It doubled in two years... Why is Iraq increasing its possession of US Treasury bonds?

Last week ,

the Treasury Department in Washington announced an increase in Iraq's possession of US Treasury bonds by about $1.74 billion in just one month, to reach about $40 billion, which is about double what Baghdad held of these bonds about two years ago.

And the Treasury revealed that Iraq’s possession of these bonds amounted to about $39.717 billion this January, and that Baghdad’s total investment in these bonds increased by the equivalent of 87% compared to the same month of 2021, when Iraq’s investment at that time was approximately $21.2 billion.

The reserves of the Iraqi Central Bank are 100 billion dollars, 40 billion of which are invested in US Treasury bonds (Al-Jazeera)

government position

For his part, Mazhar Muhammad Salih, the economic advisor to the Iraqi Prime Minister, confirms that the most important method of managing the country's official foreign reserves is the ability to provide efficient and safe investment with high-level financial tools, whether in terms of maximizing returns or reducing risks.

And Saleh continues - in his interview with Al-Jazeera Net - that these reserves are distributed among the major currencies in the world, with different relative weights according to the regions of Iraq's trade with the world, in order to avoid the risks of fluctuating exchange rates among currencies and achieve a balanced return at the same time.

Moreover, Salih says, "Iraq relies on international standard investment guides in determining the degree of diversification in currencies and financial instruments, as investments are mostly adopted in sovereign financial instruments, such as short-term US Treasury bonds or European or British government bonds with a high credit rating (AAA) or placing them in deposits." It is fixed with the first-class banks in the world in proportions and amounts to avoid exposure to legal risks and so on.

Saleh: The Investment Department of the Iraqi Central Bank is legally responsible for managing the investment portfolio (Al-Jazeera)

What are the reasons for investing in bonds?

Regarding the reason for Iraq's investment in US bonds, Salih asserts that Iraq's oil revenues are primarily denominated in dollars due to the nature of the oil market, pointing out that because Iraqi oil exports dominate total exports in the current account of the country's balance of payments, oil revenues are according to that dollar-based. composition, as he put it.

There are other reasons for increasing the volume of investment in US Treasury bonds, according to Saleh, who added that with the increase in the value of the country's foreign exchange reserves during the last twenty months from a minimum of $50 billion to a large reserve that has reached about 100 billion now, the share of investment in US Treasury bonds has increased. It increased automatically due to the high weight of the dollar and the interest rate that Iraq gets, which amounted to about 4%.

As for the Deputy Governor of the Central Bank, Ammar Hamad, the reason for the increase in Iraq’s possession of bonds is due to a number of reasons, as the large increase in the central bank’s reserves and the expansion of the volume of oil revenues with the lack of legislation for the 2022 budget, all of these factors combined have strengthened the country’s foreign reserves.

Hamad added - in his speech to the government newspaper Al-Sabah - that the accumulation of Iraqi revenues from the dollar requires Iraq to deposit its oil revenues in its central bank account with the US Federal Reserve, in order to ensure the investment of these revenues, as he put it.

Al-Marsoumi: The high credit rating and the high interest rate encouraged investment in US bonds (Al-Jazeera)

Many advantages

The economist Nabil Al-Marsoumi goes in this direction, who added that Iraq has become the fourth largest Arab country in terms of the value of US bonds in his possession, pointing out that the upward trend of Iraq's possession and investment in these bonds during the past year is due to the increase in the Iraqi central cash reserves, and therefore there is an economic feasibility of Buying these bonds due to their high credit rating, with an increase in the interest rate granted to those who own these bonds from 1% to 4% now.

Speaking to Al-Jazeera Net, he explained that there are 3 types of US Treasury bonds, represented by short-term ones that extend for less than one year, others that extend for more than one year, and long-term bonds that extend for 10 years, pointing out that high interest rates on the dollar encouraged many Of the countries to invest in these bonds, including Iraq.

Meanwhile, Al-Marsoumi says, "Iraq's investment in treasury bonds is a diversification of the investment portfolio while obtaining additional returns through the liquidation of these bonds, especially short-term ones, meaning selling them and converting them into dollars in order to finance the state budget in the event of financial hardship."

Not only that, as financial expert Mahmoud Dagher adds other reasons for Iraq's increased possession of these bonds, indicating that a country like Iraq has cash reserves in dollars at a rate ranging between 80 and 85% of the total volume of reserves, and that US Treasury bonds enjoy large returns compared to other international ones such as English. And French, in addition to the preference of American bonds in terms of the possibility of liquidating them and converting them into cash in time of need.

Dagher: Approximately 85% of Iraq's reserves are denominated in dollars (Al-Jazeera)

What are the risks?

Regarding the risks of Iraq investing in these bonds in the event of a global recession, Al-Marsoumi does not see any risks as a result, indicating that no risks in investing in treasury bonds can be linked with the US public debt, which is considered an internal debt of the United States invested in these same US bonds, as he put it. .

In an interview with Al-Jazeera Net, Al-Marsoumi says, "The Iraqi government believes that investing in US bonds is the best way to save money in the face of claims by international creditors in the private sector other than the creditors of the Paris Club."

This agrees with Dagher's proposition, as he adds, "Despite some politicians' warning of an increase in Iraq's possession of US Treasury bonds, there are no risks as a result of that, as Iraq does not pose a threat to US national security, and therefore, there is no possibility of freezing Iraqi assets."

On this, the economic advisor to the Prime Minister says that managing Iraqi investments takes place according to maps and foundations through which the country's financial interests are preserved in the best way, indicating that this task falls to the Investments Department of the Iraqi Central Bank, which is the central department legally responsible for managing the investment portfolio in foreign currency, according to his expression.