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By John Lee.

Just a month ago, Iraq Business News ran an article examining the possible connection between support for Donald Trump and a belief in the Iraqi Dinar revaluation theory -- the idea that the Iraqi Dinar (IQD) will revalue ("RV") to as much as 1000 times its current value.

You can read the full article here:

https://www.iraq-businessnews.com/2024/12/21/donald-trump-and-the-great-iraqi-dinar-revaluation/?swcfpc=1

With the swearing-in yesterday of Donald Trump as 47th President of the United States, some have high hopes of an imminent revaluation of the Iraqi Dinar.

Let us know your thoughts on the likelihood of an unprecedented revaluation using the poll below:

This survey is now closed.

The results were as follows:

You can also let us know your thoughts in the Comments Section below.

For more information on the Iraqi dinar, check out IBN's Dinar Page here: https://www.iraq-businessnews.com/the-dinar-page/?swcfpc=1 

See also: The Iraqi Dinar Revaluation Scam: False Hope, Financial Deception

By a Guest Blogger. Any opinions expressed are those of the author(s), and do not necessarily reflect the views of Iraq Business News.

Anecdotal evidence, including inquiries to Iraq Business News, seems to suggest that supporters of US President-elect Donald Trump are more likely to believe that the Iraqi currency, the Dinar (IQD), will increase in value by an unprecedented multiple, some saying by as much as 1,000-fold!

The correlation between being a Trump voter and believing in a significant revaluation of the Iraqi dinar (often called the "dinar RV" theory) is not rigorously studied, but there are social and cultural dynamics that might help explain the connection between the two groups.

The Dinar revaluation theory emerged after the 2003 Iraq War: The basic premise is that the Iraqi Dinar, which traded at around 3 IQD per USD before the 1991 Gulf War but crashed to roughly 1,310 IQD per USD, would suddenly revalue back to its previous rate or even higher. Believers often hold large quantities of physical Dinar notes, sometimes investing tens of thousands of dollars.

The theory's spread among Trump supporters was facilitated by several factors:

The "Global Reset" Narrative:

• Many believers connected the Dinar revaluation to a broader theory about Trump leading a massive reorganization of the global financial system
• This often tied into QAnon-adjacent beliefs about Trump secretly fighting a "deep state" that was suppressing the Dinar's true value
• Some proponents claimed Trump and his team were directly involved in orchestrating a coming revaluation

Social Media Dynamics:

• The theory spread rapidly through Facebook groups, YouTube channels, and forums that also shared pro-Trump content
• Many of these platforms used similar language about "mainstream media suppression" of both Trump and the "truth" about the Dinar
• Currency speculators and scammers actively targeted these communities, recognizing their receptiveness to anti-establishment financial narratives

Political Context:

• The theory appealed to a desire for both financial windfall and validation of political beliefs
• Some promoters claimed Trump's Middle East policies, particularly regarding Iraq and Saudi Arabia, would trigger the revaluation
• The belief often aligned with broader skepticism of traditional financial institutions and expertise

Psychological Factors:

• The combination of potential financial reward and political validation created a powerful motivational force
• Believers often interpreted skepticism from financial experts as further evidence of a cover-up
• The complexity of international currency markets made it easier for promoters to make plausible-sounding but false claims
• Investment in the theory often strengthened social bonds within these communities, making it harder to abandon the belief

Despite years of failed predictions, the theory continues to circulate; some believers have modified the timeline but maintain their basic conviction. The persistence of this belief system despite contrary evidence and expert warnings illustrates how financial conspiracy theories can become deeply intertwined with political identity and resistant to contrary evidence. Both Trump supporters and proponents of the dinar revaluation theory often demonstrate a tendency toward belief in conspiracy theories or "hidden truths" that challenge mainstream narratives.

For more information on the Iraqi dinar, check out IBN's Dinar Page here: https://www.iraq-businessnews.com/the-dinar-page/?swcfpc=1 

The Iraqi Dinar Revaluation Scam: False Hope, Financial Deception

Have you seen a connection between support for Trump and a belief in the revaluation theory? Please let us know in the comments below.

[UPDATE, January 21st 2025: Following Donald Trump's inauguration, let us know your thoughts on Dinar RV in our survey here: https://www.iraq-businessnews.com/2025/01/21/survey-trump-and-the-iraqi-dinar/?swcfpc=1]

See also:

"Tired of Dinars", Iraq flocks to Dogecoin

By a Guest Blogger. Any opinions expressed are those of the author(s), and do not necessarily reflect the views of Iraq Business News.

The Iraqi Dinar Revaluation Scam: An Examination of False Hope and Financial Deception

Introduction

The notion that the Iraqi Dinar (IQD) will appreciate in value by an unprecedented multiple has circulated in certain investment circles for many years.

This idea, often presented as an insider tip or a once-in-a-lifetime opportunity, is in reality a long-standing scam. Promoters of this scheme suggest that the Iraqi Dinar, which has been significantly devalued since the fall of Saddam Hussein's regime, is poised for a dramatic revaluation (or "RV" as proponents call it - a term that also calls to mind the recreational vehicles that people dream of buying with there newfound wealth) that will multiply its worth many times over, making early investors incredibly wealthy.

However, the likelihood of such an event occurring is virtually non-existent. This essay will explore the history of the Iraqi Dinar revaluation scam, the demographics it targets, and the improbability of the currency's value ever increasing as advertised.

