The currency devaluation will hurt ordinary Iraqis, but it was inevitable.
Iraq’s recent decision to devalue its currency is being severely criticised by some political groups but experts say it’s a step in the right direction to address the economic ills which have held back the oil-rich nation.
The government of Prime Minister Mustafa al Kadhimi on Saturday revised the exchange rate to 1,450 Iraqi dinar per US dollar against the previous official rate of 1,190 dinars.
This marks a 20 percent devaluation, the steepest in two decades, as Baghdad struggles to control depletion of its foreign currency reserves, hit hard by the collapse in oil prices.
The government depends on earnings from oil exports to meet almost all its expenses. The crash in oil prices means it doesn’t have enough to pay public sector employees who now wait weeks to get their salaries.
Iraq, which was a frontline state in the fight against Daesh (ISIS), is reeling under an economic crisis.
Devaluation allows the government to buy more Iraqi dinars from the central bank.
“This government has acknowledged that there’s a problem and something needs to be done about it,” says Ahmed Tabaqchali, an Iraqi investment banker and regular commentator on the country's economic issues.
The fact that it has taken the decision ahead of June election is praiseworthy, he tells TRT World.
A myriad of coalitions that ruled Iraq since the US invasion in 2003 have deferred politically unpopular reforms, he says.
Kadhimi’s finance minister, Ali Allawi, published a white paper in October that spoke about how Iraq’s oil revenue was consumed to pay salaries of government employees instead of being spent on health or education.
“The cost of salaries and pensions of public sector workers is expected to be around 122 percent of Iraq’s oil revenue in 2020,” it said.
Private sector woes
Iraq’s public sector, which employs more than 4.5 million people in different departments, has overshadowed private companies, which are fewer in number and their products cannot compete with imports.
The devaluation also aims to spur the private sector, especially the producers of vegetables and fruits.
With the dollar’s value going up against the Iraqi dinar, imports of food products become expensive. Over the years, Iraq became heavily dependent on imports from neighbouring Iran and Turkey.
“Currencies of Iraq’s major trading partners - Iran and Turkey - have depreciated in the past year. It was about time Iraq made an adjustment,” says Tabaqchali.
A third of Iraq’s 38 million people depend on agriculture but years of neglect and policies which encourage imports have hurt farmers.
Earlier this year when Iraq closed its borders in wake of the Covid-19 spread, local agri products flooded the domestic market.
The government hopes the devaluation will discourage imports and generate more jobs in the agricultural sector, which roughly employs 20 percent of the labor force.
Iraq has been beset by the recurring unrest in the past year due to widespread dissatisfaction and anger over the ruling elite that has doled out government jobs to its supporters and drained the nation's oil wealth.
The World Bank says the twin shock of the coronavirus pandemic and collapse in oil prices has pushed millions of Iraqis into poverty.
Over the years, successive Iraqi governments have struggled to wean the country off its dependence on oil, which makes up around 90 percent of the state budget and almost all its exports.
Iraq has one of the world’s youngest populations. Many of them are out of work and look to family and friends for financial support.
Instead of taking tough decisions to strengthen institutions like the judiciary, which can enforce private contracts, politicians have used Baghdad’s oil wealth to reward supporters with jobs.
This has bloated the public sector; a large chunk of the government's budget of $80 billion is spent on salaries and pensions. This burden is set to increase as the country's population increases by almost a million people every year.