Submitted by Abdullah Ali, Jan 21, 2007 03:56

A few misdemeanors

First, I think you are reading too much into the exchange rate appreciation. It is informally set by the central bank and is not conventionally free-floating as you may think. Inter-convertibility is a SBA condition but managing the rate isnt. If you read Iraqi press you will find appreciation has been the policy of the CBI for the last three months. Not driven by demand as you may suggest - the reserves, however, will rise or decline instead.

Second, why would insurgents from Iran and Syria use Iraqi dinars when they can pay their so-called recruits in US$? The US dollar is used for large transactions (here and elsewhere in the Middle East) and the Iraqi dinars are used for smaller ones. This type of transactional demand does not enter the books and thus has no effect on the exchange rate.

Third, if you read standard development economics textbooks, depreciating currencies are usually the trait of failed states. This is not the case here. Iraq is in a bad state but it is far from catastrophic.

You mention global oil prices falling. This the combined effect of slowing global demand and the relatively warm winter in Europe. It is not set according to the situation in Iraq although it is fiscally relevant.

Please dont base your comments on speculative causality without asking someone on the ground.

Much appreciated.

Abdullah

economist_in_iraq@hotmail.com

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