MIDEAST MONEY-Iraq dinar is short-term disappointment, long-term bet

[rockhound60]

MIDEAST MONEY-Iraq dinar is short-term disappointment, long-term bet

By Aseel Kami | Reuters – Wed, Oct 3, 2012

Iraqis still prefer hard currencies for many transactions* But some foreign speculators see long-term opportunity

* External, budget surpluses could eventually boost dinar

* For now, central bank wants to keep currency stable

* Any major appreciation unlikely before two or three years

BAGHDAD, Oct 3 (Reuters) - Many Iraqis have lost faith in

their dinar currency but to some foreign speculators, it

promises big profits. The contrast underlines the uncertainties

of investing in Iraq as the country recovers from years of war

and economic sanctions.

The logic of the dinar bulls is simple. Iraq's oil exports

rose to 2.6 million barrels per day in September, their highest

level in three decades; the country aims to hit 6 million bpd by

2017, which would put it close to Saudi Arabia's current level.

Even if unstable politics, militant violence and

bureaucratic inefficiency prevent that target from being hit,

Iraq still seems to be on the threshold of an oil boom that will

transform its finances.

Inflows of new oil revenue could give the country big

external surpluses and push state finances deep into the black

by late this decade - the classic recipe for a strong currency.

"As far as our investors are concerned, when they buy Iraqi

dinars they do know it is a long-term investment. You know it

takes time for a country to rebuild itself," said Hassnain Ali

Agha, president of Dinar Trade, a U.S. dealer of exotic

currencies.

Because the dinar is not freely traded by banks outside

Iraq, online dealers of banknotes such as Dinar Trade are the

only way that most foreigners can invest in the currency. The

Las Vegas-based company says it sells as much as hundreds of

thousands of dollars worth of dinars daily, shipping dinar notes

to thousands of customers in the United States and elsewhere.

Agha said that because of optimism about Iraq's oil wealth,

there had been solid demand for dinars since his company was

founded in 2004, a year after the U.S. invasion which triggered

years of political violence and economic turmoil.

Back in Baghdad, however, Iraqis themselves are not

convinced. Many take what opportunities they have to change

their dinars into hard currency, and conduct all but small

day-to-day transactions in U.S. dollars.

"We have no trust in the Iraqi dinar - we feel afraid to

save it. We trust the dollar more. The dollar does not go up and

down, it is fixed," said housewife and mother-of-two Eman

Saadeldine.

WILD SWINGS

The dinar has endured wild swings over the past three

decades. In the 1980s, one dinar bought around $3, but economic

sanctions imposed on Iraq around the time of the 1991 Gulf War

sent the currency into decline and stoked inflation, which the

government fuelled by printing money. By late 1995, $1 bought as

much as 3,000 dinars.

After the 2003 invasion, the central bank intervened in the

currency market to strengthen the dinar, using its supplies of

dollars to manage the exchange rate.

But over the last several years, even as Iraq's oil

production has expanded, there has been none of the appreciation

for which speculators have been hoping. The central bank now

sells dollars in daily auctions at a fixed price of 1,166

dinars, a level barely changed since 2009.

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 1,280 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 1,200 currently.

Another factor counting against the dinar is the fact that

the largest banknote is only 25,000 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 2009.

"If our money had been in dinars, it would have been

impossible for us to carry it. It was in dollars and we carried

it in a small suitcase," she said.

The central bank has been considering plans to knock three

zeros off the nominal value of banknotes to simplify financial

transactions. This would not in itself increase the real value

of the dinar, since prices would adjust in line with the

redenomination, but economic experts say it could improve

confidence in the dinar and thus boost its value eventually.

"It would increase trust in the dinar even though its value

would not change," said Baghdad-based economist Majid al-Souri.

"Indirectly, when trust increases there will be appreciation."

Earlier this year, however, the cabinet decided to suspend

the technically complex redenomination plan until further

notice, saying the economic climate was not suitable.

The biggest obstacle to dinar appreciation is the fact that

for now at least, Iraqi authorities appear content with the

exchange rate in its current range.

In a memorandum to the International Monetary Fund on

economic and financial policies for 2011, written in March that

year, the Iraqi government said it saw benefits in keeping the

dinar stable.

"We believe that the policy of maintaining a stable exchange

rate continues to be appropriate, as it provides a solid anchor

for the public's expectations in an otherwise uncertain

environment and in an economy with a still very low level of

financial intermediation," it said.

LONG TERM

In the long term, however, Iraq's finances and economy may

improve so dramatically that authorities feel comfortable

allowing the dinar to appreciate under the pressure of flows of

oil money into the country.

The IMF expects this year's estimated budget surplus of just

0.2 percent of gross domestic product to balloon to 12.1 percent

in 2017. The country's balance of trade in goods and services,

in deficit as recently as 2010, is projected over the next five

years to shift to a large surplus of 11.3 percent of GDP.

Deputy central bank governor Mudher Kasim told Reuters that

he expected redenomination of the dinar to go ahead in 2014 or

later, by which time the amount of Iraqi currency in circulation

would have increased significantly, making financial dealings in

cash even harder.

In the long term, the central bank aims to make 1 dinar

equal to $1 with a combination of redenomination and

appreciation, although that will take over three years because

of instability in the Middle East, Kasim said: "If not for the

regional circumstances, we would proceed faster with that plan."

Some analysts think the appreciation could go further.

Kamal al-Basri, research director at the Iraqi Institute for

Economic Reforms, an independent research body in Baghdad, said

he expected the dinar to stay stable for the next three years,

but that afterwards it might strengthen beyond parity against

the dollar, including the effect of redenomination.

For that to happen, Iraqi politics will have to stabilise,

skill and education levels rise and the economy diversify so

that it is not so heavily dependent on oil exports, he said.

Speaking at the Baghdad currency exchange shop that he owns,

Ahmed Abdul-Ridha said the dinar's stability in the past three

years was good, but it did not indicate the long-term trend.

"We wish the dinar's value would go back to what it was like

before, when it used to equal $3 in the 1970s and even in the

1980s," he said.

"I expect that day will come. Why not? What we are going

through is an abnormal condition...We are an oil country."

http://en-maktoob.ne...--business.html

[DropItLikeItsHot]

Very Interesting read Rockhound

Like the last line,

"I expect that day will come. Why not? What we are going

through is an abnormal condition...We are an oil country."

We all knew when getting into buying Iraq Dinar (or at least should have) that it was a long term investment.

YES everyone including myself would like to see this come to an end this year with a GREAT RETURN.

However it is out of our control.

DropItLikeItsHot GO RV