Investing in foreign currencies can be an enticing opportunity for diversification and potential profits. Among the lesser-known currencies that have attracted speculative attention is the Iraqi dinar (IQD). This currency has piqued the interest of some investors.

This is mostly driven by the hope that Iraq’s substantial oil reserves and potential economic recovery might lead to a significant appreciation of the dinar’s value. However, a deeper analysis reveals a more complex and risky picture. This makes it necessary to evaluate the viability of the Iraqi dinar as a wise investment. In this article, we will discuss the future of Iraqi dinar as an investment. Let’s go!

Understanding the Iraqi Dinar

After the 1991 Persian Gulf War, Iraq’s economy deteriorated due to UN sanctions and rampant corruption. The dinar plummeted from a prewar value of $3 to less than one cent by 1993. Inflation was soaring over 448% by the following year.

Following the U.S.-led invasion in 2003 that ousted Saddam Hussein, old dinars remained until a new currency was introduced in 2004. Support from global powers raised hopes for economic recovery after years of isolation during the ’90s. 

By 2007, IMF reports commended Iraq’s measures against inflation as interest rates increased and currency appreciation began. This led many speculators to invest heavily in Iraqi dinars. This was similar to Kuwait’s post-war success while officials warned about fraudulent schemes related to these investments.

However, late in 2020 brought challenges. Falling oil prices combined with pandemic effects forced Iraq’s government to devalue its currency by over 20%. This decision sparked public protests amid ongoing economic struggles within the country.

The Appeal of the Iraqi Dinar

The prospects for Iraq’s economy appear promising. It is driven largely by its substantial oil reserve which account for 11.7% of the global total. This positions Iraq to potentially follow in the footsteps of other successful Middle Eastern economies.

However, achieving this vision hinges on essential political reforms that will enhance the business environment and boost investor trust. Investing directly in Iraqi dinars may not be wise as their value is fixed by the central bank.

Thus, they are unlikely to appreciate significantly even if economic conditions improve. Instead, investing in Iraqi stocks could yield better returns without relying on changes in currency value.

Additionally, trading volumes for dinars are minimal since they do not participate actively in international forex markets and can only be obtained through a few select money exchanges—often at high fees that diminish potential profits.

Furthermore, investors must remain vigilant about scams associated with dinar investments; regulatory warnings have been issued regarding dubious brokers who promise exorbitant returns while charging steep transaction fees—a trend that gained traction after political events raised hopes about currency appreciation but often led to disappointment instead.

Pros and Cons of Investing in Iraqi Dinar

There are some pros and cons of investing in Iraqi dinar. However, keep in mind that investing in Iraqi dinar isn’t viable for forex traders. The pros only apply to certain scenarios. Let’s have a look:

Pros

Iraq’s Oil Reserves and Economic Potential

Iraq is home to some of the world’s largest oil reserves, accounting for approximately 12% of global proven reserves. The country’s reliance on oil exports provides a significant source of national revenue. Some investors argue that this resource wealth positions Iraq for long-term economic growth and, by extension, potential currency appreciation.

Indeed, oil exports have historically been a stabilizing factor for Iraq’s economy. If the government can channel oil revenues into rebuilding infrastructure, diversifying the economy, and fostering stability, the dinar’s value could theoretically improve. This belief has been the cornerstone of speculative investments in the currency.

Speculative Opportunities

For risk-tolerant investors, the Iraqi dinar offers a high-stakes, high-reward opportunity. The logic is simple: should Iraq’s political and economic situation stabilize, the currency might revalue significantly, yielding substantial returns for those holding IQD. While speculative, such scenarios have occurred with other nations recovering from conflict or economic distress.

Cons

Fixed Exchange Rate and Limited Market Activity

The Iraqi dinar operates under a fixed exchange rate system. It means the Central Bank determines its value rather than market forces. As a result, even if Iraq’s economy improves, the dinar may not experience the same appreciation as currencies that float in open forex markets.

Additionally, the dinar is not widely traded outside Iraq. Investors typically acquire IQD through specialized money exchangers or private dealers, often at a premium. This lack of a robust secondary market makes the currency highly illiquid, challenging investors looking to sell their holdings.

Prevalence of Scams

The Iraqi dinar market has been a breeding ground for scams. Unscrupulous dealers often prey on uninformed investors, promising astronomical returns based on false claims. These scams usually involve selling dinars at inflated rates. Scammers also promote unsubstantiated rumors about an imminent “revaluation” that will dramatically increase the currency’s value.

U.S. regulatory bodies, including state securities commissions, have issued warnings about these schemes. For example, some dealers falsely assert that international organizations plan to intervene in Iraq’s economy. It can lead to a sudden spike in the dinar’s value. However, no organization or entity has shown any such interest.

Political and Economic Instability

Iraq’s political environment has seen decades of turmoil. This including wars, insurgencies, and corruption. However, there has been significant progress in rebuilding certain sectors. But the country still remains vulnerable to political instability, sectarian conflicts, and regional tensions. These factors undermine investor confidence and contribute to the dinar’s volatility.

Moreover, Iraq’s economy is heavily reliant on oil, making it susceptible to fluctuations in global oil prices. Economic diversification efforts have been slow, further exposing the country to external shocks.

No Interest or Dividends

The Iraqi dinar does not provide any income in the form of interest or dividends. This is unlike other investment vehicles such as stocks, bonds, or real estate. This means that investors must rely entirely on currency appreciation to generate returns, which remains speculative at best.

Alternative Strategies for Investing in Iraq

For those interested in Iraq’s economic potential, there are alternative investment strategies. These strategies offer greater stability and transparency than purchasing the dinar. Let’s have a look:

Investing in Iraqi Equities: Iraq’s stock market, though small and underdeveloped, provides opportunities to invest in companies operating in key sectors such as banking, telecommunications, and construction. While this avenue still carries risks, it offers exposure to Iraq’s economic growth in a more regulated environment.

Infrastructure Projects and Foreign Direct Investment (FDI): Iraq’s need for infrastructure development has attracted international investors. Opportunities exist in sectors like energy, transportation, and housing. Participating in such projects allows investors to contribute to Iraq’s growth while potentially earning substantial returns.

Commodities and Oil: Given Iraq’s reliance on oil exports, investments in oil-related assets, such as energy ETFs or shares in multinational oil companies operating in Iraq, provide indirect exposure to the country’s economy without the inherent risks of currency speculation.

Conclusion

The future of Iraq’s economy and its currency, the dinar, remains highly unpredictable. For those holding Iraqi dinars outside the Middle East, trading them is challenging and they do not accrue interest. While there is potential for appreciation in value over time, other investments typically offer lower risks with better returns.

Given Iraq’s precarious situation, significant revaluation of the currency seems unlikely. Moreover, forex trading inherently involves risk due to uncontrollable international factors. Investors should be particularly cautious when dealing with exotic currencies like the Iraqi dinar unless they use regulated markets or agents to mitigate these risks effectively.