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Fluctuations In Value Of Iraqi Dinar Due To Regional Political Tensions

The Governor of the Central Bank of Iraq (CBI) Sinan al-Shabibi has recently told a conference that fluctuations in the value of the Iraqi dinar were due to the relatively unstable political conditions in Iraq and to the difficult situation in neighboring Syria and Iran, which are under sanctions. This has led to surge in demand for the US dollar in the Iraqi market since the beginning of the year and a rise in its price to a four-year high of $1=ID1,320. The Council of Ministers on 11 April decided to set up a committee to examine these fluctuations and find a suitable solution to avert any harm to the Iraqi economy.

Some Iraqi economists argue that the depreciation of over 10% in the value of the dinar from the exchange rate of $1=ID1,166 set by the CBI would add to inflationary pressures in the country. The oil sector contributes some 50% of GDP and oil exports generate over 90% of foreign exchange earnings. Also with Iraq being an import economy, the fall in the value of the local currency will result in a fall in its purchasing power.     

As the effect of sanctions tightened on Iran because of the nuclear standoff and on Syria on account of its violent repression of street protests, the availability of foreign currency in these two countries had become limited. This has prompted Iranians and Syrians to turn to the Iraqi market to obtain foreign exchange, thereby bidding up its price. Mr Shabibi is reported as saying that since the beginning of 2012 demand for dollars had risen by some 40-50%, stressing however that Iraq, which was earning $7bn monthly from its oil exports, had sufficient forex reserves to cope. In February the CBI introduced new measures to curb demand for the dollar by asking the banks acquiring dollars in the regular CBI auctions to identify their clients and their needs for foreign exchange. But opinion is divided among Iraqi economists about restricting supply of foreign exchange, with some arguing that the CBI should supply more dollars to the market to meet rising demand from neighboring countries. Clearly such regulations will make the purchase of foreign exchange by Iraqi businessmen or otherwise more cumbersome and create possibilities for profiteering.

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