_Dropping Zeros, Gaining Credibility? Currency Redenomination in Developing Nations
Layna Mosley, Dept. of Political Science, University of North Carolina, Chapel Hill, NC
In reading the above document, I find that the type of redenomination Iraq is soon to face does not really fit any of the models with the above named document. The reason is; Iraq’s currency was not the victim of inflation like some of Iraq’s neighbors, like Turkey with inflation in 1980 at 110% and 1994 at 106%, who redenominated in 2005, Georgia with inflation in 1995 at 163% who redenominated in 1995 and Israel with inflation in 1980 at 131%, 1981 117%, 1982 120%, 1983 146%, 1984 374% and 1985 305% who redenominated in 1980 and 1985. Iraq’s inflation rate was low before the Sadam era and is still low now at 6.02% for December of 2011. Iraq is not mentioned in the above publication in the table of inflationary countries and redenomination.
In early 1988, the official dinar-dollar exchange rate was still ID 1 to US $3.22; however, with estimates of the nation’s inflation rate ranging from 25 percent to 50 percent per year in 1985 and 1986, the dinar’s real transaction value, or black market exchange rate, was far lower-only about half the 1986 official rate, which would have been US $1.32. See Wikipedia on the history of the Iraq Dinar.
No, inflation was not the problem; Iraq fell victim of war instituted by the Sadam regime with subsequent sanctions employed by the United States and upheld by the United Nations, which in turn tumbled the Iraq Dinar to keep them from buying weapons of mass destruction.
Iraq’s Dinar was sanctioned from 2001 US $0.00027 to 2004 US $0.00068 and now US $0.00086 average.
Read More Link on Right
In the part below the author omits countries that dollarization was used, such as Iraq but not named.
Excerpt from the above document:
“The dataset includes developing and transition economies during the 1960-2003 periods. Many countries enter the dataset after 1960, because they do not gain independence until later in the period. Country-years that coincide with official dollarization, either fully or nearly, are omitted from the analysis.14 I also include Portugal, Spain and Greece – long classified as part of “emerging Europe” – until they join EMU (1999 for Portugal and Spain, 2001 for Greece). This results in a dataset of 5,736 country-years although, for many variables, missing data render the number of cases included significantly smaller.”
Iraq is a different sort of exchange rate regime due to past sanctions.
Another excerpt from the above document:
“Of course, neither measure captures international influences perfectly: the capital flows indicator includes all types of capital (short and long term), and it is likely that different types of flows (e.g. equity vs. FDI) will affect government policymaking in different ways. Moreover, the exchange rate regime could cut either way, assuming (and this is an assumption, given the time frame) capital mobility. Governments with fixed rates may worry more about external pressures, as they need to impress markets, lest they face a speculative attack on their peg. Alternatively, governments with flexible rates may worry about their currency’s value, particularly if they are more trade dependent.”
Governments with fixed exchange rates, such as Iraq, will use policymaking and elections to determine when a redenomination will occur, such as internal capital from oil revenues and other commodities. Iraq as we know has lots of different ways to gain GDP, which in turn will allow over time a return to the proper exchange rate.
Because of Iraq’s quailed exchange rate and dollarization of Iraq the excerpt of the above mentioned document explains more of what in my opinion is Iraq’s exchange rate future.
“Currency and Identity. The final two hypotheses developed in Section II concern the relationship among confidence in currency and government, national identity and redenomination. Along these lines, hypothesis 6 suggests that foreign currency substitution will influence positively the hazard of redenomination. Unfortunately, data on foreign currency substitution is not available for most of the country-years included in the analyses. One means of assessing these hypotheses would be the analysis of public opinion data: holding all else equal, are changes in the inflation rate or the dollar to local currency rate correlated with changes in approval of the government, or changes in affinity with the nation-state? Or, in a cross-sectional sense, do citizens of nations with higher levels of foreign currency denomination have significantly lower levels of confidence in their governments? The latter analysis would necessitate only cross-sectional (as in Feige et al 2002, Feige 2003) data on currency substitution, rather than a fuller set of time series data.”
As we know Iraq is currently being dollarized pulling the Dinar out of the market place of Iraq, as such, Iraq will eventually redenominate with lower denominations buying the USD back, once the Citizens of Iraq gain confidence in their government and the nations-states currency.
In the near future I predict we will see articles coming out that will influence the Iraqi People into confidence of their own Nation-state currency. When we start seeing these articles the RV is near!
As I show above and the statements made at PDF page 17 of the Future Project of Iraq, wherein its states that the IQD should have been devaluing and the history showing the IQD was only really worth US $1.32, I employ you to give more credence to the 1 to 1 articles rather than that of the Intel Providers dream of 3.22 to 12.00. I believe that the RV will come out at somewhere between 1.13 and 1.17 and could be as high as 1.32, but we will not know until that day.
I do know it will not be in the high ranges we hear so often and I believe, if you read the above document and the history of Iraq’s currency, as well as the 1 to 1 articles, you will become convinced as I have that the high numbers are nothing but dream poppers and hype and a LOP is out the window.