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Iraq Dinar and Chapter 7

A Change for the Iraqi Economy

Written by Joseph Cafariello
Posted July 10, 2013 at 1:55PM

A new chapter has begun for the once again completely sovereign nation of Iraq, as it was reclassified from Chapter 7 to Chapter 6 of the United Nation’s charter. In effect, it is like someone being released from prison. All of his confiscated possessions will be returned to him, and he will once again have full control of his finances.

july 2011 new iraqi dinarThis could deliver a huge boost to the value of Iraq’s currency, the dinar, with the return of billions of dollars worth of assets frozen shortly after its 1990 invasion of neighbour Kuwait.

But Iraq’s release from political prison also opens it up to suits and claims of reparation against it. Out from under Chapter 7 restrictions, how will Iraq manage its affairs now? And what will this mean for its dinar?

A New Chapter

While Chapter 7 authorizes the UN to impose sanctions or use military force against a country that steps out of line, Chapter 6 allows a nation to handle disputes with other countries on its own through peaceful negotiation.

“Iraq can now have normal relations and sign all sorts of treaties with other countries of the world,” Labeed Abbawy, Iraq’s former deputy foreign minister, expressed his relief to the Kurdistan paper Rudaw. “We were not getting invitations from the international conferences and some countries would even deny visas to our Iraqi diplomats.”

Only two issues still remain under Chapter 7: a ban on certain arms and the completion of reparation payments to Kuwait, with $11 billion outstanding of the original $52 billion owed.

All other sanctions and restrictions have been lifted. Iraq can rebuild its military. It can be party to political and trade treaties. It will control its oil revenues as its own government determines. It will even see the return of some $82 billion worth of frozen assets held in foreign banks since its invasion of Kuwait in 1990.

“The lifting of Chapter 7 against Iraq will enable it to regain independence in its oil policy, and Iraq again can become an important regional and international energy player,” Dr. Rebawar Khinsi boasted his optimism to Rudaw.

Good times are indeed in Iraq’s future, which should bode well for the dinar. But there are still a number of obstacles to clear out of the way.

Stability Issues

For the time being, the country is still being closely watched, like a released ex-convict under probation.

“Iraq will remain under observation and it has to respect the role of the United Nations Assistance Mission for Iraq (UNAMI),” Dindar Zebari, special representative of the Kurdistan Regional Government (KRG) in the UN clarified to Rudaw. “Iraq is still not a stable country so the UN delegation will keep its presence there.”

Threatening Iraq’s stability are a number of unresolved issues from its past. Rudaw reports that “minorities have been especially concerned, apprehensive that the Iraqi government - without a leash - could turn into yet another threat.”

Haydar Mulla, an al-Iraqiya MP, although supportive of the chapter change, acknowledges “there are fears that lifting the restrictions will free the hands of the Iraqi government against the minorities.”

Besides continued tensions among Iraq’s disunited population, there are also a number of reparation claims to be settled after Saddam Hussein’s dictatorial rampage. As Amir Hassan Fayaz, head of the political science department at Nahrein College, expressed to Rudaw, “Iraq will become a normal country again and will be dealt with as a sovereign state. Now all the countries that Iraq is indebted to can ask for payment.”

The ex-convict is now going to be confronted by all the people he robbed and cheated, and there is no longer any Chapter 7 to protect him. The dinar can’t pull its flying carpet trick just yet.

Effect on the Dinar

What the changing of the chapters does for Iraq is lift a multitude of restrictions. But the nation still needs to grow into those expanded boundaries. Just because you move a plant from a small pot to a large pot does not mean it will grow instantly.

There are three main economic benefits delivered by Chapter 6: a) the return of frozen assets; b) debt forgiveness; and c) full control of revenues. While the first two will have an immediate affect on the nation’s financial circumstances, the third will take years to bear results.

  • First, there is the return of $82 billion in frozen assets. Indeed, this will have an immediate effect on Iraq’s balance sheet as soon as the funds are returned. Unfortunately, it will have a very small impact on the nation’s financial position or its currency’s value.

$82 billion is barely six months’ worth of Iraq’s annual GDP of $155 billion (CIA World Factbook). This is a “one-shot-deal”, not a recurring revenue. It should boost the value of the dinar to a certain extent. But once it is factored in, it will have no further boosting effect.

  • Next is the forgiveness of Iraq’s debt by as much as 80%. With most of that forgiveness already applied between 2004 and 2010, the current remaining debt, as reported by the CIA World Factbook, is $50 billion. Iraqi Foreign Minister Hoshyar Zebari expects this to be completely paid off by 2015, making the nation debt free.

Though this is quite the achievement, it is another “one-shot-deal”, not a recurring revenue. Its value is only 4 months’ worth of GDP, spread out over the next 2 years, the effect of which should strengthen the IQD a little over time until 2015 and then stop.

  • Finally, as the greatest benefit of the UN’s decision, Iraq will be in full control of its oil revenues to spend as its elected governing bodies determine. Yet this does not result in an immediate increase in the nation’s wealth. Rather, the immediate effect of taking control of its finances will likely result in a worse balance sheet over the shorter term.

While under Chapter 7, Iraq could do just two things with its oil revenues: pay reparations to Kuwait and invest in its reconstruction fund, which included upgrading infrastructure and expanding its oil production.

Under Chapter 6, however, Iraq will have to manage additional expenses. It must rebuild its military, not an inexpensive task in these modern times. It also needs to start dealing with the multitude of claims against it by nations and groups not yet compensated for Saddam’s abuses against them.

Slow Evolution

Iraq’s economy will grow. It will become wealthier, and the dinar will increase in value. But this will evolve slowly over time.

As Rudaw reports:

“According to Iraq’s energy plan, oil exports are expected to reach 6 million barrels per day by 2017, elevating the federal budget to $216 billion, [and] 9 million barrels per day by 2020, raising the budget to $324 billion. In 2025, the federal budget will reach $432 billion, if Iraq succeeds to export 12 million barrels of oil per day.”

Sounds like a great plan, and it will strengthen the IQD gradually over the next 12 years. But only when the Iraqi central bank finally decides to allow the currency to trade freely. As it is now, it just keeps returning to those same central bank-controlled rates.

The change from one UN chapter classification to another does only one thing: it puts sovereignty back into Iraq’s hands. But the journey to prosperity and ultimately a strong currency depends on what that nation’s government does with its new found freedom. Is it responsible enough? Is it capable enough? Is it united enough?

The future of the IQD depends on more than just a UN classification and the return of frozen assets. It depends on Iraq’s patching up differences with its neighbors and unifying its own citizens, on its continued reconstruction and investment in its oil industry, and on its willingness to open the cage confining its currency to let it fly and trade freely in an open market.

Until these three things happen – unity, reconstruction, and free exchange – the IQD will have a heck of a time gaining any strength at all.

In the meantime, other markets that are fully united, fully built, and fully free are ready and waiting for our investments. And they will likely give us a better return over a shorter period of time.

June 27’s news on the chapter change has had no impact on the IQD thus far, currently trading at 1162 per 1 USD, as it was then. (click chart to enlarge)

iraqi dinar 7-10-13 smallSource: XE.com

Joseph Cafariello

 

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