History of the Iraqi Dinar
Iraq is a cash driven society where banks are not viewed by Iraqi's as places to store
their money and communications between branches of even the same bank are often
difficult to conduct. Most Iraqi's rely on face-to-face meetings to update account
balances rather than the use of automated networks. The flow of funds in Iraq's
economy is generally one of funds flowing out from banks, with very little recirculation
as is experienced in other societies.
How did this happen? It's a result of their bank experiences dating back to the end of
the first Iran-Iraq war. During that time, the former dictator was 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 based on events
like that will take time and consumer education to overcome.
The exchange 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 was 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 (2003).
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 $US 3.20 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, and 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 servants to boost the economy. This was not
intended to "dollarize" 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.
Paul 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.
Mr. 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".
This new Iraqi 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 ½ dinar note of the
1980s issue and the 1000 Dinar note of the 2002 issue.
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 125 percent in the year
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 that year, especially
compared to the double-digit or higher inflation 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 quickly discovered that there was system in place of 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
worked 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
receiver. 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.
