Iraq does not have a liquidity crisis

A spokesman for the Kurdistan Regional Government (KRG) told Rudaw this week that Iraqi Finance Minister Tayf Sami blamed a lack of liquidity for the failure to send the Kurdistan Region’s December public salaries. But could there truly be a shortage of dinars in Iraq at this time?

According to the latest report by the Iraqi Ministry of Finance, published on its website, revenues for 2024 as of the end of October stood at 124.66 trillion dinars, while expenditures were 122.72 trillion dinars. This means that the Iraqi government had no deficit up to that point, with expenditures remaining below revenues. So why would the government face a liquidity issue?

No deficit, no crisis

Iraq’s revenues primarily come from oil exports, accounting for 90% of total revenues as of the end of October, according to the Ministry of Finance’s report. The ministry receives these dollars and exchanges them with the central bank for dinars to meet its obligations as mandated by the budget, such as the payment of salaries, pensions, and so on.

“There is no liquidity crisis. The Iraqi government has no liquidity problems at all,” according to Ahmed Tabaqchali, a senior fellow at the Institute of Regional and International Studies (IRIS) and a non-resident senior fellow with the Atlantic Council.

“The budget law for 2024 allows the government to borrow up to 45.8 trillion dinars, even though it does not need to borrow at this stage. Assertions of liquidity problems are baseless,” he said.

“The government can easily borrow up to 28.04 trillion dinars domestically through a combination of T-Bills issuance discounted by the CBI, borrowing from state owned banks, and issuance of bonds - with these limits set by the budget law,” he added.

The role of dollar auctions

The central bank’s dollar auction process is often misunderstood. These auctions, where the central bank sells $250 million to $300 million daily, are not directly related to liquidity or liquidity shortages. The cash auctions are primarily aimed at enabling commercial banks and authorized foreign exchange companies to provide US dollars at official rates for specific purposes, such as tourism or medical travel abroad. However, the majority of auctioned dollars facilitate foreign trade by approving corporate imports of goods and services.

Starting in 2025, the Iraqi Central Bank (CBI) plans to end its online platform for dollar auctions, transferring the responsibility for dollar supply and foreign remittances directly to commercial banks. While the extent of this implementation remains unclear, the central bank’s website continues to display daily auction data. Even if the auctions were to cease entirely, a liquidity crisis would still be unlikely.

Central banks and currency printing

Central banks have the unique ability to create a country’s national currency as needed. For Iraq, this means the central bank can produce dinars to meet the government’s requirements. These dinars become a liability on the central bank’s balance sheet and an asset for the holders of the dinars. However, the Ministry of Finance can borrow dinars by issuing T-Bills, which are mostly bought by the state-owned banks such as Rafidain, Rasheed, or the TBI, who then discount them at the central bank, even if the Ministry of Finance lacks sufficient funds to meet its obligations, provided that the government has the authority to borrow according to a budget law or authorized by parliament. Borrowing by the state, by issuing T-Bills or bonds - whether domestic or foreign - is standard practice.

For instance, the budget law for 2024 planned for a 64.04 trillion dinar budget deficit, of which 71.5% was to be financed through domestic or foreign debt. However, high oil prices averaging above the budgeted $70 per barrel and increased domestic revenues meant that the Ministry of Finance did not need to borrow by the end of October.

What triggers a liquidity crisis?

A liquidity shortage occurs only when the Iraqi government’s revenues decline significantly due to factors like falling oil prices or reduced oil exports. This was evident in 2020, when oil prices collapsed, with Brent crude falling to $19 per barrel and WTI even dropping to -$37 per barrel. Despite this real liquidity issue in 2020, parliament allowed the government to borrow, ensuring its operations continued.

“Even in 2020, when oil prices collapsed and there was a real liquidity issue, the government borrowed after parliament authorized the government to borrow up to IQD 27.0 trillion and managed the situation. Today, there is no such thing as the government having a liquidity crisis,” said Tabaqchali. “People are not using data and so are talking about something they don’t understand.”

The claims of a liquidity crisis in Iraq are unfounded. With revenues exceeding expenditures, robust oil income, and the central bank’s ability to provide liquidity when needed, Iraq’s financial position remains stable. Discussions of a liquidity crisis appear to stem from misunderstandings or misinformation, not from the realities of Iraq’s economic landscape.

 

CORRECTION: An earlier version said the 2024 budget allows the Iraqi government to borrow a total of up to 64.03 trillion dinars, borrow up to 25.04 trillion dinars domestically, and that in 2020 the Iraqi parliament authorized the government to borrow up to 60 trillion Iraqi dinars. These numbers have been corrected.

Updated at 11:06 am

Omar Ahmed is editor-in-chief of Rudaw’s Economy Desk.

The views expressed in this article are those of the authors and do not necessarily reflect the position of Rudaw.