Asst. Lecturer Amina Jasim Mohammed<br /><br />This study analyzes the impact of the exchange rate on the Iraqi economy, highlighting its importance as a key macroeconomic variable that affects multiple sectors. It shows that exchange rate fluctuations have significant implications for trade, inflation, the national budget, investment, and public debt—especially in a rentier economy that heavily relies on oil exports.<br /><br />Key Points of the Study:<br /> • Definition of Exchange Rate: It is the value of the local currency against foreign currencies and is determined by the type of exchange rate system (free, fixed, or managed).<br /> • Mechanisms of Impact:<br /> • Trade Balance: A depreciation of the Iraqi dinar makes exports more competitive and reduces imports, while appreciation has the opposite effect.<br /> • Inflation: A weaker dinar increases the cost of imported goods (imported inflation), while a stronger dinar reduces it.<br /> • Foreign Direct Investment (FDI): A lower exchange rate may attract more foreign investment due to lower asset costs, while a higher rate may deter it.<br /> • Public Debt: If part of the public debt is in foreign currencies, a lower dinar increases the cost of debt service.<br /> • National Budget: Since oil is sold in USD, a lower dinar increases government revenues in local currency upon conversion, while a higher dinar reduces them.<br /><br />Challenges:<br /> • Heavy dependence on oil exports.<br /> • Imported inflation.<br /> • Weak domestic production base.<br /> • Political and security instability.<br /> • Presence of a parallel (black) market for foreign currency.<br /><br />Opportunities:<br /> • Economic diversification away from oil.<br /> • Promotion of non-oil exports.<br /> • Attraction of foreign investment.<br /> • Enhancing the role of the Central Bank and reducing the influence of the parallel market.<br /><br />Recommendations:<br /> • Diversify income sources and reduce reliance on oil.<br /> • Support domestic industries to limit reliance on imports.<br /> • Implement structural reforms to improve the business environment.<br /> • Coordinate monetary and fiscal policies effectively.<br /> • Build sufficient foreign currency reserves.<br /> • Combat corruption and enhance transparency.<br /> • Develop the official foreign exchange market and reduce black market influence.<br /> • Establish a clear exchange rate strategy (flexible, fixed, or managed) aligned with economic and geopolitical realities.<br /><br />Conclusion:<br />The exchange rate is a vital factor with wide-ranging effects on the Iraqi economy. Addressing its challenges requires well-designed, integrated policies to promote financial stability and sustainable economic growth.