The Relationship between the Iraqi dinar Strength and the petrodollar

There is a close relationship between the Iraqi dinar and the petrodollar, given the Iraqi economy's dependence on oil on the one hand and the valuation of Iraqi oil in US dollars on the other.

Self-Reported Indicators of the Oil Sector
The Iraqi economy relies on oil for most of its indicators, given its vast oil reserves (145 billion barrels), ranking it fourth globally, third regionally, and second in the Arab world.
Iraq also ranks fourth globally in production, after the United States (11 million barrels per day), Saudi Arabia (10), Russia (9), and Iraq (4 million barrels) in 2022.

In terms of exports, Iraq ranks third globally, after Saudi Arabia (7 million barrels per day) and Russia (4 million barrels per day). Iraq will then export (3 million barrels per day) in 2022, according to OPEC data.

These subjective indicators of the Iraqi oil sector (reserves, production, exports) cast a shadow over the Iraqi economy, given the absence or weakness of institutions. Oil has become the prominent identity of the Iraqi economy.

The Oil Sector and Economic Indicators

Gross domestic product (GDP) is the most important economic indicator, as it provides a picture of the nature of the economy's composition. The mining and quarrying sector, including the oil sector, accounted for the largest proportion, 56%, of the GDP in the third quarter of 2022, compared to the limited importance of other activities, especially the agriculture and forestry sector, fishing (1.5%) and manufacturing (2.26%), which clearly indicates the dominance of the oil sector in the GDP.

The same applies to oil revenues and their share of public revenues. While oil revenues constitute 96.07%, other revenues constituted only 3.39% of public revenues in the third quarter of 2022, meaning that oil revenues represent the backbone of public revenues.

The situation is no different with regard to the export index, and even more so; oil exports dominated the export structure, as oil exports constituted 99.2% (crude oil 96.52%, oil products 3.40%), while other exports constituted only a very small percentage of 0.08% of exports in the third quarter of 2022, according to data from the Central Bank of Iraq.

Given the dominance of the oil sector in the Iraqi economy, and its failure to serve economic diversification, in addition to the diversification and growth of imports, especially consumer goods, to constitute the largest growth rate of 22.81% in the third quarter of 2022 compared to the third quarter of 2021, the Iraqi economy has become unilateral, dependent, volatile, and unsustainable (weak economy), ranking 15th out of 17 countries for the period (2018-2021) in the Arab Economic Competitiveness Report issued by the Arab Monetary Fund.

Where does the Iraqi dinar's strength come from?

In general, the fundamental basis for a currency's strength comes from the strength of the economy. The currency derives its strength from the economy, not the other way around.

In other words, a strong economy is capable of producing goods and services at lower costs and with better quality, as demand for it increases, demand for its currency increases, increasing its value and strength, and vice versa.

In other words, a weak economy produces goods and services at higher costs and of lower quality. As demand for it decreases, demand for its currency decreases, decreasing its value and strength.

Given this premise, where does the Iraqi dinar's strength come from, given that the Iraqi economy is weak, as demonstrated above?

The strength of the Iraqi dinar does not come from within the Iraqi economy, as it is fundamentally weak. This is a point that is taken for granted, given the importance of oil to the global economy, the increasing demand for it, and Iraq's possession of large quantities of it, as well as its production and export activities, as evidenced by the oil sector's own indicators, this point has become the most important factor in supporting the Iraqi dinar.

In this context, selling Iraqi oil in US dollars also plays a major role in supporting the Iraqi dinar, given that it is considered the most widely accepted and widespread currency in the global economy, and that the increase in oil production and exports, along with the rise in oil prices means increasing the amount of petrodollars entering the Iraqi economy, increasing demand (artificially created by the Central Bank) for the Iraqi dinar, and increasing its value and strength!

In short, the Iraqi dinar derives its strength from petrodollars, not from the Iraqi economy itself, given the weakness and dependence of the Iraqi economy on oil on the one hand, and the depreciation of Iraqi oil in US dollars on the other.

It can be said that, just as the Iraqi economy is weak due to its unilateralism, dependency, volatility, and unsustainability, the Iraqi dinar is also weak because its value does not stem from itself or its economy, but rather from its connection to oil and the dollar. Its strength is merely an illusion, not a real expression of the Iraqi economy itself.

Oil to Strengthen the Economy

In general, to work toward making the Iraqi dinar a true force derived from the reality of the Iraqi economy, it is necessary to work to transform the role of oil from dominance to service. It is necessary to shift the role of oil from dominance over the economy to service and strengthen it through diversification. It is also necessary to benchmark oil against a basket of global currencies.

The starting point is to use oil to provide infrastructure, given that oil is a public resource and infrastructure represents a public service, there is also a focus on adopting e-government, as it represents a public service, in addition to its role in combating corruption, a problem Iraq occupies at a high level and a major obstacle to the Iraqi economy's recovery.

Providing infrastructure and adopting e-government in all transactions means lower production costs and a smoother business environment, this increases the demand for Iraqi economic products and services, and then for its currency, increasing its value and strength. Here, the Iraqi dinar derives its strength from the strength of the Iraqi economy, making its strength intrinsic and not derived from oil and the dollar, as was previously explained.