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New Iraqi Currency

Iraq has a cash driven society where banks are seldom viewed as places to store consumer wealth and communications between branches of even the same bank are often difficult to conduct and rely mostly on face-to-face meetings to update account balances rather than the use of automated networks. The flow of funds in Iraq's economy in general is more often than not, one of funds flowing out from banks with very little recirculation as is experienced in other societies.

Why does this happen? It's a result of "learned behavior" including consumer experiences dating back to the end of the first Iran-Iraq war. During this timeframe, the former dictator found the country nearly broke and faced with making millions in stipend payments to returning soldiers. To generate cash, he instructed all banks to stop making payments other than those needed to pay government workers. Most who stored their wealth in the banking system lost everything. Accordingly, the current distrust in the banking system will take time and consumer education to overcome.

The population of any type of currency in banks given the current security situation makes such movements risky to the extent that it is often difficult for Iraq's own Ministries to keep current on payments to its own workforces. It's not an uncommon event for the State owned banks to simply run out of cash to make payrolls, and then call for special Coalition assistance to arrange transports of cash to them.

When officially introduced at the end of the British mandate (1932), the dinar [consisting of 1,000 fils or 20 dirhams] was equal to, and was linked to, the British pound sterling, which at that time was equal to US$4.86. Iraqi dinar (ID) equaled US$4.86 between 1932 and 1949 and after devaluation in 1949, equaled US$2.80 between 1949 and 1971. Iraq officially uncoupled the dinar from the pound sterling as a gesture of independence in 1959, but the dinar remained at parity with the pound until the British unit of currency was again devalued in 1967.

One Iraqi dinar remained equal to US$2.80 until December 1971, when major realignments of world currencies began. Upon the devaluation of the United States dollar in 1973, the Iraqi dinar appreciated to US$3.39. It remained at this level until the outbreak of the Iran-Iraq War in 1980. In 1982 Iraq devalued the dinar by 5 percent, to a value equal to US$3.22, and sustained this official exchange rate without additional devaluation despite mounting debt. In early 1988, the official dinar-dollar exchange rate was still ID1 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.

The Iraqi dinar was worth $US3.20 before the United Nations embargo that followed Iraq's 1990 invasion of Kuwait. By August 2002 it was trading at just below 2000 to the US dollar, and by mid-April 2003 it had slipped to anywhere between 3500 and 4000 against the dollar. In July 2003 one US dollar equaled about 1,500 Iraqi dinars. Nearly all the bank notes issued after the 1991 Gulf War were without watermark or metal line due to technical difficulties, which is why so many forgeries took place.

In April 2003, following the end of major combat operations, the Iraqi economy was in distress because of closure of oil sales, imposition of UN sanctions. At that time, United States officials said that a new currency was needed, to introduce some stability. Without a proper currency in circulation there was a fear of inflation. The US decided to distribute $20 bills to the civil servents to boost the economy. This was not an issue of "dollarizing" the economy, but to get money that had real value into people's hands.

As Brad Setser, former acting director of the US Treasury Office of International Monetary Policy, noted, "A currency that is tightly linked to the dollar would ... make it harder for the government of Iraq to manage its dependence on oil revenues. The dollar revenue from oil sales is highly volatile, so the government would have trouble paying the same dollar salary when oil is at $10 a barrel and when oil is at $30 a barrel. Rather than matching expenses and revenues by paying dollar salaries that vary in line with global oil prices, it is far easier to pay salaries in a local currency and let the value of the local currency fluctuate against the dollar."

By the end of April 2003 the economic life and conditions in Kirkuk city were becoming increasingly difficult due to the severe shortage of fuel, the increase in market prices and the non-payment of salaries to the civil servants in Kirkuk. The produce in the market had become increasingly expensive due to the significant rise in the number of people from Erbil and Sulaymaniyah who traveled to Kirkuk for shopping purposes. These shopping trips by people from the northern governorates were a result of the more attractive prices at which products were available in Kirkuk compared to the north, due to the low value of the 'new' Iraqi Dinar used in Government of Iraq [GOI] areas as against the 'old' Iraqi Dinar in use in the north.

In the long run, Washington wanted a new Iraqi government to pick its own currency, much as Afghanistan adopted a new one after the fall of the Taliban. As of May 2003 the US reportedly estimated that it was unlikely that a new government would be formed in Iraq in less than a year, and it would take at least three months after that to design a new currency. Until then, the Iraqis would have to use the various currencies floating in the market.

