Iraq: Currency Redenomination To Increase Confidence, Revaluation Not On the Horizon
Merrill Lynch indicated that a revaluation of the Iraqi dinar is unlikely to take place until after the country substantially increase oil production over the coming 5 to 7 years, adding that the planned redenomination of the currency is not a prelude to the dinar’s revaluation. It said the Central Bank of Iraq’s plan to drop three zeros from the dinar reflects successful macroeconomic stabilization and will not alter the value of the currency or of that of Iraqi assets, but aims to make daily accounting and cash transactions easier. It noted that the redenimination will increase confidence in the local currency, will send a strong signal that the economy has normalized, and could effectively decrease the dollarization rate in the economy.
Merrill Lynch said that Iraq has managed over the past few years to improve its macro fundamentals in line with the requirements for successful currency redenomination, as authorities reduced inflation to low single digits, rendered fiscal policy more credible, and secured Paris Club Debt relief, which reduced external debt from 348% of GDP in 2005 to about 50% of GDP currently. It added that oil revenues have allowed Iraq to build up foreign currency savings, as the country’s foreign reserve stood at $55bn at end June 2011 and represented 150% of total external debt.
Merrill Lynch considered that a large currency revaluation would cripple fiscal revenues, unless oil production increases massively. It said the large dependence on oil for government revenues, the elevated fiscal breakeven price of $100 per oil barrel, and the need for large domestic spending on reconstruction and infrastructure make revaluation an unlikely scenario in the short term. It ruled out substantial appreciation pressures on the currency over the near term; and added that the dinar may appreciate 3% to 5% at best annually from 2012 onwards if reserves continue to rise and inflationary pressure emerge.
Source: Merrill Lynch