What does it mean to "invest" in the Iraqi dinar? In simple terms, it's conducted in the same fashion as any currency investment. You purchase ‘x’ amount of Iraqi dinar (IQD) by paying ‘y’ amount of U.S. dollars (USD). As with buying stocks, bonds, or other currency, you purchase dinar at a given price and then expect the price to rise. The real question, though, is not just "can" you invest in this particular currency, but rather "should" you invest.
Is it a Scam?
Financial scams usually have certain characteristics that can be identified with a bit of research:
- If the scheme is run and promoted by individual agents instead of known brokers, financial firms, or other entities, or
- If there are heavy unofficial promotions through internet/emails/telemarketing calls instead of open and fair marketing, or
- If marketers promise exaggerated returns.
In the case of the Iraqi dinar investment scheme, there might be additional red flags:
- Reputed banks (e.g., Bank of America) abstain from offering forex trading in Iraqi dinars.
- States like Utah, Oklahoma, and Alabama issue warnings against such investments.
- Available quotes include wide bid-ask spreads.
- Impractical reasoning (discussed below) justifying the Iraqi dinar as a "perfectly safe" and "sure-shot high return" investment.
All these factors give rise to further doubt.
The Basics of Forex
Forex refers to currency trading and currency pairs. Say, for example, the Iraqi dinar forex rate (IQD/USD) is 1,160 Iraqi dinar per U.S. dollar. If you invest $1000 in Iraqi dinars with that rate, you will get 1.16 million Iraqi dinars. After this “investment,” you wait and watch, expecting the IQD to rise against the USD.
If your expectations come true, and the exchange rate improves to a hypothetical value—say one U.S. dollar equals one Iraqi Dinar, then your IQD/USD investment is now worth $1.16 million. Under this unlikely hypothesis, the investor would become a millionaire by investing $1,000, which grew to $1.16 million.
- The Iraqi dinar is the currency of Iraq and can be exchanged for U.S. dollars.
- Hopes that Iraq's economy can recover from civil and regional wars have led to some speculation that the Iraqi dinar can increase in value against the dollar.
- However, major banks and brokers do not offer trading of the IQD/USD pair, and transactions are placed through money exchanges, which charge hefty fees.
- Scam artists have also been active in promoting IQD investments, which has led many states in the U.S. to issue warnings.
- Iraq's currency faces many challenges and much uncertainty in both the short and long run.
But what happens if the dinar takes the opposite direction? Say it deteriorates and now $1 buys 2,000 Iraqi dinars? Now your invested holding of 1.16 million IQD is worth 580 USD; effectively, you have lost $420 on your investment.
Hyped Scam or Hidden Profit Opportunity?
First, let’s begin with the positives:
Although speculative thoughts about Iraqi dinar Investments have been going around for a long time, there were developments based on reports which led to a spike in speculation in IQD/USD trading (like the statement issued by IMF around mid-2007, in the post-Saddam Hussein era). It mentioned the International Compact with Iraq, which was interpreted in multiple ways and led to further speculation in the Iraqi dinar currency trading.
“(Iraqi Authorities) have taken some courageous measures, including the gradual increase in domestic fuel prices and, starting in 2007, the elimination of all direct budgetary fuel subsidies, except for kerosene. Iraq has also embarked on an ambitious structural reform program, in order to make the transition to a more market-based economy.”
The article further states:
“To combat inflation, action has been initiated on three fronts. First, the Central Bank of Iraq raised its policy interest rates sharply and allowed a gradual appreciation of the dinar. These measures aimed to de-dollarize the economy in order to enhance the central bank's control over monetary conditions, and also to reduce imported inflation.”
Just prior to these, the IQD/USD exchange rate was around 1,270 (April 2007), and as of Feb. 2020, it is around 1,190—a positive return of around 6.5%. Trends further down the line likely depends on the current and future developments in the region.
Civil war, regional fights, and western countries staying away are major concerns of current Iraq, with the extreme possibility of the country splitting into three separate regions. If that happens, the payday may never come for investors holding the Iraqi dinar and waiting for value appreciation.
Backed by the oil reserves, Iraq has the potential to spring back and establish itself as a stable economy. It managed to do so after the eight-year-long Iran-Iraq war. But that will need a peaceful, promising business atmosphere to establish investor confidence, which will, in turn, help revive its economy and bring back the IQD forex rate to less depressed levels.
Now to the other side of the coin:
There are signs indicating that Iraqi dinar investments are nothing more than a hyped scam. The most obvious important factor is IQD literally trades in the “forex black market” instead of regular banks and trading desks. Additionally, some incorrect statements are heavily publicized by the propagators of Iraqi dinar Investment schemes (incorrect statements in italics):
“IQD is heavily undervalued at present and will rise significantly against USD in mid-to-long term due to a pending revaluation bound to happen soon.”
