prices and exports.
