Iraqi Dinar: Speculators Beware
By Cam McGrath
Asia Times
CAIRO - Speculators who stashed away "Bremer dinars" earlier this year in the hope their value would skyrocket are suffering enormous losses as the official Iraqi currency plummets. Hit particularly hard are a high number of Egyptians, who had earlier raced to pick up the currency.
"Many people sold anything they could to buy Iraqi dinars," Mohammed al-Abyad, chairman of the Egyptian Foreign Exchange Association told IPS. "When the dinar went down these people lost a lot of money."
The Iraqi dinar was trading at one Egyptian pound (16 cents) per 50 dinars on the black market before its value dropped sharply earlier this year on news of escalating insurgency in Iraq. The pound is now worth 210 dinars on the black market.
"The black market has narrowed and the currency has no liquidity now," said Shady Sharaf, head of market research at Cairo-based al-Shorouk Brokerage. "The people cannot sell the dinars they bought, which presses on demand."
The new Iraqi dinar banknotes introduced by the US command last October replaced old banknotes bearing images of deposed Iraqi leader Saddam Hussein. Speculators believed the value of the "Bremer dinar" - named after the US civilian administrator of Iraq, L Paul Bremer - would rise as the economy of war-devastated Iraq recovered.
But that recovery has yet to take place, with daily reports of further violence, deaths and insurgency making the headlines. In the latest, a car bombing attack hit an Iraqi police car and a civilian vehicle carrying foreigners in the city of Ramadi, some 110 kilometers west of Baghdad on Wednesday, killing at least four people. On the same day in Kirkuk, Iraqi security forces said gunmen ambushed and killed the top security official for the state-run Northern Oil Company, dealing another blow to the country's already battered oil industry.
But months ago, unaware the instability would continue to plague Iraq even as the handover date draws near, thousands of investors working in the Gulf region brought bags stuffed with the new Iraqi dinars. They stashed away the currency or sold it for quick profits to other speculators on the black market.
"They remembered what happened in Kuwait, and believed the same thing would happen in Iraq," al-Abyad said.
The value of the Kuwaiti dinar fell to less than 10 cents during the country's occupation by Iraqi forces in 1990, but climbed steeply after its liberation by coalition forces the following year. It now trades at US$3.50.
"The situation in Iraq and Kuwait is very different," said al-Abyad. "Kuwait recovered in little time because its [infrastructure] remained intact."
The speculation was based on credibility, says Alaa al-Shazly, economics professor at Cairo University. "The dinar is backed by the US and people wouldn't have thought the US would get into something that would turn out to be a failure."
Although many countries do not trade the Iraqi currency, Western traders have been doing so through websites. When trading began last October, a dollar bought 420. Now it buys 555 - a 32% drop. The currency has declined 11% against the dollar in the past five weeks alone, and this while the dollar itself has fallen. In downtown Baghdad, though, the exchange rate is 1,400 to the dollar.
Many foreigners in Iraq are also buying up dinars in the hope that it will recover strongly. One analyst commented that the word in Iraq is that at the low end, a dinar could be worth $1. At the top end, more than $4 - many people will become very rich overnight. In its April report, the Economist Intelligence Unit forecast a 60% gross domestic product growth for 2004 and 25% for the following year.
But speculators should perhaps heed the advice of another anlayst: "The only thing the Iraqi dinar is likely to hit is a wall." Perhaps he was thinking of Iraq's huge whopping $120 billion foreign debt, which few countries are interested in writing off.
By Cam McGrath
Asia Times
CAIRO - Speculators who stashed away "Bremer dinars" earlier this year in the hope their value would skyrocket are suffering enormous losses as the official Iraqi currency plummets. Hit particularly hard are a high number of Egyptians, who had earlier raced to pick up the currency.
"Many people sold anything they could to buy Iraqi dinars," Mohammed al-Abyad, chairman of the Egyptian Foreign Exchange Association told IPS. "When the dinar went down these people lost a lot of money."
The Iraqi dinar was trading at one Egyptian pound (16 cents) per 50 dinars on the black market before its value dropped sharply earlier this year on news of escalating insurgency in Iraq. The pound is now worth 210 dinars on the black market.
"The black market has narrowed and the currency has no liquidity now," said Shady Sharaf, head of market research at Cairo-based al-Shorouk Brokerage. "The people cannot sell the dinars they bought, which presses on demand."
The new Iraqi dinar banknotes introduced by the US command last October replaced old banknotes bearing images of deposed Iraqi leader Saddam Hussein. Speculators believed the value of the "Bremer dinar" - named after the US civilian administrator of Iraq, L Paul Bremer - would rise as the economy of war-devastated Iraq recovered.
But that recovery has yet to take place, with daily reports of further violence, deaths and insurgency making the headlines. In the latest, a car bombing attack hit an Iraqi police car and a civilian vehicle carrying foreigners in the city of Ramadi, some 110 kilometers west of Baghdad on Wednesday, killing at least four people. On the same day in Kirkuk, Iraqi security forces said gunmen ambushed and killed the top security official for the state-run Northern Oil Company, dealing another blow to the country's already battered oil industry.
But months ago, unaware the instability would continue to plague Iraq even as the handover date draws near, thousands of investors working in the Gulf region brought bags stuffed with the new Iraqi dinars. They stashed away the currency or sold it for quick profits to other speculators on the black market.
"They remembered what happened in Kuwait, and believed the same thing would happen in Iraq," al-Abyad said.
The value of the Kuwaiti dinar fell to less than 10 cents during the country's occupation by Iraqi forces in 1990, but climbed steeply after its liberation by coalition forces the following year. It now trades at US$3.50.
"The situation in Iraq and Kuwait is very different," said al-Abyad. "Kuwait recovered in little time because its [infrastructure] remained intact."
The speculation was based on credibility, says Alaa al-Shazly, economics professor at Cairo University. "The dinar is backed by the US and people wouldn't have thought the US would get into something that would turn out to be a failure."
Although many countries do not trade the Iraqi currency, Western traders have been doing so through websites. When trading began last October, a dollar bought 420. Now it buys 555 - a 32% drop. The currency has declined 11% against the dollar in the past five weeks alone, and this while the dollar itself has fallen. In downtown Baghdad, though, the exchange rate is 1,400 to the dollar.
Many foreigners in Iraq are also buying up dinars in the hope that it will recover strongly. One analyst commented that the word in Iraq is that at the low end, a dinar could be worth $1. At the top end, more than $4 - many people will become very rich overnight. In its April report, the Economist Intelligence Unit forecast a 60% gross domestic product growth for 2004 and 25% for the following year.
But speculators should perhaps heed the advice of another anlayst: "The only thing the Iraqi dinar is likely to hit is a wall." Perhaps he was thinking of Iraq's huge whopping $120 billion foreign debt, which few countries are interested in writing off.
