Sunday, 1 May 2011

Too Many Zeroes: Iraq Plans to Change Currency

niqash Mayada Daood

The Iraqi government plans to take three zeroes off the national currency. It should make transactions easier and enhance the exchange rate. But local economists are not sure the country is ready.

Recently the Iraqi government announced that they were close to completing plans for re-denomination. Three zeroes will be removed from Iraq’s currency, the Iraqi dinar or IQD, and old banknotes will gradually be phased out. For example, this would make an IQD 1,000 note into an IQD 1 note. Currently IQD 1,000 is worth around €0.60 and US$0.85.

Logically speaking, re-denomination does not change the value of a currency nor should it cause inflation. It should make currency easier to use and increase its credibility. Re-denomination may also be a matter of political expedience.

For example, when Turkey announced a re-denomination in 2005, the country’s central bank explained that extra zeroes on their banknotes meant “problems in accounting and statistical records, data processing software and payment systems”, adding that the move to cut them was “psychologically and technically essential”.

Re-denomination can usually only be undertaken once inflation is under control and over the last few years, inflation in Iraq has dropped from over 30 percent to single digits. Nonetheless Iraqi opinions about the planned change remain divided.

Qasim Jabbar, an economic researcher, is concerned about the psychological impact the removal of three zeroes will have on locals. Additionally Jabbar does not think the time is right. “We must create a stable environment in political, economic and legal terms, in order to control the conditions during the transition period to a new currency,” he explained. “This is necessary in order to ensure that the transition is not manipulated by government departments and in society in general, where there is rampant corruption.”

Jabbar was also worried about the absence of a central authority that was truly capable of controlling the Iraqi currency market. By rights, re-denomination should not impact the actual value of a currency; it should still buy the same goods as it did before for the same prices. “But a person with IQD 10 million will feel they have lost a fortune when the zeros are removed,” he noted.

Re-denomination is nothing new. “Many countries, such as Turkey and Germany, have also taken this step,” another Iraqi economist Kareem al-Halfi said. “But this doesn’t mean that the Iraqi experience will be like that of those nations. Iraq has serious structural problems and high rates of unemployment. These problems cannot be solved in the short term and we need to create the economic conditions necessary to allow re-denomination.”

According to Mothahhar Mohammed Saleh, an advisor to the Central Bank of Iraq, which was established in 2004 to administer monetary policy in Iraq, the impact of re-denomination could have both positive and negative effects.

Firstly, a reduction in the large amount of currency in circulation – there is an estimated IQD 27 trillion in circulation – could have an inflationary impact on everyday transactions, he said. For example, one previously recorded impact in other countries has included the rounding up (or down) of prices due to re-denomination.

On the other hand, the currency will become far easier to use. “In the wholesale sector, goods are being traded using US dollars,” he said. This process is known as “dollarization” and occurs when a country uses a foreign currency, in parallel to or instead of, its own currency because it is seen as more stable and subject to fiscal discipline.

Anyway, according to Saleh, “this change will not be introduced hastily. It will only be introduced when inflation is under control - and after parliament and the Iraqi cabinet has gone through legislation thoroughly. They will then decide how the [re-denomination] law will be implemented.”

As Saleh said, “the Central Bank is proceeding cautiously in this matter because it realizes re-denomination could cause economic problems if implemented in haste.”

The IQD was first introduced in the early 1930s and was pegged first to the British pound, then the US dollar. After Iraq’s invasion of Kuwait, under the leadership of Saddam Hussein, strict economic sanctions saw the value of the IQD drop. By the mid-1990s, IQD 3,000 was worth around one US dollar.

In order to make purchases in Iraq, huge amounts of cash were needed. An IQD 25 note was the highest denomination available so to make life easier, the government introduced an IQD 250 note. After the American-led invasion in 2003, the Iraqi government issued even more notes with higher values. IQD 25,000 notes were now the highest value.

The average person on the Iraqi street said they would be happy to see the IQD stabilize further. But they are also afraid that the lopping off of zeroes will have a negative impact.

Baghdad merchant Abdul Amir trades in food products and when he deals with wholesalers he prefers to use US dollars because then he doesn’t have to carry as much paper around. “Large transactions require millions of Iraqi dinar. If I use foreign currency, I don’t need as much,” he explained. “But when it comes to daily transactions, I don’t mind using the dinar.”

As to his thoughts on the planned re-denomination, Amir had only questions: “Would there be a loss expected? Would the market be controlled to guarantee its stability?” he asked.

Government employee Sabah Daoud raised further questions: “Would the Iraqi dinar rise against the dollar? Would my salary be worth the same, with and without the zeroes?” He wanted to see more research on the impact of such a step on the average Iraqi citizen.

Currently the Iraqi government seems set on losing the extra zeroes, those digits that have become such a burden on the dinar. But the road toward this goal is a difficult one. And it is just one stop along an even longer road, the one leading toward prosperity and steady, stable economic growth for Iraq.

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