Iraqi Dinar : A Short History of the Iraqi Economy & Dinar, Part 2
The Iraqi economy and Dinar have come a long, long way since the days of brutal starvation under Saddam Hussein.
The American-led invasion in 2003 toppled the regime and reset the Iraqi economy. Nowadays the young nation is growing rapidly because of its booming oil industry, and its certainly oil-rich.
Still, the Iraqi Dinar’s value hasn’t risen to the level expected by many…. It seems that the residual effects of actions taken by both Saddam and U.S. government interests have combined to keep the Dinar’s value low.
Saddam’s legacy continues to affect the Dinar today, although recent development suggest that may change soon.
Following Part 1, let’s now take a look at the recent history of the Iraqi economy and the Dinar, beginning with the coalition invasion that ousted Saddam, and continuing up to more recent events that may offer hope for a higher Dinar value soon.
Following the 2003 invasion, the U.S. established a Coalition Provisional Authority in order to govern Iraq. In January of 2005 the country held its first free elections in many years.
Although political bickering and violence continued throughout the period, military responsibilities were gradually transferred from U.S. to Iraqi control, as long planned.
In 2006 Saddam Hussein finally had his day in court, and was condemned and hanged by his countrymen for his crimes against humanity.
The Iraqi Dinar Outlasts Saddam
After the removal of Saddam, the Iraqi Governing Council with American assistance continued printing more of the old Dinar notes in order to ensure an orderly financial transition during the chaotic first days of the new nation.
Beginning in 2004 the authorities issued new Dinar notes using modern anti-counterfeiting techniques. Old banknotes in circulation were exchanged for the new notes at a one-to-one rate.
The only exception was the so-called Swiss Dinar, which had previously been circulating in the northern Kurdish region of Iraq. Swiss Dinar banknotes were exchanged at a rate of 150 new Dinars for each Swiss Dinar.
Iraq’s Foreign Debts Were Forgiven
As soon as Saddam was ousted, leading Iraqi business people and government officials began calling for Iraq’s old foreign debts to be forgiven since they were largely the dictator’s fault.
One of the key challenges for Iraq’s economy was the heavy foreign debt remaining from previous years, then estimated at about $125 billion. Some of this debt resulted from failed export contracts, and some of it resulted from military and financial expenses during Iraq’s exhaustive war with Iran in the late 1980s.
In spite of this foreign debt, the Iraqi economy grew rapidly beginning in 2004 and continuing up to the present time. Economic growth as measured by GDP has grown at rates of between 10% to 17% each year, which an extraordinary rate of development.
In view of the oil-rich young democracy’s rapid economic growth and excellent prospects, in 2004 the so-called Paris Club of governmental and institutional creditors agreed to forgive nearly all Iraq’s old debts and accepted pennies-on-the-dollar for settling old loans.
Freed of debt, Iraq’s economy grew even faster.
A Booming Oil Industry Drives the Economy Upward
Rising petroleum prices during the mid and late 2000s led to a quick doubling of Iraqi oil production. Reduced inflation and the easing of violence after Saddam’s departure have spurred the Iraqi economy to skyrocket upward since 2007.
The number of registered corporations tripled, and sales of items such as vehicles, televisions and cell phones have risen consistently each year since then.
Since 95% of Iraq’s revenues are derived from oil sales, it’s apparent that the nation’s oil industry is thriving in spite of the occasional flare-ups in sectarian violence and attacks regarding ISIS.
Iraqi Agriculture Grows Alongside the Oil-Backed Economy
Historically, only about 50% to 60% of the country’s arable land has been cultivated. After many years of inconsistent agricultural policies under Saddam, Iraqi agriculture development hasn’t yet reached its full potential.
Iraqi farmers greeted the 2003 American-led invasion with a record grain harvest, more than 20% more than the grain harvested in 2002.
Nowadays, fueled by oil revenues and pushed by the Iraqi government, agricultural production is growing rapidly. Yet, Iraq is still a net food importer.
The country’s main crops are wheat, corn, barley, rice, dates, vegetables and cotton. Cattle and sheep are the main livestock.
Iraqi farmers are being trained to produce higher yields, and large-scale investments in machinery and equipment are yielding impressive results.
Numerous Iraqi and foreign institutions have extensive loan programs to help farmers mechanize their production and increase yields.
The current Iraqi government apparently believes that expanding agriculture is essential for the long-term health of Iraq’s economy.
Iraq’s agriculture is rapidly modernizing to match the pace of development in the oil industry.
