Iraq Devalues Dinar to Ease Cash Crunch, Leaving Traders in Limbo

Baghdad, Iraq – In a small room at the Jameela wholesale market, one of the main trading hubs in Baghdad, food merchant Hamza al-Rudayni is waiting to see how the coming days unfold.

The Iraqi government's decision to devalue the dinar against the US dollar has left people like him facing sudden losses and uncertainty over what price to set for their goods.

"I don't know what to do," al-Rudayni told Al Jazeera after the devaluation cut the dollar value of the dinars he was holding, leaving him with less money to buy imported goods.

"The only thing I know is that a few days ago, I woke up and found I had lost 25 million Iraqi dinars (about $16,500 at the new rate) because of this decision, while bigger traders lost billions," he said.

Al-Rudayni entered the wholesale market last year after losing his job at a private Iraqi bank that he said had been sanctioned by the US Treasury Department. He sold his car and used his savings to start trading with a larger merchant before recently opening his own business.

With exchange-rate volatility making prices hard to predict, al-Rudayni said he and many other traders have chosen to pause buying and selling until the situation stabilises.

"Market activity has stalled," al-Rudayni said. "Traders buy in dollars but sell in dinars, because regulations bar them from selling in dollars."

That is the root of the problem for merchants: a weaker dinar means they must pay more local currency for imports priced in dollars, while also making it harder to set an appropriate price for goods already in stock.

Why the devaluation?

On October 7, the Iraqi government set a new official exchange rate against the dollar, aiming to ease a financial crisis triggered by the US-Israel war with Iran and disruption to oil exports through the Strait of Hormuz.

Before the war, Iraq exported about 3.5 million barrels of oil per day through the Strait of Hormuz, accounting for 90 percent of the Iraqi government's revenue.

The Iraqi Central Bank's decision set the rate at 1,520 dinars to the dollar for cash sales to the public. The previous rate was 1,320 dinars to the dollar.

Devaluing the dinar by nearly 15 percent against the dollar allows the government to receive more local currency for every dollar of oil revenue it converts, helping to cover public spending, including civil servant salaries.

"This is my decision and I am responsible for it," Iraqi Prime Minister Ali al-Zaidi said during a meeting with parliamentary leaders on Thursday.

"I faced three difficult options to cover salaries and other mandatory expenses," al-Zaidi added. "First was cutting salaries by 35 percent... second was paying salaries every 45 days... while the third was relying on foreign borrowing."

Al-Zaidi, a former banker, also said his government inherited public debt exceeding 208 trillion Iraqi dinars ($139bn at the new rate) when it took office in May. He said the government needs about 10 trillion dinars ($6.7bn) a month to cover salaries and other essential spending.

A shortage of liquidity

The crisis at the Strait of Hormuz has placed severe financial pressure on the Iraqi government.

Although the situation has eased somewhat in recent weeks after Iraq's oil exports partially recovered, output has not returned to pre-war levels.

Mudher Mohammed Salih, financial adviser to Iraq's prime minister, said in August that the Iraqi Central Bank's foreign currency reserves had fallen from $106bn to about $80bn.

To offset lost revenue, the Iraqi government has also turned to borrowing from domestic banks to cover salaries and other costs.

A Finance Ministry official told Al Jazeera that ensuring salaries are paid on time remains the government's main priority, describing the issue as a factor for domestic economic stability.

"Our hands are tied on revenue and on how to maintain enough money to ensure we can pay salaries," the official said, speaking on condition of anonymity because he was not authorised to speak publicly.

Economists warn that while the exchange-rate adjustment may ease some immediate fiscal pressure, it will not resolve the deeper weaknesses of Iraq's economy.

"Nothing in economics is sacrosanct, including the exchange rate," said Nabil al-Marsoumi, an economics professor at Al Maaqal University in Basra. "It can be adjusted, but only after every other option has been exhausted."

"In any case, the exchange rate should not be used to paper over the state's failures in economic and fiscal policy," he added.