Why Two Exchange Rates?

By Mark DeWeaver.

Since the Central Bank of Iraq (CBI) began changing the rules for its USD auctions in 2012, Iraq has been operating a de facto dual exchange rate system. (There’s a summary of some of the CBI’s recent rule changes on pages 12-14 of this report from Sansar Capital.) For those with access to the CBI auction—mainly banks and (as of March, 2013) importers using letters of credit—the rate has been fixed at IQD 1,166: USD 1.00. For the rest of us, the dinar has ranged from 1,194 to 1,292, with two major episodes of depreciation in mid-2012 and mid-2013 (see chart).

The ostensible purpose for this arrangement is to limit illicit outflows of foreign exchange to Iran and Syria. In practice, it serves mainly as a subsidy to banks, large importers, and anyone in a position to generate phony trade documents. The losers include everyone from foreign investors in Iraqi stocks to the government itself, which gets the CBI rate on its oil-export revenues.

Iraq is unusual in this regard. Dual (or even multiple) exchange rates are usually only found in countries suffering from chronic trade deficits and foreign exchange shortages. Typically the objective is to make foreign exchange available for “essential” imports or to control inflation by lowering import prices. Examples include Hitler’s Germany, China in the 1980’s and early ‘90’s, Burma prior to 2012, and Venezuela today. (See this note from the Asian Development Bank for an excellent introduction to this topic.)

It’s hard to see why Iraq belongs on this list. The country has a trade surplus, inflation is low, and the central bank has ample foreign exchange reserves. Even USD outflows to Iran are presumably no longer a major issue.

One exchange rate should be enough.

11 Responses to Why Two Exchange Rates?

  1. Cajun Dago April 3, 2014 at 1:32 pm #

    With all this reserve money, oil output, investors. Iraq is doing very good in progress. Why hasn’t the dinar revalued yet. It will help their people n country move on at a higher rate. It’s time an should revalue ASAP Thank you

  2. Mr.Smithster April 3, 2014 at 2:21 pm #

    It will never RV, at best they will let it float, which will most likely lower the value even further. I sold my dinars and cashed out with only a 10% loss and feel really lucky (thanks ebay!). If there were any future value, all the big banks and investment houses would be invilved, they avoid like the plague. No banks will take dinars in exchange, only the dinars dealers, and they charge 20% premium to buy and 30% to sell for you. Remember the dinars dealers only buy from you if they want to and the rules are very strict. So the RV has to be at least a 50% increase in value just to break even, and there is no evidence that the dinar is worth even that. Just MHO…

  3. Mr.Smithster April 3, 2014 at 3:16 pm #

    By the way, Iraq just purchased 36 TONS OF GOLD, guess what happened to the value of the IQD? Absolutely nothing, still at 1166. They more than doubled their gold holdings with zero increase in the IQD. Over $1.5 Billion added to reserves with nothing to show for it as far as the dinar is concerned…

  4. Edward April 3, 2014 at 3:31 pm #

    The 36 tons of gold recent purchase and now imminent sales of Iraqi gold coins are exactly why I own stocks, electronic and currency Dinar. It’s now obvious to even seasoned professional investors that the Dinar is set to revalue. This is not some get rich quick scheme as one needs to be very patient. IMO

  5. Mike Allen April 3, 2014 at 7:31 pm #

    Iraq , and this fact very few know , is holding US$57 billions at the Federal reserve which covers the IQD in circlation at 220% .The central bank as of Janu. 2014 holds US$ 84 billions deposits at major US and European banks . Therfore it is as a first step , the 3 zeroos should be taken , and no need to revalue the IQD as it will appreciate against the dollar .

  6. Stew April 3, 2014 at 8:18 pm #


  7. Ernest April 6, 2014 at 11:33 am #

    Why are there two exchange rates? Same reason distortionary subsidies exist anywhere else: the folks receiving them have influence with policymakers.

  8. Barry April 7, 2014 at 3:26 pm #

    Edward – “It’s now obvious to even seasoned professional investors that the Dinar is set to revalue.”

    LOL. “Revalue” to what? Iraq’s total money supply is now over 87 trillion Dinar and their foreign currency reserves to back it between $80-90 billion Dollars (1,000x less) + gold + SDR’s. Even that “36 tons of gold” is worth only $1.5bn. As Mr. Smithster said, the Dinar simply isn’t “undervalued” if you actually understand how currencies work. That’s precisely why as the article states, the market value is lower than the pegged – the exact opposite of all these “RV guru” claims…

    Edward – “This is not some get rich quick scheme…”

    On the contrary, the “RV” as some are pumping it, thinking they’ll turn $860 into $3m is exactly what it is, and has been all along…

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