Growth of the Banking Sector
Since 2004 the Iraqi financial services sector has grown dramatically. Numerous Iraqi and foreign-based banks compete in the marketplace for retail financial services including credit-card issuance and acquiring.
The dozens of private banks first established in the 1990s have been joined by dozens more since 2004 up to the present, including many regional Arab banks based in the Arab Gulf nations as well as Lebanese and Turkish banks, and European banks, too.
Given its oil-backed economy and central role in regional trade, Iraq is well-positioned to become a regional Shiite banking center perhaps similar to the role that Dubai plays in Sunni banking and trade in the Arab Gulf.
Iraqi Exports Surged Beginning in 2006
After years of thievery by Saddam and his family, and the damage from UN sanctions, the Iraqi economy finally turned the corner in 2006. That’s the year when the value of Iraqi exports of all kinds surged.
Each year since then, most classes of exports have continued to set new export volume records regularly.
By early 2010, Iraqi exports had risen to almost $50 billion. The country’s chief export (recipient) partners have generally been the U.S., China, India, South Korea, Italy, Japan and the Netherlands.
Because they’re neighboring countries, Iran, Turkey and Syria are traditionally the largest import partners for Iraq, supplying many kinds of foodstuffs and consumer products which are not yet manufactured in Iraq.
The Dinar Begins Replacing the Dollar for Denominating Oil Contracts
During the early years of the Middle Eastern oil industry, oil contracts were routinely denominated in Dollars, meaning that all oil sales were required to be paid in USD.
However, beginning in 2007 an increasing number of oil contracts are being denominated in IQD. This increases demand for the Dinar, since it means that buyers of Iraqi oil must first buy Dinar with which to pay for their oil purchases.
This increased demand supports the foreign-exchange value of the Dinar against that respective currency.
Since oil is Iraq’s strongest export, worldwide demand for the Dinar depends ultimately on oil sales. Each year that Iraq exports more oil, as it has every year since 2007, demand for the Dinar increases, so the currency becomes stronger in the foreign-exchange market, especially when considered relative to the Dollar.
As well, IMF policy is very supportive of Iraq with regard to national monetary policy and the Dinar’s value. Beginning in 2007 the IMF has released a series of encouraging statements that suggest the value of the Dinar will be allowed to appreciate gradually in order to combat ?dollarization? of Iraq’s economy.
This supports a rise in the value of the Dinar by increasing its desirability for denominating oil-sales contracts worldwide.
Someday soon, the ?almighty Dinar? may replace the Dollar for all oil-sales contracts throughout the region.
The Troop Surge in 2007 and 2008 Strengthened the Oil Industry
Although the troop surge launched in 2007 was in response to an uptick in sectarian violence, still, it had the effect of boosting confidence in the oil industry. Production rose dramatically and the Iraqi economy continued to grow rapidly during the entire period of the troop surge.
Once Iraqi military forces were trained, the U.S. military largely withdrew from Iraqi cities in 2009 although they have continued to be deployed in remote bases, mostly in training, intelligence and support roles.
Even though crime initially spiked, Iraqi Interior Ministry officials later reported that by November 2009 the number of civilian deaths had fallen to its lowest level since the invasion in 2003.
Oil production continues to increase and monthly export revenues have regularly set new highs ever since.
?Gold Rush? in Oilfield Development
From 2009 to 2010 the Oil Ministry tendered and awarded a wide range of contracts to develop the country’s existing oilfields. Kurdistan awarded its own contracts separately.
These oilfields, which are still being developed in 2015, will increase Iraqi production to approximately 12 million barrels per day. This is comparable to Saudi Arabia’s daily capacity of 12.5 million barrels daily.
Depending on the field, the projected build-out time to achieve full production ranges from 5 to 8 years. So, production and exports should continue to build up even more over the next few years.
As production increases, the economy grows and the Dinar becomes potentially stronger, waiting to be freed from the artificially-low valuation set during the darker days of Iraq’s history.
After the U.S. Troops Left
In 2011 U.S. troops were formally withdrawn to American bases in Kuwait. Although political instability and insurgency have continued, most observers note that Iraq is steadily becoming more peaceful over time.
During 2011 the ?Arab Spring? protests reached Iraq. Sunnis claimed that Shiites were attempting to marginalize them in Iraqi society and government.
As a form of protest, Sunni legislators boycotted Parliament for several weeks during late 2011 and in early 2012. But, there were no changes in government.
