Iraqi dinar loses about 14.5% in official devaluation

The Iraqi dinar is about 14.5% weaker after a change on Wednesday set the official public price of the US dollar at 1,520 dinars.

Ministers backed the new set of rates at a cabinet session on Tuesday. They acted on proposals from the finance minister and the central bank governor. Under the decision, the Finance Ministry buys dollars at 1,500 dinars each. Banks then pay 1,510 dinars per dollar, while the public pays 1,520 dinars when buying from banks and non-bank financial institutions.

The central bank told lenders, electronic payment firms and exchange offices to drop the old rate. The new prices applied from the opening of business on October 7. Since February 2023, the official rate had stood at 1,320 dinars.

Why the Iraqi dinar fell

According to economists, the devaluation answers a blow to oil sales, the largest source of state revenue, from the war on Iran. Crude sales provide nearly 90 percent of Iraq’s revenue. However, the conflict has choked shipping through the Strait of Hormuz, the route for almost all Iraqi oil exports.

In August, Iraq shipped about 2.34 million barrels a day, compared with more than 3.6 million before the war began. Higher insurance costs for ships, delays at southern terminals in Basra and price discounts have also cut foreign currency earnings. Meanwhile, reserves of foreign currency have shrunk by about $20 billion, while prices for consumers have risen.

Iraqi analyst Mohammed al-Saffar described the devaluation as “essentially a fiscal response to the shock to Iraq’s oil revenues.” In his view, Baghdad now receives more dinars for each dollar its oil earns. Still, a cheaper Iraqi dinar also lifts import costs and erodes the buying power of households.

Budget strain and street rates

Iraq relies heavily on dollars from oil to pay for imports, steady its currency and cover salaries for state employees and retirees. Members of the parliamentary finance committee said the draft budget assumes oil at $58 per barrel. They said it projects spending of 217 trillion dinars, about $166 billion. They also expect a deficit above 40 trillion dinars. The plan assumes the country will export roughly 4 million barrels of crude daily, with the Kurdistan region included.

This marks the second major cut to the value of the currency in six years. The central bank last made such a move in December 2020. At that time, with oil prices falling amid the Covid-19 pandemic, it shifted the rate to 1,450 dinars per dollar from 1,182.

At the same time, the finance ministry scrapped a rule that forced importers to pay customs duties and tax deposits in advance before sending money abroad. Traders had complained that the rule created a cash squeeze, pushing many of them toward the parallel market.

On the street, the dollar still costs far more than the official price. In markets across the Kurdistan Region, the US currency traded at about 173,000 dinars for every $100 on Wednesday. Such a gap can push up the cost of imported goods and squeeze household budgets.

Global oil prices, meanwhile, have risen above $100 a barrel, partly because Gulf crude shipments have faltered. For now, Baghdad is searching for other routes to move its oil, while the weaker Iraqi dinar raises the cost of food, medicine and other imports.