KTFA:

Clare:  Dinar Explainer 2: Consequences of Iraq's Two Exchange Rates

28th June 2024 

On a recent webinar organised by the Iraq Britain Business Council (IBBC), Professor Frank Gunter of Lehigh University outlined the key changes in the dinar exchange rate over the years, as well as the consequences of having two exchange rates. (For more on the reasons why Iraq has two exchange rates, click here).

Current Exchange Rates

There are two exchange rates in Iraq: the official exchange rate and the market rate.

The official exchange rate is approximately 1,310 Iraqi dinars per US dollar.

The market rate is higher, at around 1,460 Iraqi dinars per US dollar, which represents a 12% gap between the two rates.

Impact of Dual Exchange Rates

The existence of dual exchange rates has several negative effects on Iraq's economy:

It slows economic growth by disrupting existing contracts and discouraging trade and investment both domestically and internationally.

It encourages corruption, as individuals and entities can profit from the difference between the official and market rates by being paid in dollars and making payments in dinars.

It complicates fiscal policy, making it harder for the government to manage the economy effectively.

Historical Changes in Exchange Rates

December 2020: The dinar was devalued by 23%, primarily due to the fiscal crisis of 2020 and the drop in oil prices. This devaluation was intended to allow the Ministry of Finance to obtain more dinars for each dollar of oil revenue.

February 2023: There was a revaluation, increasing the value of the dinar from 1,450 to 1,310 per dollar. This revaluation was beneficial for importers, as it made imports cheaper, but it negatively impacted exporters of non-oil goods, making their products more expensive abroad.

Effect of Dollar Appreciation

Since the revaluation in February 2023, the US dollar has appreciated by about 3.3%. This further makes imports cheaper in Iraq but makes exports more expensive, affecting the balance of trade.

Challenges of Dual Exchange Rates

The dual exchange rates have contributed to economic disruption by making it difficult to conduct business with predictable costs and revenues. The gap between the rates incentivizes corrupt practices and complicates governmental fiscal management, ultimately leading to slower economic growth.

In summary, the official and market exchange rates in Iraq have undergone significant changes in recent years, driven by economic crises and fiscal policy decisions. The dual rates present ongoing challenges for economic stability, growth, and governance.

The consequences of having two exchange rates in Iraq can be summarised as:

Slowing Economic Growth

The dual exchange rate system disrupts existing contracts and discourages both domestic and international trade and investment. This disruption hinders economic stability and growth.

Encouraging Corruption

The gap between the official and market exchange rates creates opportunities for corrupt practices. Individuals and entities can profit from the difference by being paid in dollars and making payments in dinars, exploiting the discrepancy for financial gain.

Complicating Fiscal Policy

Managing the economy becomes more challenging with dual exchange rates. The existence of two rates complicates fiscal policy, making it difficult for the government to implement effective economic measures and maintain financial stability.

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