8-15-2012 SWFloridaGuy: Many ask how will Iraq be able to pull off a historic revaluation of this magnitude. It's a fair question and one that's hard to answer because there is no real precedence for it. However, there is also no real precedence for the unique investment opportunity Iraq presents, which we have all recognized and is the reason we are here. Previously there have been 14 episodes where a country's real and nominal effective exchange rate appreciated by 10% or more without discretionary adjustments of the parity by the government (over a two-year window or less), leading to sustained real effective appreciation. Since 1960 there have been 25 episodes of large nominal and real appreciations. Usually these revaluations were the indirect consequence of the appreciation of the anchor currency of the peg against other currencies.
In Iraq's case, their currency is severely undervalued due to UN resolution 661, a devastated infrastructure and they have had to completely rebuild their banking sector. But they have also been on the path to recovery for quite some time. Iraq presents a unique situation and there is a tremendous gap between the current rate and previous values the IQD has held. It has taken almost a decade and it's my belief that after the GOI implements these latest reforms, the recovery process will have reached its pinnacle and be strong enough to support phase 3 of the economic reforms. Studies have shown that the immediate output response of large RVs is positive, i.e. output growth accelerates, but they turn negative after about three years. For years now economists have been studying ways to raise the value of the IQD and sustain that growth as well. If they were planning a straight redenomination with no significant rate increase they would have never spent this much time studying the long term effects, in-country (and out) security issues, counterfeiting, de-dollarization and how to institute a market-based economy where they are respected as a borrow in the eyes of global capital markets.
They have been aided in this endeavor by the IMF, World Bank and many other powerful governments and organizations. Iraq has many options. Oil prices fluctuate so a basket peg would not solve the problem. Iraq may peg the currency to the export commodity (PEP). The CBI could set the daily price of IQD in direct proportion to the daily price of a barrel of oil in terms of USD. That would stabilize the price of oil in domestic terms. That's the best of both worlds (fixed & floating) and would also help promote integration into world markets. Iraq has many options and the CBI and Finance Committee have told us that they are going to make their move (whatever that may be) in 2012. These next few months could be very exciting and my opinion is that it's in Iraq's (and the world's) best interest to revalue, where the Central Banks holding the dinar as a reserve currency would also benefit. This is not something I can prove and it's just my opinion, which may or may not be correct.