In June 2003 the Iraqi central bank once again began printing Dinars, with fallen leader Saddam Hussein's image on them. The 250 dinar denominated banknotes were printed by the Baghdad mint, under the supervision of the manager of the central bank. This was an effort to overcome a severe shortage of Iraqi dinars and to offset fears of counterfeit currency. The new 250-dinar bills -- worth less than US$0.20 each, were issued because of a shortage that caused a liquidity crisis in the country.

The administrator for the Coalition Provisional Authority in Iraq, Paul Bremer, outlined in an address to the Iraqi people 07 July 2003 the key spending priorities for the Iraqi national budget over the coming six months. These included commitments to improve the water, electrical, public health and telecommunications systems.

Bremer announced that the Coalition would print and distribute new banknotes for Iraq. In response to this press announcement in Baghdad, De La Rue confirmed that it was in discussions to assist in the production of banknotes for Iraq. The Company led a consortium of global currency specialists to manufacture the banknotes. De La Rue is the world 's largest commercial security printer and papermaker, involved in the production of over 150 national currencies and a wide range of security documents such as travellers cheques and vouchers. Thomas de la Rue began printing British postage stamps in 1855, and obtained the contract for all Indian postal requirements.

Banknote Corporation of America, Inc. (BCA) is the largest high security printer in the United States, with headquarters in New York City and a manufacturing plant in North Carolina. Banknote Corporation specializes in intaglio printing, producing stamps for the United States Postal Service as well as for foreign postal administrations.

American Banknote Corporation (formerly United States Banknote Corporation) is primarily concerned with the engraving and printing of corporate and government securities and other secure documents, including the production of holograms. The American Bank Note Company, the first security printing company in the United States, can trace it origin over 200 years ago to the father of security printing, Paul Revere. The American Bank Note Company traces its beginning back to 1795, with the formal creation of the American Bank Note Company in 1858. On August 8, 2003, a jury found that Morris Weissman, former chairman and CEO of American Banknote, had inflated his company's earnings in 1996 and 1997. Based on the false numbers, the 1998 public offering of the company's subsidiary, American Banknote Holographics, was a success, netting the company $115 million. When the accounting fraud was uncovered in early 1999, the spinoff's shares dropped from about $16 a share to $1.80 a share. The stock was delisted in August 1999. American Bank Note Holographics ("ABNH") is in many ways a new company today, with new management that started in 1999.

Bremer stated that the so-called "print" dinars in circulation in most of Iraq, nor the formal national currency (or "Swiss" dinar) still used in some parts of the Kurdish North were suitable for the new Iraq. "Print dinars" were poor quality, and in practice circulated widely in only two denominations -- the 250 dinar note, and the 10,000 dinar note [and no coins]. This made Saddam dinar notes very inconvenient to use. The "Swiss" dinars, while of higher quality, were so old that they were literally falling apart in people's hands. The former national ("Swiss") dinar notes were used throughout Iraq until the early 1990's, and this national currency still circulated in the Kurdish north. The bills nicknamed "Swiss dinar" either because of their relative stability and strength or because it was made in Europe, depending on the account. The Swiss dinar was trading at about 6.7 to the dollar in early July 2003.

Bremer stated that a new currency had not been designed by the United States as only a sovereign Iraqi government could take that decision. The new currency would not depict Saddam Hussein. The design for the new currency, which was not been released in advance to the public, was taken from the designs of the "Swiss" dinar, though the new notes had different colors and denominations. The new dinars were printed in a full range of denominations: in 50s; 250s; 1,000s; 5,000s; 10,000s; and 25,000s. The new banknotes were much better protected against counterfeiting, they were much more durable and suffer less "wear and tear".

The new currency was made available to the Iraqi people on 15 October 2003. They replaced the existing Iraqi "print" dinars at parity: one new Iraqi dinar was worth the same as one "print" dinar. The new dinar replaced the "Swiss" dinar at the rate of 150 new dinars to one Swiss dinar. These different rates reflected the different prices, expressed in local currency, in different parts of the country.

Currency could be exchanged at branches of the Rafidain and Rasheed banks, and Iraqis had three months in which to make the exchanges. On 18 August 2003 the Central Bank of Iraq advised Iraqis to deposit all their dinars in local banks to facilitate their change into the new currency. The Bank's governor, Faleh Dawood Salman, said the UK firm charged with printing the new Iraqi money intended to ferry the first shipments to the country in a few days. "The process of changing the money has started and I call on all Iraqis to open accounts in both government and private banks and deposit the amounts they are willing to swap," Salman said.