During 2013 and 2014 ISIS terrorists seized control of a number of towns in Iraq and neighboring Syria. Since then, a U.S.-led coalition has responded with regular bombing campaigns against ISIS. The terrorist group continues to weaken over time.
A Political Turning Point for the Iraqi Economy and Dinar
In the summer of 2014 beleaguered Iraqi Prime Minister Nouri al-Maliki finally stepped down. He was seen as divisive and unwilling to help bring together the often-at-odds Sunni and Shiite elements of Iraqi society.
Iraqi citizens and Dinar owners worldwide breathed a collective sigh of relief when Maliki was replaced by new Prime Minister Haider al-Abadi, who has rapidly healed much of the damage to the Iraqi economy that occurred during Maliki’s administration.
Prime Minister Abadi has made great progress in bringing together historically-opposed Shia, Sunni and Kurdish factions to further unite the Iraqi nation.
Saddam Hussein had spent forty years driving them apart, so Abadi’s progress in just a few months seems remarkable.
During the Abadi administration’s time in office so far, it has also reached an agreement with Kurdish governing authorities in the northern part of the country regarding oil-revenue sharing.
Now that the long-running dispute between Baghdad and Kurdistan instigated by Saddam Hussein in the 1960s has finally been resolved as of 2015, oil is flowing freely everywhere across Iraq, and the Iraqi economy is growing faster than ever before.
During the coming weeks and months, as Abadi and successive Iraqi administrations trudge along the road of democracy, there will be increasing successes against the remnants of ISIS along with increasing business activity as usual.
The Iraqi economy has now recovered and far surpassed the peak of development during Saddam’s reign. The nation is downright rich from its oil revenues
Why Is the Dinar Still so Low?
The Dinar is still low for a variety of reasons, although this may soon change.
In one sense, the Dinar is undervalued because of the ghost of Saddam Hussein.
The ghost of Saddam Hussein
The Dinar still suffers from Saddam’s over-printing of banknotes years ago because the Central Bank of Iraq (CBI) is still fixated on the arbitrary exchange rate first set in 2003.
Meanwhile, the CBI is so frightened of currency over-valuation that it has spent the past few years disregarding the enormous growth in Iraq’s oil production and exports.
For now, the value of the Dinar remains pegged to the same arbitrary, artificially-low level as for the past few years. However, this may change in the near future.
Pressure for Change
As the Iraqi economy booms and the Dinar remains at a low exchange rate, there’s growing pressure to find out why the disparity persists.
After all, with so much oil wealth the Iraqi currency should be worth significantly more than it was when the country’s oil industry was dormant at the end of Saddam’s reign.
Dinar activists and government sleuths are working hard to locate and account for all of Iraq’s oil wealth, since that’s what the value of the Dinar is based on.
Once the formerly-looted assets are returned to the Iraqi national treasury, the value of the IQD is expected to reflect those assets as well as the current oil revenues. The Dinar may rise as a result.
Although Saddam Is Long Gone, His Money Isn’t
Even though Saddam Hussein is long gone, the actions he took in stealing large amounts of Iraq’s cash and attempting to hide it in foreign bank accounts are still being dismantled today, layer by layer.
Likewise, reversing the actions Saddam took years ago can today free the Dinar from its current value and allow it to rise upward.
Dinar owners worldwide are asking what happened to all the money from oil revenues that was documented as stolen by Saddam and his family during their long reign.
As reported elsewhere, the stolen or unaccounted oil revenues during Saddam’s reign totaled approximately $485 billion. That’s plenty of money to fund any sort of monetary policy change the CBI may be tasked with.
Since 2003 Iraqi intel experts and the U.S. authorities have been working steadily to help the CBI identify, trace, claim and ultimately recover these stolen revenues from Iraqi oil that Saddam Hussein and his family transferred from Iraqi banks to foreign banks in a variety of countries.
Members of the Dinar community are especially hopeful that this huge, ongoing cash-recovery process will eventually gather most of the long-missing funds back into the CBI’s cash reserves.
Once recovered, these looted funds will boost the CBI’s reserves to somewhere around the level they enjoyed before Saddam’s pilferage. With the Iraqi national treasury replenished by the loot recovered from Saddam, changes in monetary policy seem much more likely.
What Happens Next?
It’s hard to know what may happen next. In any event, knowledge is power ? Well-informed Dinar owners are in the best position to plan effectively and act successfully for the future.
To learn more about the Iraqi economy and Dinar click below.