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Iraq’s Urgent Need for a US Dollar Sovereign Fund

Establishment of a Sovereign Fund: A Strategic Necessity for Iraq’s Economic Stability

As Iraq continues to grapple with significant economic challenges, increasing calls have emerged for the establishment of a sovereign fund denominated in US dollars. This fund would be utilized to invest oil revenues in various economic and development projects aimed at enhancing the nation’s financial stability.

The Case for a Sovereign Fund

Mustafa Akram Hantoush, a researcher specializing in financial and banking affairs, underscored the imperative for such a fund. He noted its potential role in fostering financial stability and stimulating investments within the country. Currently, Iraq operates several local financial entities, such as the Development Fund, Retirement and Social Security Funds, and the Education Fund. However, these funds are confined to the Iraqi dinar and are largely inactive due to their limitations in engaging with international investment opportunities.

The Currency Dilemma

Hantoush elaborated on the limitations posed by the Iraqi dinar, which serves primarily as an internal currency and is not suitable for foreign transactions or large-scale investments. This situation renders existing funds ineffective in generating profits that could positively impact the economy. A sovereign fund denominated in US dollars, utilizing oil revenues for investment rather than allowing them to remain stagnant in the U.S. Federal Reserve, is deemed essential. This fund has the potential to facilitate secure investments that yield substantial profits, particularly in the oil and gas sectors, thereby contributing to financial stability and supporting the national economy.

An efficiently managed sovereign fund could ensure strategic investments that not only bolster government revenues but also reduce reliance on the volatility of oil prices. A portion of the returns could be directed toward critical development projects, including infrastructure, energy, and technology, thereby enhancing Iraq’s financial independence in the long run.

Learning from Global Experiences

Global experts point to successful international examples of sovereign funds, such as Norway’s sovereign wealth fund, recognized as one of the largest investment funds worldwide. This fund skillfully invests oil revenues across a diversified portfolio to guarantee long-term financial sustainability for future generations. Similarly, Gulf nations like Saudi Arabia, the UAE, and Qatar have developed substantial sovereign funds aimed at diversifying their economies and reducing dependence on oil revenue.

However, Iraq faces significant hurdles that could impede the establishment of a sovereign fund. These challenges include political instability, which has detrimental effects on major economic decisions, alongside administrative corruption that could hinder effective fund management and investment. Legal and institutional challenges related to governance standards, as well as fluctuations in oil prices impacting the flow of financial returns, further complicate the situation.

Potential Positive Impacts

Economists assert that establishing a sovereign fund could help diminish reliance on international aid and external loans, potentially stabilizing the Iraqi dinar and mitigating inflation. Furthermore, allocating the fund’s resources to support infrastructure, housing, healthcare, and education projects — in lieu of total dependence on the general budget — could promote both social and economic stability.

On the flip side, the Iraqi government might encounter political or partisan resistance against the fund’s establishment, stemming from concerns that it could be exploited for non-economic purposes or become entangled in political strife that affects its operational independence. Nonetheless, the successful experiences of other nations serve as vital evidence of the importance of such funds in achieving financial sustainability, reinforcing the urgency for Iraq to take decisive action in this area.

The creation of a sovereign fund in US dollars is poised to be a strategic move that can spur long-term economic stability for Iraq by channeling oil revenues into initiatives that foster growth and sustainable development. As discussions about this fund continue to gain traction, the principal question remains: Does the Iraqi government possess the political and administrative fortitude necessary to actualize this crucial endeavor?

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