Iraq’s economy and the Iraqi Dinar have a long, colorful history. And there’s plenty more excitement to come, since this oil-rich young nation is growing quickly based on its ownership of the world’s second-largest high quality petroleum reserves.
In order to better understand what may lie ahead for Iraq and the Iraqi Dinar, it’s worthwhile to take a closer look at the history of the country, its economy and currency.
Ancient history of a modern nation
Iraq, known as Mesopotamia in ancient times, is home to the world’s oldest civilization, hence its nickname “the Cradle of Civilization.”
The land now called Iraq has a documented cultural history of more than ten thousand years, and it has been host to many successive empires – Sumerian, Babylonian, Assyrian, Sassanian – as well as foreign invaders including Muslims, Turks and Mongols.
By the 16th Century, Iraq was firmly under Ottoman control. The Ottoman Empire was a Turkey-centered area of influence with Muslim rulers. The Ottomans forfeited Iraq after World War I because they sided with Germany, which lost.
Ultimately, British forces captured Baghdad in 1917. When Germany lost the war in 1918, victorious Britain and France carved Iraq out of the Ottoman Empire and it quickly became part of the British Empire.
In 1920 Iraq was designed by the League of Nations (forerunner to the UN) as a “mandate” or protectorate under British administration.
The Brits remained in control until the Kingdom of Iraq was established in 1933.
The first Iraqi Dinar
The Iraqi Dinar currency was first introduced in 1932 in preparation for the British plan to relinquish control of Iraq. Oil had been discovered several years earlier, and banking authorities were already confident in the new nation’s long-term economic prospects.
The dinar is the unit of national currency used in several Middle Eastern countries, each with its own foreign exchange value. Other than the Iraqi Dinar, there is also a Kuwaiti Dinar which is recent years has been one of the world’s highest-valued currencies.
The word “dinar” itself is derived from the Latin word denarius, which means ‘money.’ And, descendants of the word are still found today in some modern languages, such as the Spanish word dinero.
Dinar coins were also introduced alongside the paper Dinar banknotes in 1932, and some of the higher denominations were made of silver. Yet, Iraqi consumers have always shunned coins in favor of banknotes, even for small denominations.
The Dinar replaced the Indian Rupee as Iraq’s official currency, which the British had been using throughout their holdings in the Middle East.
Historical value of the Iraqi Dinar
During the early years of the Iraqi kingdom the value of the Dinar was worth as much as several U.S. Dollars.
The original exchange rate was set at 1 Iraqi Dinar per 11 Indian Rupees. Later, the Dinar was pegged to the value of the British Pound.
In 1959 the Dinar was re-pegged from the British Pound to the U.S. Dollar, with an exchange rate of 1 Iraqi Dinar per USD $2.80
Oil changes Iraq’s future
In 1927, British geologists first discovered a huge oil field near Kirkuk in northern Iraq. Full exploration rights were given to the Iraqi Petroleum Company, which was owned by British business interests.
Development proceeded quickly in a small number of oilfields throughout Iraq. Although the British built roads, the remoteness of the sites slowed progress.
During this period, Iraq was ruled by a series of kings – Faisal, Ghazi, and Faisal II – who generally continued the policies of the previous British administrators.
In 1945 Iraq was admitted into the United Nations, and it also became a founding member of the Arab League.
In 1948 Iraqi leaders entered into the Arab-Israeli War alongside fellow members of the Arab League with the goal of defending the Palestinian right of sovereignty.
During 1958 the Iraqi monarch engaged in discussions with the Kuwaiti ruler regarding the possibility of uniting Iraq and Kuwait together as a single nation.
The discussions didn’t bear fruit, yet they did bring the Iraqi government into conflict with the British government, which opposed any union between Iraq and Kuwait.
From monarchy to military dictatorship
In July of 1958 the King was toppled, and the Republic of Iraq was established. Over the next few years, Iraq was ruled by a succession of military leaders. In 1963 Iraq’s Ba’ath Party seized power and managed to retain control during several years of political turmoil.
Saddam Hussein first stepped into the limelight in 1969. As Secretary-General of the Ba’ath Party, he was tasked with finding a solution to the ongoing Kurdish rebellion in northern Iraq. He brokered a political agreement which ended the hostilities, at least for awhile.
For several years the Ba’ath leadership helped the country grow. Unlike the previous military regimes, during its early years the Ba’ath government focused on agriculture and economic growth.
The monopoly of the British-owned Iraq Petroleum Company was broken in the late 1960s, and Iraq’s economy and oil industry grew rapidly. Even during this turbulent time, the value of the Iraqi Dinar remained fairly stable. Based on the nation’s early oil production, the historical value of its currency rose modestly during this period.
