< Back to Iraqi Dinar in the News December 11th, 2006

Iraqi dinar builds head of steam amid nation's chaos

The currency nears its peak value since being reissued in 2004. With the state buying to curb inflation, the strength may be temporary.
By Molly Hennessy-Fiske
Times Staff Writer

December 11, 2006

BAGHDAD — An unexpected bright spot has appeared in this war-ravaged Iraqi capital: The national currency is strengthening against the U.S. dollar.

The dinar has appreciated to about 1,400 dinars to the dollar, near its two-year high, triggering a dinar buying frenzy among currency traders.

"I had people call to sell $150,000, $100,000. I had to tell them I didn't have that many dinars," said Alaa al Shemry, deputy manager at the Beirut Exchange Co., where he sat last week, watching a man sell dollars for the blue 5,000-dinar notes adorned with waterfalls and desert fortresses.

Economists and investors say the dinar's rise is temporary and largely driven by the Iraqi Central Bank, which is buying the currency as it seeks to raise interest rates to combat rampant inflation.

But that hasn't stopped currency speculators from seeking to cash in.

A.F. Alhajji, an associate professor of economics at Ohio Northern University who has studied the Iraqi economy for 15 years, received e-mail from Mideast currency speculators urging him to buy Iraqi dinars, similar to messages he got after the dinar was issued in 2004.

Alhajji says he watched teenagers in Jordan and Saudi Arabia respond to the e-mail, buying up the currency.

"They seriously think they can gain money by buying Iraqi dinars. This has become like a fever over there," he said.

And not just over there.

In Danbury, Conn., Jeff Pasquarella is buying billions of Iraqi dinars for customers through his currency trading website, Bet-OnIraq.com, which sells the Iraqi currency "because liberty breeds prosperity." EDinar Financial in Los Angeles and similar companies have popped up from Nevada to Wisconsin.

At Dinar Trade in Brentwood, Tenn. (formerly Bakersfield), sales dropped off during the last few months but picked up again in the last two weeks as many of its 54,000 customers took a renewed interest in the dinar, an employee said. The company expects the dinar to appreciate 10% to 20% in value.

"Picture Iraq as a company selling stock," the website says. "Each Dinar you purchase represents a share in Iraq's bright future."

On Thursday, the last day of business in this largely Muslim country, the dinar was trading at 1,424 against the dollar, according to the central bank. That was its strongest price since March 2004, when it was 1,420.

Some economists are surprised at the dinar's rise, considering that Iraq's economy is still a shambles, with trade and major industries such as agriculture and oil crippled by the ongoing conflict.

Electricity is so sporadic in the capital that the Iraq Stock Exchange — which is preparing to switch from erasable white to electronic boards on the trading floor — can still count on only two hours of power a day.

In late November, three car bombs exploded in markets near the central bank, killing at least 68 people, injuring 111 and destroying 22 businesses, police said.

The dinar's price is determined at streetside foreign exchanges and daily dollar auctions at the central bank. Each weekday except Friday, the Muslim day of prayer, traders from 30 state-run and private banks arrive at the central bank in downtown Baghdad, each bearing an envelope listing the amount of dollars they wish to buy and a bid price. Bank managers confer and set the price.

The central bank is widely believed to be trying to force the exchange rate down to 1,000 dinars per dollar, in line with the Saudi riyal and the Jordanian and Kuwaiti dinars.

Ahmed Salman Jabouri, the deputy central bank governor who oversees the foreign exchange market, said Iraqi banks were buying up dinars, reversing a recent trend.

Under a multiyear agreement with the International Monetary Fund, Iraq is required to increase its dollar reserves and bring inflation down to 15% as part of the nation's reconstruction effort. During the last two years, the bank's dollar reserves about doubled, records show, now totaling about $11 billion, while inflation has leaped this year, Jabouri said.

An IMF report in May showed inflation of 58% during the previous 12 months, compared to 31.7% the year before. Economists and investors put current inflation even higher, at up to 80%.

