From Dollar to Dinar: Exchange Rate Policy Threatens the Stability of Iraq’s Oil Sector
The Central Bank of Iraq’s decision to disburse dollar remittances and convert them into Iraqi dinars for contractors with oil companies operating in Iraq has raised widespread questions in economic circles regarding the implications of this measure on those companies, particularly with regard to external obligations and operating costs.
Experts believe that continuing to implement this measure may impose additional financial burdens on companies that rely on the dollar in their transactions, given the fluctuations in the exchange rate and the requirements of the oil market.
Economic expert Nabil Al-Marsoumi says in a tweet on social media that “more than 200 Iraqi companies contracted with oil licensing companies, employing more than 50,000 Iraqi workers, are threatened with large financial losses and layoffs, due to the Central Bank of Iraq’s directive not to disburse their dollar transfers in dollars and to convert them to dinars at the official rate, even though their contracts and expenses are also in dollars,” explaining that “the loss occurs due to the large difference between the official and parallel exchange rates of the dollar against the dinar,” and pointing to “the collapse of companies due to the exchange rate.”
For his part, Mahmoud Hassan, a representative of one of the oil companies, said at a demonstration organized by a number of subcontracted oil companies working with an international oil company, that “Iraqi companies working in the oil sector have been facing a continuous crisis for more than a year without reaching solutions,” warning of “serious repercussions that may lead to the collapse of a large number of those companies.”
Hassan tells Shafaq News Agency that “the contracting oil companies, which employ more than 40,000 Iraqi workers, have begun to face significant financial pressures after the state began paying their dues in dollars at the official rate of 131,000 dinars per 100 dollars, while the dollar is trading at around 155,000 dinars on the parallel market,” stressing that “this is causing direct losses for the companies.”
He adds that “the state, instead of supporting these companies, is pushing them to reduce their operations,” noting that “the continuation of this situation will force companies to lay off their workers and may lead to their complete shutdown,” pointing out that “most of the companies contracted with international oil companies are Iraqi companies, and they have already begun to be unable to pay the salaries of their employees.”
Hassan called on the Central Bank of Iraq to “intervene urgently and find a solution that takes into account the nature of these companies’ work and their obligations,” warning that “the continuation of the crisis will negatively affect the oil sector and the labor market in the country.”
A number of subcontracting companies operate in Iraq, which vary from project to project, and carry out services, supplies, maintenance, construction, transportation, and other work, within contracts with oil companies or with international companies linked to the contracts.
The contract is the law between the contracting parties.
In this context, economist Hamza Al-Jawahiri told Shafaq News Agency that “as long as the contracts stipulate that payment should be in dollars, then payment should be in dollars,” explaining that “payment in any other currency is contrary to what the contracts stipulate.”
He affirms that “these companies can file complaints with the competent courts, as the rule states that the contract is the law of the contracting parties.”
Migration of foreign oil companies
For his part, energy expert Ahmed Sabah says that “the Central Bank of Iraq’s decision to disburse payments to companies contracted with oil companies in Iraqi dinars instead of dollars may lead to the gradual exclusion of some foreign companies, in favor of focusing on local companies or those that accept dealing in dinars,” explaining that “a number of Western and foreign companies rely on external supply chains that require payment in dollars to secure equipment and services.”
He adds, to Shafaq News Agency, that “this measure is not always sustainable in the long term, especially given that the current government is a caretaker government, which reduces the possibility of establishing decisions with a long-term strategic impact on the oil sector,” suggesting that “some major foreign companies will refrain from expanding or entering into new contracts if this mechanism continues to be used.”
Sabah points out that “the decision may be temporary and subject to change in the coming period, especially if negative repercussions appear on the investment environment or the pace of work in the oil fields,” noting that “the measure is not a political reaction as much as it is a phased organizational step.”
Creating confidence in the Iraqi dinar
For his part, economist Dirgham Muhammad Ali believes that “the attempt to avoid creating a parallel market for the dollar prompted the Central Bank to take a number of measures to enhance confidence in the dinar and strengthen it, but these measures were not fair in light of the continued gap between the official and parallel exchange rates.”
He adds, to Shafaq News Agency, that “the Central Bank is required to reconsider the policy of mandatory currency conversion, due to the losses it causes to traders, as well as the loss of an important channel for the market to inject dollars legitimately, away from illegal trading and dealing in foreign currency,” stressing the need to “either convert at a real and fair price or find a different mechanism for dealing with foreign companies.”
Economic circles warn that the loss or collapse of secondary oil companies contracted with international and local oil companies will lead to the disruption of operational work in the oil fields, especially maintenance, logistics and equipment work, which will negatively affect the stability of production, as well as the loss of tens of thousands of job opportunities, given that these companies rely mainly on Iraqi labor.
The collapse of these companies would also weaken supply chains and raise operating costs for foreign companies, which might lead some of them to reduce their activity or refrain from entering into new projects, which would affect the oil investment environment and limit the role of the local private sector.
Shafaq.com