I expect that day will come. Why not?

MIDEAST MONEY-Iraq dinar is short-term disappointment, long-term bet inShare3Share this Email Print Related NewsIranian police clash with protesters over currency plunge Wed, Oct 3 2012Analysis & OpinionThis week in EM, expect more doves Carry currencies to tempt central banks Related TopicsCurrencies » Markets » Investing Simplified » Wed Oct 3, 2012 10:00am EDT * 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 By Aseel Kami 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." ============ Banking in Iraq – The Need for Change In Iraq “cash is king”. Whether you are buying a shirt or a house, chances are you will be doing so in cold, hard cash. Is this because of collective personal preference that Iraqis have? Unfortunately it is due to necessity as there are no alternatives. Iraq’s banking and financial sectors are not only lagging, they are crippled. Iraq is different from its neighbours in many ways. The financial sector helps set Iraq apart from other countries. While credit cards grew in popularity during the 1980’s in most countries, Iraq was preoccupied with the Iran-Iraq War. As credit and debit card usage became mainstream during the 1990’s, Iraq was suffering from severe sanctions imposed by the United Nations. By the time the regime of Saddam Hussein was toppled in 2003 most Iraqis’ savings and investments were depleted and hardly anyone claimed to own a bank account. This history of war and sanctions has left many Iraqis financially illiterate. As things stand, there aren’t hoards of people demanding different financial services or products from Iraqi banks. Iraq’s history has also caused the financial and banking sectors to mature at a snail’s pace post-invasion. This lack of supply and demand for modern banking, among other reasons, is what is keeping Iraq from progressing. For example, recently there was uproar in Iraq over a proposal by the government to change the ration system. The thinking was, rather than provide each individual a monthly amount of staple foods (worth about $5 USD) each Iraqi would receive 25,000 IQD (roughly $20 USD). Countries with efficient welfare systems tend to hand out their benefits with money. Whether a cheque is sent in the mail or funds are electronically sent to recipients via direct deposit, the individual and the state do not have a reason to meet face-to-face as the transaction is seamless. Such a welfare system is not viable at the moment in Iraq as people cannot cash cheques (never mind the fact that the mail service is so unreliable that the cheque wouldn’t arrive to begin with) nor do many have bank accounts with which to receive direct deposit. Given the backlash against this proposal the Iraqi government shelved it, only kicking the can further down the road. This is unfortunate for a couple of reasons. The existing method for distribution of the food rations is highly susceptible to corruption and inefficiency. The food distributors are known to holdback a family’s rations unless a bribe is paid or they skim off the top of their food allocation. Also, the need for Iraqis to go to a neighbourhood food distribution center and transport the rations home is tiring work. Had the monthly welfare stipend been implemented, these are two issues that would have been eliminated. For Iraq to emerge from its crippling past, construct a stable economy and emerge as an economic powerhouse, it must tackle the incredible undertaking of building its banking system. As it does, it can start educating its people on the importance of personal banking, saving and even investing. Hassan Hadad is an economist and works in retail & small business banking at one of Canada’s largest financial institutions. The views expressed here are solely his own and do not reflect those of his employer. You can follow him on twitter (@Abufellah). ====== Comments on “Banking in Iraq – The Need for Change” ABSDecember 19, 2012 at 12:21 pm# Just a thought rather than criticism: we all wish for Iraq to be economically mature and stable. However the model you propose seems an imported one from a typical European/Western system. My main issue is that no economic system is value-free. The banking system has developed over centuries organically and in line with many significant changes to the social and political institutions in Europe and the West, with its own distinct identities and values. I’m not at all saying that because it’s from the West it’s inherently wrong, however will Iraq and its people, with their own unique religious/ethical values, really benefit from its full implementation? The banking system you propose is the life-blood of a typical capitalist model, and one of the unique features of capitalism is its non-attachment to ethical norms. Profit and margins are the measure of all things. In addition, it had developed in a highly secularised region of the world (this is not meant to be a critique of capitalism and I’m not dismissing it entirely; I’m only mentioning those features that are relevant within this context). Yet Iraq has a strong Islamic as well as ethnic (Arab/Kurd) identity. If your model was implemented in its ideal fashion, it will certainly influence the social dynamic of the country profoundly. However I can’t help but suspect that its distinctly secular character will cause many forms of tension in Iraq. Rather than directly import a model, this could be a real opportunity for politicians/economists to develop an economic system that is more suited to the ethnic identity and values of Iraq. This is certainly a challenge and it requires a level of creativity to come up with a more viable model. However this is a critical time for Iraq’s future and long term prospects – the institutions that steer a nation’s direction are being formed, albeit slowly. Non-economic consequences of a direct import of a distinctly Western model should not be dismissed at all or taken lightly. Thinking short term only, or looking for a quick-fix solution can be detrimental to its future – not just economically, but on many levels. Reply Ali Al-SaffarDecember 19, 2012 at 12:37 pm# Interesting thought ABS, I just had one comment on the opportunity to develop an economic system that is suited to Iraq’s identity. This is certainly needed; at the moment the country is stuck in a purgatory between socialism and capitalism, taking the worst aspects of both systems. The state is the provider of all a lion’s share of jobs and almost all services, and at the same time, foreign goods flood the market and foreign companies develop the hydrocarbons resources without a knowledge/skill transfer that usually accompanies these things. The problem is, what incentive is there for real reform to happen? The oil revenues are coming in and are keeping the system sufficiently greased. I feel this debate will only be really be had once oil prices dip enough for things to start to become uncomfortable. ========