A Western official in Baghdad said the Iraqi government is doing all it can to fight inflation.

"They're basically meeting their targets," said the official, who requested anonymity. "I think this is actually a good thing for Iraqi consumers."

Most Iraqis receive oil and food subsidies but struggle to pay for cars, computers and other items, said Laith al Abadi, 30, a computer engineer who was exchanging dollars for dinars at the Beirut Exchange Co. last week. Abadi said he imports PCs on the black market to avoid taxes and keep his prices low — $300 to $1,400 for a basic model.

"If something changes, if the market is OK, then I pay taxes," he said.

Investors were more upbeat last week at the stock exchange, where 93 stocks appeared on whiteboards. In a stucco building behind an armed checkpoint and concrete barriers, men fingered prayer beads as they waited for the exchange to open. Some said they are more confident that the central bank can curb inflation as the dinar's value rises.

"It's a sign of stability because you are going to have capital that has fled the country coming back," said Saad Lutfi, 64, a trader who mostly invests in the banking sector, which he said is picking up. "But it's a long-term thing."

Alhajji, the Ohio economist, said Iraqis were following the bank's lead, exchanging dollars for dinars.

"People historically, since the days of Saddam Hussein, saved their money in non-Iraqi currency. Since the U.S. came, it was the U.S. dollar, especially since the military was paying in dollars," he said. Now people believe the economy is improving and will keep buying dinars, he added.

Even with prices rising, U.S. soldiers in the streets and bombs in the markets?

"Sometimes high inflation is a sign that the economy is picking up," Alhajji said. "In Dubai, inflation is rampant, but it is one of the most prosperous places in the world."

But Iraq is no United Arab Emirates. The Dubai skyline is dotted with construction cranes, while Baghdad's high-rises are pocked by mortar rounds. Iraq emerged from Hussein's rule with $125 billion in international debt, pared down to $76 billion, and trade ties weighted heavily in favor of foreign countries, chiefly the U.S.

Add to that the complications of post-colonial currency shifts.

After World War I, when Iraq fell under British rule, the official currency was the Indian rupee, with rates set by the empire. Once Iraq gained independence in 1932, leaders created a national currency board to set exchange rates for the dinar but not shape monetary policy.

Under Hussein, the exchange rate fell from $3.30 per dinar to a low of 3,000 dinars per dollar in 1995 as the government, bedeviled by international embargoes, massively printed old dinar notes, including those emblazoned with the dictator's likeness.

The new central bank was created with U.S. and British oversight in part to help stabilize the dinar. Some say the currency's rise amid the sectarian war is the result of the bank's dysfunctional money management.

"Given their history with money in Iraq, they should never have had a central bank," said professor Steve H. Hanke, co-director of the Institute for Applied Economics and the Study of Business Enterprise at Johns Hopkins University in Baltimore.

He said Iraq should replace the central bank with the currency board it had before or adopt a foreign currency. Ecuador, El Salvador and East Timor have adopted the dollar, he noted, while Montenegro and Kosovo use the euro.

Hanke called the dinar's rise "both very dangerous and the worst of all possible worlds" because it is not curbing inflation.

"This is a major train wreck waiting to happen," he said.

The head of the Iraq Stock Exchange, Taha A. Salam, said the dinar will inevitably decline in value. When it does, he said, "you will have more problems in the streets" as Iraqis' buying power wanes.

Shemry, the exchange dealer, advises clients like Mudhaffar Jenari, an employee at the Ministry of Oil, to keep their dollars as insurance against further unrest. Just a few months ago, a car bomb exploded up the street, wounding the owner of another foreign exchange shop and killing an employee. After the blast, thieves stole $40,000.

"Everything depends on the security situation," Shemry said.

This is true for the dinar as with everything else. "One thing goes badly, and we lose everything."

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molly.hennessy-fiske@latimes.com