Experts: Gap Between Official and Parallel Dollar Rates Costs Iraqi Market Losses and Fuels Informal Activity

Economic experts said the gap between the official US dollar exchange rate in Iraqi dinars and the parallel rate in the market and exchange shops is causing significant financial losses in Iraq.

This raises questions about why the dollar consistently outperforms the Iraqi dinar in a country that has solid oil reserves and quantities of gold in the Central Bank of Iraq.

Economic expert Ali Da'doush said, "Explaining the persistence of the gap between the official and parallel dollar rates does not necessarily mean there is a shortage of foreign reserves; rather it primarily reflects a gap between demand for the dollar and the official channels available to obtain it, along with restrictions related to external transfers, informal trade, speculation and market participants' expectations."

Da'doush added: "Economically, the impact of this gap is greater than just a price difference; it raises the cost of imports that cannot pass through official channels, puts upward pressure on prices, and increases uncertainty for producers, importers and consumers," noting that "the gap creates an incentive to shift from formal activity to informal channels."

He stressed that "narrowing the gap requires expanding the use of the dinar in local transactions, improving customs oversight and reducing informal trade, developing correspondent banking networks, as well as addressing delays in bank transfers, and adjusting the customs pricing framework for some essential goods."

He pointed out that "the parties benefiting from the persistence of the gap are intermediaries, speculators and some exchange and informal trade activities, and entities able to obtain dollars at the official rate and then reprice or cycle them outside official channels," clarifying that "not all exchange companies or traders can be considered beneficiaries; a large part of the commercial sector bears the gap as an additional cost."

For his part, money changer Osama Al-Mushrafawi, owner of an outlet in Baghdad, said that "among the reasons for the gap between the official and parallel dollar rates is the government's focus on supporting only large companies, with no support for small companies or small traders," explaining that "large traders invest funds by buying goods at the official exchange rate and selling them at the parallel rate."

Al-Mushrafawi added that "owners of clothing and mobile phone shops and some importers do not obtain dollars at the official rate, which pushes them to buy from the black market; the more demand for dollars rises, the higher its value and the wider the gap between the official and parallel rates," noting "the state's lack of control over the black market and the need to create a transactional environment inside Iraq that uses only the Iraqi dinar."

He indicated that "government measures to find some possible solutions to lower the value of the dollar are progressing very slowly and are subject to certain considerations, so we find that the percentage decrease in the dollar is small compared to its increases," and that "the parallel exchange rate in recent days reached 1,600 dinars per dollar."

Al-Mushrafawi proposed "creating a dedicated platform for shop owners to import goods at the official rate to reduce the pressure on dollar demand."

Financial and banking affairs expert Mustafa Akram Hantoosh said that "unifying the exchange rate represents economic stability, but the parallel market reflects demand outside the platform because the platform does not cover small traders."

Hantoosh added that "there are thousands who do not own companies and have no means of importing; they need companies that sell retail-appropriate quantities, or to grant the capability to exchange shops that import orders for each trader who has an established location," noting that "bringing small traders into a framework supervised by the Central Bank would help reduce the parallel market, since there is large trade with neighboring Iran that includes foodstuffs, dairy and others but the Central Bank does not cover it."

Hantoosh affirmed that "if banking credit facilities are untied, it is possible for the parallel rate to fall and become equal to the official exchange rate."

MP Amer Abdel-Jabbar said in a previous statement that "the Iraqi people lose 27 billion dinars due to the price gap between the official exchange rate and the parallel market over 1,295 days, which is the total period of the previous government's term," noting that the rate of losses amounted to "$21 million every 24 hours."

Abdel-Jabbar noted that the increase in the price gap between the official and parallel dollar to "2,900 dinars per dollar in the current month of September" is the highest price gap since 2003, and that the average losses for "50 actual working days of the current government amounted to $43,100,000 every 24 hours."

The gap between the official and parallel rates remains an ongoing challenge for successive Iraqi governments, none of which have managed to close this divide or present solutions that convince markets and bolster confidence in the Iraqi dinar, while the divergence continues to unsettle citizens and commercial activity in the country.