Iraqi Prime Minister Mustafa al-Kadhimi’s government has announced a reform package that seemed for many observers and economic experts a “leap into the unknown” as part of the government’s efforts to reform the country’s ailing economy.
On Saturday, the Central Bank said it will devalue the Iraqi dinar by over 20 percent, a measure that has sparked public outrage as the government struggles to cover its expenses.
The CB increased the sale price of US dollars to banks and currency exchanges to 1,460 dinars, from 1,182 dinars, seeking to compensate for a decline in oil revenue due to low crude prices.
The bank explained that the key reason behind the dinar’s devaluation was to close the gap of widened 2021 budget inflation.
“The financial crisis which Iraq suffered due to the coronavirus pandemic caused a decline in oil prices that caused decreasing oil revenues, all together have caused a large deficit in the federal budget,” it said in a statement.
The devaluation decision came as a preemptive move to prevent “draining Iraq’s foreign reserves” and help the government to secure public servants’ salaries, the bank added.
In Iraq’s largely dollar-denominated economy, lowering the value of its dinar by a significant rate would immediately raise the price of goods, hitting living standards.
Almost all goods are dollar-priced imports, so a cheaper dinar would instantly make normal Iraqis feel poorer without providing any benefit to the wider economy via cheaper exports.
The package further includes cutting salaries in varying proportions and increasing taxes on a large scale as indicated by the projections of the general budget, in an attempt by the government to face its financial crisis and reform what can be fixed after years of mismanagement and weak economic planning.
Commenting on the public outrage, Kadhimi stressed that he is one of the first to be affected by these measures, especially that the country is heading to parliamentary elections.
"The political crisis in Iraq is linked to three issues: power, money, and corruption. We are working to address the crisis from an economic standpoint and with a bold decision to overcome the obstacles of corruption and money," al-Kadhimi media office said in a statement.
In a separate statement, Iraqi Minister of Finance Ali Abdul-Amir Allawi said: “It has become clear that urgent reforms are needed in various economic fields, including the currency exchange rate.”
“Despite the difficulty of this decision, we are forced to take such a step to address a large part of the crisis and to ensure the protection of the Iraqi economy by achieving a bold reform step,” he added.
