February issue 2004

Anis Mukhtar, a widow, purchased the new Iraqi currency on the advice of a friend in order to earn a quick profit after the dinar’s value surged following the American occupation. For her this seemed to be a goldmine investment for earning a quick profit. But it proved to be a high-risk choice.

“With an investment of just thousands of rupees in Iraqi dinars, you can become millionaire and earn a handsome profit within a short time,” a friend informed Mukhtar. She was told that people had earned a 30 to 40 per cent profit within weeks by investing in Iraqi currency.

Mukhtar could not resist the temptation as a friend of hers had also earned a hefty profit. She purchased the new Iraqi ‘Bremer’ currency in high denomination notes from the open market.

The new Iraqi dinar notes, named after Paul Bremer, the US civil administrator, were introduced on October 15 last year, replacing the currency of Saddam era. The currency started gaining in value after the capture of former Iraqi President Saddam Hussein, which created a buying frenzy in currency markets in Pakistan and Arab countries.

According to a market survey, in Pakistan only 10,000 and 25,000 denomination notes of Iraqi currency are in demand. The new notes with all security marks and symbols, bear scenes from the old Mesopotamia, a picture of ‘al-Hadbaa minaret’ in al-Musil mosque and pictures of the Babylonian King Hamourabi and a 10th century mathematician, in place of the smiling Saddam Hussein.

When the new notes were first introduced, the exchange rate with the Pakistani rupee stood at one dinar to 0.03 rupees, which went as high as 9 paisas in December. This surge is attributed to an artificial demand in Dubai, Bahrain and other Gulf markets as well as in Pakistan and India. According to analysts, financial market players have cashed in on the situation, causing the dinar to tumble. Mukhtar bought the Iraqi dinar at the exchange rate of one dinar to 0.06 rupees. But just a few days after her purchase, the Iraqi currency came down to 4 paisas due to profit — selling by market players. Though Mukhtar suffered a loss of 2 paisas on each dinar, she had no option but to hold on to the currency in the hope of its appreciation.

When she made the deal, she was told that the dinar could touch the 10 paisa mark within a few weeks, giving her an unimaginable profit of 4 paisas per dinar. But all her dreams shattered due to market volatility. Although the rate has improved, slightly, to 4.5 paisa a dinar in recent days, she is still at the losing end.

As are many others. According to Ovais Kalia, chief of Khanani and Kalia, many money-changers, particularly those operating in the Punjab, are persuading people to sell the maximum number of notes to earn their commission. He said the buyers are tempted to speculate in Iraqi dinars due to lack of better investment options. The lure of easy money has snared rich and poor alike. Tempted by the attraction of quick bucks, small investors were trapped in a vicious circle, this time by the money-changers and their brokers, who minted billions of rupees trading in the Iraqi dinar, while small investors were squeezed.

The daily trading volume of Iraqi currency is still enormous as compared to other currencies. However, due to the unorganised nature of the currency market it is very difficult to quantify volumes. “We have documented all records of the currency trade because like every exchange company we have to keep a record,” says Kalia, adding that most money-changers maintain no such record.

Some analysts and experts believe that the State Bank should play its role as a regulatory authority and safeguard the interests of the common investor. “We cannot do anything because we have no control over the money market. It is an open market, where anyone can buy or sell any amount of any currency,” says Syed Waseemuddin, chief spokesman of SBP.

Large banners at prominent places in Islamabad, Lahore and other major cities of Punjab, enticing people to purchase Iraqi currency, attracted the attention of even small income salaried people, who earlier had never thought of purchasing a currency, they had never even seen.

Research analysts and money market sources says the market is currently flooded with higher liquidity. Money earned from undocumented or parallel economy, real estate and stock market investments as well from remittances from overseas Pakistanis is not finding any proper channel for profitable investment.

The recent decrease in the rate of return on national savings schemes and declining profits on bank deposits has forced investors to look elsewhere. An artificial demand for Iraqi currency was created during November-December and after it reached its peak value, profiteers started selling, catching small investors unaware. “People have no awareness how the currency market operates, so they mainly rely on money-brokers’ advice or follow others,” says Mohammed Sohail, research head at Investment Capital Securities.

“This is not a financial scam because Iraqi currency is legal tender and is acceptable everywhere in the world,” maintains Kalia, adding that people should study the market before buying or selling currency. Many early investors have already earned windfall profits on the Iraqi dinar. However, small investors have lost heavily as the currency tumbled after the initial surge.

Money-changers and investment advisors, however, maintain that the Iraqi dinar is still likely to give good returns in the long term.