Why Two Exchange Rates?

By Mark DeWeaver.

Since the Central Bank of Iraq (CBI) began changing the rules for its USD auctions in 2012, Iraq has been operating a de facto dual exchange rate system. (There’s a summary of some of the CBI’s recent rule changes on pages 12-14 of this report from Sansar Capital.) For those with access to the CBI auction—mainly banks and (as of March, 2013) importers using letters of credit—the rate has been fixed at IQD 1,166: USD 1.00. For the rest of us, the dinar has ranged from 1,194 to 1,292, with two major episodes of depreciation in mid-2012 and mid-2013 (see chart).

The ostensible purpose for this arrangement is to limit illicit outflows of foreign exchange to Iran and Syria. In practice, it serves mainly as a subsidy to banks, large importers, and anyone in a position to generate phony trade documents. The losers include everyone from foreign investors in Iraqi stocks to the government itself, which gets the CBI rate on its oil-export revenues.

Iraq is unusual in this regard. Dual (or even multiple) exchange rates are usually only found in countries suffering from chronic trade deficits and foreign exchange shortages. Typically the objective is to make foreign exchange available for “essential” imports or to control inflation by lowering import prices. Examples include Hitler’s Germany, China in the 1980’s and early ‘90’s, Burma prior to 2012, and Venezuela today. (See this notefrom the Asian Development Bank for an excellent introduction to this topic.)

It’s hard to see why Iraq belongs on this list. The country has a trade surplus, inflation is low, and the central bank has ample foreign exchange reserves. Even USD outflows to Iran are presumably no longer a major issue.

One exchange rate should be enough.

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Categorized | Blog

Money Still Flowing into Iraq

With just four weeks left to the parliamentary elections, and all the uncertainty and risk that that brings, it is interesting to note that money is still flowing into the country and oil is still flowing out.

On the production and export side, the latest figures look very positive, and Lukoil has just started production at the giant West Qurna 2 oilfield.

As regards investment, we see Abu Dhabi’s TAQA pumping $300 million into its Atrush oilfield, and Samsungsigning an $840 million deal at Zubair.

Meanwhile, analysis from our Expert Blogger Mark DeWeaver questions the official exchange rate for the Iraqi Dinar, arguing that “one exchange rate should be enough“.

You can read all about it at Iraq Business News.