Iraq devalues dinar to ease liquidity crunch, leaving traders in a fog of uncertainty

The government hopes a weaker dinar will help it pay salaries, but traders face higher import costs and uncertainty.

BAGHDAD, Iraq - Hamza al-Rodini, a food trader, anxiously waits in his small office in Jamila Bazaar, one of Baghdad's wholesale markets, to see what the coming days will bring.

The Iraqi government's decision to devalue the country's currency, the dinar, against the US dollar has left traders like him with sudden losses and uncertainty about the prices they should charge for their goods.

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"I don't know what to do," Al-Rodini told Al Jazeera after the dollar value of his dinar holdings dropped.

"All I know is that I woke up a few days ago and realized that I lost 25 million Iraqi dinars (about $16,500 at the new exchange rate) because of this decision, while bigger traders lost billions of dollars," he said.

Al-Rodini entered the wholesale business last year after losing his previous job at a private Iraqi bank that he said was sanctioned by the US Treasury. He sold his car and used his savings to start a business with a bigger businessman before he recently started his own business.

Al-Rodini said that with exchange rate fluctuations making prices unpredictable, he and many other traders have decided to stop buying and selling until the situation stabilizes.

Al-Rodini said: "The activity of the market has stopped. Traders buy goods in dollars but sell them in dinars, because regulations forbid them to sell in dollars.

That's the root of the problem for traders: a weaker dinar means they have to pay more in local currency for goods they import in dollars, while making it harder to determine the right price to charge customers for goods they already have in stock.

On October 7, the Iraqi government introduced a new official exchange rate against the US dollar to ease the financial crisis caused by the US-Israeli war against Iran and the disruption of oil exports through the Strait of Hormuz.

Before the war, Iraq exported about 3.5 million barrels of oil per day through the Strait of Hormuz, which accounted for 90 percent of the Iraqi government's revenue.

The decision of the Central Bank of Iraq to sell cash to the public set the rate at 1,520 dinars per US dollar. Previously, each dollar was set at 1320 dinars.

The nearly 15 percent depreciation of the Iraqi dinar against the dollar allows the government to receive more local currency for every dollar of oil revenue it converts, helping it cover public spending, including government employee salaries.

"This is my decision and I am responsible for it," Iraqi Prime Minister Ali al-Zaidi said in a meeting with parliament leaders on Thursday.

"I was facing three challenges. Options to cover salaries and other mandatory expenses," Al-Zaidi added.

Al-Zaidi, a former banker, also said his government inherited a public debt of more than 208 trillion Iraqi dinars ($139 billion) when it took office in May. He said the government needs 10 trillion dinars ($6.7 billion) every month to cover salaries and other essential expenses.

The crisis in the Strait of Hormuz had caused severe financial pressure for the Iraqi government.

Although the situation has eased somewhat in recent weeks following a partial recovery in Iraq's oil exports, they have not yet returned to pre-war levels.

Mudar Mohammad Saleh, a financial adviser to the Iraqi prime minister, said in August that the Iraqi central bank's foreign exchange reserves had fallen from $106 billion to about $80 billion.

To compensate for the loss of income, the Iraqi government has also resorted to borrowing from domestic banks to cover salaries and other expenses.

A Finance Ministry official told Al Jazeera that ensuring the timely payment of salaries is the government's top priority, describing it as a matter of domestic economic stability.

The official, who asked not to be named, said: "Our hands are tied about the income and how to keep enough money to ensure the payment of salaries. We are allowed to speak publicly," he said.

Economists have warned that while the exchange rate adjustment could ease some of the immediate financial pressures, it would not address deeper weaknesses in the Iraqi economy.

"Nothing in economics is sacred, including the exchange rate," said Nabil al-Marsoumi, an economics professor at Al-Maqal University in Basra. "It can be adjusted, but only after all other options have been exhausted."

He added: In any case, the exchange rate should not be used as a cover for failure in the economic and financial policies of the government.