The History of the Iraqi Dinar Scam

The origins of the Iraqi Dinar scam can be traced back to the early 2000s, following the U.S.-led invasion of Iraq in 2003. After the overthrow of Saddam Hussein, the Iraqi economy was in turmoil, and the new government introduced a series of new banknotes to replace the old currency, which had become virtually worthless. The new Dinar, while more stable than its predecessor, was still valued at a fraction of a U.S. cent.

Around this time, rumours began to spread that Iraq's abundant oil reserves and the eventual recovery of its economy would lead to a significant revaluation of the Dinar. Promoters of this idea claimed that the currency, which was trading at a rate of thousands of Dinar to one U.S. dollar, would soon be revalued to something much closer to the U.S. dollar's value. Some extreme predictions suggested that a single Dinar might one day be worth several U.S. dollars, representing a profit potential of several hundred thousand per cent for those who bought in early.

The scam gained momentum over the years, particularly through online forums, social media, and even in-person seminars. It preyed on people's desire for quick and easy wealth, often using pseudo-economic arguments and speculative analysis to lend credibility to the claim. However, despite the persistence of these rumours, the Dinar's value has remained relatively stable at its low level, with no indication that a revaluation is on the horizon.

Targeting the Vulnerable: Who Falls for the Dinar Scam?

The Iraqi Dinar scam targets a broad range of individuals, but certain demographics are particularly susceptible. The scam is especially appealing to those who are financially insecure, such as retirees, low-income earners, or individuals facing economic hardship. These people are often attracted to the idea of a small investment potentially yielding a life-changing return. The promise of a Dinar revaluation can appear as a beacon of hope in an otherwise bleak financial landscape.

Moreover, the scam often targets those who lack sophisticated financial literacy. Many victims do not have a deep understanding of how currency markets work and are easily swayed by the seemingly logical but fundamentally flawed arguments presented by promoters. These arguments often include references to historical revaluations of other currencies, misleading comparisons to post-war Germany or Japan, and exaggerated claims about Iraq's economic potential due to its oil reserves.

In addition, the scam tends to attract individuals with a distrust of conventional financial institutions. Promoters often paint the Dinar investment as a way to circumvent traditional investment vehicles, appealing to those who believe that mainstream finance is rigged against the average person. This conspiratorial mindset is further fuelled by the online echo chambers where these ideas are shared and reinforced.

The scam has also found a foothold in certain social and religious communities, where trust in fellow members can be exploited by promoters of the scheme.

Scammers sometimes exploit patriotic sentiments, suggesting that purchasing dinars somehow supports Iraq's reconstruction while promising enormous returns.

The Improbability of a Dinar Revaluation

Despite the persistence of these rumours, the likelihood of a substantial revaluation of the Iraqi Dinar is exceedingly slim. Several fundamental economic and geopolitical factors contribute to this conclusion.

1. Firstly, the vast quantity of Iraqi Dinars in circulation significantly hampers the possibility of the currency appreciating massively in value. For the dinar to experience a dramatic increase in value, Iraq would need to undergo an extraordinary economic transformation, which is highly improbable given the current economic conditions. The large money supply means that any attempt to revalue the currency would require a substantial reduction in the number of dinars in circulation, which is logistically and economically unfeasible. Additionally, a sudden and massive appreciation would disrupt the economy, leading to inflation and other financial instabilities. Therefore, the sheer volume of dinars makes a significant revaluation highly unlikely.
2. Iraq's economy, while possessing significant oil reserves, remains fragile and heavily reliant on oil exports. The country faces ongoing challenges such as political instability, corruption, and security concerns, which undermine investor confidence and deter foreign investment. Additionally, the Central Bank of Iraq has implemented a monetary policy aimed at maintaining stability rather than pursuing aggressive revaluation strategies. Any significant increase in the Dinar's value would likely harm Iraq's economy by making its exports more expensive and less competitive on the global market.
3. Currency revaluations of the magnitude suggested by Dinar promoters are unprecedented. Historical examples of revaluations often involve countries emerging from periods of hyperinflation or war, where the value of the currency had been artificially suppressed. Even in such cases, the revaluation process is controlled, gradual, and does not result in the kind of massive windfalls that Dinar promoters suggest.
4. Lastly, the Iraqi government and the Central Bank have consistently denied any plans for a major revaluation. Official statements have reiterated that the Dinar's value will continue to be determined by market forces and that there are no plans to peg the currency to the U.S. dollar or any other foreign currency at a dramatically different rate.

Conclusion

The idea that the Iraqi Dinar will appreciate in value by an unprecedented multiple is nothing more than a persistent scam, preying on the hopes and fears of the financially vulnerable. Despite the seductive promise of enormous returns, the economic realities of Iraq and the dynamics of currency markets make such a revaluation virtually impossible.

Those who have fallen for the Dinar scam have often lost money, time, and hope, while the promoters of this scheme continue to profit from spreading falsehoods. It is crucial for potential investors to exercise scepticism and to seek out reliable financial advice before engaging in any such speculative investments.

Click here to read more.

The Currency of Iraq: A Comprehensive Guide

By John Lee.

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:

1. 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.
2. 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.
3. 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.

For more on the reasons why Iraq has two exchange rates, click here.

The full IBBC webinar can be viewed here.

To register for IBBC's Tech Forum discussion on AI, click here (free).

Attend IBBC's Spring Conference.

IBBC's new white paper on de-dollarisation of Iraqi economy can be downloaded here.

By John Lee.

