Redenomination an unlikely priority for the CBI

Earlier this month it was reported that the Central Bank of Iraq (CBI) might redenominate the Iraqi dinar after the new government is formed, exchanging one new dinar for 1,000 old. (For more on this story, see While such a redenomination would obviously help to simplify transactions and record keeping, it is not clear that these benefits would be sufficient to justify the costs, both to the government and the economy as a whole, of switching to a new currency.

It’s not even true that all transactions would be simplified. Consider the ISX, for example, where stocks have a ID 1 par value and most of the share prices tend to be in the ID 1 – 30 range. While the redenomination is usually presented as a matter of “knocking off three zeros,” in the case of a name like BCOI, which last traded at ID 1.38, you’d actually be “tacking on” three zeros as the price in the new currency would be 0.00138. Would the companies then have to consolidate their shares, replacing every 1,000 old shares with 1 new one?

In any event, it’s not really clear why the CBI would choose to redenominate the dinar at this time. Historically, redenomination has typically been done either as part of “heterodox” inflation-fighting programs or, more rarely, as a way of expropriating wealth. (Heterodox programs are designed to lower the public’s inflation expectations, mainly through administrative measures such as wage/price controls.) For example, episodes of hyperinflation led to the introduction of the Argentine peso, which replaced the austral at a rate of 1:10,000 in December, 1991 and the Brazilian real, which replaced the cruzeiro real at a rate of 1:2,750 in July, 1994. More recently, North Korea replaced existing won notes with new ones at a rate of 1:100 last November, capping exchanges at W 100,000 per family (about US$ 40 at black-market rates), with the evident intent of wiping out free-market traders.

With Iraqi inflation now in the low single digits and, as far as we know, the government not out to expropriate anyone’s cash holdings, it’s hard to see why redenomination would be a priority. And indeed the disadvantages of having three extra zeros to deal with aren’t all that clear either. Think of the South Korean won, which at 1,150 to one US dollar is worth about ID 1.03. Does anyone really think there would be big benefits to the Korean economy from “knocking off” three zeros from the currency?

17 Responses to Redenomination an unlikely priority for the CBI

  1. Dave 25th September 2010 at 11:08 #

    You seem to ignore the fact that many countries redenominate simply to remove the effects of PAST inflation.
    As far as stock prices... I think it's fairly common that when countries redenominate they also consolidate shares (reverse split). Turkey is a perfect example, and Turkey is also a country that has been used by CBI officials as an example of what they will do with the currency.

  2. John Oliver 26th September 2010 at 01:20 #

    If they are not going to redenominate the Iraqi dinar,how are they
    going to increase the value without reducing the number of dinar
    in circulation first.
    There are reported to be around 27 trillion dinar in circulation.

  3. Andy Skal 29th September 2010 at 09:50 #

    Will redenomintion bring the dinar closer to the value of the U.S. dollar?

    When if at all do you see the Itaq making changes to bring the dinar closer to the value of the U.S. dollar?

  4. DeWeaver 4th October 2010 at 06:59 #

    I don't see why it would. If the exchange rate prior to the redenomination was ID 1170 = USD 1, I don't know why the post-redenomination rate wouldn't just be ID 1.17 = USD 1.

    In principal, the value of someone's ID holdings in dollar terms should be unaffected.

  5. DeWeaver 4th October 2010 at 07:05 #

    I think the value of the dinar will be determined primarily by the supply and demand for dollars in the Iraqi economy. If oil exports take off and/or the price of oil continues to rise, the dinar is likely to appreciate whether or not there is a redenomination.

  6. DeWeaver 4th October 2010 at 07:18 #

    Actually I think it's generally true that redenominations are done to remove the effects of past inflation. This was the case with both the Brazilian real and the Argentine peso, for example. My point is just that the logical time to do this is while inflation is still high, when redenominating can help convince the public that the monetary authorities have "turned over a new leaf." Once inflation is already under control, it's a bit like closing the barn door after the cows have come home (to coin a new metaphor).

    The problem with consolidating shares is simply that the ISX seems barely capable of coping with ordinary corporate actions like bonus issues. The last thing investors need at this point is for all the listed companies to be suspended for weeks on end while each thousand of their existing stocks are consolidated into 1 new one.

  7. Don West 12th October 2010 at 15:30 #

    In other word, the Dinar is worth nothing? rite...

  8. Stew 2nd December 2010 at 16:34 #

    Mark DeWeaver... You mentioned above that redenominations are “a way of expropriating wealth”
    While I don’t think the Iraqi government would do that to their own citizens at this point… what’s your opinion on this situation? The Iraqi gov has allowed trillions of dinars to leave the country and end up in the hands of speculators hoping for a big windfall. (Just read a lot of the comments on this site.) I’d estimate that it’s in the 6 to 8 trillion dinar range. If Iraq redenominates, gives a short exchange period, and makes an effort to block currency re-entering the country... they stand to make about $5 billion dollars. That’s a substantial amount of money to a country like Iraq.

