The forex rate of a particular currency is directly tied to its economy and geopolitical situation of that particular country. Although price fluctuations in forex rates between two currencies follow the demand and supply trend based on “Purchasing Power Parity” and interest rates, the case of Iraqi dinar (IQD) becomes a special one due to its current situation. (PPP is an important economic concept; watch Investopedia's helpful video on the subject.)

The IMF, which monitors Iraq’s economy, is using a single fixed rate of 1170 IQD per US$. The official market rate of IQD-US$ keeps hovering around this fixed price. But in reality, a lot of variation exists in the bid/ask quotes for buy/sell prices at the various foreign exchange dealers, as the Iraqi dinar is no longer easily traded. The bid-ask spread is pretty wide, and dealers (legitimate or illegitimate) are known to charge a high mark-up fee for any transactions in IQD.

The Iraqi dinar has special attributes, as its valuation and volatility are tied to developments in Iraq. Given the reality of Iraq's being a war-torn country, a number of factors exacerbate risk,including: 1) multiple factions trying to control different parts of land; and 2) the withdrawal of Western countries.

Even if one is willing to take the bet based entirely on chance, the unknowns are considerable.

Changes in the price of Iraqi dinar will depend on lots of factors, including the following:

How soon the war comes to an end

Unless business participants and investors can be assured of a peaceful, secure and trustworthy atmosphere for making investments, the economy will struggle to recover. Investors already have to deal with enough risk as it is even under the best of circumstances; hence, they look for stable regions without political or other disturbances. The current war-like situation is the major deterrent in the Iraqi economy's recovery, and thus in the improvement in Iraqi dinar pricing. The sooner Iraq achieves normalcy, the better prospect the economy and the dinar will have for recovery.

Whether the country remains unified or is heading for a split

In the event of the latter, will the new authorities honor the debt and obligations of the existing currency and economy? If not, then it will be a sunk cost for all investors holding Iraqi dinars. High price fluctuations will continue on the downward trend, with much wider spreads in the unofficial forex trading markets, until the situation becomes clear at ground level.

Whether Western countries are ready to re-engage in rebuilding Iraq and its economy

Western countries have been phasing out their presence in Iraq. This may be a cause for the current disturbances that have sprung up. Just the sheer engagement of Western countries can give a kick-start to help building the investor confidence, thereby improving the economy and improving the forex rate.

Whether organizations like the IMF, World Bank, United Nations are willing to help

The forex rate IQD-US$ showed positive trends during the period when programs like the “International Compact with Iraq (IMF)” were introduced. A further step in this direction by introducing similar programs by capable organizations should be a big positive for enhancing IQD rate.

Whether erstwhile investor interest can be rekindled

As reported by Newsweek, in 2006, “The U.S. Chamber of Commerce reports 34,000 registered companies in Iraq, up from 8,000 three years ago.” Once past the current conflict, in the post war scenario Iraq should be able to attract the same large size investor interest which should improve the economy and leading to enhancement in exchange rates.

Iraq's potential to develop an oil revenue-based, solid economy

Iraq’s economy is clearly dominated by revenue from oil, which reportedly provides 95% of foreign exchange income for Iraq. Iraq's recent contracts with major oil companies have the potential to greatly expand oil revenues. Once stable, Iraq will need to upgrade its oil processing, pipeline, and export infrastructure to enable these deals to reach their full potential, paving the way for a rapid growth.

Whether Iraq can develop oil-associated industries

Iraq’s manufacturing, chemical and fertilizer industries are tied to the oil sector. Still, given a suitable business environment, they have a tremendous potential to grow.

Whether Iraq is able to develop other sectors

Within Iraq, there are significant opportunities available in the construction, retail and energy sectors. These sectors saw substantial interest and backing by foreign investors, during the post-Saddam period. Hundreds of foreign companies, backed to a good extent by their governments, continue to operate in Iraq in these sectors even during these troubled times. Unless there is a major wind-up of operations from these large organizations, the probability of Iraq coming back to recovery remains up for grabs.

