7-13-2012 SWFloridaGuy: It's no secret that the IQD's current rate was government imposed and is grossly undervalued but that doesn't mean we should down-play the significance of what we believe they are trying to accomplish. To put things in perspective; for Iraq to revalue to even a fraction of what we expect (on par with USD/100,000% appreciation) would make this currency reform project a singularity and considered an extremely ambitious economic phenomenon even to Heterodox economists who take "power" and the global elite more into consideration. My goal in writing this post is to credit this historic opportunity with the respect it deserves rather than simplify it with baseless rumors, misinformation and contemptible hype. I will continue to promulgate the theory that the Iraqi dinar will revalue, while also recognizing the challenges it presents.
So, let's look at some historical FACTS: Countries must choose between capital mobility, monetary policy autonomy and exchange-rate stability. Nominal appreciation must lead to sustained real appreciation. The definition of a "large exchange rate event" comprises a 10% (or larger) appreciation of the nominal effective exchange rate over a two-year window (or less), leading to sustained real effective appreciation. In the past 52 years there have been 25 episodes of large nominal real appreciations and revaluations. There were 14 cases of "appreciation shocks" that occurred not as a result of discretionary policy action, but were linked to the appreciation of the anchor currency under pegged exchange rates. There are a few examples that I've found to be duplicates so I won't name them all but here are a few contributing factors (with corresponding countries & percentages) to these appreciations throughout history: Being pegged to a basket of currencies with a large U.S. dollar weight when the USD strengthens (Algeria 17.2). The depreciation of the USD when a currency is pegged to the GBP (Australia 10.2%). When a country's exchange rate is stabilized against another whose appreciation triggers it (Malaysia 20%). Appreciation on a trade-weighted basis as a consequence of the appreciation of the anchor currency (French Franc) against the USD (Cameroon 11.8% & Ivory Coast 27%). Appreciation as a function of strength of the main anchor currency (Singapore 12%). European currencies appreciate against the USD (Spain 13.4). Revalued under the Bretton Woods system (Germany 10.7%). Multiple revaluations after the demise of a monetary system (Switzerland 10.2 & 22.4%). Central Bank manages the appreciation (Japan 14.7%). Exchange rate regime was changed towards a more market determined rate (Taiwan 13.9%). Central Bank revalues the central parity of the currency (Chile 29.8% & Colombia 11.2%). New exchange rate framework with a crawling band and Central Bank interventions (Czech Republic 11.2%). As you can see there are many different mechanisms that lead country's currency to appreciate and all would pale in comparison (both numerically and strategically) to what we believe is on the horizon for the Iraqi dinar.
We believe the goal for the IQD is to increase purchasing power, maintain long-term stability and to be a globally traded currency. Although after decades of war there is still much work to be done, the CBI, Finance Committee and IMF have worked to improve the fiscal and political outlook by collaborating with Iraqi Parliament, financial experts along with their international counterparts. The value in the IQD is still there. Just two days ago Bloomberg reported that Iraq’s crude production overtook Iran's for the first time in more than two decades. Last month alone Iraq pumped 2.984 million barrels a day, outpacing Iran’s 2.963 million. Now just as they didn't get to their current value alone, I also don't believe they can recover alone. I believe this is all part of a well-orchestrated plan and while the IQD will not be the world's savior by any means, it does present a unique opportunity for the Central Banks to rebalance the system and use this currency as an adjustment tool or stimulus during this global financial crisis. In this respect, a significant revaluation somewhere on par with the USD gains a bit more tenability. If all the reports out of the CBI lately are true, one way or another Iraq will be added to the history books in 2012 and my research has led me to believe that it will be a VERY "large exchange rate event." This is just my opinion, which may or may not be correct.
I agree with you, SWFloridaGuy, that the IQD will most likely have a very large exchange rate increase. As you rightly pointed out, we seriously and artificially devalued the currency in the first place. This devaluation had nothing to do with what the currency was actually worth and everything to do with the political situation of the time, i.e., Saddam Hussein, and our war against him. Since that is true, the raising of the currency to levels that we anticipate, though eye-popping and quite historical, are really just returning them to where they had been previously. Nobody is saying that anything big has happened in Iraq to make this happen. They don't have to do anything to prove that they deserve this. They deserved it before, they will deserve to have those rates again. In your excellent examples of previous revalues, how many of them had similar circumstances, meaning that they had been seriously and artificially devalued at some point that caused a revaluation take place to bring them back to where they had been? My suspicion is that it is true of none of them. Iraq is truly a unique situation on many levels. There may be other revaluations that happen after this, but there will never be another revaluation of a currency the likes of what we will see in the near future.