Iraq reduced the dinar rate by 14.5% on Wednesday, establishing the new rate at 1,520 dinars per dollar. This decision was made following several months of disruptions in oil exports through the Strait of Hormuz, which have harmed the government's primary source of income.
Details of the New Iraqi Government Decision
The Iraqi government approved the new exchange rate structure on Tuesday, and these changes took effect on Wednesday. The Ministry of Finance's buying rate is set at 1,500 dinars per dollar, while the selling rate for banks and non-bank financial institutions to final consumers is set at 1,510 dinars per dollar. Baghdad had previously intended to weaken the dinar to between 1,400 and 1,500 dinars per dollar while planning for the 2027 budget with expenditures of 217 trillion dinars and a deficit of over 40 trillion dinars.
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Consequences of Dinar Rate Reduction for Iraq's Economy
The reduction in the dinar rate means an increase in the value of the dinar against Iraq's dollar oil revenues, allowing the government to address the budget deficit. This change also raises import costs and reduces household purchasing power. Iraq's oil exports, which provide a significant portion of government revenue, have faced challenges due to economic and political conditions. In August, export volumes fell to about 2.34 million barrels per day, while this figure was over 3.6 million barrels per day before the war. However, southern exports returned to about 2.6 million barrels per day by the end of September, still significantly lower than pre-war levels.
To attract buyers, Baghdad has significantly reduced prices. The state marketing company SOMO offered crude oil in September with discounts ranging from $15 to $20.80 off the official selling prices to customers. Vitol has purchased at least 25 million barrels of Iraqi crude for loading in September, while buyers accepting these discounted barrels take on the transportation risks through the Strait of Hormuz.
Iraq is planning its 2027 budget based on an oil price of $58 and oil exports of about 4 million barrels per day, including loadings from the Kurdistan region. The draft budget includes expenditures of 217 trillion dinars and a projected deficit of over 40 trillion dinars. The reduction in the dinar rate under these circumstances will help increase the value of Iraq's oil revenues.
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