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Prior to the U.N. sanctions that followed the Gulf War, but after the deprivations of the Iran-Iraq war and despite the massive debt Iraq accumulated in that period, one Iraqi dinar used to buy you USD$3.20. At the moment, you get 1480 dinars for one U.S. dollar. You can see where this is going.

Shortly after the latest war the Iraqi dinar was in a seriously bad position, fluctuating between 3,500 to 4,000 dinars to the dollar. By July 2003 it was trading at 1,500 dinars to the dollar, where it has roughly remained since. In October 2003 the Coalition Provisional Authority released a new set of notes (they had been reduced to printing notes depicting Saddam to avert a liquidity crisis) which were incredibly difficult to counterfeit, unlike the old dinar. Iraq finally had a currency that people could put some confidence in, which has reduced the reliance on U.S. dollars in the country since.

There is a precedent: the Kuwaiti dinar was worth over $3 before Saddam Hussein invaded the emirate and declared it Iraq's nineteenth province. In a highly unpredictable international system following the fall of the Berlin Wall, no-one knew whether the West would intervene and the Kuwaiti dinar rapidly became near-worthless. When Kuwait was liberated by coalition forces and Jabir al-Ahmad al-Jabir Al Sabah was restored, the price rose sharply despite the $5 billion damage done to Kuwait's oil fields and the Emir's ridiculously long name. Now, as before, a Kuwaiti dinar is worth just a little over three dollars.

Of course, things happened so quickly in the case of Kuwait that few cashed in. But there is good reason to believe the Iraqi dinar will prove to be a fruitful investment in the longer-term. A mini-industry has sprung up on the internet, mainly based in the U.S. selling dinars to citizens. In the days before the run-up to the handover of power, one site was trading $20,000 - $30,000 a day in dinars. People in countries in the region, especially the Pakistani middle class, have also been buying up the currency.

Why investing in the dinar is a good idea

Many things devalued the Iraqi currency during the 1990s. For a start there were the U.N. sanctions which were designed to weaken Saddam's state and to encourage him to give up his designs on weapons of mass destruction. As he never complied with inspections, the sanctions remained, much to the detriment of his economy. Then there was rampant counterfeiting due to the poor quality of the notes and the lack of security features. Then there was the hugely unstable nature of Saddam's regime and the lack of the rule of law in the country, which created an unstable business environment. Iraq was a pretty poor place to invest and apart from its huge oil reserves was something of an economic wilderness.

All this has changed. Iraq still has the second largest proven oil reserves in the world, but it now has a lot more. It's not saddled with a dictator who focuses on his military and internal security forces anymore, and instead has one of the most free economies in the world. The top tax rate is only 15% and barriers to foreign trade have been removed. Much of Iraq's foreign debt has been cancelled. Under such conditions, the oil sector can once again flourish and Iraq's agricultural sector can make it the breadbasket of the Middle East. Currently the country is a net food importer despite its abundant resources, due to neglect of the sector and collectivization programmes that decreased productivity.

Of course, the insurgency is a problem. However, the wind is being taken out of its sails, especially since legitimacy was transferred to the political process by the hugely successful election in January. These guys are no Viet Cong - the terrorists don't have the support of the population (blowing up wedding parties and trying to stir religious conflict tends to sour the appeal of your movement), and the nationalists can hopefully be co-opted into the political process. Things look better than they have for months and the pessimists are repeatedly proven wrong: why not make a little bet on the eventual success we all hope for?

Why investing in the dinar is a bad idea

Of course, the country is still highly unstable. Sabotage continues in the oil sector and there is still great uncertainty in a lot of the country which is not conducive to a stable business environment or attractive to foreign investors. Even if you accept that the security situation wil get better with time, counter-insurgency wars of this type usually take five to ten years. So if you want a quick return on your investment, then the Iraqi dinar isn't the place to be - failing the Central Bank pegging it to the dollar or the euro overnight and you collecting a windfall (unlikely), you're going to be waiting some time.

In a country whose situation is as fragile as that of Iraq, there are numerous other worries. In situations like this you can't really predict what could happen. Due to a fairly strong nationalism dating back to the 1920 uprising against British rule, the country fragmenting in a civil war was always unlikely. However, you never know what might happen under the stress of occupation and war. A scarier prospect is the repeated assassination of high government officials and political figures by terrorists, sowing instability and resentment.

This instability and the fact the Iraqi government lacks the monopoly on the use of force within its borders at the moment means it's hard to predict exactly what might go wrong, but it puts a big question mark against the idea of investing in the dinar. Essentially one has to make a judgement on whether they believe a stable, democratic government can be established in Iraq and whether they believe that free and open societies lead to strong economies. You could say buying the dinar is more of a gamble than an investment.

How to do it

At the moment, no Western bank will buy or sell dinars. This means that you have to buy it off the internet (presuming you're not going to go to Iraq yourself); it also means your investment is not currently liquid at all apart from if you sell it over eBay. As Western banks become established in Iraq, as they should if the economy develops, you will eventually be able to sell the currency to your bank. If the economy does develop, this will happen and by the time you're ready to sell you should be able to.

Only buy from a company that is registered with the U.S. Department of the Treasury as a currency trader, as this will ensure you're getting the genuine article and not Monopoly money. All of these companies charge commission because of the risk associated with going to Iraq to get the currency and costs for labour, shipment, and the like. Surprisingly, the percentage commission varies dramatically between different sites, despite the fact they're all easy to find with Google by searching for "buy dinar". The one that charges the least commission that I have found is dinartrade.com, but there's also betoniraq.com, portaliraq.com and new-iraqi-dinars.com .

Remember - only invest as much as you can afford to lose!

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