Iraq finmin expects dinar to strengthen 13 pct

Iraq finmin expects dinar to strengthen 13 pct
12/12/2006
Source: Reuters AlertNet

Iraq's government expects the dinar to strengthen by 13 percent against the dollar by early 2007 after raising interest rates to limit the use of dollars in the economy and stem inflation, the country's finance minister said.

Minister Bayan Jabor told Reuters on Monday that the government has targeted an exchange rate to reach 1,260 dinars to the dollar in the first three months of 2007 from the current level of 1,500 to the dollar.

The 2007 $41 billion budget assumes an exchange rate of 1,260 dinars to the dollar, he said, adding the cabinet would discuss the draft budget on Saturday before hopefully sending it to parliament next week.

"There is an expected increase in the value of the dinar. The exchange rate is expected to drop from 1,500 dinars to the dollar to 1,260 in early 2007," he said in an interview.

"We will calculate the budget based on 1,260 dinars to the dollar and based on 50 dollars per barrel (of oil) and production of 1.7 million barrels per day.

"The central bank has started increasing the interest rate from 12 percent and it has now reached 16 percent."

Jabor said there were no immediate plans to raise interest rates further. The central bank increased its main interest rate to 16 percent from 12 percent on Nov. 8, according to the bank's Web site.

He said the aim of raising interest rates was to strengthen the dinar to fight dollarisation -- the use of dollars on a daily basis alongside the local dinar currency -- to stem high inflation and boost Iraqis' confidence in the domestic currency.

"It is to fight dollarisation. Every economy that depends on the dollar is considered weak," he said.

"Now I can say that Iraqis should use dinars instead of dollars. When we increase the value of the dinar it will help ease inflation, which is now at 56 percent. We expect inflation will decrease," he said.

Iraq's inflation rate hit 76.6 percent in August.

But sectarian violence is claiming the lives of more than 100 Iraqis a day and threatening to push the country into civil war. The daily violence has scared off foreign investments in the oil rich country.

A recent UN report said there was growing unemployment and poverty rates in Iraq. Corruption is endemic and state owned industries are inefficient. Oil is the main source of revenues but oil sector is suffering from years of mismanagement and violence.

"There is also a psychological factor -- Iraqis need to trust their currency when it is stable or strengthening."

The International Monetary Fund, which has backed Baghdad with a $685 million standby credit agreement, has also warned that rising inflation could undermine economic well-being and hinder the goal of improving the welfare of ordinary Iraqis.

Another problem facing the government is the high rate of unemployment, mainly among the young. Officials say the unemployment rate is between 30 and 40 percent.

Jabor said he was not worried by possible negative consequences of strengthening the dinar because the Central Bank had enough reserves to support the dinar.

"The dinar is strong -- the central bank is one of the best central banks in the region except for those in the Gulf. We have reserves of $15 billion in foreign currency other than gold, and it is only to support the dinar."






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