Time Running Out for the Dinar Peg

August 26, 2015
in Banking & Finance
By John Lee.

A foreign-exchange crunch cause by the drop in oil prices could force a devaluation of the Iraqi dinar, according to a report from Bloomberg.

Data compiled by Bloomberg show that dollar reserves fell by approximately 20 percent to $59 billion as of July 23, while in the first 25 days of August the Central Bank of Iraq (CBI) sold $4.6 billion of currency to keep the dinar at its pegged rate of 1166 to the US dollar.

Frank Gunter, author of “The Political Economy of Iraq,” said the currency could weaken as much as 20 percent over the next year, adding “Iraq’s perfect storm means the country will continue to lose reserves until the government of Iraq decides to devalue the dinar.”

Research from Dubai-based bank Emirates NBD suggests that Iraqi dinar is one of the Middle East currencies most at risk of devaluation, but that the current exchange-rate regime is likely to remain.

London-based investment firm Exotix Partners LLP said that maintaining the peg could cause Iraq’s foreign-currency reserves to drop to about $45 billion by the end of next year. “The authorities will try to hold on to the peg as long as possible, but may be forced to devalue if pressures continue,” said Jakob Christensen, a director at Exotix.

But Waleed Eedi, a director general at the CBI, told Bloomberg that the policy now is to meet the demand for dollars, the reserves won’t be depleted because of oil sales, and the dinar won’t devalue.