On 01 October 2003 it was disclosed that agents from the Defense Criminal Investigative Service (DCIS) and the 812th Military Police Company assisted by Iraqi police and the Ministry of Finance had broken a counterfeit printing operation in Baghdad and seized counterfeit currency worth 100 billion dinars. DCIS agents and Military Police raided two locations, seized printing presses and arrested Amar Fadil Ramadan Al-Kayse, an Iraqi national who was subsequently released to Iraqi Ministry of Interior officials for prosecutorial action by the Iraqi Ministry of Justice and Courts. The investigation leading to the arrest of Al-Kayse revealed that Al-Kayse was printing and attempting to pass counterfeit 250 Iraqi dinar notes to the Central Bank of Iraq (CBI), which is funded and operated by the Coalition Provisional Authority (CPA). Al-Kayse owned and operated the Sarmad Company for Printing, a local Baghdad printing shop and worked as editor of Nuktat Dhaw ("Spot Light"), a newspaper in Baghdad.

Stephen Cecchetti, Professor of International Economics and Finance at Brandeis University, noted in June 2003 that "Cultural legitimacy is the final and most important issue to confront in designing the new Central Bank of Iraqi. What any of foreigners write or say is irrelevant unless the people of Iraq are involved. Most importantly, we cannot go into Iraq and build a set of institutions that reflect American and Western European values. This will not work. The new Central Bank of Iraqi will belong to the Iraqis and so they have to set it up. While I might think it would be fitting to start printing new Iraqi currency with an image of King Hammurabi on it, I'm not going to use the currency."

The new currency was unveiled during a press conference in the capital of Baghdad, October 4, 2003. The new Iraqi dinar is a sturdy and secure currency, imprinted with traditional Iraqi symbols -- altogether a great improvement over the flimsy bills with Saddam's face. Iraq's new banknotes include pictures of an ancient Babylonian ruler and a 10th century mathematician in place of the face of Saddam Hussein. An ancient Islamic compass, patterned on the an Astrolabe from Baghdad dated 1131 AD, on the new Iraqi 250 dinar banknote replaced the face of Saddam Hussein on the old note. This is the same Arabic Astrolabe that was used on the dinar note of the 1980s issue and the 1000 Dinar note of the 2002 issue.

The original order of 2 billion notes filled more than twenty-five 747 airplanes.

At the time that the new dinar was introduced, the Central Bank of Iraq (CBI) was made independent of the Finance Ministry, which had been under the control of the Baathist Party. The CBI had suffered from a long period of domination by the Baathist regime and isolation from the international community, and needed much assistance to rebuild. The CBI's monetary policy function required special attention. It lacked a modern statute to facilitate monetary stability, a coherent framework for conducting monetary policy aimed at achieving price stability, and corresponding instruments for implementing monetary policy.

The exchange rate of the new dinar appreciated about 25 percent in the months following its introduction in late 2003, while prices were stable and inflation low. The exchange value of the dinar was quite stable, despite further growth in quantity. The earlier strength in the dinar helped hold down prices over the first several months of this year, and it seems quite likely that inflation will end up low this year, especially compared to the double-digit or higher rates that had characterized the Saddam era. This stability provided the basis for much-needed public confidence in the management of its currency.

Coalition Contractors did not have to be in country long to discover that there was no ability to use credit or ATM cards, and finding available bank related services was challenging given the security situation near many work sites. In order to make payments to local suppliers, vendors and sub-contractors, some resorted to carrying luggage bags of USD across borders themselves while others paid fees to international banks for the risk associated with making a physical money movement on their behalf. Nearly all contractors have had a different experience and story to share on how they have wired around the difficulties and challenges posed to them to get the currency they need when they need it, and where they need it.

Once acquired however, payments in cash continue to be problematic for the payee. For example, Iraqi persons in their role as contractors, suppliers and employees can become easy targets for criminals and insurgents when paid in cash. There have been instances when Iraqi's have left a coalition base with a cash payment and been robbed, often resulting in injury and at times death. Payments made in the form of a check drawn on a local bank branch and denominated in Dinar is perhaps the safest way to pay Iraqi firms and persons.

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Page last modified: 09-07-2011 02:47:52 ZULU