8-22-2012 SWFloridaGuy: I am very encouraged by some recent reports out of Iraq regarding the easing of political tensions, the focus on implementing the reform proposal and holding a successful National Meeting. Does this mean we will RV tomorrow at a rate of $42? Of course not; it doesn't relate directly to the exchange rate at all. Indirectly however, we do see a connection. The CBI did say that they will proceed with the National Economic once the GOI resolves this political crisis and if the reports out of Iraq are true, they have made much progress in this area. Just to clarify, the CBI did not say revalue, they said remove the zeros. There seems to be much confusion on what "remove the zeros" actually means. Some researchers like to add their own interpretation and say it refers to a revaluation and the entire process of drawing in the large notes. Deleting the zeros simply means deleting the zeros, pretty straight forward. This simply refers to the CBI's plan to drop the zeros from the nominal value and introduce the lower denoms to ease cash transactions. I'm simply making this point because I see the CBI misquoted quite frequently and I used to struggle with this understanding myself. Having said that, I do believe Iraq will revalue their currency and I think there are many ways they can achieve this. For painfully obvious reasons, the CBI will never announce to the world that they are about to revalue their currency. Shabibi himself alluded to this in Washington when he said "Even if I knew I could never tell you."
Whether there are several incremental adjustments or a historical large currency appreciation of 100,000% to get us to 1 to 1, I do think Iraq will accomplish returning their currency to its previous levels by increasing the value of the paper currency in a quantitative sense. There are several ways I believe Iraq could accomplish this, some are better solutions than others. Under a fixed exchange rate, fluctuations in the value of a currency to which the IQD is pegged could produce volatility. We see these effects when the USD appreciates and other currencies linked to the USD in turn show appreciation also. Iraq does not want unnecessary monetary volatility. There are a few solutions to this. They could include oil in a basket of currencies to which the IQD is to be pegged, in order to facilitate the recovery and expansion of the oil sector. They could define the value of the IQD as 1/3 a USD + 1/3 a Euro (subject to change dependent upon the future of the Euro), + 1/100 of a barrel of oil. An oil-producer like Iraq could thrive with this scenario, even if there were big swings in international exchange rates or global oil prices in the future. For this to work though, they would need to stabilize the price of oil in terms of purchasing power.
Another solution is Iraq could peg the currency to the export commodity (PEP), as I've mentioned in the past. 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 to promote integration into world markets. I cannot prove that Iraq will revalue their currency but I do postulate that theory and believe there is a great basis for it. The powerful countries, organizations, corporations and foreign Central Banks that have all invested so heavily into Iraq's reconstruction and helped to foster monetary cooperation will also reap the benefits. This is why I believe they have assisted in the development, extended project loans and offered technical assistance with communications and Iraq's banking sector. The global monetary system is broken and although the IQD is not the world's savior by any means, I do believe Iraq presents a unique opportunity and may serve the role of a fulcrum in its recovery. As always, I'm simply stating my opinion, which may or may not be correct.