Stephen J. Glain
The Boston Globe
May 24, 2003

BAGHDAD — Iraq’s currency is trading at the highest level since it was reissued after the 1991 Persian Gulf war, despite the nation’s war torn and sanctions-ridden economy and potentially crippling foreign debt.

The question is why.

On the streets of Baghdad, money-changers say the reason is purely economic: The dinar is strengthening, they say, as civil servants exchange the $20 bills they receive each week as emergency pay for dinars.

Foreign journalists and aid workers who buy dinars with dollars are also bolstering the Iraqi currency, they say.

“It’s very simple,” said Imad Sadoon Abu Ali, who exchanges money near the Palestine Hotel, home to the largest group of foreigners in Baghdad. “The dollar weakens on Mondays when people are paid and then gradually strengthens over the rest of the week.”

US officials in Baghdad have a different theory, one that vindicates the time and investment of America’s postwar occupation of Iraq: Even at such an early stage, they say, there is growing confidence about the future of Iraq, particularly since the United Nations on Thursday voted to lift the sanctions it had imposed on the country after Saddam Hussein’s army invaded Kuwait in 1990.

“I suspect it is because despite all the problems there is hope in the currency,” said a senior member of the Office of Reconstruction and Humanitarian Assistance, the US group overseeing the rebuilding of Iraq. “The question is what will happen now that sanctions have been lifted. Will it [the dinar] continue to rise?”

US offici als have been careful not to talk up the dinar openly, though they acknowledge a de facto strong-dinar policy that is in many ways more compelling than the US Treasury’s strong-dollar stance in the face of the currency’s dwindling value against the euro.

Yesterday, a senior US official said the occupation authority would buy 10,000 dinar notes that have been at the center of an alleged counterfeiting scheme, in exchange for an equivalent value of 250 dinar notes.

Peter McPherson, assigned by the US Treasury to rebuild Iraq’s financial sector, also lamented the country’s “very substantial” need for debt relief. Iraq’s debt has been estimated at about $130 billion, though it could be much higher. “The debt as it stands would be crushing to service,” he said.

The UN’s announcement that it would end one of the world’s most punitive embargos had little impact on the dinar, though traders say the move was already factored into the market. Yesterday, the dollar was holding at 1,100 dinars after having reached 900 dinars on Monday, its lowest level since Hussein issued a new version of the currency in response to the sanctions.

In Jordan, perhaps the most liquid market for Iraqi dinars outside of Iraq, the currency has been shifting dramatically.

Following a brief spike against the Jordanian dinar, the Iraqi dinar has in the last several days weakened against its counterpart by about 65 percent, say money-changers; hordes of Iraqis have been converting their own currency to purchase tax-free vehicles in Jordan’s free-trade zone. So hungry are Iraqis for quality used cars that Saudi Arabians and Kuwaitis have been driving to Jordan to put their vehicles on the block.

At its peak in the late 1990s, before a UN program that allowed Iraq to sell oil for humanitarian items, the dollar reached some 4,000 Iraqi dinar. It rose to a similar rate in the run-up to the US invasion in March.

Since the embargo began, Iraq has had a three-currency economy. While dollars financed a massive smuggling trade that congealed around the sanctions regime, Iraqis bought daily goods with dinars. In Iraq’s northern Kurdish region, a semi-autonomous enclave where the economy has boomed under the protection of a US-patrolled no-fly zone, the dinars that circulated before sanctions were imposed trade at about 10 to the dollar.

Before 1990, a dinar was worth $3.30 at the official rate, though the dollar on the black market could buy about 10 dinars.

As late as the mid-1980s, even as Iraq was locked in a debilitating war with Iran, Iraqis enjoyed a relatively high standard of living, with a per-capita income of about $3,200, and the Iraqi central bank held foreign exchange reserves worth $40 billion.