The International Monetary Fund (IMF) has issued a detailed report on the Iraqi economy.

The following key points were highlighted:

1. Improved Domestic Stability: Since the new government took office in October 2022, Iraq has experienced improved domestic stability. This facilitated the passage of its first three-year budget, which led to a large fiscal expansion starting in 2023.
2. Economic Recovery: The fiscal expansion supported a strong recovery in Iraq's non-oil economy after a contraction in 2022. Despite regional conflicts, Iraq remained largely unaffected.
3. Inflation Decline: Domestic inflation decreased to 4 percent by the end of 2023. This decline was attributed to lower international food prices, currency revaluation as of February 2023, and normalization in trade finance.
4. Imbalances Worsened: Despite the positive aspects, imbalances worsened due to the large fiscal expansion and lower oil prices.
5. Expected Growth in 2024: The ongoing fiscal expansion is anticipated to further boost growth in 2024. However, this expansion comes at the expense of a further deterioration of fiscal and external accounts, increasing Iraq's vulnerability to oil price fluctuations.
6. Medium-Term Sovereign Debt Stress: Without policy adjustment, there's a high risk of medium-term sovereign debt stress, indicating potential fiscal challenges ahead.
7. External Stability Risks: Iraq faces external stability risks, particularly concerning its vulnerability to fluctuations in oil prices. The ongoing conflict in Gaza and Israel also presents a potential downside risk.

In summary, while Iraq has experienced improvements in domestic stability and economic recovery, challenges remain regarding fiscal imbalances, external stability risks, and the potential impact of regional conflicts on its economy.

Click here to download the full 68-page report

Press release from IMF:

On May 13, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Iraq and considered and endorsed the staff appraisal.

Domestic stability has improved since the new government took office in October 2022, facilitating the passage of Iraq's first three-year budget, which entailed a large fiscal expansion starting in 2023. This supported the strong recovery in Iraq's non-oil economy after a contraction in 2022, while Iraq was largely unaffected by the ongoing conflict in the region. Domestic inflation declined to 4 percent by end-2023, reflecting lower international food prices, the currency revaluation as of February 2023, and the normalization in trade finance. However, imbalances have worsened due to the large fiscal expansion and lower oil prices.

The ongoing fiscal expansion is expected to boost growth in 2024, at the expense of a further deterioration of fiscal and external accounts and Iraq's vulnerability to oil price fluctuations. Without policy adjustment, the risk of medium-term sovereign debt stress is high and external stability risks could emerge. Key downside risks include much lower oil prices or a spread of the conflict in Gaza and Israel.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the strong economic rebound, declining inflation, and the improved domestic conditions which have resulted in the implementation of the first-ever three-year budget. Noting that risks are tilted to the downside, given regional conflicts and large dependence on volatile oil prices, and that the large fiscal expansion could result in fiscal and external imbalances, Directors underscored the need for sound macroeconomic policies and structural reforms to secure fiscal and debt sustainability, advance economic diversification, and achieve sustainable, inclusive, and private sector-led growth.

Directors emphasized that a gradual, yet sizeable fiscal adjustment is needed to stabilize debt in the medium term and rebuild fiscal buffers. They encouraged the authorities to focus on controlling the public wage bill, phasing out mandatory hiring policies, and mobilizing non-oil revenues, while better targeting social assistance. Directors agreed that prompt implementation of customs and revenue administration reforms, a full implementation of the Treasury Single Account, and a strict control and limit of the use of extrabudgetary funds and government guarantees are key to support fiscal consolidation. Limiting monetary financing and reforming the pension system are also important.

Directors commended the central bank's efforts to tighten monetary policy and enhance its liquidity management framework. Improving coordination between fiscal and monetary operations would help absorb excess liquidity and enhance monetary policy transmission. Directors concurred that accelerating the restructuring of the large state-owned banks is also essential. They encouraged further modernizing the private banking sector, including by facilitating the establishment of correspondent banking relationships, reducing regulatory uncertainties, and promoting efficiency and competitiveness of private banks.

Directors emphasized the need for structural reforms to unlock private sector development. They encouraged leveling the playing field between public and private jobs, boosting female labor force participation, and reforming education and labor laws. Directors agreed that improving governance and combatting corruption are also key and encouraged further strengthening the AML-CFT framework, enhancing public procurement and business regulations, and addressing electricity sector inefficiencies. Directors welcomed the renewed efforts toward WTO accession. They also encouraged the authorities to improve the coverage and timeliness of statistics.

Directors concurred that close engagement with the Fund, including through continued technical assistance, would be useful, and welcomed the authorities' request for a Policy Coordination Instrument.

It is expected that the next Article IV consultation with Iraq will be held on the standard 12-month cycle.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

To browse our comprehensive library of reports on Iraq, click here.

By Ahmed Tabaqchali, Chief Strategist of AFC Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Banks End the Year with a Bang

The market, as measured by the Rabee Securities U. S. Dollar Equity Index (RSISX USD Index), was down 8.4% for the month, and down 1.0% for the year. The onset of the fasting month of Ramadan at the end of the second week provided the market, and its participants, with a much-needed respite from the powerful momentum of the last few months, and an opportunity to consolidate the solid gains of this momentum (chart below) - with the extent of the consolidation influenced by the fundamentals that drove these gains.

Key among them were the significant developments discussed a few months ago in "Banks to Fuel the Market's Next Phase", that would lead to an acceleration in the growth of net profit and equity values for the top quality banks. The extent of this acceleration can be seen from the stellar year-over-year growth in 2023 for country's top-four banks (table below)- which are among the RSISX USD Index's major constituents.

