The New Iraqi dinar (NID) was broadly stable in 2004 at around NID1,455:US$1, but has been under pressure for much of 2005. This is largely the result of heightened political and security concerns, as well as a possible increase in the dollarisation rate in certain sectors of the economy. However, given the CBI’s commitment to maintaining what has become a de facto peg, and the apparent resort to foreign-exchange “rationing” (under other guises) in some instances in the CBI’s daily currency auctions, the average official rate has only depreciated to around NID1,475:US$1 by mid-August. The CBI appears reluctant to use its large accumulated foreign-exchange reserves (of over US$8bn by mid-2005) to satisfy dollar demand, but has not raised dinar interest rates sufficiently to attempt to stem dollar demand (and stimulate dinar demand). Eventually, if the CBI resorts to more pervasive rationing, a black-market exchange rate may well develop. Given the expected continuation of a poor security environment, especially with the planned forthcoming elections, we expect pressure on the currency to remain high. Nevertheless, CBI intervention will keep it from falling too far, leaving the average rate at around NID1,480:US$1 in 2005, and NID1,490:US$1 in 2006 (assuming that the political and security environments improve).
The above excerpt is from a forecast released yesterday by the EIU. To see the whole report (well actually to see even what I've posted) you need a subscription. I am currently borrowing some one else's.
The New Iraqi dinar (NID) was broadly stable in 2004 at around NID1,455:US$1, but has been under pressure for much of 2005. This is largely the result of heightened political and security concerns, as well as a possible increase in the dollarisation rate in certain sectors of the economy. However, given the CBI?s commitment to maintaining what has become a de facto peg, and the apparent resort to foreign-exchange ?rationing? (under other guises) in some instances in the CBI?s daily currency auctions, the average official rate has only depreciated to around NID1,475:US$1 by mid-August. The CBI appears reluctant to use its large accumulated foreign-exchange reserves (of over US$8bn by mid-2005) to satisfy dollar demand, but has not raised dinar interest rates sufficiently to attempt to stem dollar demand (and stimulate dinar demand). Eventually, if the CBI resorts to more pervasive rationing, a black-market exchange rate may well develop. Given the expected continuation of a poor security environment, especially with the planned forthcoming elections, we expect pressure on the currency to remain high. Nevertheless, CBI intervention will keep it from falling too far, leaving the average rate at around NID1,480:US$1 in 2005, and NID1,490:US$1 in 2006 (assuming that the political and security environments improve).
The above excerpt is from a forecast released yesterday by the EIU. To see the whole report (well actually to see even what I've posted) you need a subscription. I am currently borrowing some one else's.
Re: EIU: Currency Forecast for Iraq
Unless the CBI takes action and specifically revalues the dinar(hopefully around the time they make the dinar convertible), the rate is gonna stay the same as long as the CBI continues to hold auctions, thereby intervening to keep the dinar's official exchange rate artificially low at 1460:1.
The main reason I see for them keeping this rate up until now, is in order to keep the dinar nice and stable as wanted under the IMF's EPCA program for Iraq. Too high a value for the dinar ahead of Iraq being ready to support it, and the dinar's credibilty would have been shot. Too low a value and the Iraqis wouldnt of had any purchasing power at all and daily transactions would have been extremely inconvenient.(just like Afghanistan's currency before the new rate was announced in 2003 edition.cnn.com/2002/WORL...currency/)
Now that the dinar's stable rate has given rise to confidence by the Iraqis in their own currency, demand for the currency has increased since its introduction in 2003. This higher demand will help lead to a greater pressure on the dinar's exchange to go higher. This is what the IMF and Iraqis want, namely the eventual demise of the dual-currency system in Iraq, to one in which dinars are preferred in daily transactions. This transformation will be complete when the dinar will be a.) convertible(and thus legitimate in the eyes of other countries) and b.) have an exchange rate that gives the Iraqis much more purchasing power then the current rate does now as compared against the dollar.
All the articles that I have read in the past 2-3 months points to the dinar becoming convertible in 2006 sometime. This action will show the world that Iraq is serious about International trade and for that matter tourism. I further believe that the "desired" exchange rate has been agreed upon by the CBI and IMF and will be put in place around the same time as the dinar becomes convertible.
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