Three and a half years later, investors are still waiting, still hoping, and still buying more dinars. Their hope is that since Iraq has the second largest oil reserves in the world with the prospect of doubling its oil revenues over the next 10 years, any currency redenomination will be accompanied by a revaluation, resulting in a huge increase in the dinar’s value.
In this, there is not one but three misconceptions that may unfortunately shatter the expectations people are placing on the dinar. These misconceptions center on a) the redenomination process, b) debt forgiveness, and c) the central bank policy.
To Redenomination or not to Redenominate?
In most cases, a country will redenominate its currency when inflation erodes its value to such an extent that it becomes increasingly difficult to process transactions – when there are just too many darned zeros on every bill.
To simplify matters, nations will often chop a few zeros from their currency. For example, Bolivia in 1987 and Peru in 1991 dropped 6 zeros from their currencies, a redenomination of 1 million old money to 1 new money. To avoid confusion, the currencies were renamed. In Bolivia, 1 million pesos became 1 boliviano, while in Peru, 1 million intis became 1 sol.
But no one became a millionaire. In either country, you still had the same value in USD after the conversion as you had before. When you went to a Peruvian bank to exchange 1 million intis for 1 sol, you walked in with 1 USD worth of money and you walked out with 1 USD worth of money. It was a flat exchange.
The same will be the case with the Iraqi dinar, as indicated by XE.com:
“In 2010, the Central Bank of Iraq announced their plans to redenominate the Iraqi Dinar to ease cash transactions. The intention would be to drop three zeros from the nominal value of bank notes; but the actual value of the dinar would remain unchanged.”
Debt Forgiveness - "To Forgive is Divine"
But what about foreign debt forgiveness – as much as 80% in Iraq’s case? Won’t the erasing of so much debt make the new Iraqi currency so much more powerful?
Indeed, Iraq’s debt cancellation is substantial, as a 2006 CRS report for the U.S. Congress explains:
“When fully implemented, the Paris Club’s treatment of Iraq’s debt will reduce the total debt owed to Paris Club countries from $38.9 billion to $7.8 billion. This remainder (20% of the original total), will be rescheduled over a period of 23 years with an initial six-year grace period of repayments.”
However, the report shows that this forgiveness of debt has already taken place – first by the U.S. in December 2004 and then by the remaining Paris Club member countries in December 2005.
The remainder of Iraq’s debt forgiveness has largely been completed as well, as the Central Bank of Iraq notes, “Negotiations with non-Paris Club creditors are ongoing (mainly with Gulf countries), and resolution of the commercial debt is largely complete ... This portion of the external debt has been reduced to $45 billion in 2010.”
The CBI further states that while Iraq’s debt for 2010 was estimated at $92.3 billion, its GDP for that year was $82.2 billion. While the debt is high at 112% of GDP, it is not uncommonly high, and it is manageable. It is highly doubtful that any remaining debt forgiveness will be substantial, nor that it will ever impact the currency all that much.
Central Bank Policy - "Stronger Isn't Always Better"
Another major misconception is that the Iraqi government wants a stronger currency that better reflects the wealth of its substantial oil reserves, which are currently the second largest in the world.