Hard currencies are still preferred by the Iraqis for many transactions
* However some foreign investors find long-term chance
* External, budget excesses could ultimately improve dinar
* For now, central bank likes to keep currency unchanged
* Any big appreciation unlikely before two or three years
While dinar currencies have lost its attractions for many Iraqis, some foreign speculators, it still assures big profits. Actually, this difference highlights the uncertainties and fears of investing in the economy of Iraq as the country that has recently recovered from a political as well as economical turmoil.
Dinar bull’s logic is simple and straightforward. The oil exports of Iraq increased to 2.6 million barrels per day or BPD in September, which is the highest level of the country in last three decades. Therefore, the country aims to hit 6 million BPD by 2017. This figure would take it near to Saudi Arabia's present stage.
Even if Iraq will need to face some more unbalanced politics, several militant violence and bureaucratic incompetence, which can prevent that target from being reached, the country can still reach on the threshold of a massive growth of oil production that will completely change its economy.
Introduction of latest oil revenue could provide Iraq huge external surpluses. These surpluses will augment the state finances by late this decade - the typical method for a powerful economy.
Hassnain Ali Agha, president of Dinar Trade, a U.S. dealer of exotic currencies said that as far as their investors were concerned, when they bought Iraqi dinars they knew it was a long-term investment. He also added that it normally takes a long time for a country to reconstruct itself.
Online dealers of banknotes like Dinar Trade are the only way to invest in the currency for most of the foreign traders. According to the Las Vegas-based company it sells to the extent of hundreds of thousands of dollars worth of dinars daily. The company also sells shipping dinar notes to the thousands of customers in the US and other countries as well.
Agha said that since the birth of his company in 2004, there had been extreme demand for dinars, because of great hope about Iraq's oil prosperity.
However, Iraqis, especially the inhabitants of Baghdad themselves are not convinced with these growth of oil production. Many Iraqis accept the opportunities to transfer their dinars into hard currency. They prefer to conduct all but small day-to-day transactions in U.S. dollars.
Housewife and mother-of-two Eman Saadeldine said it clearly that they don’t have any faith on Iraqi dinars, rather they can trust on US dollars which seems more stable and secure to trade with.
WILD SWINGS
The Iraqi dinar has tolerated wild swings over the past three decades. In the 1980s, one dinar bought approximately 3 dollar. But unfortunately the economic turmoil on Iraq since the time of the Gulf War in 1991 sent the Iraqi currency into decline, which the government stimulated by printing money. As a result by late 1995, $1 bought as much as 3,000 dinars.
After the invention in the year 2003, the central bank arbitrated in the currency market of Iraq in order to strengthen the dinar. But even after Iraq's oil production has expanded impressively, appreciation is missing for which speculators have been hoping.
In fact, recently the Iraqi dinar has faced descending pressure because of the international economic permits imposed on neighboring countries like Iran and Syria. Iraqi traders hurried to purchase dollars in order to sell on illegally to inhabitants and business companies in those countries, which are eagerly waiting for hard currency.
Another issue that is counted against the dinar investment is the fact that the largest banknote is only 25,000 dinars. In an economical condition where the banking system is primordial and deals are often done in cash, this often makes the currency unappealing to use for the traders.
Eman recalls paying in cash for their new house in the year 2009. She said that if their money had been in dinars, it would have been impossible for them to carry it. It was in dollars and they carried it in a small suitcase.
In order to simplify the financial transactions the central bank has been planning to knock three zeros off the minimal value of banknotes. However, this change may not be able to increase the real value of the Iraqi dinar, because costs would adjust in line with the redenomination. But the experts of economic zone think that it could enhance confidence in the Iraqi currency and hence ultimately increase its value.
However, the cabinet decided to hang up the technically complicated redenomination plan until further notice earlier in this year, since they feel that the economic climate was not suitable for that change.
Iraqi authorities seem satisfied with the current exchange rate, which is the toughest hurdle to dinar appreciation.
In a memorandum to the International Monetary Fund on economic and financial policies for 2011, which was written in March that year, the Iraqi government said it is beneficial to keep the dinar stable.
LONG TERM
On the other hand, in the long term, the economy of Iraq may develop so radically that the Iraqi authorities may feel relax to allow the dinar to rise under the pressure of flows of oil money into the country.
Deputy central bank governor Mudher Kasim said that he anticipated dinar’s redenomination to go forward in the year 2014 or later and by this time the sum of dinar in circulation would have improved considerably, which would make in-cash financial dealings even harder.
The central bank targets to make 1 dinar equals to 1 dollar as the long term, with a perfect blending of redenomination and appreciation. However, it will take more than 3 years because of unsteadiness in the Middle East.
Some financial analysts believe that the development could go further. Kamal al-Basri, research director at the Iraqi Institute for Economic Reforms, an independent research body in Baghdad, said he anticipated the Iraqi currency to remain steady for the next 3 years, but after that it might increase beyond equality against the dollar, which will be the effect of redenomination.
However, Iraqi politics will have to stable in order to make that possible, he said.
Ahmed Abdul-Ridha, the owner of the Baghdad currency exchange shop said the stability of dinar in the past three years was impressive, but it did not assure the long-lasting trade.
They wish the value of dinar would go back to what it was like before, when it used to equal $3 in the 1970s and even in the 1980s, he said.
He believes that his country is going through an abnormal condition and since they an oil country, the situation would definitely change.
Source [Reuters]