Will the Dinar be Revaluated?
By Joseph CafarielloWednesday, April 24th, 2013
For a nation that has only recently come out of decades of
dictatorship, war, and mismanagement, Iraqâ€™s currencyâ€”the dinarâ€”has been
Perhaps too stable. Something is going on with the Iraqi dinar.
(Chart shows dinar per $1 USD. Descending plot lines indicate dinar strength.)
gradual strengthening from 2007 to 2009, the Iraqi government decided
it wanted a weaker dinar in early 2010, and the currency has remained
remarkably stable ever since.
A couple of months ago, however,
the currency abruptly strengthened against the USD, as can be seen by
the sharp drop at the far right. Immediately, the Central Bank of Iraq
scrambled to weaken the dinar back to 2012 target levels.
Isnâ€™t it supposed to keep strengthening? After all, Iraq has the
worldâ€™s second largest oil reserves. What ever happened to that highly
anticipated revaluation? Is the CBI deliberately weakening its own
money? CBI Control
One short sentence
answers all these questions: the Central Bank of Iraq regulates the
flow of money through controlled auctions.
Needless to say,
this is not normal. In most other countries, money can be easily
exchanged into a number of currencies at the will and whim of any
citizen. The exchange rates are allowed to move freely according to
the forces of supply and demand, interest rates, etc.
According to Middle East e-paper Al-Monitor
day since 2004, the CBI has held an auction through which hard
currency is sold to banks, companies and traders in exchange for
evidence of import and transaction receipts. The auctions aim to
prevent market speculation and stabilize the exchange rate of Iraqi
dinars to the US dollar.â€ť
The purpose of these auctions
is to control the IQD:USD exchange rate by controlling the amount of
USD circulating in Iraq. At these auctions, USD is issued exclusively
to banks, companies and traders for the purpose of conducting business
transactions with foreign entities (ie: importers, securities traders,
By controlling the amount of USD available in Iraq,
the Iraqi government controls the value of the USD relative to its own
currency, thereby stabilizing the dinar. It is as close as you can
get to an outright currency peg. Cracking Down on Auction Abuses
Things were going really great for years, until evidence turned up
that some buyers at these auctions were falsifying their transaction
receipts, enabling them to purchase more USD than their business
activity legitimately entitled them to have.
believes much of the excess dollars purchased were smuggled across the
border into Iran, which has a shortage of hard international currency
due to sanctions. Money laundering and black market demand account for
the remainder of auction abuses.
When it came to light earlier
this year that more USD had made it into circulation than was
officially thought, the value of the USD relative to the dinar abruptly
dropped and the dinar rose.
ratio dictates that the more supply you have of something, the cheaper
its value. More USD in circulation than previously thought meant a
cheaper USD, which meant a stronger dinar. Hence the sudden inverted
spike at the right of the chart.
Following the recent arrest of
the CBIâ€™s former governor, Sinan al-Shabibi, the CBI has introduced
additional auction controls, as Al-Monitor
CBI prohibited any bank or company with capital of less than $400,000
from taking part in the currency auction. Additionally, all
participants had to submit their [transaction receipts] to the criminal
division in the Ministry of Interior, the economic crime unit and the
money-laundering division of the CBI for approval.â€ť
Reducing the number of buyers at the auctions meant reducing the amount
of USD making it into circulation, strengthening the USD relative to
the Iraqi dinar, and weakening the dinar back to that desired 2012
target level.Anger Over Weakening Dinar
Iraqi citizens and businesses who do not have dealings with foreign
entities are understandably angered by CBI controls aimed at keeping
the dinar weak. A weak currency means citizens and businesses need to
pay more for goods and services, especially since so many goods are
still being imported from abroad.
Iraqi parliamentâ€™s Amin Abbas stressed to Al-Monitor
that the CBI must take â€śfull responsibility for the fall of the â€¦
Iraqi dinar â€¦ because of its restrictive measures in granting permits
to exchange companies.â€ť And Mohammed Khalil, an official on Iraqâ€™s
Economic and Investment Committee, accused the CBI of deliberately
â€śhinder[ing] the flow of US dollars into the market.â€ť
Others are pinning the blame on Iraqi banks, as Al-Monitor
al-Yasiri said some banks have stopped selling dollars to regular
customers and instead have been selling them to exchange companies.
