Should You Invest in Iraqi Currency?

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Investing in Iraqi currency has been called a scam, gambling and speculating. Yet people have bought Iraqi dinars on the basis of Iraq being oil-rich, of the dinar being at bottom, of the dinar being in the same situation as the Kuwaiti dinar during the Iraqi invasion, and the Euro when it first came into circulation. These arguments seem faulty.

Background

  • In late 2003, the Iraqi Provisional Government introduced a new Iraqi dinar to replace the Saddam-issued currency, which had traded at a Saddam-set rate of US$3 to the dinar. Since then, the old dinar has become worthless while the new dinar could be had for much less than $3. On the basis of "rock-bottom" rates and other arguments, investments in the dinar were touted as a way towards big and easy profits.

Risks

  • Any investment in Iraq is considered by many as extremely risky. This country's infrastructure has been devastated by war, and years of economic sanctions. It has over $100 million in external debts, an unstable government and a rising insurgency. Facilities for exploiting oil are sabotaged continually and predictions of civil war abound.

Speculation

  • Investing in the dwindling currency of a fledgling government in the world's most chaotic country is considered a big gamble. It may even be a scam of people unable to unload their dinars, a currency so illiquid few banks are willing to exchange them. Buying and selling quotes are so few and distant, potential investors have wondered how much profits are made both ways.

Considerations

  • It is argued the Iraqi dinar is so low it can go no lower. That may not be so. The Iraqi Central Bank has not allowed the dinar to trade openly in the market, stating it aims only for a stable currency. What the Iraqi CB doesn't say is the dinar can become practically worthless if trade were not controlled.

Comparisons

  • The case of Kuwait is argued, where its dinar dove during the Iraqi invasion, then appreciated rapidly when the Iraqis were ousted. While speculators made money, the situation differs. Kuwait's economic situation was stable before and after the invasion, while Iraq's was not during Saddam's time, is not because of the insurgency, and probably can't be with threat of a civil war.

Arguments

  • Proponents of investments in the dinar argue that the Euro started low when it first came out, but has since appreciated substantially. They conclude the dinar will follow the same pattern. But Europe was and is not in a civil war.

Speculation

  • An argument is presented about Iraq having the world's second biggest reserves that will soon be exploited fully and, with soaring oil prices, the dinar will also soar. But, "soon" seems unlikely, as with equally oil-rich Venezuela. Because of political instability, the bolivar's value has declined to a third of the dollar's value since 2001.

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