  9. DeWeaver 3rd December 2010 at 08:19 #

    Good point, Stew. I've been wondering about that scenario too. Certainly a risk--particularly for anyone holding Iraqi dinar cash outside the country. Though it may not be that easy to target the speculators without also targeting locals who for one reason or another have foreign passports or reside abroad. For example there seem to be many wealthy Iraqis who spend a lot of their time in Jordan while still running domestic businesses. And then what about dinar cash held by the hundreds of thousands of displaced persons in Syria and elsewhere...

    I hadn't heard the 6-8 trillion estimate for speculative dinar holdings before. Out of curiousity, what is the source for that figure? I'd be interested to know how it was calculated.

  10. Stew 3rd December 2010 at 09:35 #

    Mark, that's just my estimate. The only thing I've ever seen in print was about a year after the the NID was introduced....
    "According to Ahmed Muhammad, a deputy governor of Iraq's central bank, roughly half the 4.5 trillion new dinars have been removed from domestic circulation, either stashed away at home or smuggled out for sale abroad."
    So about 2.2 Trillion, or half of the original amount, went to speculators. There were articles about buying frenzies all over the Middle East. That was all before the internet dinar craze got started and promoted the dinar world wide. The internet dealers have been pushing dinar for 6 full years now. Iraq currently has 27 trillion dinar in circulation. So it's just an estimate on my part.

  11. DeWeaver 3rd December 2010 at 10:05 #

    Wow. Sounds like your estimate might even be on the conservative side!

  12. Stew 3rd December 2010 at 10:55 #

    Wish I still had the article, it was 3 or so years ago. But at the time it was stated that second only to oil, dinar sales were the #2 leading revenue generator for Iraq.
    I hate to sound conspiratorial… but I’ve often wondered why the Iraqi or the US government hasn’t stepped in and put a stop to the dinar business. For 6 years now dealers and websites have been all but promising people 100,000% or more returns. How could Iraq or the US officials not be aware of this phenomenon?
    The conspiracy part of me says they do know, and that they are capitalizing on it.
    There were articles a few years back about Iraq depositing $5 billion into the N.Y. Fed for safe keeping and to draw interest. A US official at the time stated that most of the $5 billion came from selling the new currency. If this is all true, which it seems to be, I have a hard time believing they plan on giving the money back.
    Along the same lines, and further into the conspiracy line. I read an article years ago from a journalist in Turkey I believe. He claimed to have sources that said the Iraqi Gov and Coalition planned to push the dinar out to as many Middle Easterners as possible. The idea being that if people held dinar hoping for a profit they would be much more likely to support the entire effort in Iraq. The dinar was basically a PSYOP plan to win support for the war.
    Farfetched??? Maybe not. Originally a PSYOP plan to win support locally, then unexpectedly picked up and sold all over the world through the internet, it became a source of revenue.
    Call me crazy... everyone on the dinar boards does. 🙂

  13. Stew 3rd December 2010 at 11:11 #

    Here's the $5 billion deposited witht Fed story. From Feb 2005.

    "BAGHDAD - The Iraqi central bank has built up five billion dollars in reserves in recent months which have been deposited with the US Federal Reserve, a top US treasury official said Tuesday.

    The sum will earn the Iraqi government about 100 million dollars of much needed interest each year, John Taylor, US treasury under secretary for international affairs, told a press conference after talks with Iraqi officials.

    The money has been placed with the Federal Reserve Bank of New York.

    Taylor said the five billion dollars had built up from the currency transactions since the introduction of the new Iraqi dinar."

  14. DeWeaver 3rd December 2010 at 11:51 #

    That actually doesn't sound any crazier than a lot of other ideas the Coalition came up with!

  15. DeWeaver 3rd December 2010 at 11:51 #

    Thanks, that's great stuff

  16. Jim 5th December 2011 at 21:32 #

    I disagree, our government will make sure the Dinar revalues. Obama wants to spend 4.5 trillion next year in his budget, it is estimated that 10 million Americans hold 1 million Dinars. They will make sure it revalues at $1.24 to 1 so even if there is a crazy spread each one of those Americans will walk away with 1 million US dollars. That is ten trillion dollars worth of new money that gets taxed at 35% or if Obama can get his tax increase on the rich closer to 40%. That is at the very least 3.5 trillion dollars in personal income taxes to the UST. Plus the extra taxes from the banks that made the transactions. Now Obama has a balanced budget with the normal 1.5 trillion in taxes brought in every year and can get re-elected! That how it works folks, buy some Dinar today and by the end of the year you will be rich and will have secured another 4 years for our President!!!!!!!

    If that sounds great to you and you are going to get some Dinars today, you just got scammed. It sounds great and it plays on what you want to believe is real but its just not possible to invest 1000 bucks and turn it into a million dollars. Sure it happens, but not to 10 million people at one time.


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