Iraqi Dinar (IQD)

What Is the Iraqi Dinar (IQD)?

IQD is the currency code for the Iraqi dinar, the currency of Iraq. The Central Bank of Iraq circulates the Iraqi dinar, which is made up of 1,000 fils. Due to inflation, fils are no longer used and dinars are the smallest unit of currency in circulation.

As of Q2 2021, the IQD is pegged at a rate of US $1 = 1,450 IQD, although the actual exchange rate may fluctuate slightly around that peg.

Understanding the Iraqi Dinar (IQD)

The dinar, first introduced in 1932 to replace the Indian rupee, had a conversion rate of one dinar for 11 rupees. The dinar was pegged to the British pound (GBP) until 1959, when it was pegged to the U.S. dollar (USD). The exchange rate remained relatively stable until the Gulf War in the early 1990s.

The dinar was worth over $3 in U.S. currency prior to the 1990 to 1991 Gulf War. Currency printed before the Gulf War became known as the Swiss dinar. After the war, the government printed new currency that was inferior in quality, due to the lack of printing technology as a result of war-related sanctions. This rapidly devalued the currency to an average of 1,950 dinar per USD by 2003. The old Swiss notes still circulated in some regions of the country.

Starting in 2003, new notes were once again issued, this time better quality, so that the entire country could use one currency. Old notes were exchanged for new ones on a one-to-one basis, while Swiss notes were exchanged at a rate of one Swiss note for 150 new notes. The exchange rate for the USD/IQD was set at 1,190 until December 2020, at which point Iraq's Central Bank announced it would devalue the nation's currency by more than 20% in response to a severe liquidity crisis brought on by low oil prices, a measure that has sparked public outrage as the government struggles to cover its expenses. As of December 2020, the peg is set at 1:1,450.

The dinar has little use outside of Iraq because the country's main export, oil, is priced in US dollars. Despite this, there are numerous scams that try to entice people to buy dinars in the hopes of eventual price appreciation. Many agencies and publications warn investors against investing in IQD scams. 

Typically, brokers selling IQD cash will charge a 25% to 30% premium over the official exchange rate. Those that buy it thus face large losses immediately upon purchasing it. Selling it is also difficult since there is virtually no market for it outside of Iraq. The brokers typically offer 30% under the official exchange rate if someone wishes to sell them dinars. These transaction costs could erode 40% to 60% of capital invested if the official exchange rate doesn't change.

According to World Bank data, Iraq experienced annual inflation of 0.4% in 2018 and -0.2% in 2019. Gross domestic product (GDP) dropped to -1.2% in 2018, up to 4.4% in 2019, and down to -10.4% in 2020.

Scams of Investing in the Iraqi Dinar

Legitimate forex trading in the USD/IQD currency pair is virtually nonexistent. Major banks don't offer Iraqi dinars for trade. Iraqi dinars are only available for purchase or sale through select money exchangers, who may or may not be legally registered. As discussed, these exchangers or brokers typically charge fees of 30% or more, which is factored into the exchange rate offered. Thus buying and selling IQD could result in losses of 50% without the exchange rate moving.

Redenomination happens in cases of high inflation, where old high-value notes convert to new smaller value notes by removing zeros to increase the buying power of the currency. There have been rumors of plans to redenominate the dinar but nothing has resulted from these rumors. Redenomination without revaluation would not increase the value of the IQD. Those holding old notes would likely just have to swap for new ones, likely incurring additional fees if outside Iraq.

The calculated adjustment made to a country's official exchange rate relative to a chosen baseline, such as gold or the USD, is known as a revaluation.

Example of Buying and Selling Iraqi Dinar Outside of Iraq

There is no use for dinar outside of Iraq, thus buying it typically means buying cash from a broker and storing it with them or taking physical delivery.

The official exchange rate is 1,459 dinars per USD as of August 2021. It would cost about $685.51 to buy one million dinars at this rate (1 million/1,459). If buying from an online broker, they may offer one million dinars for $857. That's about a 25% premium over the official rate. Tack on shipping fees and the premium could be even more.

Assume the rate of the USD/IQD does not change. If our investor decides to sell their one million dinars, there is likely nowhere to sell except for back to a broker, since there is little demand for the currency outside Iraq. A broker may offer $568.97 to buy back the dinars. This is 17% less than the official exchange rate value, and 33.5% less than the $685 paid for the dinars. All this without the actual exchange rate moving. An investor could lose more than 30% just from buying and selling the currency through brokers who work a premium into every transaction.