Rabee Securities U.S. Dollar Equity Index

(Source: Iraq Stock Exchange, Rabee Securities, AFC Research, daily data as of March 31^st)

Year-over-Year Comparisons

(Source: Rabee Securities, AFC Research, data as of Q4/2023)

(Note: All numbers rounded up for ease of display, while percentage changes are of actual numbers)

The catalyst for this spectacular growth was the Central Bank of Iraq's (CBI) new procedural requirements for its provisioning of U.S. dollars for cross-border transfers in mid-November 2022, and the subsequent series of measures throughout 2023, which promise to accelerate the adoption of banking and bring about a transformation of the sector and its role in the economy. All of which disproportionally benefited the top-quality banks, whose net profit and equity values accelerated quarter on quarter from the 4^th quarter of 2022 (Q4/2022), and throughout 2023 as the CBI's measures came into effect as discussed in the market outlook for 2024 in "What Next After a Gangbuster Year ???".

This acceleration can be appreciated by considering it in the context of the growth of each of these banks over the last four years as in the two graphs below. The first is that of trailing 12-month net profit, while the second is of trailing equity values, for Q4/19 - Q4/23. Both have been normalised, with Q4/19 figures set at 100 to allow for a review of the growth of these two key measures during this period, and for an easy comparison between the four banks - with the areas in pink background showing the effects of the acceleration that began in Q4/2022.

Normalised Trailing 12-months Net Profit

Normalised Trailing 12-months Equity Values

(Sources: Rabee Securities, AFC Research, data as of Q4/2023. Note: The graphs based on this data, are for net profit and equity value of the company and not per-share data.)

The National Bank of Iraq (BNOI), and the Bank of Baghdad (BBOB) both had a sharp acceleration in net profit and equity value quarter-on-quarter (above two charts), and both finished with stellar year-over-year growth for 2023 (above table). For the two banks, this growth builds upon the successful strategies pursued by each over the course of the prior few years as reviewed in "The Opportunity in Retail Banking" and in "Banks and the Predictability of Earnings".

Following these two, but with a distance, was Mansour Bank (BMNS), which still experienced strong growth, while the Commercial Bank of Iraq (BCOI) lagged the three, but nevertheless had a solid year-over-year growth in 2023 (*). For all of these banks, the accelerations in net profit and equity values builds upon the gradual multi-year recovery in the banking sector following the 2014-2017 economic crisis that devastated the sector, as reviewed in "Private Sector Deposit & Loan Growth Continues"; and in which each of the four bank pursued different strategies for recovery that drove each banks' growth trajectory.

The intensity of such an acceleration should moderate meaningfully over the course of the next few quarters, and the quarterly progression will likely be uneven, leading to a new normal for the net profit and equity value growth profile for each of the four banks. However, five strong quarters, i.e., Q4/22-Q4/23, are not enough to arrive at a picture of what this new normal is, as the CBI's measures would unfold over a long time - more likely measured in years than months - and importantly as the banks need to adapt their strategies and infrastructures to normalize these changes, and accommodate the higher growth levels.

Nevertheless, it's clear that the future growth trajectories of the four banks will be from a much higher base, and from a significantly improved financial position. Moreover, this new normal will be marked by an increased adoption of banking and of formality, coupled with a move away from the dominance of cash and informality - developments that the investment thesis for the banking sector contends would come with growth in bank lending, resulting in an expansion of the money circulating in the economy and consequently to an increase in non-oil GDP. Over time, the banks' net profit should grow substantially, and ultimately feed into higher stock market valuations driven by both earning momentums, and by increases in market multiples placed upon these net profits.

However, risks remain given Iraq's recent history of conflict, extreme leverage to volatile oil prices, as well as the risks of a potential widening of the current Middle East conflict that could destabilise the region - as reviewed recently in "Markets Continue to Look Through Tensions".

Notes
(*) The currency's official devaluation in December 2020, and subsequent revaluation in February 2023, had an over-sized effect on BCOI's net profit and equity values relative to the other three banks' net profit and equity values given the nature and size of its holdings of Iraq's sovereign Eurobonds - which has the effect of distorting the growth experienced in the period.

Please click here to download Ahmed Tabaqchali's full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the Chief Strategist of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years' experience in US and MENA markets. He is a Visiting Fellow at the LSE Middle East Centre, Senior Fellow at the Institute of Regional and International Studies (IRIS), and a Senior Non-resident Fellow at the Atlantic Council. He is also a board member of Capital Investments, the investment banking arm of Capital Bank in Jordan.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By John Lee.

An International Monetary Fund (IMF) mission met with the Iraqi authorities in Amman during February 20-29 to conduct the 2024 Article IV consultation.

Some key data from their report:

1. Economic Growth:
   • Non-oil GDP growth: 6% in 2023.
   • Overall growth projected to rebound in 2024.
2. Inflation:
   • Declined from 7.5% in January 2023 to 4% by year-end.
3. Fiscal Position:
   • Deficit: 1.3% of GDP in 2023, down from a surplus of 10.8% in 2022.
   • Projected deficit for 2024: 7.6% of GDP.
   • Public debt: Expected to nearly double from 44% in 2023 to 86% by 2029.
4. Policy Priorities:
   • Need for fiscal adjustment to stabilize debt and rebuild buffers.
   • Focus on reducing current expenditure, increasing non-oil revenues, and improving revenue administration.
5. Monetary Policy:
   • CBI raised policy interest rates and reserve requirements.
   • Efforts to reduce excess liquidity and improve monetary policy pass-through.
6. Structural Reforms:
   • Comprehensive employment strategy needed.
   • Financial sector reform to improve credit access.
   • Urgent pension reform required.
   • Combat corruption and improve governance.
   • Hurdles to private sector development need to be removed, including in the electricity sector and business registration procedures.
7. IMF Support: The IMF staff team stands ready to support reform efforts.

