Payraw Anwar
The Iraqi Prime Minister has suddenly decided to devalue the Iraqi dinar against the US dollar as a new financial measure to address the financial difficulties the Iraqi government has faced since the war broke out in the region. Iraq’s budget relies heavily on oil revenues, but oil exports have been severely limited due to the war and the closure of the Strait of Hormuz.
Every month, the Iraqi government must allocate a significant portion of its revenues to public-sector salaries and other expenditures. More than 10 million Iraqis benefit from government payments through various channels, including pensions, military salaries, social welfare networks, and civil service salaries. This has forced the Iraqi government to prioritise salary payments over development projects and to allocate a substantial portion of its budget to infrastructure and public services. Consequently, the government has devalued the national currency to address its financial difficulties. However, this is not a sustainable solution; it is merely a temporary measure.
Any decision concerning the national currency must be made within the framework of the Iraqi Central Bank, which is responsible for monetary policy in the country. However, the Iraqi Central Bank did not take this step. Meanwhile, the Iraqi government, through the Ministry of Finance, has borrowed millions of US dollars to address its financial difficulties, as limited oil exports have made it increasingly challenging to meet public-sector salary obligations.
On the other hand, some Iraqi members of parliament have raised their voices against this measure and called for the Prime Minister to be held accountable. Shortly afterwards, however, the Iraqi Prime Minister went to parliament to justify the decision, officially stating that there was no alternative to this measure if the government wanted to avoid paying salaries every 45 days.
In brief, the issue is not merely about the Iraqi currency; it is also about the country’s economic system, which relies primarily on a one-dimensional economic model based on oil exports and the distribution of revenues among the population. This is known as a rentier state. In such a system, society, the state, and the market remain highly vulnerable to external economic shocks. Whenever oil prices fall, the state’s financial capacity weakens and the market declines because government revenues decrease.
The best solution is for the government to take two key steps:
1. Diversify the economy. The Iraqi government must develop the industrial, agricultural, tourism, and other sectors of the economy, relying on multiple sources of revenue rather than a single source.
2. Support the private sector. The Iraqi government must provide full support to the private sector to reduce the public sector’s burden and ease the pressure and crises associated with paying public-sector salaries.
Overall, the government has decided to address some of its financial difficulties today by devaluing the national currency. But what will the government do tomorrow if the crisis deepens and becomes even more difficult to manage?