SULAIMANI (ESTA) — Iraqi Prime Minister Mustafa al-Kadhimi on Saturday warned of the collapse of social and political system in Iraq if the country does not go through financial reform, as Iraq’s Central Bank announced devaluation of the Iraqi dinar.
Kadhimi said during a meeting of Council of Ministers on Saturday that all the developed countries in the world including South Korea, Singapore and the UAE had made “difficult decisions, and begin bad steps” to overcome the crises, according to his office.
“The political crisis in Iraq is linked to three issues: power, money, and corruption. We are working to address the crisis from an economic standpoint and with a bold decision to overcome the obstacles of corruption and money,” said Kadhimi.
“The white paper and the reform we are carrying out have garnered international, regional and political support,” he added.
Since an oil price crash earlier this year, Iraq has been grappling with an unprecedented liquidity crisis.
The crude-exporting country has had to borrow from the bank’s dollar reserves to pay the nearly $5 billion in monthly fees for public salaries and pensions.
Oil revenues, which account for 90% of the budget, have brought in an average of $3.5 billion.
On Saturday, Iraq’s Central Bank said it had increased the sale price of U.S. dollars to banks and currency exchange to 1,460 dinars, from 1,182 dinars, seeking to compensate for a decline in oil revenue due to low crude prices.
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 added.
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.
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.
“Devaluation of the currency would self-inflict destructive repercussions on economy. It would be catastrophic,” said Qais Jawhar, a Baghdad-based economic professor, according to Reuters.
In a separate statement, Iraqi Finance Minister Ali Allawi said “it has become clear that urgent reforms are needed in various economic fields, including the currency exchange rate.”
“Despite the difficulty of this decision, we are forced to take such a step to address a large part of the crisis, and to ensure the protection of the Iraqi economy by achieving a brave reform step,” Allawi added.
The Central Bank of Iraq justified the devaluation saying it was the product of “intense deliberations” with the prime minister, finance minister and lawmakers, and stressing the reduction in the dinar’s value would be a one-time occurrence.
“It must be emphasized here that this change (reduction) in the value of the Iraqi dinar will be one-time only and will not be repeated,” the bank said. “The Central Bank will defend this price and its stability with the support of its foreign reserves,” which it maintained are still at stable levels.