By Dr Amer K. Hirmis, Capital Business Strategies Ltd.
Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.
Iraqi Dinar needs political support...to serve the economy!
The Iraqi Dinar (IQD) was devalued by nearly 23 percent on Saturday, December 19, 2020, from its previous (official) price of 1,182 IQD down to 1,450 IQD per one US$.
The ministry of finance said the devaluation has been agreed with the International Monetary Fund (IMF), and serves the diversification of the Iraqi economy. [i]
Typically, devaluation serves the following key purposes:
- It makes exports more price-competitive, and hence leads to more exports being sold, though this may not necessarily lead to a corresponding fall in the value of imported goods/services.
- Policymakers also hope that currency devaluations leads to 'expenditure-switching', that is consumers spend their money on output of domestic firms, rather than on imports. Expenditure-switching may, additionally, be supported by imposing (new/extra) tariffs on imports and/or introduce quotas, which directly reduce expenditure on imports. These measures are also aimed at improving both the balance of trade and (indirectly) the balance of payments.
- Finally, depending on the elasticities of supply of goods, inflationary pressures might ensue in the short- to medium-term.
In Iraq, the policy makers at the Ministry of Finance and Central Bank of Iraq (CBI) have on the same day expressly outlined the reasons for the IQD's devaluation:
"First, there was a feeling that IQD was over-priced in comparison with the US$ [ii]; encouraging imports, the exodus of capital, and discouraging foreign investment and tourism, with the economy thus leaning towards commerce and retail trade rather than productive sectors; second, overall, given over-priced IQD, the Iraqi economy becomes less competitive, and the Iraqi markets controlled by imports; third, high valued IQD, in general, does not encourage investment in sectors Iraq wishes to develop, e.g. agriculture, tourism, industry and services; fourth, adjusting the value of the IQD will increase the proceeds from oil revenue in IQD, and will lessen the budget deficit, but the timing of the devaluation now is organically linked with the acute decline in the state's oil revenues, and the price of the IQD should reflect this reality." [iii]
Arguably, the IQD's devaluation presents a litmus test to Prime Minister Mustafa al-Kathimi [al-Kadhimi] and his finance minister Ali Allawi. In so doing they have bought precious time - this is the moment of truth!
Decisive political and economic actions are now needed to protect the IQD and the economy from sliding into the abyss. Al-Kathimi must now subvert the deliberate and well-organised intruders (defined below) who since 2003 continue to exacerbate a cycle of fragmentation of the economy and society in Iraq.
It is al-Kathimi's supreme obligation to provide against the intruders, which aim to deepen strife, acting against the common good.
To save the Iraqi economy from collapsing, Messrs al-Kathimi and Allawi have a short-term window: January-June 2021. They will be well-advised to focus on three critical issues - politics, economics and export-oriented diversification...
Dr Amer K. Hirmis is Principal at UK-based consultancy CBS Ltd. (2008-present). In October 2009, Amer began a 20-months assignment as Senior Development Planning Advisor to the Ministry of Planning in Iraq (funded under the DANIDA programme for 'peace and reconstruction' in Iraq). The posts Amer has assumed include Chief Economist and Head of Policy at the London Chamber of Commerce and Industry (1992-5), Economic Advisor to UK South West Regional Development Agency (1996-8) and Associate Director and then Head of Consulting and Research (Middle East) at the global firm DTZ (1998 to 2007).
Dr Amer K Hirmis is the author of 'The Economics of Iraq - ancient past to distant future' (Grosvenor House Publishing - United Kingdom) https://www.amazon.com/Economics-Iraq-Ancient-distant-future/dp/1999824105)
[i] See http://www.mof.gov.iq/Pages/MOFBannerHeadlineDetail.aspx?BannerNewsID=886, and https://cbi.iq/news/view/1624. Both websites accessed on Dec. 20, 2020.
[ii] This assertion is contrary to findings of a recent report from researchers at the CBI, which suggests that on the basis of PPP (purchasing power parity) the IQD is undervalued by anything between 4-14 percent at 1,182 IQD = 1 US$. See Mahwoos, A. Hussain and Muhammad, B. Qasim (2020) 'Iraqi Dinar: 1200 IQD/US$? (Available at the http://iraqieconomists.net/ accessed on November 23, 2020)
[iii] See answer to question no. five: 'reasons for changing exchange price/rate?' posted at the Ministry of Finance's website, noted in i above (original in Arabic; author's translation).