Why Iraq hasn’t Independently Revalued the IQD Higher (Part 2)

In Part 1 of this article series, I outlined Iraq’s Dollar Crisis and Lack of Confidence in the IQD.

Here in Part 2, I discuss Iraq’s current peg to the US dollar and the financial challenges they face in order to revalue (re-peg) the IQD substantially higher against the US Dollar and other major currencies in general.

The question arises: why won’t Iraq simply re-peg the IQD at a higher rate, say $1.00/IQD, and potentially open the door for a substantial revaluation?

Iraq’s currency exchange rate arrangement is classified as a stabilized soft peg anchored to the US dollar.

As Iraq grapples with a crisis of confidence in its national currency, the Central Bank of Iraq (CBI) and the Government of Iraq (GOI) maintain a delicate balance by soft-pegging the Iraqi Dinar (IQD) at 1310 IQD/USD. This peg, held with purpose, acts as a stabilizing force in their evolving economic environment.

The question arises: why won’t Iraq simply re-peg the IQD at a higher rate, say $1.00/IQD, and potentially open the door for a substantial revaluation?

The answer lies in the significant economic challenges that Iraq faces. While the CBI and GOI possess the authority to re-peg the IQD at will, the feasibility of maintaining a higher peg rate becomes evident when considering the existing instability and insecurity within Iraq’s borders (not to mention their current economic situation).

The stark reality is that an abrupt shift to a higher peg rate, such as $1.00/IQD, demands a significant reserve of US dollars that Iraq currently cannot sustain at this time.

According to recent article from al-Sabaah News in Iraq, there are an estimated 100 trillion Iraqi Dinar circulating outside of the banking system (out of a total of 173 trillion IQD in circulation).

Let that 100 Trillion IQD number sink in for a moment…

In order for any currency to maintain it’s valuation against other currencies, the economy of the nation must support that valuation.

Iraq must pull in and destroy the a very large portion of those physical 100 trillion IQD notes in order to re-peg the Dinar to a higher rate. If one looks at Iraq’s current economic situation, their GDP (Gross Domestic Product) is only around $260 billion in USD terms.

If one takes a look at all of Iraq’s key 2023 economic indicators compared with it’s neighboring countries that have a much higher exchange rate (including Kuwait), an independent RV approaching $1.00 per IQD is financial suicide today.

This is why Iraq is constantly discussing it’s US dollar problem, the need to bring more IQD into the banking system (in Iraq), and deleting three zeros off of their notes. Yet even deleting three zeros would mean there are still over 173 billion (instead of 173 trillion) IQD in circulation.

Consequently, if Iraq were to RV, they would require a substantially higher GDP, or substantially higher foreign exchange reserves than their current $100 million USD FX reserves they have in the bank.

Understanding these financial constraints provides clarity on why Iraq hesitates to independently revalue the IQD at this time.

The risk of exacerbating instability and compounding the no-confidence crisis at the proposed revaluation rate creates a formidable obstacle. The existing economic landscape demands a cautious approach, prompting Iraq to navigate its economic and currency valuation challenges strategically.

All of this said, the main point is that Iraq cannot just independently RV (float or peg) today as many appear to believe. But there is another path…

While the allure of a higher IQD valuation is enticing, the reality is that Iraq’s financial limitations, coupled with its prevailing geopolitical instability, necessitate a more measured and calculated path for now.

The pivotal question arises: can Iraq sustain a higher peg rate without succumbing to the financial pitfalls described above?

This question underscores the intricate dance that Iraq engages in today as it strives for economic rejuvenation while treading carefully to avoid the certain economic suicide of premature or unsustainable financial maneuvers.

All of this said, the main point is that Iraq cannot just independently RV (float or peg) today as many appear to believe.

There is a path towards a successful and sustainable RV or $3.00 (or higher) for the IQD

Part 3 of this article series specifically addresses a scenario where Iraq independently RV’s at a value of $3.00 per IQD and introduces a likely “existential” solution for achieving this exchange rate.