Currency News

Think We're Losing Iraq? Take a Look at the Dinar

January 19, 2007

War rages in Iraq. America is preparing to launch an offensive in Baghdad, Iranians are infiltrating the country, and, according to the United Nations, civilians in Iraq are dying at a rate of 100 people a day.

Yet the Iraqi currency is rising in value.

Tuesday, the rate of exchange had reached 1,308 dinars to the American dollar — up from 1,470 last November. Money changers in Baghdad say they cannot keep up with the demand and that Iraqis who used to hang on to their American dollars for dear life are rushing to exchange them.

What gives?

The answers are as murky as anything in Iraq, and the actions of both good and bad guys seem to be helping the dinar.

On the good guys' side, the Iraqi Central Bank is getting its act together after having built foreign currency and gold reserves of at least $16 billion, up from a mere $5 billion in 2005. That is serious enough to create a strong backbone for the local currency. On its Web site, the central bank noted that it has increased its main interest rate to 16% from 12% — a move that has boosted the dinar, too.

For its part, the American Army, or some units of it, is beginning to pay contractors in "dinar checks" instead of dollars. That has the double benefit of reviving the moribund banking system — you've got to go to a bank to cash it — while boosting the local currency.

Bad guys are doing their bit too, interestingly.

Corruption is said to account for perhaps as much as 500,000 barrels of daily oil production "disappearing," which means stolen. Even when disposed of at a discount, this stolen oil would fetch a minimum of $20 million American dollars a day for those corrupt officials siphoning it off. Experts are certain that not all of this leaves the country, however. At least half the money ends up being "recycled" into the Iraqi black economy to buy loyalties, services, arms, protection, and villas with swimming pools. In the end, this money creates jobs and demand for more dinars.

Ironically, both Iran and Syria, which are working hard to undermine Iraq, are boosting the dinar too. By pumping millions of dollars to support Shiites and Sunni insurgents, buy arms, and make bombs, they are also ratcheting up demand for dinars, since the fighters, the militias, and the secret cells all need to be paid in local currencies instead of dollars so as to keep a lower profile.

The biggest spender in town, the American Army, seems to be deliberately helping with the new pay-in-dinar policy, as noted by Major Richard Santiago, commander of 3rd Finance Company, 3rd Soldier Support Battalion, Division Support Brigade. "Issuing dinar check payments improves the economic and financial stability of Iraq by promoting the Iraqi banks while using their local currency. It also decreases the cash requirements our finance offices need in order to meet mission requirements," Major Santiago told the defense-oriented Web site a few days ago.

Of course, the dinar has a long way to go against the dollar. In its heyday in the 1980s, one dinar fetched almost three dollars compared to the present — reverse — ratio of one dollar to more than 1,300 dinars.

How long this is going to last is anyone's guess.

It could be argued that, in a sinister way, everything terrible that could have happened in Iraq has happened, so what else could sap confidence in the dinar — short of an abrupt American withdrawal? A good point indeed.

The same logic applies to oil, which has been falling in price like a rock even though demand has not diminished. As with oil, the dinar was pushed by psychological factors that attached a monetary premium devaluing it. As Iraqis get used to the fear, the premium lifts.

Should a whole new batch of catastrophes hit the country, though, the dinar may tumble again, as other experts firmly believe.

"It is a major train wreck waiting to happen," co-director of the Institute for Applied Economics and the Study of Business Enterprise at Johns Hopkins University in Baltimore, Steve Hanke, told Fox News.

January 19, 2007 Edition > Section: Business > Printer-Friendly Version


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