Al-Bouri: “The Exchange Rate Is Not the Problem, but the Result of a Larger Problem”

Banking expert Noaman Al-Bouri wrote an article in which he said:

When the gap between the official exchange rate and the dollar price in the parallel market exceeds 40%, it is natural for demand for the dollar to increase. Ultimately, the dollar is a commodity with a price and, like other commodities, is subject to the laws of supply and demand.

Addressing the Exchange Rate Starts with Public Finances

It is a mistake to view the exchange rate solely as a monetary problem that can be resolved through banking or administrative decisions. To a large extent, the exchange rate reflects the country’s fiscal and economic situation.

When government expenditure exceeds revenues, a deficit emerges that must be financed in one way or another. If public spending continues to rise without corresponding real growth in revenues and productive sources, pressure on resources—and particularly on foreign currency—increases.

In an economy that relies heavily on oil revenues, the issue becomes even more sensitive.

Government spending translates into demand for goods and services, a large proportion of which are imported. Ultimately, this means increased demand for foreign currencies.

This is how the cycle begins:

Fiscal deficit → high government spending → increased demand for goods and imports → increased demand for dollars → pressure on the foreign exchange market → widening gap between the official and parallel exchange rates.

Therefore, attempting to address the exchange rate alone, without addressing the deficit that fuels demand, is like treating the symptom without addressing the underlying cause.

When dollars are available at an official rate significantly below their actual market value, the difference itself becomes an economic incentive.

The wider the gap, the greater the potential benefit from obtaining dollars at the official rate, increasing incentives for speculation and the misallocation of foreign currency.

At that point, exchange-rate policy shifts from being a tool for achieving stability to becoming a source of economic distortions.

Therefore, continuing to defend an official exchange rate that is inconsistent with market fundamentals may ultimately be more costly than acknowledging the problem and addressing it gradually.

The Real Starting Point: Controlling the Deficit

Monetary policy cannot indefinitely correct the mistakes of fiscal policy.

The Central Bank can use various monetary tools to ease pressure on the currency, but it cannot, on its own, address a persistent fiscal deficit.

Therefore, any serious strategy for exchange-rate stability must be part of an integrated economic policy that brings together fiscal, monetary, and trade policies.

What Do We Need?

First, we need genuine transparency in public finances and a clear understanding of the actual level of revenues, expenditures, and the fiscal deficit.

We then need to establish a clear ceiling on government spending that is consistent with sustainable revenues, rather than optimistic expectations regarding oil prices or production.

We also need to direct spending toward investment and production instead of continuing to expand current expenditure.

Only then can exchange-rate policy become part of a sustainable solution rather than a continuous attempt to treat the symptoms of the problem.

Currency stability begins with fiscal stability.