You probably have heard about the hype over the new Iraqi dinar as a profitable investment opportunity over the last few years. Many speculators believe that a small investment in the currency will reap great returns as soon as the economy of the free Iraq stabilizes. What was the actual source of this idea?
The most common argument or say, reference that supports this idea may possibly be the investment comparisons of the new Iraqi dinar with the Kuwaiti dinar investment. Iraq is compared to Kuwait in terms of its recovery from the Gulf war and the revaluation of its currency. The premise is that the new Iraqi dinar will increase its value just like the Kuwaiti dinar after recovering from the invasion. This comparison, however, is totally flawed. It lacked the vital common threads that many have quickly assumed.
Let’s start with Kuwait. In 1990, when the country was invaded by Saddam Hussein, the country suffered major financial setbacks because the Iraqi army destroyed over 80% of all its oil wells. There was massive turmoil in Kuwait, but with the assistance of the United States and the allied forces, the war ended. Kuwait was able to restore the oil wells and increase production in just ten months. During Saddam’s invasion of the country, a lot of Kuwait’s banknotes were stolen by Iraq. The Iraqi dinar then replaced the Kuwait dinar. When Kuwait broke free from the invasion, a new set of Kuwait dinar was introduced and the stolen ones were demonetized. The people of Kuwait began to fear that the currency will eventually become worthless and so, for a short span of time, it traded one Kuwaiti dinar to USD 0.10. However, the value went up to is previous price. It is now valued as one of the world’s prized currencies. For the last twenty years, the Kuwaiti dinar has remained stable at an exchange rate of 1KWD to about 3USD.
Iraq, on the other hand was different. It’s currency did not suffer devaluation due to invasions that allowed fear to influence its already dropping value. The currency has remained low relative to the United States dollar for two decades now. This is due to the massive printing of new but inferior quality Iraqi banknotes after the Gulf war. The inferior quality made the currency easy to counterfeit. Moreover, the rapid printing caused high inflation and thus made the dinar’s worth lesser when exchanged to the dollar. In order to prevent the widespread counterfeiting, another set of new dinars were introduced in 2003. They were embedded with security features and were used since Saddam Hussein was removed from the country.
The argument that the new Iraqi dinar will also increase just like what happened to the Kuwaiti dinar is purely speculative and may not happen due to the difference in circumstances that prompted the devaluation of their currencies. You may see that the Iraqi dinar has been trying to recover for a long time now while the Kuwaiti currency was quickly controlled after it faced a short term crisis. Furthermore, the new Iraqi dinar has no fixed exchange rate yet. It still has to be set by the International Monetary Fund.