Full statement from IMF:

An International Monetary Fund (IMF) mission, led by Mr. Jean-Guillaume Poulain, met with the Iraqi authorities in Amman during February 20-29 to conduct the 2024 Article IV consultation. The following statement was issued at the end of the mission:

Economic growth is projected to continue amid fiscal expansion. Meanwhile, medium-term vulnerabilities to oil price volatility have increased significantly. Reducing oil dependence and ensuring fiscal sustainability while protecting critical social and investment spending will require a significant fiscal adjustment, focused on controlling the public wage bill and increasing non-oil tax revenues. In parallel, higher economic growth will be needed to absorb the rapidly expanding labor force, boost non-oil exports and broaden the tax base. The authorities should therefore seek to enable private sector development, including through labor market reforms, modernization of the financial sector and restructuring of state-owned banks, pension and electricity sector reforms, and continued efforts to improve governance and reduce corruption.     

Economic Outlook and Risks

Growth in the non-oil sector has rebounded strongly in 2023 while inflation receded. Supported by increases in public expenditure and solid agricultural output, real non-oil GDP is estimated to have grown by 6 percent in 2023 after stalling in 2022. Headline inflation declined from a high of 7.5 percent in January 2023 to 4 percent by year-end, reflecting lower international food and energy prices, and the impact of the February 2023 currency revaluation. The current account is expected to have recorded a surplus of 2.6 percent of GDP and international reserves increased to US$ 112 billion.

These positive developments were supported by the normalization of trade finance and the stabilization of FX market. After some initial disruptions following the introduction of new anti-money laundering and combating financing of terrorism (AML/CFT) controls on cross-border payments in November 2022, the improved compliance with the new system and the Central Bank of Iraq (CBI)'s initiatives to cut processing time led to a recovery in trade finance in the second half of 2023. This ensured private sector access to foreign exchange at the official rate for imports and travel purposes.

In the meantime, the fiscal position worsened. Although the expansionary budget was under-executed due to delayed Parliamentary approval, the fiscal balance still declined from a surplus of 10.8 percent of GDP in 2022 to a deficit of 1.3 percent in 2023, due to lower oil revenues and an increase in expenditures by 8 percentage points of GDP, of which salaries and pensions contributed 5 percentage points as the authorities started hiring in line with the budget law.

Overall growth is projected to rebound in 2024 and risks are tilted downwards amid heightened uncertainty. Non-oil growth momentum will continue in 2024. Larger declines in oil prices or extended OPEC+ cuts could weigh on fiscal and external accounts. If regional tensions escalate, a disruption of shipping routes or damage to the oil infrastructure could result in oil production losses that could outweigh the potential positive impact of higher oil prices. In case of a deterioration in domestic security conditions, this could lead to a decline in business sentiment and suspension of investment projects. Over the medium term, non-oil growth is projected to stabilize around 2.5 percent given existing hurdles to private sector development. Furthermore, vulnerability to oil price declines has increased as higher expenditures are projected to push the fiscal break-even oil price above $90 in 2024. Absent new policy measures, the fiscal deficit is expected to reach 7.6 percent in 2024 and widen further thereafter as oil prices are projected to gradually decline over the medium term. As a consequence, public debt would almost double from 44 percent in 2023 to 86 percent by 2029.

Policy Priorities

An ambitious fiscal adjustment would be required to help stabilize debt in the medium term and rebuild fiscal buffers, while protecting critical capital spending. Most of the fiscal adjustment would have to come from reducing current expenditure, especially controlling the wage bill by limiting mandatory hiring and gradually introducing an attrition rule. The authorities should also seek to increase non-oil revenues by broadening the personal income tax base and making it more progressive, reviewing the customs tariff structure, and considering new taxes on luxury items. In parallel, efforts to make revenue and customs administration more efficient should continue. Further savings could be obtained through better targeting social support and increasing cost recovery within the electricity sector. These adjustment measures should provide room for the expansion of the targeted social safety net.

The authorities should also strengthen public financial management and limit fiscal risks. The mission welcomes initial steps towards the establishment of a Treasury Single Account (TSA), which is crucial to improve cash management. Further progress is needed and close cooperation between the CBI and Ministry of Finance will be essential. The next steps are to define TSA design options and complete the bank account census. In future years, overall ceilings on the issuance of guarantees should be specified in the budget law and be enforced. The mission advise against the use of extrabudgetary funds and highlights potential fiscal risks associated with their use. As a second best, it would be important to ensure the Iraq Fund for Development has appropriate governance arrangements, including governing board independence while ensuring transparency of the Fund's activities including by publishing its investment plans in the annual budget documentation and restricting its ability to borrow.

