By Shobhit Seth AAA |
What does it mean to "invest" in the Iraqi dinar? In simple terms, it's conducted in the same fashion as any currency investment. You purchase ‘x’ Iraqi dinar (IQD) by paying ‘y’ U.S. dollars (or your domicile currency). As with buying stocks, bonds or other currency, you purchase dinar at a given price and then expect the price to rise. The real question, though, is not just "can" you invest in this particular currency, but rather "should" you invest. (Check out Investopedia's large selection of forex tutorials.)
Is there the possibility of a scam in such an investment scheme?
Financial scams usually have certain characteristics. A few tip-offs include:
- If the scheme is run and promoted by individual agents instead of known entities;
- If there are heavy unofficial promotions through internet/emails/telemarketing calls instead of open and fair marketing;
- If transactions occur primarily through street-based dealers, high variations in available rates, and high markup fees yet promises of overly exaggerated returns.
In the case of the Iraqi dinar investment scheme, there might be additional red flags:
- Reputed banks (e.g. Wells Fargo) abstaining from offering forex trading in Iraqi dinars;
- States like Utah issuing warnings against such investments;
- Very wide bid-ask spreads; and
- Impractical reasoning (discussed below) justifying Iraqi dinar as a "perfectly safe" and "sure-shot high return" investment scheme.
All these factors give rise to further doubt (See Investopedia's tutorial on Investment Scams.).
The basics of forex
First, here's a very rudimentary explanation of what it means to invest in a currency. For example, let's say the Iraqi dinar forex rate is 1 US$ = 1160 IQD (as is the case, approximately, in August 2014). If you invest US$1000 in Iraqi dinars with that rate, you will get IQD 1.16 million. After this “investment,” you will wait and watch, expecting the IQD to rise against the US$. If your expectations come true, and the exchange rate improves to a hypothetical value--say 1 USD = 1 IQD, then your investment is now worth US$1.16 million. Under this hypothesis, the investor would become a millionaire by investing US$1000, which grew to US$1.16 million.
But what happens if the dinar takes the opposite direction? Say it deteriorates to 1 US$ = 2000 IQD. Now your invested holding of IQD1.16 million is only worth US$580. Effectively, you have lost $420 on your investment.
The big question, Is the Iraqi dinar Investment a hyped scam or can any profitability be achieved?
First, let’s begin with the positives:
Although speculative thoughts about Iraqi dinar Investments have been going around for a long time, there were developments based on reports which led to spike in speculation in IQD-US$ trading (like the statement issued by IMF around mid-2007, in the post-Saddam Hussein era). It mentioned the International Compact with Iraq, which was interpreted in multiple ways and led to further speculation in the Iraqi dinar currency trading.
“(Iraqi Authorities) have taken some courageous measures, including the gradual increase in domestic fuel prices and, starting in 2007, the elimination of all direct budgetary fuel subsidies, except for kerosene. Iraq has also embarked on an ambitious structural reform program, in order to make the transition to a more market-based economy.”
The article further states:
“To combat inflation, action has been initiated on three fronts. First, the Central Bank of Iraq raised its policy interest rates sharply and allowed a gradual appreciation of the dinar. These measures aimed to de-dollarize the economy in order to enhance the central bank's control over monetary conditions, and also to reduce imported inflation.”
Just prior to these, the IQD-USD exchange rate was around 1270 (April 2007) and as of August 2014 it is around 1160 – a positive return of around 8.5%. No big significant price moves have been observed since then, considering the long duration.
Trends further down the line will depend on the current and future developments in the region.
Current Situation & Future Prospects of Iraq:
Civil war, regional fights and western countries staying away are major concerns of current Iraq, with the extreme possibility of the country splitting into three separate regions. If that happens, the payday may as well never come for investors holding Iraqi dinar and waiting for value appreciation.
Backed by the oil reserves, Iraq has the potential to spring back and establish itself as a stable economy. It managed to do so after the eight-year long Iran-Iraq war. But that will need a peaceful, promising business atmosphere to establish investor confidence, which will in turn help revive its economy and bring back the IQD forex rate to realistic levels.
