Effect of Global Oil Price Volatility and Exchange Rate Policy on Foreign Exchange Reserves in Iraq

Abstract

Purpose: This paper offers simulations and forecasts of the ideal currency reserve measure in light of future shocks to the Iraqi economy due to the downturn in the international price of oil and the global economic shutdown triggered by the Corona pandemic.
 
 Theoretical framework: The Iraqi foreign exchange reserves have entered a cycle of sustained and accelerated degradation in recent years and hit alarming amounts in 2020, affecting Iraq's financial stability compared to other foreign currency reserves. According to figures from the Iraqi Parliament's Financial Commission, the Iraqi fund in the Central Bank of Iraq decreased, following removing the government's second loan by the end of 2020, to $35 billion. The Fitch Ratings Agency, on the other hand, has found that Iraq's plan to slash public sector wages and pension costs will delay the reduction of currency reserves as part of the attempt to lower financial imbalances and relieve financial pressures. However, it will be difficult to enforce and risk exacerbating social disorders. According to Fitch, by the end of August (15% of projected GDP for 2020), cash funding from the Central Bank of Iraq grew to 28.5 billion Iraqi dinars from 14.1 billion Iraqi dinars at the end of May.
 
 Design/methodology/approach: The study uses an analytical approach to show the fluctuations in oil prices and their impact on the fluctuation of oil revenues and the currency-selling window that the Central Bank of Iraq applies to its foreign reserves.
 
 Findings: The systemic problem of worldwide petroleum price drops that provide longer-term estimates to estimate the decrease in petroleum prices on global oil markets explains the quick fall in Iraqi exchange reserve magnitude. Iraq's foreign reserves, mostly from oil exports, fulfill international standards. Iraq's exchange rate policy depends on the Central Bank's direct foreign currency sales. This approach reduces foreign money diversion from Iraq, preventing the central bank from maintaining exchange rate stability.
 
 Research, Practical & Social implications: The impact of foreign reserves on national financial stability is becoming more obvious as their function evolves from supplying fundamental transaction needs to fulfilling financial security criteria.
 
 Originality/value: The Iraqi dinar's value must be protected at all costs, hence the Central Bank of Iraq's foreign reserves are crucial. These reserves are affected by oil revenues, the main financier for it, and the window for selling the currency, which is the outlet for leakage from it.