By Alan Rappeport
Financial Times, 29 March 2006
Chris Papatheofanous was a medical lab technologist with a prized collection of old coins from the Middle East, when she realised that owning some of Iraq’s new currency, the dinar, might be a better investment than the relics she was selling on the side.
Now, nearly three years later, Ms Papatheofanous no longer works in the medical industry and her salary has quadrupled. She deals Iraqi dinar full-time from her home in Quebec, Canada, and sells millions of them each week.
“It’s very speculative, it’s very risky,” Ms Papatheofanous, who runs PortalIraq.com, says.
It also can be very lucrative. Since the new Iraqi dinar began printing in 2003 to replace the old Saddam Hussein-clad currency, people have been betting that the value of the new money will appreciate. Many of those who found ways to acquire the dinar from the Central Bank of Iraq began re-selling them on Ebay and then started their own exchange services. Most have no background in finance or currency exchange.
“I used to run a company that promoted web sites, and now I run a site of my own,” said Jeff Pasquarella, of Connecticut, who sells between 40 million and 50 million Iraqi dinar each week through BetOnIraq.com.
The Iraqi dinar is a managed currency and has been relatively stable since it was first introduced in October 2003. The official exchange rate has remained around 1,450 Iraqi dinar to the US dollar, with moderate fluctuation. It operates on a managed float so that the central bank can maintain control over inflation. The bank holds daily currency auctions to determine the demand on the dinar.
“The security situation sometimes leads to stagnation of demand,” says Muzher Kasim, general director for research at the Central Bank of Iraq in Baghdad. “At this moment things are stable. There’s no problem because the turnover of dollars is high because of the export of oil.”
Since Iraqi dinar can only be bought in Iraq, people selling them privately over the internet must have a direct connection there or with a trader often in Jordan or Kuwait. In many cases the currency passes through layers of investment, as people buy from suppliers and then resell it, usually at a mark-up of about 30 per cent.
Dinar dealers talk in terms of millions, and 1m Iraqi dinar generally costs a buyer about $1,000 (€828.14, £571.47) Since the currency is not yet convertible on the international market, the money is shipped as cash, in boxes, by courier services. Banks outside of Iraq will not deposit the currency, so those who purchase it must keep it in deposit boxes or other secure places.
“We’re just holding dinars and hoping that this currency will hit the world market and that we’ll be able to exchange it at our local banks,” says Ms Papatheofanous, whose trading company now has 14 employees.
If not, investors will be holding expensive memorabilia. The fate of the currency depends on Iraq’s future stability. If the country is divided or if the dinar somehow ceases to be the national currency, then dinar buyers will suffer great losses.
“I’m not as optimistic as some other sellers that will tell you it’s going to go up to its pre-war rate,” says Sanjay Madhavji, who runs InvestInDinar.co.uk in Ipswich, England. “But in five to ten years, we should start seeing some changes.”
Less optimistic is Harvard economist Jeffrey Frankel. He attributes some of the Iraqi dinar’s apparent stability to a global economic cycle that is supporting currencies in emerging markets that have commodity-based economies. The influx of foreign capital brought in with the reconstruction is also propping the Iraqi currency, he adds.
“People should not be gambling on a currency like this that has a reasonable possibility of complete chaos and hyper-inflation,” Professor Frankel said. “It’s not something I would advise servicemen on a limited budget to invest in. I don’t see a tremendous upside to the currency.”
Despite pessimism about Iraq, the numbers of Iraqi dinar dealers is increasing. Marshall Donnerbauer sells dinar out of his home in Boston through InvestInDinar.com and said that when he started in 2003 there were only two or three other people doing it. Now he has more than 300 competitors, including some who buy their dinar from him.
“It’s made a real good living for me,” said Mr Donnerbauer, who has earned $300,000 (€248,486.84, £171,457.94) in the last two years through dinar sales. “I’ve sold over a billion dinar in the last year.”
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Citation: Alan Rappeport. "Dinar traders bet on Iraq’s future," Financial Times, 29 March 2006.
Original URL: http://news.ft.com/cms/s/e8da54b0-bf05-11da-9de7-0000779e2340,dwp_uuid=c1a5b968-e1ed-11d7-81c6-0820abe49a01.html
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