In many ways, the 1970s were a golden era in Iraq – Young, technocratic leadership oversaw a fast-growing, stable economy. Yet, Iraq’s heyday didn’t last long.
Saddam’s ambition created conflict
Saddam’s political and territorial ambition led Iraq into a series of conflicts which were disastrous for Iraq’s economy and the Dinar. His first major conflict was the Iran-Iraq War, which lasted eight years. Although its outcome was ultimately inconclusive, the war left Iraq with huge debts as well as the largest army in the Gulf region – nearly one million strong.
During the Iran-Iraq War, restive Kurds in northern Iraq took advantage of the central government’s preoccupation to launch their own rebellion. Saddam was able to quell the Kurdish uprising, but at a terrible cost – An estimated 200,000 Kurdish civilians were killed along with an unknown number of soldiers from both sides.
He was said to have ordered large-scale attacks using chemical weapons which killed thousands more. These atrocities drew the attention of governments worldwide, although Saddam continued to receive support from most Western governments, as well as China and the Soviet Union.
Stepping over the line
Saddam’s 1990 invasion of Kuwait was the beginning of the end for his regime. Iraq invaded Kuwait based on a fabricated charge that Kuwaiti oil companies near the border had been horizontally drilling for oil beneath Iraqi territory. Four days after Iraqi troops overran Kuwait, the UN’s National Security Council imposed economic sanctions including a strict trade embargo against Iraq. Saddam responded by annexing Kuwait and announcing that it was historically Iraq’s “19th Province.”
Concerned about the possibility of Iraqi aggression toward Saudi Arabia, America’s main ally in the region, President George H.W. Bush launched Operation Desert Shield beginning in August of 1990.
Following Saddam’s failure to comply with international sanctions, Operation Desert Storm began in January of 1991. The U.S.-led coalition included 28 countries more-or-less committed to stopping Saddam’s aggression against Kuwait. The ferocious aerial bombardment campaign was successful in convincing Iraqi troops to leave Kuwait, yet it also unfortunately destroyed much of Iraq’s infrastructure, including its roads, factories, bridges. And, electricity, water and telephone services were also cut nationwide.
The bombing also caused the closing of Iraq’s national oil refining and distribution facilities. Faced with the damage from the coalition’s attacks, Saddam quickly decided to comply with the UN sanctions and withdraw Iraqi forces from Kuwait.
In April of 1991 Iraq agreed to the UN’s terms for a permanent cease-fire and the end of Iraqi hostilities against Kuwait. The UN also imposed strict conditions regarding the disclosure and monitored destruction of weapon stockpiles.
Soon after the Iraqi military forces were driven out of Kuwait, Saddam’s government faced two other threats, from Shia-dominated rebels in southern Iraq as well as from Kurdish rebels in the north. Saddam’s regime responded to the internal rebellions with massive, indiscriminate force. Tens of thousands of innocent people were killed during ruthless persecution of civilians in the affected areas.
Another two million Iraqis fled in search of safety, while others were forcibly relocated by the government.
Saddam’s regime also drained large portions of the Iraqi marshlands in the southern part of the country as a form of economic warfare against local communities dependent on fishing. This provoked an environmental disaster, which is slowly healing today.
Economic impact of the first Gulf War
The years between Saddam’s retreat from Kuwait in 1991 and his eventual ouster in 2003 represent a low point in Iraq’s modern history. Because of international sanctions and Saddam’s continuing large-scale thefts from the country’s banking system, the resulting domestic hyperinflation, extensive poverty and malnutrition caused ordinary Iraqis to suffer greatly.
Due to Iraq’s invasion of Kuwait, the UN Security Council implemented Resolution 661 which placed harsh economic sanctions on Iraq, including a full embargo against any trade with other nations, excluding only certain medical supplies, food aid and other humanitarian necessities.
After the Iraqi military withdrawal from Kuwait, by means of Resolution 687 these sanctions were tied to Iraq’s willingness to disclose and destroy its weapons of mass destruction. Predictably, Saddam’s regime failed to comply. Although Iraq had previously been fairly generous with state welfare in the past, during the years of sanctions all forms of government aid to the people nearly dried up.
The large, well-educated middle class which had grown during the country’s early oil boom years became impoverished. Political dissent grew louder.
Saddam becomes even more desperate and dangerous
Because of Saddam’s persecution of Iraqis in southern Iraq and the Kurds in the north, the U.S. declared so-called “no-fly zones” in both regions.
Yet, even while besieged, Saddam continued to lash out at his enemies: In 1993 the Clinton administration punished Iraqi intelligence agents’ previous assassination attempt against former President Bush by directing a retaliatory missile attack at Iraq’s intelligence headquarters building in Baghdad.
