Iraq devalues dinar to lower budget inflation as oil prices squeeze revenue

By Ahmed Rasheed and Hesham Abdul Khalek

BAGHDAD (Reuters) - Iraq's central bank increased the sale price of U.S. dollars to banks and currency exchanges to 1,460 dinars, from 1,182 dinars, seeking to compensate for a decline in oil revenue due to low crude prices, the bank said on Saturday.

The central bank of Iraq said the key reason behind the dinar's devaluation was to close the gap of widened 2021 budget inflation after a collapse in global oil prices, a major source of Iraq's financial resources.

"The financial crisis which Iraq suffered due to the coronavirus pandemic caused a decline in oil prices that caused decreasing oil revenues, altogether have caused a large deficit in the federal budget," the central bank said in a statement.

The devaluation decision came as a preemptive move to prevent "draining Iraq's foreign reserves" and help government to secure public servants' salaries, the bank said.

Iraq depends on oil revenue for 95 percent of its income. The last devaluation was in December 2015 when it raised the sale price of U.S. dollars to 1,182 dinars from 1,166.

But in Iraq's largely dollar-denominated economy, lowering the value of its dinar by a significant rate, which was the highest devaluation rate since 2003, would immediately raise the price of goods, hitting living standards.

Combined with other pending painful economic reforms by the government of Prime Minister Mustafa al-Kadhimi, this could lead to further unrest in a country where protests broke out on Oct. 1 last year and continued for several months, with hundreds of thousands of Iraqis demanding jobs, services and the removal of the ruling elite, which they said was corrupt.

Iraqi security forces and anti-riot police were deployed on Saturday near central bank headquarters, state banks and other financial offices in Baghdad in anticipation that protests could erupt after the central bank decision, said two security officials.

The OPEC member's economy has only a small manufacturing base and almost all goods are dollar-priced imports, so a cheaper dinar would instantly make normal Iraqis feel poorer without providing any benefit to the wider economy via cheaper exports.

"Devaluation of the currency would self-inflict destructive repercussions on economy. It would be catastrophic," said Qais Jawhar, a Baghdad-based economic professor.

 

(Reporting by Hesham Abdul Khalek and Ahmed Rasheed; Writing by Ahmed Rasheed; Editing by William Maclean and David Evans)