Circumventing the Impact of Public Expenditure on Foreign Currency Sales

April 27, 2025

US dollars are pictured on top of a stack of local currency bank notes in the southern Iraqi city of Nasiriyah in the Dhi Qar province, on December 20, 2020. - A year of economic agony for pandemic-hit and oil-reliant Iraq is drawing to a close, but a draft 2021 budget involving a hefty currency devaluation could bring more pain for citizens. Iraq, which relies on oil sales to finance 90 percent of its budget, projects that its economy has shrunk by 11 percent this year, while poverty doubles to 40 percent of the country's 40 million residents. (Photo by Asaad NIAZI / AFP)

Mohammed Hashem Helou

Government spending is one of the tools used to guide a country’s economic policies, meeting basic needs and fostering economic development. The Iraqi dinar is the currency upon which the Iraqi economy relies in its daily transactions, and the exchange rate is merely an indicator that responds significantly to various influencing factors, including monetary and fiscal ones.

An increase in government spending leads to an expansion of the money supply, resulting in higher prices and, consequently, inflation, which negatively affects the value of the Iraqi dinar and lowers the local currency’s exchange rate. As a result, the Central Bank intervenes through foreign currency sales to absorb excess liquidity, i.e., sterilizing the money supply by selling dollars in exchange for dinars.