As Insurgency Spreads, Value Of "The Bremer Dinar" Dives

by Cam McGrath

(IPS) CAIRO -- Egyptian speculators who stashed away 'Bremer dinars' earlier this year in the hope their value would skyrocket have suffered enormous losses as the official Iraqi currency plummets in the midst of the ongoing insurgency.

"Many people sold anything they could to buy Iraqi dinars," Mohammed al-Abyad, chairman of the Egyptian Foreign Exchange Association (EFEA) told IPS. "When the dinar went down these people lost a lot of money."

The Iraqi dinar was trading at one Egyptian pound (16 cents) per 50 dinars on the black market before its value dropped sharply earlier this year amid the escalating insurgency. The pound is now worth 210 dinars on the black market.

"The black market has narrowed and the currency has no liquidity now," said Shady Sharaf, head of market research at al-Shorouk Brokerage. "The people cannot sell the dinars they bought, which presses on demand."

The new Iraqi dinar banknotes introduced by the U.S. command last October replaced old banknotes bearing images of deposed Iraqi leader Saddam Hussein. Speculators believed the value of the "Bremer dinar," named after the U.S. civilian administrator of Iraq L. Paul Bremer, would rise as the economy of war-devastated Iraq recovered.

Thousands of Egyptians working in the Gulf region brought home bags stuffed with the new Iraqi dinars. They stashed away the currency or sold it for quick profits to other speculators on the black market.

"They remembered what happened in Kuwait, and believed the same thing would happen in Iraq," al-Abyad said.

The value of the Kuwaiti dinar fell to less than 10 cents during the country's occupation by Iraqi forces in 1990, but climbed steeply after the invasion by coalition forces the following year. It now trades at $3.50.

"The situation in Iraq and Kuwait is very different," said al-Abyad. "Kuwait recovered in little time because its infrastructure remained intact."

The speculation was based on credibility, says Alaa al-Shazly, economics professor at Cairo University. "The dinar is backed by the U.S. and people wouldn't have thought the U.S. would get into something that would turn out to be a failure."

Egyptian law does not explicitly prohibit the possession of Iraqi currency, but authorities have taken measures to limit rampant currency speculation. The Central Bank of Egypt has prohibited banks and foreign exchange offices from listing or trading the Iraqi currency. Customs authorities say they have received orders to confiscate Iraqi dinars from arriving passengers.

"The government is more informed simply because they know the political situation is unstable," said al-Shazly. "It understands that the currency doesn't carry any weight."

A currency trader told IPS he was lucky to sell all his dinars before the exchange rate began to sink. He said many people are still holding on to dinars hoping the currency will recover.

"If the situation improves in Iraq maybe the dinar will go up again," he said, "but I won't keep them any more. It is too risky."

Mohammed Aboul Eyein did not get out in time. The farmer sold livestock to purchase dinars when they were at their highest value only to watch his investment crumble.

"Everyone was saying the dinar would increase ten times in value," he said. "Now nobody wants them."

Local experts say that if trading in the Iraqi currency were allowed in Egypt, a pound would fetch 235 dinars.

"Until now, the government could not legalize dinars because in order to trade in any currency you need to be able to transfer the currency to and from its respective country," said al-Abyad.

He points out that the Iraqi dinar recently began trading on the international market. This could give the Egyptian government fresh incentive to legalize dinar trading at banks and foreign exchange offices.

"Legalizing the dinar would be good for the people and even the government because the money is already in the market," he said. "This would also allow people to trade it and put their money back (into circulation)."