Iraq: Is Rising Dinar An Attractive Investment?
"Every dinar you buy represents a share in Iraq's bright new future."
That's how one website selling Iraqi dinars tries to convince potential investors to acquire the currency.
A commonly quoted fact on such "dinar" websites is that the Kuwaiti dinar plunged to a worth of about $0.10 after Iraq invaded Kuwait in August 1990. But within a few years the Kuwaiti dinar had rebounded to be worth more than $3.
That means that a $1,000 investment during the first Gulf War would yield the investor a profit of some $30,000.
Could the same thing also happen with the Iraqi dinar? The currency has already risen more than 60 percent in value against the dollar since the new banknotes began to circulate.
The U.S. Coalition Provisional Authority introduced the new dinar in October 2003 at the initial rate of 2,050 to $1. Today the exchange rate is about 1,230 dinars to $1.
Robert Powell, the Iraq analyst at the Economist Intelligence Unit, says the dinar's appreciation against the dollar is the result of an antiinflationary strategy -- not necessarily a reflection of the demand for the currency.
"It's mainly a Central Bank [of Iraq] policy to appreciate the dinar, which they do through auctions," Powell says. "So sometimes they will sell a limited number of dinars and then, as such, that causes [the currency] to appreciate. So they simply ration the supply of dinars. And obviously if you lower the supply of something the price goes up."
Since 2006, the Central Bank of Iraq has also implemented several interest-rate increases in an effort to counter rising inflation and an increase in "dollarization" -- people using dollars instead of the local currency.
But Powell says he thinks the pace of the dinar's appreciation against the dollar will slow in the coming two years compared with 2007. "It looks like at the moment, having gotten inflation below 10 percent -- which was the target -- then they're going to end this policy and probably reintroduce the [informal] peg [to the dollar] that they had in place from around 2005 to late 2006," he says.
However the "dinar" websites are banking on the hope that the Iraqi currency will gain even more strength against the dollar.
Promoters of that hope explain that the expansion of stability in Iraq will stimulate the economy and the value of the dinar, creating huge profits for dinar speculators. "Imagine the growth potential of the Iraqi dinar once Iraq recovers and begins to enjoy the potential revenue of a country rich in oil and other natural resources," says one website.
"In the near term, frankly, the predominant question should be: 'If I hold Iraqi dinars, who is going to buy them off me?'" Powell says. "Maybe in the long term, if Iraq became stable, if Iraq became an economic success, if [Iraqis] were able to utilize their full oil potential, then the currency could appreciate enormously. But making such a bet at this stage seems highly speculative. [Kuwait] was liberated in the space of about six months whereas the Iraq situation is now going toward a fifth year. And it's a long, long way to go before we can possibly see a stable, successful Iraq."
Two years ago, the state of Utah's Division of Securities included Iraqi currency trading on its list of the most common investment scams. Among other things, the agency warned that the dinars couldn't be freely traded on the world market. To put it simply, you couldn't physically trade dinars anywhere except in Iraq.
Today, dinars are exchangeable at select U.S. banks and currency traders.