Iraqi Dinar Discussion Board

[Arctec]

Inflation
Iraq’s high rate of inflation is a serious
obstacle to progress under the IMF’s Stand-
By Arrangement (SBA). Sustained progress
under the SBA is necessary to secure donor
support for the International Compact, and
failure to meet the terms of the SBA would
complicate negotiations for a new IMF
program in 2007. Satisfactory progress under
an IMF program for three years is required
for the final 20% of Paris Club debt relief.
High inflation—a result of disruptions in the
supply of food and fuel, price deregulation,
spending by the Government of Iraq and
donors, and growth of the money supply—is
threatening progress toward economic stability
in Iraq. Unlike in previous years, when
inflation was confined mainly to rents, fuel,
and transport, prices are now increasing
rapidly in all sectors. According to Iraq’s
Central Organization for Statistics and
Information Technology, the annual inflation
rate from October 2005 to October 2006 was
53%. It is widely believed that the official
inflation rate underestimates the actual
inflation rate.
Runaway inflation exacerbates the government’s
decline in purchasing power and
increases wage and pension demands, placing
added pressure on the budget.
Over the past three months, the Central Bank
of Iraq has taken steps to try to stem inflation.
• The bank raised interest rates from 7% to
12%, but the weak banking sector and the
significant influence of the dollar rendered
this move largely symbolic.
• The bank also slowly appreciated the
dinar. The exchange rate is now approximately
1,455 Iraqi dinar to US$1. However,
a much faster rate of appreciation
will be necessary to fight inflation. By
increasing the dinar’s value, the Central
Bank of Iraq could encourage more Iraqis
to hold onto dinars as opposed to converting
them to dollars. Appreciation ofthe dinar would also reduce the dinar value
of the Government of Iraq’s dollardenominated
revenue (more than 90% of
revenues is from oil), but, as appreciation
succeeds in controlling inflation, the government
would require fewer dinars to pay
for its expenditures. Appreciation of the
dinar would not harm the competitiveness
of Iraqi exports—non-oil exports are
negligible—but it could impair the ability
of domestic industries like agriculture to
compete with foreign imports.
However, the bank has been reluctant to take
the necessary stronger measures.


http://www.defenselink.mil/pubs/pdfs/9010Quarterly-Report-20061216.pdf


http://www.defenselink.mil/home/features/Iraq_Reports/Index.html