Whether investors from non-first-world economies will get involved

Investment has come into Iraq not just from companies in developed countries like the US and UK, but also from companies in developing countries like India. The only need is an improved, secure and peaceful business atmosphere and the Iraqi economy should resume a normal course.

Whether regulatory deficiencies in Iraq can be sorted

Most foreign investors in Iraq had challenges with the regulatory framework, even during the post-Saddam period. List included problems in land acquisition, corruption and delay in implementing reforms which could support private sector. Iraq needs to find a way to get over these impediments to win foreign investors’ confidence.

Interestingly, the above mentioned challenges also exist in other developing economies like BRIC nations, but trouble in Iraq gets compounded by the war like situation and hence need more prompt resolution.

Whether promising signs from previous peacetime scenarios can resurface

Even after the eight-year long Iran-Iraq war, which had a devastating effect on both nations, Iraq was able to restore itself. It would not be impractical to assume that given sufficient time of established peace, Iraq does has the required potential of springing back to be a stable and healthy oil-based economy.

Whether other hidden gems in the Iraqi economy can be further explored

Due to political conflicts, in spite of having plentiful irrigation and water resources, Iraq remains a net food importer. Establishment of a stable government, and hence concrete policies, will ensure that the agriculture sector can add significantly to the country’s economy, further providing economic stability.

Investments are always subject to two unknowns – “How Much” and “When.” No one can say for certain “when” the IQD's recovery will occur.

The Bottom Line

Trouble with the Iraqi dinar is compounded by a war-torn situation, a non-existent legal market for forex trading and high mark-up charged by a limited number of legitimate forex dealers. Taking a short-term bet is a clear no-no. Long-term bets depend upon lots of unknown and uncontrollable external factors, which investors should keep in mind before proceeding.

Related Articles
  1. Economics

    Understanding the History of Money

    Money has been a part of human history for at least 3,000 years, evolving from bartering to banknotes.
  2. Forex Fundamentals

    How To Calculate An Exchange Rate

    An exchange rate is how much it costs to exchange one currency for another.
  3. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  4. Forex

    How 2016 Could Be A Disaster for These Currencies

    Tanking oil prices, slowing BRIC growth, and general instability do not bode well for these currencies.
  5. Forex Fundamentals

    These Currencies Are The Biggest Losers Of The Stock Downturn

    Here’s a list of the hardest-hit currencies amid the global stock market mayhem.
  6. Forex Strategies

    How To Build A Forex Trading Model

    The forex market is volatile, but a forex trading model with clear, step-by-step rules based on a sound strategy can help decrease losing trades.
  7. Forex Fundamentals

    Explaining Slippage

    Slippage occurs when a trade is executed at a different price than what was expected.
  8. Forex Education

    About the EGP, or Egyptian Pound

    The EGP, or the Egyptian pound, is the currency of Egypt.
  9. Forex Education

    The History Of Money: From Barter To Banknotes

    Money has been a part of human history for at least 3,000 years. Learn how it evolved.
  10. Forex Education

    Top 7 Questions About Currency Trading Answered

    Whether you're puzzled by pips or curious about carry trades, your queries are answered here.
  1. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  2. How is the value of a pip determined?

    A pip in foreign exchange trading is a measure of a price movement in a currency pair. "Pip" is an acronym for price interest ... Read Full Answer >>
  3. How are NDFs (non-deliverable forwards) priced

    The price of non-deliverable forward contracts, or NDFs, is commonly based on an interest rate parity formula used to calculate ... Read Full Answer >>
  4. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  5. What is the difference between a Nostro account and a regular bank account?

    The term nostro account is a bit of an umbrella term and can have different meanings for different contexts. For instance, ... Read Full Answer >>
  6. What types of companies benefit from reporting results utilizing constant currencies ...

    Any company that does a substantial amount of business in foreign countries, and is therefore subject to foreign currency ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center