Iraq devalued the dinar by 14.5% on Wednesday, setting the exchange rate at 1,520 per dollar after months of disruption to oil exports through the Strait of Hormuz cut into the government’s main source of revenue.
The cabinet adopted the new exchange-rate structure on Tuesday, with the changes taking effect Wednesday. The decision set the Finance Ministry’s purchase rate at 1,500 dinars per dollar and the rate for sales by banks and non-bank financial institutions to end beneficiaries at 1,510 dinars per dollar.
Baghdad had been considering weakening the dinar to between 1,400 and 1,500 per dollar as it prepared a 2027 budget with spending of 217 trillion dinars and a deficit exceeding 40 trillion dinars. The new 1,520 rate goes beyond that range.
Oil sales provide the bulk of Iraq’s state revenue. Iraq sells its crude in dollars and pays much of its domestic spending in dinars. Economists told Reuters that the devaluation is a fiscal response to the drop in oil revenue, increasing the dinar value of the government’s dollar earnings while raising import costs and reducing household purchasing power.
Iraq has few alternatives to Hormuz for its crude exports. Shipments fell to about 2.34 million bpd in August, from more than 3.6 million bpd before the war. Southern exports recovered to about 2.6 million bpd by late September, but remained well below prewar levels.
Baghdad also cut prices aggressively to attract buyers. State marketer SOMO offered September crude at discounts of $15 to $20.80 per barrel to official selling prices, depending on destination. Vitol bought at least 25 million barrels of Iraqi crude for September loading, while buyers accepting the discounted barrels assumed the risks of transporting them through Hormuz.
Iraq is building its 2027 budget around $58 oil and crude exports of around 4 million bpd, including shipments from the Kurdistan region. The draft calls for spending of 217 trillion dinars and projects a deficit of more than 40 trillion dinars.
The devaluation increases the dinar value of Iraq’s dollar-denominated oil revenues as Baghdad confronts that deficit. It will also raise the cost of imports and reduce household purchasing power, according to economists cited by Reuters.
By Charles Kennedy for Oilprice.com
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