The mission encourages the authorities to build on the CBI welcomed efforts to reduce excess liquidity. The CBI appropriately raised the policy interest rate and reserve requirements, introduced a 14-day CBI bill facility last summer, and scaled back its subsidized lending to the real estate sector. However, monetary policy pass-through has been muted, hampered by large excess liquidity and lack of market incentives in financial intermediaries, especially at state-owned banks. The CBI's ongoing efforts should be supported by consolidating idle government deposits in a TSA, refraining from procyclical fiscal policy, reducing the reliance on monetary finance, and improving public debt management. In parallel, efforts to develop an interbank market with the help of IMF technical assistance should continue. The mission also welcomes the authorities' steps to speed up the digitalization of the economy, reduce the reliance on cash and enhance financial inclusion.

Wide-ranging structural reforms are needed to foster private sector development and economic diversification. Iraq needs higher and more sustainable non-oil growth to absorb the rapidly growing labor force, increase non-oil exports and government revenue, and reduce the economy's vulnerability to oil price shocks. Key reform priorities include:

• Adopting a comprehensive employment strategy aimed at phasing-out mandatory hiring in the public sector, leveling the playing field between public and private jobs, addressing mismatches between educational curricula and the skills needed in the private sector, and strengthening labor market institutions. The strategy should also aim at reducing informality and addressing legal, social, and cultural impediments to women's participation in the workforce.

• Accelerating financial sector reform to improve access to credit. The authorities are committed to modernizing the banking sector and supporting banks' ability to secure correspondent banking relationships and have taken steps towards consolidation of small private banks. Efforts to restructure the two largest state-owned banks should intensify, including by expediting certification of past financial statements and implementation of core banking systems, and enhancing corporate governance in line with best practices.

• Implementing a comprehensive pension reform. This is urgently needed to reduce the overall projected fiscal costs of the public pension scheme, better align the benefits and rules across the public and private schemes, ensure adequacy of pensions and intergenerational equity, and increase the ratio of workers participating in the private pension scheme.

• Combating corruption and improving governance, particularly by strengthening the institutional and legal frameworks needed to ensure the independence of the Integrity Commission and the Board of Supreme Audit, enhancing the publication of assets and conflicts of interests declarations for top level officials, and adopting an updated anticorruption strategy. Further, public procurement and business regulations should also be enhanced. The authorities should also continue to strengthen the AML/CFT framework and its effectiveness, including in the banking sector, guided by the priority actions identified in the MENAFATF Mutual Evaluation that will be concluded in May 2024.

• Removing other hurdles to private sector development by reforming the electricity sector to improve efficiency, cost recovery, and reliable access; simplifying procedures for business registration; and upgrading critical infrastructure.

The IMF staff team stands ready to support the authorities in their reform efforts and would like to thank them for constructive and productive discussions during this mission.

(Source: IMF)

By Ahmed Tabaqchali, Chief Strategist of AFC Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

"What Next after a Gangbuster Year ???"

The market, as measured by the Rabee Securities U. S. Dollar Equity Index (RSISX USD Index), was up 6.2% and 97.2% for the month and the year, respectively, making it the best-performing equity market in the world.

After such a gangbuster year the obvious question is what is in store for the market in 2024? The answer lies with the drivers of the market's performance in 2023 and their continuation going forward. The key driver was a significant fundamental development that promises to accelerate the adoption of banking and bring about a transformation of the sector and its role in the economy as discussed a few months ago in "Banks to Fuel the Market's Next Phase".

The catalyst for this development was the Central Bank of Iraq's (CBI) new procedural requirements for its provisioning of U.S. dollars for cross-border transfers in mid-November 2022. These were part of an ongoing process of encouraging the economy's increased adoption of banking; they nevertheless represented a seismic shift to the country's cash-dominated economy, in which large informal sectors drive the bulk of economic activity.

As such, their introduction had an immediate detrimental effect on the volumes of cross-border transfers conducted through the CBI, which led to a dollar supply-demand mismatch and consequently to the currency's upheaval (i).

In the ensuing months, the CBI introduced a raft of measures to further regulate cross-border transfers, accelerate the adoption of banking and the use of the banking system for settling commercial transactions instead of cash. These measures, coupled with the unintended consequences of the currency's upheaval, created the economic incentives for informal companies to transfer to formality and to access the banking sector for the first time (ii).

The CBI followed these by two key measures that would substantially strengthen the banking system and advance its development. The first measure was the mandate that that all banks should increase their capital by up 60% by the end of 2024, after which the CBI would initiate a merger, an acquisition, or a liquidation of banks that fail to comply. The second measure was that all cross-border-transfers in 2024 would be through banks that have foreign correspondent banking relationships, bringing the process fully in-line with that of the rest of the world.

These two measures, on top of the earlier ones, have disproportionally benefited the top-quality banks, who have the wherewithal to increase their capital bases, who already have correspondent banking relationships with major international banks, and whose infrastructures are able to deal with the meaningful inflows of new banking customers and the subsequent increased volumes of cross-border transactions.

A preview of the resultant boost to the earnings growth of four of the top-quality banks that are among the RSISX USD Index constituents, as the CBI's measures came into effect throughout 2023, can be seen in the last three quarterly reports for these banks. The extent of this boost can be appreciated by considering these reports, i.e. the first quarter of 2023 (Q1/23) to Q3/2, in the context of the growth profiles over the last five years as in the two graphs below.

The first is that of trailing 12-month earnings, while the second is of trailing book values, for Q4/19 - Q3/23. Both have been normalised, with Q4/19 figures set at 100 to allow for a review of the growth of these two key measures during this period, and for an easy comparison between the four banks.

