Some time back, we wrote about some investors opting to play a high risk game, gambling on a long-term bet on the Iraqi dinar. The idea behind the investors’ choice was that Iraq’s government would stabilize at some future time, and that’s when Iraq’s vast oil reserves could make for a radical turn of events. In the meantime, however, Iraqis themselves are ambivalent regarding the dinar.
In September, Iraq’s oil exports hit 2.6 million barrels per day. That’s a 30-year peak, and if Iraq reaches 6 million bpd by 2017, they will be on par with Saudi Arabia’s current numbers. Statistics like these underlie the dinar bulls’ thinking.
It isn’t a niche trend either; the Las Vegas-based Dinar Trade sells hundreds of thousands of dollars’ worth of dinars on a daily basis. The company ships dinar notes to customers around the world, since it is not a currency openly traded by banks outside of Iraq.
Over in Baghdad, though, Iraqis tend to convert any dinars into hard currency, and nearly all major business transactions are in U.S. dollars.
Reuters reports:
“We have no trust in the Iraqi dinar – we feel afraid to save it. We trust the dollar more. The dollar does not go up and down, it is fixed,” said housewife and mother-of-two Eman Saadeldine.
Back in the 1980s, one dinar could buy $3. But then came the Gulf War, and by the end of 1995, things had reversed to the point where $1 could buy almost 3,000 dinars. Following the warfare in 2003, central bank policy ensured the dinar didn’t collapse completely. Interestingly, despite Iraq’s oil production expanding rapidly over the past few years, the dinar has not appreciated significantly since 2009.
International sanctions on Iran and Syria haven’t helped; Iraqi traders continue to buy dollars and sell them to residential and business customers in both countries. This year, the dinar dropped to 1,280 on the open market. Subsequently, two state banks and several private lenders were authorized to sell dollars, a move that helped adjust the exchange rate to its present average of 1,200.
The large numerical values on dinar notes present another unattractive factor; the biggest denomination is just 25,000 dinars. Iraqi deals are frequently cash-based, and the low value of the dinar makes for physical inconveniences.
Some believe the Iraqi central bank has been musing over a redenomination plan in order to boost public trust in the dinar, but any plans that might have existed have been indefinitely shelved. In 2011, the Iraqi government communicated to the IMF that it means to keep the dinar at its present exchange rate for the foreseeable future.
That doesn’t mean it can’t improve drastically in the future, though. Indeed, according to the IMF, this year’s 0.2 percent budget surplus of GDP could shoot up to 12.1 percent in 2017. Deputy central bank governor Mudher Kasim thinks it is highly likely that a redenomination, as well as significant appreciation of the dinar value, will come about sooner rather than later, perhaps as soon as 2014.
The central bank hopes to establish parity between the dinar and the U.S. dollar, making 1 dinar equal to $1 over time. In fact, Reuters quotes a Baghdad currency exchange shop owner whose beliefs reflect popular sentiment on the subject:
“We wish the dinar’s value would go back to what it was like before, when it used to equal $3 in the 1970s and even in the 1980s,” he [Ahmed Abdul-Ridha] said.
“I expect that day will come. Why not? What we are going through is an abnormal condition…We are an oil country.”