Now to the other side of the coin:
There are reasons pointing to Iraqi dinar investments being a hyped scam, most important factor being IQD literally trading in the “forex black market” instead of regular banks and trading desks. Additionally, the following incorrect statements are heavily publicized by the propagators of Iraqi dinar Investment schemes:
- “IQD is heavily undervalued at present and will rise significantly against USD in mid-to-long term due to a pending revaluation bound to happen soon”
Supporters of Iraqi dinar Investment are reported to be confusing the two economic terms - Revaluation vs. Redenomination.
Revaluation is the actual calculated adjustment made to a country's official exchange rate relative to a chosen baseline (gold or USD). Revaluation results in that currency becoming expensive to the base currency by the factor of adjustment and hence changes the purchasing power of that currency.
Redenomination is done in case of high inflation levels by old high value notes being made equal to new small value notes (1000 Old dinars = 1 New dinar). It simply drops off the zeroes keeping the purchasing power the same as before.
There are confirmed news items that Iraq did plan to redenominate its currency, but not revaluate. In the absence of any revaluation, there is going to be no change in the forex exchange rate of Iraqi dinar IQD (with or without redenomination).
Economists also point out that it would not be beneficial to the Iraqi economy to allow any such value appreciation by the authorities (even by means of revaluation). Doing so will lead to multiple problems for Iraq:
- The inability to repay the national debts due to revised valuations
- Literally putting barricades for foreign companies to enter Iraq for business
- Overall restricted growth in the post-war era, due to ripple effects of above
2. “Similar 'Revaluation' Of Kuwaiti dinar is a historical proof”
Some try to encourage investment in the Iraqi dinar based on the success case of the “revaluation” of the Kuwaiti dinar (KWD), which today is a high valued currency.
However, this is misleading. While the official Kuwait Government Site does mention a new release of notes following the Iraqi invasion, there wasn’t any revaluation. The new release was to prevent use of stolen and looted old Kuwaiti dinars.
In the Kuwaiti example, the pre-war forex rates were retained, simply changing the bank notes.
It is also impractical -- and economically impossible -- to “revalue” a currency in such a way that its value increases many fold, without there being a real addition to the reserves.
3. "Post War development may take time, but always gives good results"
Examples of European countries like the Netherlands, UK, etc. are cited in this case in an attempt to justify an Iraqi dollar investment. These other countries managed to make a rapid comeback from the effects of World War II, and are today considered among the developed countries.
One important fact missed here is that these countries were able to progress faster because the war situation was completely different from the Iraq War. It was then a case of world war where the European countries in question were on the winning side and got maximum support in the post-war aftermath.
The case of Iraq, by contrast, is more of a civil war, where there exists a possibility of the country being split into multiple fragments. Even if it stays as one nation, it will still take a good long time for the economy to recover.
4. “Executive Order 13303 gives Americans special legal rights to hold or invest in Iraqi dinar”
Order 13303 is for protection of “the Development Fund for Iraq, Iraqi oil products and interests – including ownership by U.S. persons – from any legal attachments or liens”. It does not mention rights or protection for investments in Iraqi dinar, at all, by anyone.
5. The Iraqi dinar is still a good buy, even without a “revaluation”
This is based on the strong belief by a few investors that Iraq’s oil reserves and development potential make the dinar a good purchase. Some investors argue that the market could drive a strong appreciation for the Iraqi dinar in the post war era, simply because the huge oil reserves will eventually make it a strong currency.
Similar to Iraqi dinar, similar rumors are reported for Vietnamese dong and, most recently, the Egyptian pound.
Can a short term high-frequency trader benefit from IQD-USD forex trading?
Possibly Yes, but practically No.
The reason is that the IQD-US$ forex trading market is virtually non-existent. No banks are offering Iraqi dinars. If you have to buy Iraqi dinars, you can buy them only at select money exchangers, who may or may not be legally registered. Secondly, they charge a hefty markup fee, to the tune of up to 20%, for such transactions. This will erode the profit potential even for short term trading.
Can this be a good bet for a long term investment?
Forex trading in general comes with a few challenges:
- Overvalued profit potential based on investor’s misconceptions.
- The misleading practices of foreign exchange dealers as forex is primarily an OTC market. Further complications and malpractice exist in trading such illiquid and unregulated asset class.
- Investors' basic ignorance about international forex valuations
- Loss aversion – investors holding onto loss-making assets further deteriorating the valuations of their investments
How Iraq, its economy and hence the forex rate develop over the long term, is going to be a long term uncertain bet.