And they'll probably be worth even less when the war ends, says Bob Hormats, a Goldman Sachs economist. At some point, the new Iraqi government will likely create a new dinar without Saddam's picture on it and allow old ones to be converted, but a war rarely helps the exchange rate.
Hurry and sell them on eBay before everyone else does. But as a new conflict raged between U. In January of that year, CNN financial editor Walter Updegrave strongly cautioned a reader inquiring on whether or not they should buy into the Iraqi dinar hoping its value would restabilize. For expatriate workers in Iraq who are paid at least partly in foreign currencies, the same applies.
However, the boost to their purchasing power from the improved exchange rate is likely to soon be at least partly offset by higher inflation. The latest official annual inflation rate was low at 0. Being also fixed, this rate could soon become overvalued, so the black market is likely to continue to thrive.
The proposal is for a country to peg its currency to the export commodity. It could be implemented as follows. The central bank would set the daily price of dinars in terms of dollars in direct proportion to the daily price of a barrel of oil in terms of dollars.
The result would be to stabilise the price of oil in domestic terms. This approach combines the best features of both fixed and floating exchange rates. Like fixed exchange rates, it constitutes a transparent nominal anchor and also helps promote integration into world markets. And yet, at the same time, it retains a crucial advantage claimed by floating exchange rates: automatic accommodation of fluctuations in world markets for the export commodity.
In short, it offers the best of both worlds. To fix the dinar simply to oil alone may be too radical a proposal. While it would facilitate the recovery and expansion of the oil sector, it might at the same time discourage production of other internationally tradeable goods by shifting the entire burden of price uncertainty on to them.
My proposal for Iraq, therefore, is to add oil to the basket of currencies to which the dinar is pegged. For simplicity, give equal weight to all three units. Or, what is almost equivalent, define the value of the dinar as one-third of a dollar plus one-third of a euro, plus one-hundredth of a barrel of oil.
Unlike other proposals for nominal anchors, this is one that Iraq could live with even if there are big swings in world exchange rates or oil prices in the future. The country faces enough challenges without worrying about the risks of a future currency crash. Journal Article - Research Policy. After the invasion, the central bank intervened in the currency market to strengthen the dinar, using its supplies of dollars to manage the exchange rate.
The central bank now sells dollars in daily auctions at a fixed price of 1, dinars, a level barely changed since In fact, the dinar has recently faced downward pressure as a result of the international economic sanctions imposed on neighbouring Iran and Syria. Iraqi traders rushed to buy dollars to sell on illicitly to residents and businesses in those countries, which are hungry for hard currency.
The dinar fell as low as 1, in the open market this year before Iraqi authorities reacted by allowing two state-run banks and some private lenders to sell dollars, helping push the exchange rate back to around 1, currently.
Another factor counting against the dinar is the fact that the largest banknote is only 25, dinars. This often makes the currency unattractive to use in an economy where the banking system is primitive and deals are often done in cash.
Saadeldine recalls paying in cash for a new house in
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