Serious repercussions for the fluctuation of the dollar exchange rate in Iraq
The Iraqi Murad Adel (37 years old) receives a monthly salary of 700,000 dinars for his work in an Iraqi government department. But he does not know how much this amount is exactly in dollars; He likens the volatile exchange rate to quicksand, “which you can never guess where it will settle.”
“My salary is equivalent to $530 at the official exchange rate, and less than $500 at the market exchange rate, which is 145,000 riyals for every $100; This is in today’s accounts at this hour and this minute, and my salary account (in dollars) may change shortly,” says Adel, who was interviewed by the Arab World News Agency.
The Iraqi youth explained that his salary was equivalent to about 411 US dollars in February, when the exchange rate exceeded 1,700 dinars against the dollar. However, when comparing the same salary with the exchange rate before these fluctuations, Adel would have lost about 250,000 dinars from his monthly salary, an amount sufficient for the expenses of a limited-income family consisting of two people before the dollar exchange rate rose, he said.
Every rise in the exchange rate of foreign currencies is matched by a rise in commodity prices. Therefore, Adel considers the resulting fluctuation “a trick used by the (former) government, as it sells oil in dollars, and salaries are delivered in the local currency, which faces a dollar-language market.”
The roots of the crisis
With its formation in May 2020, the government of former Iraqi Prime Minister Mustafa Al-Kadhimi sought to overcome a financial crisis resulting from a global drop in the price of oil, which is the backbone of the Iraqi economy. That crisis reached the point of inability to secure employee salaries, which made the compass turn towards devaluing the local currency against the dollar by about 20 percent of the real value, so that the government could bridge the financing gap.
This resulted in inflation that negatively affected the lives of citizens, and led to an unprecedented economic recession.
With the arrival of the government of Iraqi Prime Minister Mohammed Shia al-Sudani, which was voted on in parliament in October of last year, financial revenues have improved due to the sharp rise in oil prices. However, with the entry of the Russian-Ukrainian war into its second year, the crisis of rising dollar prices emerged, which stirred up all sectors of society, and led to an unprecedented increase in commodity prices.
The beginning was from here
The beginning was when the Central Bank decided to stop dealing in dollars for four banks in compliance with US controls, at a time when other Iraqi banks were subject to strict controls in order to prevent dollar smuggling.
The aim of these controls was to limit dollar smuggling from Iraq. But it led to a decrease in the central bank’s daily sales of US currency from about 300 million dollars a day to about 50 million only, which led to a scarcity of hard currency and a high demand for it, and thus a rise in the exchange rate of those currencies against the local currency in the Iraqi market.
With the beginning of the crisis, the official price of the dollar reached 1450 dinars, while it reached 1700 dinars on the black market, before the decision to adjust the price, in conjunction with the subjection of the Central Bank of Iraq to the global Swift system.
Some consider that the currency auction through which the Central Bank sells the dollar is one of the most famous doors for smuggling the dollar. Where they say that formal import invoices are presented in exchange for withdrawing huge amounts without any goods entering the country in exchange for those amounts, while those amounts in hard currency go to neighboring countries, most notably Iran and Turkey.
Iraqi citizen and exchange rate volatility
The fluctuation of exchange rates has had a direct impact on the lives of Iraqis, especially those with medium and limited incomes, as any rise in the value of the dollar leads to an increase in consumer prices. According to the researcher in economic affairs, Malath Al-Amin, Iraq imports most of its needs from abroad, including the components of locally produced goods.
Al-Amin said in an interview with the Arab World News Agency that Iraq “is a consumer and importing country; And the local production in it does not match the importer and does not meet the local need, and this is a warning to the government to encourage the public and private sectors to produce consumer goods, especially since the local industry is no longer encouraged with the presence of destructive factors by merchants.
The dollar crisis and the fluctuation of its exchange rate caused a significant rise in commodity prices, including food and construction materials, which prompted the Sudanese government and the Central Bank of Iraq to issue an official decision to raise the value of the dinar against the dollar last February to 1,320 dinars.
This new official price, even if it was not applied in all outlets of financial exchange, contributed to limiting the steady rise in commodity prices and reducing some of them.
Al-Amin says, “The budget, if approved, may contribute to reducing the rate of dollar fluctuations. When you set numbers, it will be spent, and you will control the rise and fall of the dollar.
Traders are also harmed and blamed
These fluctuations in exchange rates put merchants in the crosshairs of blame, as they were not free from accusations of greed.
Alaa Mohie, 42, a wholesaler specializing in foodstuffs, who was prompted by these accusations to think about liquidating his business without going back, said: “The retailers who used to supply their shops from me blamed me on a daily basis for raising the prices of goods, as if I was responsible for this procedure.” .
