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A Wild Ride for the Dinar

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Lobo
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A Wild Ride for the Dinar

Post by Lobo on Sun 28 Jun 2015, 1:37 pm

A Wild Ride for the Dinar

June 28, 2015 in Investment, Mark DeWeaver on Investments and Finance
http://www.iraq-businessnews.com/2015/06/28/a-wild-ride-for-the-dinar/

By Mark DeWeaver.
This has been quite a year for the Iraqi dinar. From a level of IQD 1,217: USD 1 at the end of 2014, the market rate for the currency weekend steadily during the first quarter, penetrated a key support level at 1,290 in late April, and reached a low of 1,379 on June 16. By that point the dinar had lost 11.7% year-to-date and appeared to be in free fall.
Last week, however, the exchange rate rebounded sharply. As of June 25, it was back at 1,258, bringing the year-to-date loss to just 3.3%. (See chart. Exchange rates are from the CBI and Rabee Securities.)
Like the currency’s last big moves in 2013 and 2014, this year’s action seems to have been driven primarily by changes in the rules for the central bank’s dollar auctions, where qualifying buyers (e.g. importers making wire transfers to vendors) can buy the dollar for IQD 1,166. (This rate has been unchanged since the beginning of 2014.)
The last two times, the rule change involved new measures to combat money laundering. This time the trouble resulted from an attempt to collect income and customs taxes directly from outgoing remittances, combined with a reduction in the daily supply of dollars auctioned (an apparent attempt to conserve the CBI’s dwindling forex reserves).
Collecting taxes directly from importers’ payments to their suppliers sounds like a good idea in theory. Rather than trying to collect these amounts at border crossings, where there will be many ways for importers to avoid paying, why not simply add an extra charge—8% of the total—to their wire transfers and have their banks remit this to the government?
If importers were going to be stuck with this 8% charge regardless of how it was collected, it would have no effect on the exchange rate at all. Apparently many of them aren’t used to paying anything, which meant they were facing a de facto 8% deprecation in the auction rate—from 1,166 to 1,259.
Had the market rate remained at the year-end 2014 4.4% premium to the auction rate, it would have peaked at 1,314. But the central bank’s decision to limit the supply of dollars available to auction participants put the currency under even greater pressure. The resulting dollar shortage ended up pushing the dinar to its lowest level since 2006.
In the end, the government was forced to give up on the scheme to collect taxes on remittances. On June 18 the CBI announced that it was cancelling the 8% charge, at which point the dinar appreciated rapidly, regaining the 1,250 level by June 21.
Since 2011 there have been four major peaks in the IQD/USD exchange rate. The last three times, the dinar eventually returned to IQD 1,200: USD 1. This time the outcome is less certain. The 8% charge may have been cancelled but the CBI’s forex reserves are still falling. As of April 23 (the last reported date) they had dropped to USD 68 billion, down from USD 83 billion at the end of April, 2014, mainly as a result of lower oil prices and increased imports of military hardware. Until this trend reverses, the currency will continue to be weak.
The dinar’s wild ride may not be over yet.

    Current date/time is Sun 04 Dec 2016, 10:21 am