The devaluation of the Iraqi dinar has triggered a financial crisis inside Iraq and led to prolonged unrest—but the United States has urged Baghdad to stay the course, motivated in part by the devaluation’s equally negative impact on Iran.
The steady devaluation of the Iraqi dinar against the U.S. dollar over the past three years has had a tremendous impact on Iraq’s, and to a lesser extent, Iran’s economies. Given that Iraq’s financial well-being is heavily reliant on oil exports, the recent fluctuations of oil prices on international markets have affected currency liquidity in the country. This has also had an indirect impact on Iran, which has relied on Iraq as a source of hard currency amid crippling U.S. and European sanctions. Although the dinar’s devaluation has had some positive effect on regional stability, e.g. limiting the influence of Iran-backed Iraqi militias and preventing the smuggling of dollars into Iran, it has led to great hardship within the country, which imports nearly all of its essential goods.
Domestic Woes Mount
The first years of the COVID-19 pandemic were very difficult for Iraq, as multiple factors converged to weaken its economy. As in other countries, the virus prompted lockdowns and unemployment in Iraq, and the global oil glut led to an unprecedented collapse in prices. This dealt a terrible blow to the Iraqi economy. These “twin shocks” created a massive budget deficit and made it difficult for Baghdad to maintain public expenditures, such as pensions and wages in the public sector, in the short term. At the same time, the USD was trading for approximately 1,185 Iraqi dinars. It seemed an appropriate solution, from the government’s perspective, to reduce the dinar’s value to address the government’s cash shortfall. By mid-December 2020, former Finance Minister Ali Allawi announced that the Iraqi dinar would be devalued by 20%, decreasing the exchange rate to 1,450 dinars per dollar. Prior to the devaluation, the government was forced to borrow dollar reserves from the bank to cover a $1.5 billion dollar deficit. Allawi and other ministers also described the devaluation as vital to preserving Iraq’s foreign currency reserve.
The devaluation of the dinar created a backlash among the Iraqi public—a backlash particularly pronounced among Iraq’s pro-Iran militias and political parties. Imports fell by $5 billion, and calls for reversing the devaluation decision began to ring out. The Fatah Alliance and the State of Law Coalition, two pro-Iran factions in the Iraqi parliament, rejected the devaluation and delayed the passage of the national budget. Other groups went even further; a group calling itself Harakat Rabaa Allah, Arabic for the “Movement of God’s People,” demanded that the value of the dinar return to its previous rate and threatened to cut off the ears of Iraqi politicians who did not heed its calls. Asaib Ahl al-Haq, one of the largest pro-Iran militias in Iraq, called for protests against the devaluation, and its leader, Qais al-Khazali, said that the action was part of a large “heist” perpetrated by Iraq’s political class on the people. Before his accession as prime minister, Mohammed Shia al-Sudani, a Tehran-aligned politician, called for the restoration of the original value, warning of a “revolution of the hungry” if the status quo continued. Upon taking office, al-Sudani stated that increasing the value of the Iraqi dinar would be one of his highest priorities due to the positive impact it would have on poor Iraqis. One year later, however, the value of the dinar remained the same as reflected in the 2023 budget, despite a petition from 50 Iraqi MPs to reverse the decision.
Between the Hammer and the Anvil
The Iraqi financial system is unique in many aspects. To achieve monetary stability, the Iraqi Central Bank introduced the foreign currency auction. Through this process, the government controls the exchange rate on the black market. For many years, the official exchange rate of the dollar was 1,182 dinars, while on the street it was close to 1,200 dinars. Because Iraq relies heavily on oil transactions conducted in dollars, it imports most of its goods with the greenbacks that it earns.
On paper, the oil revenue first goes to an account in the U.S. Federal Reserve Bank, and the Iraqi government later makes withdrawals from this account through either cash or foreign transactions in order to cover its imports and the salaries of public sector employees. Some of the cash that the government receives goes to commercial banks for imports by the private sector. The amount of cash sold to the commercial banks varies, but usually hovers between $200 and $250 million per day. In practice, however, the money’s final destination has garnered little attention in the past—presenting Tehran with an opportunity to gain hard currency through illicit exchanges and with sympathetic officials in the Iraqi government.
Given that Iran remains under constant scrutiny because of international sanctions, it was vital for Tehran to gain access to hard foreign currency through Iraq. In 2012, for example, the Iraqi central bank announced that it was under a “currency attack” because, as it turned out, traders that buy U.S. dollars would simply sell them on the black market to Iran. It was at that time that the sale of dollars in the auction rose from a daily of $160 million to between $200 and 300 million. By 2015, the Federal Reserve reacted by temporarily halting the flow of billions of dollars to the Iraqi central bank—primarily due to concerns that U.S. dollars were being used to fund the Islamic State. After the Trump administration withdrew from the JCPOA in 2018, Iran faced even greater pressure. This only made the Iraqi currency exchange even more important to the financial livelihood of the Islamic Republic.
Although the Iraqi dinar is pegged to the dollar, its value decreased in 2018 because of Iran’s acquisitions of many of the dollars in the Iraqi market through gangs that buy large amounts, offering 20% to 25% discounts if payments for Iranian goods are made in dollars. Iran has also sold its own oil disguised as Iraqi oil in the past, receiving payment in precious dollars. The siphoning of the dollars allocated to Iraqi commercial banks by Iran reached 80%. Today, as reports indicate that Washington has received information that Iraq is conducting trade with Iran in U.S. dollars, the Federal Reserve has delayed or rejected many Iraqi requests because of the country’s links with Iran, and has drawn up plans to sanction many Iraqi banks. This has served to further depreciate the value of the Iraqi dinar.
Increased export figures notwithstanding, the real victim of the dinar’s devaluation is the average Iraqi citizen. The government employs nearly four million people in the public sector; because they receive their salary in Iraqi dinars, their purchasing power is diminished. The poverty rate is set to increase, as Iraqis see their salaries decrease in real terms and struggle to afford basic goods. The painful path Iraq and its citizens currently walk has only begun.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.