Businessmen whisper that the design of the new currency has been finalized and is ready for print; images of fake “Bank of Kurdistan” bills have started popping up on the internet.
Speculation is fueled by the fact that the Iraqi government has refused to send the Kurdistan Region its budget for half a year now, and jihadi militants have disrupted the flow of Iraqi dinars (IQD) up north -- effectively cutting off transport routes to the autonomous region. If the money is not coming from Baghdad, the thinking goes, then why not simply start printing money in Kurdistan?
Officials don’t lend these ideas much credit. “Rumors are a way of life in Iraq, and Kurdistan is very much a part of that,” says Dler Salay, spokesperson at the Kurdistan Regional Government (KRG) Ministry of Finance.
Mark DeWeaver, an emerging markets fund manager in Washington D.C., makes clear that Kurdish currency is a long shot.
“The problem with creating their own currency is that they don’t really have any foreign exchange reserves independent of the Central Bank of Iraq reserves for the whole country,” he says, referring to the store of foreign cash in Baghdad. “And to make matters worse, the KRG government is short of funds. It would be hard to create credible ‘KRG dinar’ under these circumstances.”
If confidence in the dinar falls, or if independence seems within reach, more and more transactions in foreign currency can be expected. Most imports and exports are already denominated in dollars, and banks allow Kurds to hold USD accounts.
“Now the KRG is in need of more dollars for things like foodstuffs and gasoline from neighboring countries,” says Reza Ghazal, economics professor at the University of Kurdistan Hewler. “I believe these countries, specifically Turkey, prefer to receive USD under the circumstances.”
It is not only banks and companies trading abroad that need dollars. Long an unofficial parallel currency in the region, many citizens are switching to it for daily purchases.
“I was buying juice the other day, and the man in front of me paid in dollars. The fact it’s used for such small transactions is a sign,” says Adham Darwesh, director of the Erbil branch of the Central Bank of Iraq. “I just got off the phone with Baghdad, and we are trying to arrange for planes to transport dollars to Kurdistan. With a worried expression, he added, “They haven’t agreed yet.”
Right now, Adham explains, the dollar is more expensive in Kurdistan because of the risks involved in sneaking it through insurgent-controlled areas. This effectively raises the price of imports to the region (which are bought in dollars), taxing a population already beset by budget cuts and increased fuel prices. Planes full of greenbacks would minimize the mark-up on exchanges for USD in Kurdistan, so that the exchange rate is basically in line with the rest of the country.
No matter what, high demand for dollars bodes poorly for the majority of people across the country. This includes the Kurds, many of whom are enthusiastic about ditching the dinar along with the rest of Iraq. The reason for this has to do with technical features of the country’s exchange rate regime at the Central Bank of Iraq (CBI).
The CBI has two separate foreign exchange rates: a floating “market” rate available to everyone, and a fixed “auction” rate available only to banks and certain importers. The market rate for dollars is currently much more expensive than the auction rate due to high demand. This is only natural: the gap (or “spread”) between the two widens during times of crisis because people lose faith in their currency and flock to the safety of dollar holdings.
The bigger the spread, the larger the incentive for arbitrage -- buying cheap currency and reselling it at the market rate -- for those lucky enough to have access to the auction window. Importers suddenly have an incentive to over-invoice goods at the auction rate and sell the remaining currency, while exporters have an incentive to smuggle goods out of the country. Historically speaking, large spreads are associated with high levels of corruption, price distortions, and black market activity.
If people in Kurdistan keep demanding USD, whoever gets dollars at auction rates onto planes from Baghdad will make a killing. Iraq is in a highly unusual position: uncertainty about the future of the state should keep market rates high. At the same time, record oil profits will bring in foreign cash and keep the auction rates low. The government has every reason to maintain this situation so that imports stay cheap and it can effectively tax exports (the government exchanges payment in foreign currency at overvalued market rates).
