Iraq's Dinar Devalued by 15% Amidst Financial Crisis, Traders Face Uncertainty

Baghdad, Iraq – In a move aimed at alleviating a severe cash crunch and covering revenue shortfalls, the Iraqi government devalued its currency, the dinar, by nearly 15 percent last week. This decision has cast a shadow of uncertainty over traders, including Hamza al-Rudayni, who operates from his small office in Jameela market, a key wholesale hub in Baghdad.

The devaluation against the US dollar has resulted in immediate losses for traders like al-Rudayni, who now face difficulties in determining appropriate pricing for their goods. "I don’t know what to do," al-Rudayni shared with Al Jazeera. "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." Al-Rudayni, who entered the wholesale trade last year after losing his job at a private Iraqi bank sanctioned by the United States Treasury, had invested his savings and sold his car to start his business. He noted that many traders have halted operations until the situation stabilizes due to unpredictable exchange rates. "Market activity has ground to a halt," he stated, explaining that traders purchase goods in dollars but are legally required to sell in dinars, creating a pricing dilemma when the dinar weakens.

The Iraqi government implemented the new official exchange rate of 1,520 dinars per US dollar for public cash sales on October 7, a shift from the previous rate of 1,320 dinars per dollar. This devaluation allows the government to gain more local currency for its oil revenues, thereby helping to fund public spending, including salaries for government employees. Iraqi Prime Minister Ali al-Zaidi acknowledged responsibility for the decision, stating it was one of three difficult options to ensure salary payments and mandatory expenditures. The other options were a 35 percent salary cut or paying salaries every 45 days, with foreign loans being the third alternative. Prime Minister al-Zaidi, a former banker, also highlighted that his administration inherited public debt exceeding 208 trillion Iraqi dinars ($139bn at the new rate) and requires approximately 10 trillion dinars ($6.7bn) monthly for essential expenses.

The financial strain on the Iraqi government was exacerbated by the crisis in the Strait of Hormuz, which disrupted oil exports, a primary source of revenue. Although oil exports have partially recovered, they have not reached pre-crisis levels. Mudher Mohammed Salih, the prime minister’s financial adviser, reported in August that the Central Bank of Iraq’s foreign currency reserves had decreased from $106bn to around $80bn. To bridge the revenue gap, the government has resorted to domestic bank borrowing for salaries and other expenses. A Finance Ministry official, speaking anonymously, emphasized that timely salary payments remain the government's top priority for domestic economic stability, citing limited options for revenue generation.

Economists caution that while the exchange rate adjustment may offer short-term fiscal relief, it does not address underlying economic weaknesses. Nabil al-Marsoumi, a professor of economics at Al Maaqal University in Basra, commented, "It can be adjusted, but only after all other options have been exhausted." He added, "In any case, the exchange rate shouldn’t be used as a cover-up for failures in the state’s economic and fiscal policies."