Iraq Devalues Its Currency as Economy Unravels

Iraq devalued its currency by about 20% against the dollar as the cash-strapped government faces an economic crisis brought about by low oil prices and crude-production cuts.

The central bank reduced the official rate to 1,450 dinar per dollar, the first devaluation since 2003, it said in a statement. That’s from about 1,190 previously. Dollars will be resold to local banks at 1,460 dinar apiece.

The world’s third-largest oil exporter is taking the steps to avoid depleting its foreign-currency reserves after the coronavirus sapped demand for energy and caused prices to collapse. The government last month sought upfront payments in exchange for a long-term crude-supply contract to help mitigate its dire financial situation.

What Bloomberg Economics Says...

“The devaluation was inevitable given the drop in oil prices and the budgetary pressures Iraq is facing. The government says that this is a one-off and won’t be repeated, but we’ll see if that will be the case. It is also important to watch the popular response to the resulting increase in living costs and the government’s austerity program.”

-- Ziad Daoud, chief emerging-markets economist

Prime Minister Mustafa Al-Kadhimi, who came to power in May, has warned that the government will struggle to pay civil servants without raising more debt. That’s threatening a repeat of the upheaval that last year brought down the government and saw hundreds of protesters killed.

Demonstrators at a rally at Tahrir Square at the end of October bemoaned corrupt politicians, daily power cuts, dilapidated hospitals, crumbling roads and a lack of jobs, and urged the government to ignore OPEC output cuts.

The International Monetary Fund expects Iraq’s economy to shrink 12% this year, more than that of any other OPEC member under a production quota, and that its budget deficit will reach 22% of gross domestic product.

©2020 Bloomberg L.P.

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