The Iraqi Dinar Paradox: Illusory Strength and Unstoppable Prices

The Iraqi Dinar Paradox: Illusory Strength and Unstoppable Prices

2025-06-27 03:44

Every time the value of the Iraqi dinar declines against the US dollar, Iraqis face a rise in the prices of goods and services. However, prices do not decrease when the opposite occurs. In other words, the value of the dinar against the dollar has been rising for some time in the parallel market, with the price of 1 US dollar often falling to 1,390 Iraqi dinars, after previously exceeding 1,500. Yet, the markets have not witnessed a decrease in prices. So why have prices remained the same in the market and not decreased despite the significant decline in the price of the dollar?

According to experts and economic studies, this reflects a common economic phenomenon known as “price rigidity” or “price stickiness.” This means that prices tend to rise easily when costs rise (such as a decline in the value of the local currency), but they do not fall as easily when costs fall (such as an improvement in the value of the local currency).

This phenomenon is due to several factors in Iraq and many other import-dependent economies, including inventory and import costs. This is represented by current inventory, as traders hold stocks of goods imported when the dollar was higher.

To avoid loss, they prefer to sell this stock at prices that cover their original costs. It takes some time for this stock to be exhausted and traders start importing new goods at better exchange rates;

Import operations and the so-called “supply chains” in commercial transactions are not immediate, and goods may take weeks or even months to reach Iraqi markets from their country of origin, meaning that the impact of an improved exchange rate may take time to be felt on imported goods.

Another major factor that keeps commodity prices stable despite the appreciation of the local currency against the dollar is the greed of merchants and their market dominance. In some cases, merchants take advantage of the rising dollar to raise prices. When the dollar declines, they have little incentive to lower prices, especially if they have market control or the intense competition that would otherwise motivate them to do so is absent.

Traders may resort to “fixing” prices at a certain level to achieve maximum profit.

If there is a continued expectation that prices will rise in the future due to inflation, for example, traders tend not to lower their prices even when the exchange rate improves, for fear that the dollar will rise again and they will lose.

Inflation expectations also affect consumer behavior, who may accept higher prices believing they will not fall or rise further.

Even if the dollar declines, there are other cost factors that may not decrease or may increase, such as internal transportation costs, rent, labor wages, taxes, and customs duties. These costs can limit merchants’ ability to lower prices.

Weak infrastructure and corruption add additional costs to goods and services, regardless of the dollar exchange rate. The lack of effective government price controls can allow merchants to maintain high prices even when the exchange rate improves.

When prices rise sharply due to a devaluation, consumers and society are affected by this shock; even when conditions improve, the so-called “memory of high prices” may persist, making it easier to accept higher prices than lower ones.

In order for commodity prices to fall as the value of the dinar improves, it requires

Long-term stability of the exchange rate, not just temporary fluctuations, increased competition in the market, which will push traders to lower prices, and effective government oversight, which will control and monitor prices and prevent monopolies.

Effective factors include supporting local production to reduce dependence on imports and mitigate the impact of exchange rate fluctuations, and stable macroeconomic policies to enhance confidence in the economy and prevent inflationary expectations.

In short, downward price adjustments are typically slower and less flexible than upward price adjustments, which explains why prices continue to rise even with a relative improvement in the value of the Iraqi dinar.

Boosting local production and manufacturing and reducing imports contributes to maintaining the value of the local currency by increasing exports, reducing demand for foreign currencies, and improving the trade balance. This leads to increased confidence in the local currency and increased demand for it, which strengthens its value.

When a country supports its domestic production and reduces its dependence on imports, it becomes able to export more goods and products. As exports increase and imports decrease, the demand for foreign currencies required to purchase imported goods decreases, leading to an increase in the value of the local currency.

When the value of exports exceeds imports, a trade surplus is achieved, which strengthens the economy and increases the country’s foreign reserves. This economic stability has a positive impact on the value of the currency.

When investors and markets see that a country has a strong and stable economy thanks to local production and manufacturing, they become more willing to invest in that currency, which increases demand for it and maintains its value.

As local production increases, reliance on imported goods and products decreases, reducing pressure on the local currency and supporting its value.

Therefore, boosting local production and manufacturing and reducing imports are essential factors for preserving the value of the local currency and strengthening the national economy. The government must work to revitalize idle factories and establish new ones that produce all local consumption requirements, with the possibility of exporting the surplus. The government must also stimulate agricultural production to achieve self-sufficiency in the local market, eliminating the need for foreign currency to import agricultural products.

shafaq.com