Normalised Trailing 12-months Earnings

Normalised Trailing 12-months Book Values

(Sources: Rabee Securities, AFC Research. See (iii) below for further information)

Among the four banks, the Bank of Baghdad (BBOB) and the National Bank of Iraq (BNOI) experienced sharp accelerations in earnings and book values throughout 2023, reflecting the successful strategies pursued by each over the course of the last few years as reviewed here last year in "The Opportunity in Retail Banking" and in "Banks and the Predictability of Earnings". Mansour Bank (BMNS), to a much lesser extent, experienced faster growth throughout 2023, while the Commercial Bank of Iraq (BCOI) lagged, but still had higher growth during the year (iv). For these banks, these accelerations build upon the gradual multi-year recovery in the banking sector following the 2014-2017 economic crisis that devasted the sector, as reviewed in  "Private Sector Deposit & Loan Growth Continues".

While such acceleration in quarterly earnings growth has turbo-charged the recent trends in earnings growth, however, the intensity should moderate meaningfully over the course of the next few quarters. Nevertheless, both earnings and book values should continue to grow strongly from a higher base, as the full effects of the CBI's measures unfold over a long time given the economy's still high levels of informality.

Thus, providing a boost to the investment thesis for the banking sector, the thrust of which is that increased adoption of banking would come with growth in bank lending, resulting in an expansion of the money circulating in the economy and consequently to an increase in non-oil GDP. Over time, banks' earnings should grow substantially, leading to meaningful increases in their valuations, and ultimately feed into much higher market multiples.

Among other drivers for the market's performance in 2023 was the cumulative positive effects of the relative stability that the country has enjoyed over the last few years, which provided a more stable and predictable macroeconomic framework for businesses and individuals to operate in and plan for capital investments on a scale not seen in the prior decades of conflict (v). Another driver was the positive macro backdrop that allowed the government to pursue expansionary policies that should boost economic growth and, ultimately, corporate profits, as discussed in "Government Starts Implementing Expansionary 2023 Budget".

The Iraqi equity market, while beginning to discount the fundamental developments discussed above, is in the early phases of emerging from a brutal seven-year bear market in which the RSISX USD Index was down 25.4% in 2014, 22.7% in 2015, 17.4% in 2016%, 11.8% in 2017, 15% in 2018, 1.3% in 2019, and -5.4% in 2020 - for a cumulative decline of 66.6%. Even after the 97.2% increase in 2023, it is still 26.2% below the all-time high achieved in early 2014 before the onset of the bear market.

However, risks to the Iraq investment story remain given its recent history of conflict, extreme leverage to volatile oil prices, as well as the risks of a potential widening of the current Middle East conflict that could destabilise the region - as reviewed recently in "Assessing the Risks of a Wider Middle East Conflict".

Rabee Securities U.S. Dollar Equity Index

(Source: Iraq Stock Exchange, Rabee Securities, AFC Research, data as of January 4^th)

Notes.

1. The currency's upheavals were reviewed in prior market newsletters in: "Currency Upheavals Disrupt Market Activity" in January 2023; "Market Begins to Discount Currency Upheavals" in February 2023; "Dinar Revalued Upwards, Market Shrugs" in March 2023;  "Tag Ends of Currency Upheaval Sparks Market Rally" in May 2023; and "Market Takes a Breather, While the Currency Stabilises" in June 2023. Further reviews on these and related issues are at: "Iraq needs to address the economy's structural imbalances to halt the dinar's volatility" in February 2023; "What's Happening with the Dinar?" in February 2023; and in "The Dinar, and the Conundrum over the Dollar and Iran" in August 2023.
2. Following the implementation of the CBI's new procedural requirements, the premium of the parallel market exchange rate over the official exchange rate increased significantly from the average of 1.2% that prevailed over the 18-month period preceding mid-November 2022. It traded between a low of 2.0% soon after mid-November 2022 to a high of 27.5% in early November 2023, and ended 2023 at 16.5% --with an average of 14.4% for the period. Such a high premium created a huge competitive advantage for companies operating formally versus those operating informally -consequently providing the economic incentive for informal companies to transfer to formality and to access the banking sector for the first time.
3. Data provided by Rabee Securities are based on company filings of un-audited quarterly reports between Q1/19 to Q3/23. The calculations based on this data, are for net earnings and book value of the company and not per-share data.
4. The currency's official devaluation in December 2020, and revaluation in February 2023, had an over-sized effect on BCOI's earnings and book values relative to the other three banks' earnings and book values given the nature and size of its holdings of Iraq's sovereign Eurobonds - which has the effect of distorting the growth experienced in the period. Moreover, unlike the other three banks, BCOI had a correspondent banking relationship indirectly through its majority owner and as such didn't benefit in the same way as the other three did. However, it should have established a direct correspondent banking relationship and can stand to benefit more - but will be limited somewhat by its capacity constraints. BCOI's ultimate majority regional owner is Kuwait Finance House, the second largest Islamic bank globally by assets, after its merger with BCOI's original owner Al Ahli United Bank.
5. One of the most promising recent developments in the economy is the meaningful capital investment by businesses and individuals, brought about by the relative stability of the last five years following the end of the ISIS conflict. While these years were punctured by several shocks, such as the countrywide demonstrations in late 2019, the assassination of Iran's top general in Baghdad followed by the emergence of COVID-19 and the crash in oil prices in 2020, the undecisive elections in 2021, followed by a year of a political impasse topped by political conflict and violence in the summer of 2022. Nevertheless, these shocks were short-lived, and did not lead to self-reinforcing cycles of violence and conflict along the lines of the past. As such, this relative stability provided a more stable and predictable macroeconomic framework for businesses and individuals to operate in, and to plan for capital investments on a scale not seen in the last prior decades of conflict; that in turn, should be sustained by the population's pent-up demand for goods and services to catch up with the rest of the world. These developments were reviewed in prior market reports:

1. 1. "Construction Activity and Stability", in July 2023.
   2. "Supermarkets and Stability", in December 2022.