And he added, “Raising the price of a box of pasta, for example, by 1,000 dinars (about 70 US cents), did not add anything to me, because the profit margin remained the same, and even became less; The price of the material has increased from its source because I buy it in dollars, and retailers cannot add 250 dinars (about 17 cents) to a small bag, because the citizen will refrain from buying it… I sympathize with them, and this issue made me seriously think about leaving this profession, because the price fluctuations The exchange leaves us in great embarrassment, and we describe it as greed and greed.”
As for Salam Al-Shukri (41 years old), the owner of a clothing store, he was a victim of these fluctuations in the exchange rate in another way.
Al-Shukri says that he bought goods from Turkey at a value of about $2,500 at an exchange rate of 1,520 dinars per dollar. However, he has not been able to display these summer goods until now, after the start of their season. As his colleagues bought similar goods at a lower exchange rate as a result of the fluctuation of the dollar exchange rate, he said.
He added, “Now I am compelled to sell them at the price at which they sell them; This means that I accept the loss due to the government’s faltering policy in dealing with the exchange rate.
Government efforts to no avail
As part of the government’s efforts to limit the increase in demand for the dollar, a decision was issued to prevent the circulation of that currency and to limit buying and selling operations to the Iraqi dinar.
The Ministry of the Interior and the National Security Agency moved to monitor traders and currency speculators, but to no avail. The fluctuations in the price of the dollar continued in the market, until its price reached about 1470 dinars at the end of last week, a difference of 150 dinars from the official price.
Among the most prominent government decisions is to prevent dealing in dollars in the market and official companies, such as Iraqi Airways, as well as preventing dealing in real estate and cars, and stopping dollar withdrawals from ATMs, in addition to the central bank signing an agreement with the American bank (JP Morgan) to be A mediator between Iraqi merchants and China, after the intermediary banks were in some neighboring countries.
However, Ali Al-Nusaifi, advisor to the head of the Baghdad Chamber of Commerce, believes that the fluctuation of the exchange rate is normal, and says, “Any country changes the exchange rate according to its economic policies; This transitional period causes fluctuations that the government can limit its effects in an almost complete manner, after at least six months from the date of changing the exchange rate.
He added, in an interview with the Arab World News Agency, “The packages launched by the government to control dollar smuggling, we will notice their effects clearly on the reality of the Iraqi market and the business market within the months of August (August) and September (September); Thus, the stage of price fluctuation is a natural and transitional stage, and it will definitely affect inflation and raise the value of commodity inflation, especially since most of the market requirements, by approximately 90 percent of the basic commodities of the consumer basket, are imported in hard currency, which leads to price fluctuations.
Al-Nusaifi believes that fixing the central bank’s rate of the dollar, which is 1320 Iraqi dinars per dollar, is “good, like the rest of the neighboring countries of Iraq, including the Gulf countries that operate with a policy of fixing the exchange rate.”
He added, “Iraq went on, after 2003, to fix the exchange rate; But the opposite policy is that the value of the dinar against the dollar is on the table for supply and demand, and when there is a great demand, the price of the dollar rises against the dinar, and vice versa.
He continued, “This policy is paid for by the citizen, because most of the commodities are imported, which will create pressure on the dollar’s demand and also generate a parallel market.”
One of the reasons for the instability of the exchange rate of the dollar in the Iraqi market is what is known as (black transfers), and it is a method followed by merchants that consists in withdrawing the dollar from the market and not buying it from the central bank after the strict controls it imposed.
This money goes to finance the trade of these merchants, and it leaves Iraq through bags or is transferred through unofficial offices and companies, which caused an increase in the value of the dollar in the market and its instability.
The approval of the budget also has an impact
During last May, the price of the dollar in the market began to approach stability at 1450 dinars per dollar; Central bank sales in the currency auction also returned to their previous level at $300 million per day, before the exchange rate rose again.
One of the currency traders, who asked not to be named, says that the reason is that the budget has not been approved until now, adding that approving the budget “will include an official fixation of the exchange rate, and thus we guarantee a fixed or semi-fixed rate; The more political differences escalate, and the less chances of approving the budget, the higher prices will be.
Economic researcher Jalil al-Lami also believes that what he called the specter of fluctuation in the exchange rate “will remain a camp on the Iraqi economy until the budget is approved, because the dollar has an influential role on the items and stages of preparing the general budget.”
He added, in statements to the Arab World News Agency, “The Iraqi dinar is currently going through a state of uncontrolled fluctuations, and it does not have a specific exchange system; It is formally static, but informally mobile; In practice, it is a clean float, that is, it is subject to the forces of supply and demand operating freely in the foreign exchange market.