The Iraqi government raised the exchange rates of the dollar under the pretext of providing liquidity and filling the shortfall in the budget, but in return this led to a rise in prices in the local market, which led to a decrease in the real incomes of individuals.
The Central Bank of Iraq raised the exchange rates of the dollar to take advantage of the difference in the price of selling the dollar for a barrel of oil from the local currency to fill the budget deficit and provide liquidity, which led to a contraction in the market due to raising imported goods due to the increase in the dollar exchange rate
Depreciation increases the price of imported goods and, if no local substitutes are available, it feeds inflation. For the case of Iraq: (1) oil is the main export and the main source of income for the government, (2) public debt to GDP increased steadily in 2020; (3) official inflation was nil or subdued (but I don't know "real" inflation), while on the other hand for many goods there are no local equivalents so that the impact on prices is guaranteed.
In a nutshell, government budget does not seem to be a "pretext" for depreciation, rather a way of addressing a serious issue. The government could have rised taxes instead, but the effect on income would have likely been similar: you can try to extract taxes from the most well-off only, but the result is not guaranteed; much easier and surer to rise indirect taxes, which affect common people just the same way as a rise in prices due to depreciation. Depreciation is much easier to do and can be superior as it also shrinks imports, easing the external balance current account.
I apologise for exposing abstract dynamics, while many people could be harmed by this policy, at least in the short term.
Dear Fahad
The significant devaluation of the Iraqi dinar in late December 2020 in the amount of 22.67% to the USD was precipitated by plunging net flows in the balance of payments: current account of goods, services, and primary income starting in 2019 and accelerating in 2020 according to IMF data. While there will be an increase in the domestic inflation rate and decline in local real incomes it appears the government was left with little choice. One can debate about the magnitude of the devaluation decision, nevertheless, a dinar devaluation was in order. Liquidity in the foreign exchange rate market would have been drying up before this correction in the currency value. The impact on the government budget is multi-faceted, however, there is credence to the notion that the currency adjustment should have a positive effect on the budget. The empirical outcome of this devaluation action will depend on the J-curve and the long run dynamic response of the Iraq economy.
A budget deficit involves an increase in government dis-saving which is less than fully compensated for by a rise in private sector saving. The consequence is that interest rates rise, in a closed economy.
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