The harder they fall
A brand-new currency turned to be a risky gamble for hopeful fortune-makers. Niveen Wahish reports on the swift rise and fall of the Iraqi dinar on the Egyptian markets
It started out a couple of weeks ago, with rumors spreading that the new issue of Iraqi dinars were a sure-fire investment. Demand for the currency began to rise at the beginning of the year, and within ten days had reached unprecedented levels, precipitating a government clampdown on smugglers and black market traders. While in Iraq itself one million dinars is now equivalent to $714, approximately LE5,000, some ten days ago, it was selling for LE16,000 on the streets of Cairo. By the middle of last week however, the hopes of speculators were shattered as the rate plummeted to under LE10,000.
The new Iraqi currency was issued by the Coalition Authority for use throughout Iraq. Previously, two versions of the Iraqi dinar existed: one carrying the image of Saddam Hussein and it circulated in the Central and Southern parts of Iraq. The second was the "Swiss" dinar, so named because it was printed in Switzerland, which circulated in the Northern part of the country. But the old dinars are now obsolete. A three-month period during which individuals were allowed to exchange their old dinars for the new ones ended 15 January.
In Egypt and neighbouring Arab countries, the new dinar became a commodity in itself, causing its price to skyrocket. Individuals began to want to hoard the currency hoping its value will increase. According to one anonymous observer, speculators believe that the Iraqi dinar will appreciate with the return of stability, just as the Kuwaiti dinar and the Lebanese lira did following their respective wars.
This created two types of demand for the currency, the observer explained. "First there are those who want to really invest in the currency because they see potential in Iraq as an oil exporter," he said. "Those are interested in buying the currency and hanging onto it until the economy picks up and they are aware of the risk." The second type of demand for the currency was created by speculators; that is individuals who, finding that selling the currency is a lucrative business, began smuggling the currency by the millions.
What made things worse is the fact that the new currency was not yet available in the banking system. Only one bank, the Egyptian American Bank (EAB), had quotes available for the value of the new currency, but it was not actually buying and selling it. It only imported a small amount of the currency on account of a number of its clients at the official rate. However, seeing the way the market reacted to the currency, the bank chose to halt all its operations on the new currency.
A banker who also preferred to remain anonymous said that to limit speculation, the Central Bank of Egypt should have encouraged all banks to import the new currency on account of their clients. "That would not have made the currency such a rare commodity."
He noted that lack of awareness is the cause behind this situation, saying "Nobody even knows what the new currency looks like." Moreover, as the banker said bluntly, "the Iraqi economy is in tatters." He stressed that this is the currency of a country without a permanent government yet. Not only that, but Iraq owes billions of dollars and it could spend the next 30 years paying up. And, he said, even provided this currency will be a strong one because it will be supported by the US, there is no guarantee. "It is the currency of an occupied country, resistance is still strong and there are no plans for development in sight."
The banker added that currently the Iraqi dinar is a cash currency. "No one can open an account in Iraqi dinars and no bank transfers are made in the currency. The only way to move this currency around is by carrying it in cash," he explained.
He attributed people's eagerness to posses the currency to the lack of other investment alternatives and to the depreciation of the Egyptian pound.