Inside Iraq, Saddam faced growing internal political opposition and dissent. In 1995 he fired or shuffled several of his government ministers in order to give additional authority to his two sons, Uday and Qusay. Both developed into ruthless sociopaths following in their father’s footsteps.
During the late 1990s, UN authorities considered the idea of relaxing sanctions against Iraq simply because of the hardships being suffered by ordinary Iraqis, especially children. According to some estimates, approximately one million Iraqi children died during the years of enforcement.
Focused on the objective of disarming Iraq, the U.S. used its veto power to block the lifting of sanctions. However, beginning in 1996 an “oil-for-food” program was allowed in order for Iraq to obtain foodstuffs in exchange for carefully-monitored oil sales. Throughout the 1990s and early 2000s, Saddam remained defiant and tricky. In 1998 the UN’s chief weapons inspection withdrew from its mission in Iraq due to the lack of cooperation from Saddam’s regime.
As punishment, then-President Clinton directed air strikes against military targets, government facilities, and suspected weapons sites. The campaign of occasional strikes against military and weapons sites continued until the coalition invasion of Iraq in 2003, which toppled Saddam.
End of the Saddam Hussein era
After the invasion Saddam was quickly hunted down and found hiding in a hole. After a lengthy trial, he was executed in 2006. His removal from power was great news for the Iraqi economy and Dinar. The Iraqi Dinar had suffered through the Saddam Hussein era with its value eroded by inflation. But, beginning in 2003 with Saddam’s departure the Dinar was given new life and the Iraqi oil industry quickly began emerging from Saddam’s shadow.
During the final years of his rule, the UN sanctions combined with the regime’s overspending had caused the value of Iraq’s currency to drop dramatically. Saddam directed the Central Bank of Iraq (CBI) to print huge numbers of banknotes in order to fund his government’s invasion of Kuwait as well as to cover the thefts and abuse committed by his family and political cronies during this period.
Saddam and his family and associates removed large amounts of wealth from Iraq. They hid most of it in secret bank accounts which are still being discovered and repatriated today. The recovery of Iraqi assets looted years ago by Saddam is good news for today’s Dinar owners. That’s because the funds steadily being repatriated are now adding to the strength of the Iraqi economy and Dinar.
These returned funds along with the enormous oil revenues being generated by Iraq’s booming oil industry have allowed the country’s economy to enjoy a phenomenal renaissance, even if the success isn’t yet reflected in the official value of the Dinar.
Saddam abused the Dinar, but he couldn’t kill it
With his thieving and regional aggression, Saddam Hussein was hard on the Dinar throughout the entire term of regime. The value of Iraq’s currency certainly dropped during his long regime, although fortunately it has recovered a bit since then. After assuming full power in 1979, Saddam began to systematically loot Iraq’s wealth, including its oil revenues. He ruled Iraq as a kleptocracy in which his equally-ruthless family and clan members were his partners in financial crime.
His increasingly despotic regime instigated the Iran – Iraq War during the 1980s in search of additional territory and revenues to feed his greed. This war placed a heavy burden on the Dinar. His egregious behavior eventually led to the Gulf War of 1990-91 and the imposition of global economic sanctions by the United Nations throughout the entire 1990s.
The economic restrictions punished Saddam and the Iraqi ruling elite, although they also created a humanitarian disaster among ordinary Iraqi citizens by further limiting the availability of food and other essential goods. The Iraqi economy and Dinar were battered and bruised by Saddam’s regime, but they survived.
How Saddam’s legacy affects the Dinar even today
During the transition in 2003, U.S. authorities set the official exchange rate for the Iraqi Dinar at just a fraction of a cent.
This was probably a wise move at the time, since the country’s oil industry had deteriorated and fallen dormant during Saddam’s administration. Today, however, there is widespread concern that this artificial foreign exchange rate doesn’t reflect the true value of the Dinar when compared against other currencies, such as the Dollar for example.
Many people gripe that the low official price of the Dinar first set in 2003 when the country’s oil industry was dormant doesn’t adequately reflect the value today of Iraq’s well-known oil wealth. With Saddam and his henchmen long gone, the Iraqi oil industry and economy in general are booming with rapid growth. In spite of lingering concerns about ISIS, Iraq is in good shape economically and politically.
So, why is the value of the Dinar still so low?
It turns out that Saddam’s actions, or at least the residual effects of actions that he took long ago while in office, are the key to unchaining the Dinar from its current artificial low value and freeing it to rise upward toward a higher value.
In Part 2 we’ll look at the history of Iraq between the American-led invasion in 2003 that ended Saddam’s regime, continuing up to the recent political events which affect Iraq’s economy and the value of the Iraqi Dinar.
Along the way, we’ll highlight the keys to achieving a higher foreign-exchange value for the Iraqi Dinar in the near future.
To learn more about the Iraqi economy and Dinar click below.
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