13 October 2003
BAGHDAD- Moneychangers and major bourse traders, known as "Big heads", say they will refuse to comply with the Iraqi Central Bank's plan to set the dinar-dollar exchange rate. The traders' challenge to the central bank may come as a blow to the Central Bank's plans to take control of Iraq's money supply.
On October 4, Ahmed Salman, deputy governor of the Central Bank, declared there will be three weekly auctions for setting exchange rates and that these rates are expected to apply to the dealers at the money markets.
The Bank's "Foreign Currency Auction" policy aims at setting a unified exchange rate throughout the country, giving the Bank a central role in the nation's economy. The move is part of the overall plan to build confidence in Iraq's currency, which will be swapped on October 15.
Dealers question the Bank's ability to maintain control over exchange rates and are against the idea that the Bank should take control of the foreign currency market itself. They point out that the Central Bank appears to not have taken into account the strength of the dollar against the dinar, as people continue put their money in the greenback rather than the dinar. Besides, say traders, the auctions have already run into problems (see page 9).
"I don't think that the Central Bank will have full control over the traders of the bourse because the dinar-dollar exchange rate is a matter of demand. If there is a rise in the country's imports, then the dollar will soar; but if imports shrink, it will face a decline," said Ali Hawaishawi,a chief trader at the Kifah street market, Baghdad's main bourse. "This, has so far been the policy of the market," he added.
The dinar-dollar exchange rate has long been a bone of contention between the "Big heads" at Kifah, who set the rate for the majority of Iraq's markets, and the Central Bank. During Saddam's rule the Bank was continuously fighting with currency traders to set "impossible" foreign currency exchange rates, with little success. For example, the Iraqi dinar witnessed a dramatic drop in its value against the US dollar during the war. On one occasion it fell to more than ID4000 to the dollar. At that point, the exchange rate was greatly fluctuating. Meanwhile, the Central Bank of Iraq was buying and selling dollars at a worse rate than the markets were, effectively handing over control to the dealers.
The news that dealers still have no intention of complying with Central Bank demands will come as a disappointment to consumers, the traditional losers in the battle. Consumers have long been duped by traders and have been liable to their tricks and their expert manipulation of the rates of exchange. Traders were able to to buy ID10000 notes at discounts of up to 40% in recent months, based mainly on a campaign of rumors and lies. Traders have long played on the belief that ordinary dinar notes could easily be forged and "Big heads" often circulated rumors that large quantities of counterfeits had swamped the markets.
After the war, market manipulation phenomenon became so prevalent that no denomination escaped the devaluation process. It has recently spread to small denominations of US dollars. As October 15 drew nearer, the dealers took the opportunity to take profits, and now the ID10000 is only trading at a ID500 discount. Traders repeatedly claimed that these bills had already been looted from banks in the wake of war. No sooner had the ID10000 witnessed a revaluation, than traders found the newer, smaller ID250 as an alternative through which they could make a fortune. The note has been devalued and rejected in the markets and among dealers due to rumors they allegedly spread themselves. In fact, the big bourses, like Kifah, now behave like cartels that aim to regulate and manipulate monetary policy to serve their own interests.
Dealers at Kifah, Harthiya and Khadimiya, the main foreign exchanges in Baghdad, have highlighted their dismay at the Central Bank attempt to apply a steady unified exchange rate. "Even if the Central Bank has started setting the exchange rate, it will not be able to generalize this rate all over the currency markets or force the traders here to comply with its own policy," insisted Hameed Raad, a moneychanger at Khadimiya.
Raad may well be correct. Dealers who are practiced in preserving their profits represent a tough obstacle to the Central Bank's plans. Certainly, the moneychangers have become much more adroit at spurring people on to the currency markets than any economists have?
BAGHDAD- Moneychangers and major bourse traders, known as "Big heads", say they will refuse to comply with the Iraqi Central Bank's plan to set the dinar-dollar exchange rate. The traders' challenge to the central bank may come as a blow to the Central Bank's plans to take control of Iraq's money supply.
On October 4, Ahmed Salman, deputy governor of the Central Bank, declared there will be three weekly auctions for setting exchange rates and that these rates are expected to apply to the dealers at the money markets.
The Bank's "Foreign Currency Auction" policy aims at setting a unified exchange rate throughout the country, giving the Bank a central role in the nation's economy. The move is part of the overall plan to build confidence in Iraq's currency, which will be swapped on October 15.
Dealers question the Bank's ability to maintain control over exchange rates and are against the idea that the Bank should take control of the foreign currency market itself. They point out that the Central Bank appears to not have taken into account the strength of the dollar against the dinar, as people continue put their money in the greenback rather than the dinar. Besides, say traders, the auctions have already run into problems (see page 9).
"I don't think that the Central Bank will have full control over the traders of the bourse because the dinar-dollar exchange rate is a matter of demand. If there is a rise in the country's imports, then the dollar will soar; but if imports shrink, it will face a decline," said Ali Hawaishawi,a chief trader at the Kifah street market, Baghdad's main bourse. "This, has so far been the policy of the market," he added.
The dinar-dollar exchange rate has long been a bone of contention between the "Big heads" at Kifah, who set the rate for the majority of Iraq's markets, and the Central Bank. During Saddam's rule the Bank was continuously fighting with currency traders to set "impossible" foreign currency exchange rates, with little success. For example, the Iraqi dinar witnessed a dramatic drop in its value against the US dollar during the war. On one occasion it fell to more than ID4000 to the dollar. At that point, the exchange rate was greatly fluctuating. Meanwhile, the Central Bank of Iraq was buying and selling dollars at a worse rate than the markets were, effectively handing over control to the dealers.
The news that dealers still have no intention of complying with Central Bank demands will come as a disappointment to consumers, the traditional losers in the battle. Consumers have long been duped by traders and have been liable to their tricks and their expert manipulation of the rates of exchange. Traders were able to to buy ID10000 notes at discounts of up to 40% in recent months, based mainly on a campaign of rumors and lies. Traders have long played on the belief that ordinary dinar notes could easily be forged and "Big heads" often circulated rumors that large quantities of counterfeits had swamped the markets.
After the war, market manipulation phenomenon became so prevalent that no denomination escaped the devaluation process. It has recently spread to small denominations of US dollars. As October 15 drew nearer, the dealers took the opportunity to take profits, and now the ID10000 is only trading at a ID500 discount. Traders repeatedly claimed that these bills had already been looted from banks in the wake of war. No sooner had the ID10000 witnessed a revaluation, than traders found the newer, smaller ID250 as an alternative through which they could make a fortune. The note has been devalued and rejected in the markets and among dealers due to rumors they allegedly spread themselves. In fact, the big bourses, like Kifah, now behave like cartels that aim to regulate and manipulate monetary policy to serve their own interests.
Dealers at Kifah, Harthiya and Khadimiya, the main foreign exchanges in Baghdad, have highlighted their dismay at the Central Bank attempt to apply a steady unified exchange rate. "Even if the Central Bank has started setting the exchange rate, it will not be able to generalize this rate all over the currency markets or force the traders here to comply with its own policy," insisted Hameed Raad, a moneychanger at Khadimiya.
Raad may well be correct. Dealers who are practiced in preserving their profits represent a tough obstacle to the Central Bank's plans. Certainly, the moneychangers have become much more adroit at spurring people on to the currency markets than any economists have?
Sarmad S. Ali
© Iraq Today 2003
