Why Did Iraq Increase Its Investments in US Bonds?

Iraq continues to increase its holdings of US bonds in conjunction with the rise in oil prices and the huge revenues it achieves monthly through a production capacity of 4.8 million barrels per day, thanks to which the country's cash reserves reached about 85 billion dollars.

Iraq's revenues from oil exported during ten months of 2022 amounted to 99 billion, 646 million, 786 thousand and 336 dollars, at a monthly rate of 9 billion, 964 million, 678 thousand and 633 dollars, according to the Iraqi State Organization for Marketing of Oil (SOMO) on November 21, 2022.

Accordingly, several questions have arisen about the reasons for Iraq's increase in its balance of US bonds and to what extent this can be reflected in the country's economy, which has been suffering from a deteriorating reality since the US occupation in 2003.

Treasury bonds are a debt instrument used by governments and companies to finance their spending and projects and close their budget deficits and provide a guaranteed return for investors against limited risk.

 

Fourth Rank

Not a month goes by without Iraq buying US bonds worth approximately $1.6 billion per month, which raised it two places in the sequence of countries with the largest bondholders to reach 32nd place out of 38 countries, according to the US Treasury Department on November 25, 2022.

The US Department added in a statement that "Iraq's holdings of these bonds amounted to $36.9 billion for September 2022, up by 3.65 percent from the previous August, and up by 105 percent from the same month of 2021."

It pointed out that "Iraq came the fourth largest Arab country after Saudi Arabia, Kuwait, and the UAE, while Japan came at the top of the countries with the most holders of these bonds, followed by China second and the United Kingdom third," noting that "the total bonds for the countries of the world amounted to 7 trillion and 296 billion dollars."

This data means that during the first nine months of 2022, Iraq bought bonds worth $14.4 billion.

Looking at the accounts of the Iraqi state until September, Iraq's total revenues during the 9 months of the year amounted to about $84 billion, while its expenses and expenses were about $53 billion, which means that more than 46 percent of Iraq's financial surplus was transferred to US bonds.

What tempted Iraq to convert about half of its fiscal surplus into US bonds is the large interest rate approved by the US Federal Reserve during the last months of 2022, as well as the continuous hike, which is expected to reach the end of this year by more than 4 percent.

In light of this, Iraq can receive interest a year from now on the value of its current bonds worth about $1.5 billion, while its interest will rise further with the purchase of more bonds in the coming months as oil prices stabilize above $70 a barrel.

While Iraq bought US bonds with about half of its financial surplus, the other half is distributed between buying gold, which since the beginning of 2022 amounted to about 34 tons, bringing its reserves to more than 130 tons after it did not exceed 96 tons at the beginning of this year.

The average price of a ton of gold globally during 2022 is about $50 million, and this means that Iraq bought gold for $1.7 billion and bonds for $14.4 billion, meaning that it invested in both sides with more than $16 billion, which means converting more than 50 percent of its financial surplus into gold and US bonds.

 

Three Reasons

The Central Bank of Iraq attributed its tendency to raise its balance of US bonds to increase cash reserves, while the economic and financial adviser to the Iraqi Prime Minister, Mazhar Mohammad Saleh, announced that Iraq obtained a high-interest rate of up to 4 percent in the possession of those bonds.

The state-run Al-Sabah newspaper on November 24 quoted Saleh as saying that "the foreign investment consists of Iraq's official reserves, most of which are the reserves of the Central Bank and part of which are the government's reserves.

"This is very similar to sovereign wealth funds, especially central bank reserves, and this progress is reflected in the stable purchasing power of the dinar, as these reserves are usually invested in debt instruments, including debt instruments of the United States government.

"It carries a high-interest rate of nearly 4 percent, is guaranteed and highly rated as part of an old policy to maximize returns through optimal management of foreign investments."

On the same level, Deputy Governor of the Central Bank Ammar Hamad said that "the increase in bond holdings is due to a number of reasons, foremost of which is the significant increase in the reserves of the Central Bank, as well as the expansion of crude oil export revenues, in addition to the absence of a budget law for 2022, and thus these matters strengthened the bank's foreign reserves."

He added, "The mechanism of accumulating dollar returns requires that all oil revenues be deposited to the central bank's account with the US Federal Reserve in order to ensure the continued investment of these returns."

Hamdan pointed out that "US Treasury bonds have almost zero risks, and are the most liquid instrument compared to debt instruments in the world, so the Central Bank is keen to keep a large part of these securities in light of expectations that the (Iraq Finance) Budget Law for 2023 will be approved soon, as this results in the Central Bank facing greater demands to buy the dollar.

 

Economic Problems

Regarding the extent to which Iraq's increase in US bonds reflects on its economic reality, economist Saleh al-Hammashi said, "Iraq had two directions, buying gold and US bonds, but stopped the first and then moved towards the second option, and bought in 2017 US bonds from the UAE in exchange for gold."

Al-Hammashi explained to  Al-Estiklal that "Iraq believes that financial strength is enhanced by US bonds, and although the approach is correct, but its increase is not reflected on the economic situation of the country directly, it gives financial strength, but it does not give the economic strength unless there is economic activity."

He stressed the need for "the financial strength that puts Iraq within a good financial center to be translated into economic activity, by dealing with international companies, and for the country to be safer and more secure for businessmen, and for the Iraqi currency to be strong, because Iraq does not suffer from a financial problem, but from an economic problem."

The Iraqi expert explained that "the difference between finance and the economy is very large, as the first is money, bonds, and gold, but the economy is a group of industrial, commercial, agricultural and service activities, and these activities need money, and Iraq owns that."

He pointed out that "the presence of US bonds strengthens Iraq because it is making great strides to build a strong and solid economy if it can draw an applicable and measurable economic plan within specific periods of time, but its survival without an economic identity does not make these bonds, financial abundance, and strong financial position achieve something economical."

The expert stressed that "the Central Bank of Iraq has a financial reserve of up to 85 billion dollars, and may rise to 90 billion in light of the financial abundance due to high oil prices, in addition to the presence of more than 130 thousand tons of gold, and these are all funds that enhance the strength of the Iraqi dinar and monetary policy, but it has not been reflected so far on the Iraqi economy."