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| A Tale Of Two Dinars: Parallels Between The Revaluations In Kuwait And Iraq |
When comparing the Dinar revaluation several years ago in
Kuwait with the expected Dinar revaluation in Iraq, the parallels and
similarities between the countries are remarkable. Both experienced similar
hardships during the Saddam Hussein era and beyond, yet both have also
rebounded economically. The revaluation of the Kuwaiti Dinar offers clues about
the outcome of the anticipated IQD revaluation.
Although Iraq has lagged a bit behind Kuwait, from reviewing
and comparing the two countries’ histories of growth we can see the progression
to be expected in the near future. Both countries have been molded by the
British influence. Kuwait came under British protection in 1899, and then in
1917 the British likewise took control of Baghdad.
Kuwaiti Dinar and Iraqi Dinar – Parallel pathways
Kuwait’s currency was originally named the Gulf Rupee, and
it was backed by the British Pound. In 1932 the Iraqi Dinar was introduced; it
too, was backed by the Pound. So, both countries’ currencies have similar
historical origins.
Of course, it was oil that attracted Britain and other countries
to come to Kuwait and Iraq. Once the British arrived, oil began to flow freely.
Oil was discovered in Iraq in 1908, and then in the 1930s in Kuwait.
Oil continued to flow during World War II. At one point
during the 1940s, Kuwait’s production reached an astonishing six million
barrels per day.
Under British control, Iraq began exporting oil in 1928.
Iraq wasn’t producing as much as Kuwait in those days, but it was still a large
amount of oil. Because of the remoteness of Iraq’s oilfields, most of the cost
of development was in transporting the oil to market. Most of the revenues went
to the oil companies.
Oil wealth drives currency value
In any event, the economies of both countries became
stronger and more stable due to continuing oil development. In 1932 Iraq gained
independence from Britain. At that time, the Iraqi Dinar was established and
its value was fixed with the British Pound.
Iraq lost its independence during World War II; it finally
became a self-governing republic in 1958. Oil production slowed considerably
during the war years.
In comparison, Kuwait gained independence in 1961. At that
time, the Kuwaiti Dinar was introduced as the country’s new currency. Its value
was equal to the British Pound.
During the 1970s, both countries nationalized their oil
holdings, thus taking complete control of their respective natural resources.
By then oil prices were rising, and Arab nations throughout the region began to
cash in on higher oil prices.
This led to higher gasoline prices for oil-buying nations,
and the global onset of inflation. Developed countries entered a period of
global economic crisis. Costly oil was a leading cause of the U.S. Dollar’s
devaluation.
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| A Tale Of Two Dinars: Parallels Between The Revaluations In Kuwait And Iraq |
Saddam temporarily derailed the Iraqi Dinar
In 1990, Iraq under Saddam Hussein invaded Kuwait and took
over that country, especially its financial assets. The Kuwaiti Dinar was
temporarily replaced by the Iraqi Dinar while Kuwait was robbed of its wealth.
Fortunately, the first Gulf War liberated Kuwait from Iraqi control, although
Saddam still remained in power in Iraq.
After the war, Iraq struggled even while Kuwait began
rebuilding quickly. At the same time, to finance his recovery from the war,
Saddam ordered Iraqi banking authorities to print large numbers of
nearly-worthless dinars, which caused the value of Iraq’s currency to fall even
further.
In contrast, when the Kuwaiti liberation was completed the
new Kuwaiti Dinar was established with a value of USD $3.15 per each Kuwaiti
Dinar. The country was restored and rebuilt, so that it has become an economic
leader in the region. The Kuwaiti Dinar is now one of the world’s strongest
currencies.
The Iraqi Dinar is still artificially undervalued
Meanwhile, Iraq has been slower to rebuild. After the Kuwait
debacle, Iraq suffered through a civil war and continued under the misery of
Saddam for another ten years. Finally, the second Gulf War and the U.S.-led
occupation of Iraq brought the country back onto the pathway toward success.
Kuwait quickly recovered.
However, in contrast to the fair value accorded to the
Kuwaiti Dinar when it was revalued, the new Iraqi Dinar was introduced after
the war with a value of only a fraction of a cent per Dinar; in fact, the
official exchange rate was set at USD $1 per 2000 Iraqi Dinars.
Although that low exchange rate may have been appropriate
immediately after the war, still, the Iraqi economy has been quickly growing
ever since. Nowadays, the oil-fueled Iraqi economy is increasingly similar to
the Kuwaiti economy. So, there seems to be little reason, other than the
stubbornness of the Central Bank of Iraq (CBI), why the Iraqi Dinar shouldn’t
be near the value of the Kuwaiti Dinar.
Iraq sits on vast oil reserves, said to be far greater than
Kuwait’s reserves, and monthly exports keep rising. Stability is apparent in
Kuwait, and increasingly so in Iraq. From comparing the post-war development
tracks of each nation, it seems apparent that at some point in the near future
Iraq will overcome Kuwait as a center of oil wealth.
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| A Tale Of Two Dinars: Parallels Between The Revaluations In Kuwait And Iraq |
The IQD should be worth at least USD $1 each, or
even as much as $3
Many observers believe that Iraq’s natural wealth would
support a valuation of between USD $3 to $6 for each Dinar after revaluation.
This was considered the “normal” price range for both the Iraqi Dinar and
Kuwaiti Dinar before the Saddam Hussein era.
When Kuwait was producing 6 million barrels of oil per day,
the Kuwaiti Dinar was worth more than $3. Now that Iraq is pumping more than 6
million barrels per day, it seems logical that the nation’s currency value
should be moving upward.
When the revaluation occurred in Kuwait, it was a short-term
event in which the older circulating currency was retired, and was replaced by
the new Kuwaiti Dinar at a value determined by Kuwait’s oil wealth and economic
prospects.
Nowadays, Dinar investors are expecting a revaluation in
Iraq that will rival the revaluation in Kuwait several years ago. As mentioned
above, most pundits are predicting that the IQD will be revalued upward to at
least an exchange rate of one Iraqi Dinar for each U.S. Dollar.
Given the historical similarities and parallel development
of these two neighboring countries, it seems likely that both Iraq and Kuwait
will continue to thrive as oil exporters. And, it also seems likely that Iraq
will quickly “catch up” with progress in Kuwait.
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This article A Tale Of Two Dinars: Parallels Between The Revaluations In Kuwait And Iraq was originally published by DinarInsider
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