Fluctuations of the Real Exchange Rate and the Structure of the Iraqi Economy

Abstract

This paper analyzes how a boom in the oil sector affects the relative prices of non-tradable goods compared to tradable goods, the real exchange rate, and the competitiveness of Iraq’s broader economy. As the oil sector booms, Iraq’s currency appreciates, which reduces the competitiveness of the country’s traditional export sectors. This thesis investigates the presence of Dutch Disease in Iraq, an area previously unexplored. It evaluates the impact of growing oil revenues on the non-oil sectors of the economy and provides empirical evidence showing a contraction in the tradable goods sector and an appreciation of the real exchange rate. The findings suggest that Iraq experienced symptoms of Dutch Disease, including real exchange rate appreciation, a shrinking tradable goods sector, and an expanding non-tradable goods sector. Ultimately, the appreciation of the real exchange rate is responsible for shifting Iraq‘s economy from manufacturing and agriculture (tradable sectors) to construction and services (non-tradable sectors).