This has prompted Iraqis to buy dollars from the exchange companies at
prices favorable to the companies. The exchanges are not subject to
And Iranian involvement is still
suspected by Ahmed al-Alwani, head of the Iraqi parliamentâ€™s economic
committee, who believes Iran is supplying Iraqi partners with false
trade receipts in order to obtain USD from the auctions.
Ahmed Bureihi, a former senior official at the CBI, denied such
accusations. â€śIran has nothing to do with the increased exchange
rate,â€ť he told Al-Monitor
. â€śThe CBI sells foreign currency to Iraqi customers to be used in funding trade transactions outside the country.â€ť
â€śThere are Iraqi traders who defraud the CBI and provide counterfeit
documents of virtual imports to Iraq. However â€¦ this has nothing to do
with political issues.â€ť Oil Revenues Spent
For its part, the government has a simple explanation for the dinarâ€™s
weaker value back to 2012 levels: the country spent it down.
former senior official at the CBI [Bureihi] said the rise is linked to
increased government revenue from oil sales, leading to an increase in
government spending,â€ť Al-Monitor
then describes a very logical chain reaction that stems from these
increasing oil revenues, which really is a bona fide explanation. â€śOil
revenue increased, which in turn increased government spending.â€ť
increase in government spending means higher per-capita income. [When]
spending increases, there is an increased need for importing goods.
Providing these goods requires an increased demand for foreign
currency, which led to the increased exchange rate [for USD].â€ť
On the dinarâ€™s side of that equation, as more oil is exported, more
revenue is generated, and the nation becomes wealthier â€śper capitaâ€ť.
Enabled by this increased wealth, the government starts funding sorely
needed rebuilding and expansion projects on infrastructure, energy,
education, health care, and industry. In so doing, it pumps more of
its local currency into circulation, which in turn weakens it.
This is a valid explanation for the stronger USD and weaker IQD.
However, what the CBI is reluctant to admit is that apart from these
increased oil revenues, the government is controlling the dinarâ€™s
exchange rate by controlling the amount of USD in circulation via its
It will only let into the economy the same
amount of USD that is leaving the country. â€śX-amountâ€ť pumped in equals
â€śX-amountâ€ť wired out. The balance of USD in circulation stays
unchanged, and thus the exchange rate stays the same.
(Actually, the CBI does have to pump in very slightly more USD than is
going out of the country in order to apply upward lift to the dinar as a
counter to the downward push on the dinar exerted by the increased
spending described earlier. Spending pushes the dinar down, USD
auctions lift the dinar up, cancelling each other out to keep the
exchange rate flat and steady.) What About the Revaluation?
But what ever happened to that dinar revaluation everyone has been
expecting? Even I wrote about it a couple months back (Dinar
All over the web you will find plenty of investors
who expect the Iraqi government will be forced to revalue its currency
upward. Iraq has the worldâ€™s second largest oil reserves, and it is
rapidly increasing its production and exports. The International Energy
Agency recently projected Iraq's oil output to more than double in the
So the revenue is there. Unfortunately, so is
the spending. Remember, Iraq is still rebuilding from decades of
dictatorship, war, and mismanagement. The economy is in shambles, and
social services are appalling.
Any money coming in through oil exports is quickly being spent on reconstruction and industry, not to mention its debt burden.
This is why the CBI is going to such great lengths to control the
amount of USD in circulation through auctions. It wants to keep the
dinar cheap. Not too cheap so as to introduce hyper inflation. But
cheap enough to maximize the value of its import income and get as much
construction and labor for its money as it can.
What if it
takes another 5 or 10 years for that revaluation to come? Might there
be better returns elsewhere? Investors have to weigh the pros and cons
and make their own investment choices.
If one still believes
the global economy will once again run full steam ahead, then metals
such as copper, iron, and steel will be in great demand, as will
If one still believes the global credit crises are not
over, then precious metals will also be in demand, such as gold and
silver. Who knows, perhaps this recent pull-back is a good entry point;
no one knows for sure.
And there is always the stock market, which is remarkably resilient given the Federal Reserveâ€™s easy money policy. Wealth Daily
provides valuable trading information to help you make the right choices for you.
Perhaps the most crucial variable in any investment formula is time.
You can have a sure-fire bet in a stock, gold, or even the Iraqi dinar.
But how much time will you be waiting for it to pay off? Could you
score better returns elsewhere over that same period of time?
Joseph Cafariello LINK