Supporters of Iraqi dinar Investment are reported to be confusing two economic terms: Revaluation and Redenomination.
Revaluation is the calculated adjustment made to a country's official exchange rate relative to a chosen baseline, such as gold or the U.S. dollar. After a revaluation, a currency becomes expensive relative to the base currency by the factor of adjustment, and hence the process changes the purchasing power of that currency.
Redenomination is done in case of high inflation levels by old high-value notes being made equal to new small value notes (e.g., 1,000 old dinars = 1 new dinar). Redenomination simply drops off the zeroes keeping the purchasing power the same as before.
There are confirmed news items that Iraq did plan to redenominate its currency, but not revalue. In the absence of any revaluation, there is going to be no change in the forex exchange rate of Iraqi dinar IQD (with or without redenomination).
Economists also point out that it would not be beneficial to the Iraqi economy to allow any such value appreciation by the authorities (even by means of revaluation). Doing so will lead to multiple problems for Iraq:
- The inability to repay the national debts due to revised valuations
- Literally putting barricades for foreign companies to enter Iraq for business
- Overall restricted growth in the post-war era, due to ripple effects of above
“Similar 'revaluation' of Kuwaiti dinar is a historical proof.”
Some try to encourage investment in the Iraqi dinar based on the success case of the “revaluation” of the Kuwaiti dinar (KWD), which today is a high-valued currency.
However, this is misleading. While the official Kuwait government site does mention that new notes were released following the Iraqi invasion, there wasn’t any revaluation. The new release was to prevent the use of stolen and looted old Kuwaiti dinars. In the Kuwaiti example, the pre-war forex rates were retained, but old banknotes were swapped for new ones.
It is also impractical—and economically impossible—to “revalue” a currency in such a way that its value increases many fold, without there being a real addition to the reserves.
"Post-war development may take time, but always gives good results."
Examples of European countries like the Netherlands, the United Kingdom, and France are sometimes cited in an attempt to justify an Iraqi dollar investment. These other countries managed a rapid economic comeback from the effects of World War II, and are today considered among the developed countries.
One important fact missed here is that these countries were able to progress faster because the war situation was completely different from the war in Iraq. In the case of the world wars, European countries in question were on the winning side and received maximum support in the post-war aftermath.
The case of Iraq, by contrast, is more of a civil war, where there exists a possibility of the country being split into multiple fragments. Even if it stays as one nation, it will still take a good long time for the economy to recover.
"Executive Order 13303 gives Americans special legal rights to hold or invest in Iraqi dinar."
Order 13303 is for protection of “the Development Fund for Iraq, Iraqi oil products and interests—including ownership by U.S. persons—from any legal attachments or liens." It does not mention rights or protection for investments in Iraqi dinar, at all, by anyone.
"The Iraqi dinar is still a good buy, even without a 'revaluation'"
This is based on the strong belief by a few investors that Iraq’s oil reserves and development potential make the dinar a good purchase. Some investors argue that the market could drive a strong appreciation for the Iraqi dinar in the post-war era, simply because the huge oil reserves will eventually make it a strong currency.
Similar to Iraqi dinar, similar rumors are reported for Vietnamese dong and, most recently, the Egyptian pound.
High-Frequency Trading vs. Long-Term Investment
The reason why high-frequency trading shops do not trade the currency is that the IQD/USD forex trading market is virtually non-existent. No banks are offering Iraqi dinars. If you have to buy Iraqi dinars, you can buy them only at select money exchangers, who may or may not be legally registered.
The bill was introduced by the Central Bank of Iraq in Nov. 2015 and marked the first currency issued in Iraq since 2003.
Secondly, money exchanges charge a hefty markup fee, to the tune of up to 20%, for such transactions. This will erode the profit potential even for short-term trading.
In terms of longer-term opportunities, forex trading in general comes with a few challenges:
- Overvalued profit expectations based on investor misconceptions
- The misleading practices of foreign exchange dealers, as forex is primarily an OTC market. Further complications and malpractice exist in trading such an illiquid and unregulated asset class.
- Investors' basic ignorance about international forex valuations
- Loss aversion—investors holding onto loss-making assets further deteriorating the valuations of their investments
The Bottom Line:
How Iraq, its economy, and hence the forex rate develop over the long term, is a long-term uncertain bet. In addition, trading forex currencies is always risky, as external factors at international levels are difficult to control or predict. Unless you are trading on regulated markets or through regulated agents, traders and investors should use extreme caution for trading the Iraqi dinar or similar currencies.