Please click here to download Ahmed Tabaqchali's full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the Chief Strategist of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years' experience in US and MENA markets. He is a Visiting Fellow at the LSE Middle East Centre, Senior Fellow at the Institute of Regional and International Studies (IRIS), and a Senior Non-resident Fellow at the Atlantic Council. He is also a board member of Capital Investments, the investment banking arm of Capital Bank in Jordan.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By John Lee.

A team from the International Monetary Fund (IMF) has concluded a visit with Iraqi officials, concluding:

• Economic activity is recovering, although oil production cuts are weighing on overall growth, and at the same time inflation has declined.
• The large fiscal expansion in the three-year budget law poses significant risks to fiscal and external sustainability over the medium term.
• Fiscal prudence and structural reforms are critical to safeguard macroeconomic stability, ensure sustainability, and achieve durable and more inclusive growth.

Full statement from the International Monetary Fund:

A staff team of the International Monetary Fund (IMF) led by Jean-Guillaume Poulain met with the Iraqi authorities in Amman, Jordan during Dec 12-17 to discuss recent economic developments and outlook as well as policy plans.

At the end of the mission, Mr. Poulain issued the following statement:

"Against the background of a large fiscal expansion, non-oil GDP is expected to grow by 5 percent in 2023. Continued budget execution should help sustain strong non-oil growth in 2024. However, lower oil production, following the closure of the Iraq-Turkey pipeline and OPEC+ production cuts, will reduce overall GDP growth in 2023 and 2024. Inflation has declined from its January peak and is projected to stabilize in the coming months-helped by the Central Bank of Iraq's (CBI) tighter monetary policy, passthrough from the exchange rate revaluation, lower international food prices, and normalization of trade finance as compliance to the new anti-money laundering/combating the financing of terrorism (AML/CFT) framework improved.

"The three-year budget approved in June 2023 marked a shift in Iraq's budgeting practice, envisaged to improve fiscal planning and continue important development projects over the medium term. Despite a late start of budget implementation, the fiscal balance is expected to shift from a large surplus in 2022 to a deficit in 2023. Staff projects that the deficit would widen further in 2024 reflecting the full year impact of recent measures. The large fiscal expansion, including a substantial increase in public hiring and pensions creates permanent spending that will put pressure on public finances over the medium term.

"Ensuring fiscal sustainability, in context of uncertain outlook for oil prices, requires gradually tightening the fiscal policy stance while safeguarding critical infrastructure and social spending needs. This would require mobilizing additional non-oil revenues, containing the large government wage bill, and reforming the pension system. These measures should be supported by moving toward a more targeted social safety net that better protects the vulnerable.

"The mission welcomed the government's plans to strengthen public financial management including steps towards the establishment of the Treasury Single Account. In this context, the mission reiterated the importance of adhering to the framework for managing government guarantees.

"The CBI has appropriately tightened its monetary policy, including by increasing its policy rate and reserve requirement. The mission welcomed the progress in strengthening the domestic liquidity management framework and encouraged continued efforts to mop up excess liquidity and develop an interbank market to strengthen monetary policy transmission.

"Structural reforms to spur private sector led economic diversification and job creation remains pivotal for sustainable and inclusive growth. Priorities include creating a level playing field for the private sector through banking and electricity sector reforms, reducing distortions in the labor market, and continuing efforts to enhance governance and reduce corruption.

"The IMF staff team stands ready to support the authorities in their reform efforts and would like to thank them for candid and productive discussions during this mission."

(Source: IMF)

By John Lee.

In the latest credit rating report by Standard & Poor's (S&P), Iraq has retained its credit rating at B- / B with a stable outlook.

According to the statement from the Ministry of Finance, the report highlights Iraq's financial and economic stability.

It continues:

"This new rating reflects Iraq's continued economic and financial reform policies, led by the Ministry of Finance. It also acknowledges Iraq's ability to maintain foreign currency reserves exceeding external public debt while meeting other external financial obligations, thanks to stable crude oil prices.

"The report considers several key indicators, including the Iraqi Parliament's approval of the three-year budget (2023-2025) aimed at revitalizing infrastructure projects and economic needs. It also notes that the formation of the government in late 2022 has contributed to political stability.

"Furthermore, the report predicts a significant surplus in the current account within the economic forecasts, adding to the strong foreign currency reserves, ultimately supporting Iraq's external debt service capabilities over the next 12 months.

"S&P anticipates that economic growth will reach 2.6% annually during the years 2023-2026, driven by increased oil production and its impact on non-oil sector growth. In addition, annual inflation rates are expected to decrease to 4% in July 2023, compared to 5-6% in 2021 and 2022. This reduction is attributed to government measures involving currency revaluation, price control, and government support for food and energy prices.

"The agency suggests that Iraq's credit rating could improve if economic growth rates rise, government revenue diversifies both from oil and non-oil sources, and individual income shares increase from the national income. Continuous financial and economic policy reform is also seen as a positive factor."

(Source: Ministry of Finance)