Iraq Devalues Dinar Again as Lawmakers Warn of Higher Costs for Citizens

Iraq has devalued its currency once again, reversing the government's earlier efforts to strengthen the dinar and triggering demands in parliament to overturn the decision.

Iraq's cabinet approved a new exchange rate for the dinar on Tuesday, following an urgent recommendation from Finance Minister Falih al-Sari and the governor of the Central Bank of Iraq (CBI).

From Wednesday, banks and exchange houses are selling dollars to the public at 1,520 dinars per dollar, 200 dinars above the previous rate.

Opposing lawmakers forced the cancellation of Wednesday's parliamentary agenda so the issue could be debated instead. The finance minister and the central bank governor are expected to appear before parliament on Thursday to explain the devaluation.

Why is Iraq devaluing the dinar now?

Shortly before the devaluation, Iraq's government approved its annual budget for 2027, planning spending of 217 trillion dinars (about $166 billion) and projecting a deficit of more than 40 trillion dinars (about $30 billion).

The large shortfall reflects the difficult financial position Iraq faces after the US war against Iran. Since fighting began in late February, shipping through the Strait of Hormuz has been severely disrupted.

Iraq's oil exports — most of which must pass through Hormuz to reach global markets — have been volatile throughout the conflict, at one point falling 90 percent to a very low level. In August, exports reached 2.34 million barrels per day, well below the pre-war average of 3.6 million.

Last month, Prime Minister Ali al-Zaidi said the country was "facing extraordinary economic challenges," with about $60 billion in lost oil revenue due to the disruption.

Oil revenue funds more than 90 percent of Iraq's federal budget. The lost income has made paying state salaries harder, and the CBI's foreign reserves have fallen from about $106 billion before the war to roughly $80 billion by the end of August.

Speaking to Reuters, Iraqi analyst Mohammed al-Saffar said the measure "gives the government more dinars for every dollar of oil revenue, but raises import costs and reduces household purchasing power."

Why do some lawmakers oppose the devaluation?

The Central Bank of Iraq described the decision as a "strategic step" to stabilise national finances. But many lawmakers have urged the government to reverse the change, saying it will raise the cost of living for Iraqis.

In a joint statement on Wednesday, dozens of opposing lawmakers said they had not been informed of how or why the decision was made, and that the CBI should have explained it to parliament first.

Speaking on behalf of the group, lawmaker Aziz Nasser al-Shammari, a member of Iraq's parliamentary integrity body, condemned the move, saying they had been "taken by surprise." "Waging war on the poor like this is wrong," he said.

Hassan al-Asadi, leader of the al-Nahj National Alliance bloc, rejected the measure and proposed other ways to balance the budget, such as cutting unnecessary spending.

Lawmaker Saba al-Saadi was also among those opposed to using a weaker dinar to cover the budget gap. She accused the finance ministry and the CBI of poor financial management and pledged to bring the issue before parliament.

What does this mean for Iraqis?

A weaker dinar against the dollar means imported goods will be more expensive for Iraqis, adding to costs already driven up by regional instability.

Iraq depends on imports for most consumer goods, from food and medicine to industrial materials. Last month, Iraqi consumers and business owners told Al Jazeera that prices had risen significantly since the Iran war began, compounded by delays and disruption to sea-borne imports.

Opposing lawmakers criticised the timing of the measure, when Iraqis are already facing rising prices, import fees, taxes, unemployment and delays in government salary and benefit payments.

Al-Asadi noted the growing gap between the official and parallel exchange rates for the dollar inside Iraq, warning it could "cause serious harm to the poor and vulnerable."

After the new official rate took effect on Wednesday, the dollar's rate on the parallel market also rose, widening the gap between the two. In practice, most Iraqis cannot buy dollars at the official rate and must pay the parallel market price.

Has Iraq done this before?

Yes. In December 2020, Iraq devalued the dinar to 1,450 per dollar from about 1,182 after falling oil prices left the government short of cash.

A leaked budget draft outlined the measure along with salary cuts, drawing a fierce backlash from state employees.

At the time, Mohammed al-Daraji, a member of parliament's finance committee, said the weaker rate would help cover the budget gap but warned prices would rise sharply unless the government supported poor families.

Recalling that devaluation, al-Asadi said private banks and currency speculators, not the state, had benefited from the difference between the CBI rate and the rate private banks charged for dollars.

In January 2023, after the dinar slid to about 1,670 per dollar amid US restrictions on dollar flows, then-prime minister Mohammed Shia al-Sudani replaced the central bank governor. His government later strengthened the dinar, setting the rate for the public at 1,320.

The lawmakers' joint statement on Wednesday also questioned how citizens would be affected after the dollar rate was cut under the previous government and then raised again.