Investors all over the world following dinar updates are waiting for the Iraqi dinar to revalue. Many have pinned their hopes for a change in the value of this currency on the example set by the Kuwaiti dinar. Although the value of the Kuwaiti dinar fell after Saddam Hussein’s invasion of Kuwait, it is now the strongest currency in the world. Is it possible that the Iraqi dinar will rebound similarly?
3 REASONS THE KUWAITI DINAR SURGED AFTER THE IRAQI INVASION
- The Central Bank of Kuwait re-issued the Kuwaiti dinar after the country regained its independence
- The Central Bank of Kuwait enforced a strict policy of currency control to protect the value of the currency
- The Central Bank of Kuwait controlled the currency because Kuwait is an oil-rich country with a stable economy
The Kuwaiti dinar, the currency of the country of Kuwait, is the highest valued currency in the world. What this means is that a currency converter showing the Kuwaiti dinar-to-dollar ratio shows 1 Kuwaiti dinar currently equals 3.29 United States dollars. Essentially, a foreign exchange transaction favors a Kuwaiti investor over an American investor. In other words, it is easier for a Kuwaiti company to make an investment in US assets than for an American company to make an investment in Kuwaiti assets—because a money transfer of Kuwaiti dinar to USD transaction would be inexpensive for Kuwaiti investors. However, a USD to Kuwaiti dinar transaction would be expensive for American investors.
What astonishes currency investors is how Kuwait’s economy recovered after the Iraqi invasion of Kuwait led by Saddam Hussein devastated that country. The invasion of Kuwait also depreciated the value of the Kuwaiti dinar. After the liberation of Kuwait in 1991, the Kuwaiti dinar surged in value for a few important reasons.
1. The Central Bank of Kuwait Re-issued the Kuwaiti Dinar after Kuwait Gained Independence in 1991
A new series of Kuwait dinar was issued because Saddam Hussein had stolen a large quantity of the country’s currency. This redenomination invalidated the value of the previous series of the currency. The old issue of the national currency no longer had any value, and the Kuwaiti government now only considered the new Kuwaiti dinar denominations to be legal tender.
The people of Kuwait used the third series of the Kuwaiti currency before the invasion of Kuwait. The Central Bank of Kuwait had issued this in 1980 to honor Emir Jaber al-Ahmad al-Jaber al-Sabah’s crowning. It is this series that the Iraqi government declared as illegal legal tender, substituting the Iraqi dinar as the new national currency. After Kuwait’s liberation, the Central Bank of Kuwait introduced a fourth series with enhanced security features. This restored the lost conversion rate of the third series and became the only Kuwaiti dinar that people could use to buy anything. The Kuwaiti people could not use denominations from the third series for trading, market transactions, exports or for any other purpose.
A brief history of the Iraqi invasion of Kuwait can help explain how redenomination works and why the Kuwaiti government considered it necessary.
In 1990, Saddam Hussein’s military invaded Kuwait in a two-day operation from August 2nd to the 4th in 1990. After Iraq occupied the country, many Kuwaitis fled, taking as much money as possible. Since Kuwait was no longer a sovereign nation, the value of the currency plummeted, forcing those in exile to exchange their Kuwaiti dinar for other foreign currencies at a far lower rate than the dinar had been worth.
In October 1990, Saddam Hussein declared the Kuwaiti dinar illegal and ordered that all Kuwaiti dinar be exchanged for the Iraqi dinar currency. As a result, the Kuwaiti dinar in circulation fell to its lowest monetary level.
The next year, a US-led military coalition liberated Kuwait. The large air campaign lasted four days, starting on February 24th. However, before fleeing the country, Iraqi soldiers drained Kuwait’s currency reserves by looting the Kuwaiti Central Bank, stealing $1.2 billion worth of Kuwaiti dinar and $950 worth of gold bullion.
After the US-led coalition liberated Kuwait on February 28, they put the Kuwaiti government back in power, and the new government restored the Kuwaiti dinar to its original value before the occupying Iraqi forces had shut down the Kuwaiti Central Bank. The Kuwaiti government and senior banking officials of the Kuwaiti central bank then decided that a redenomination was necessary to invalidate the entire supply of dinars stolen out of Kuwait.
2. The Central Bank of Kuwait Enforces a Policy of Currency Control
The Central Bank of Kuwait pegs the Kuwaiti dinar to a weighted basket of currencies. This undisclosed basket of currencies, linked to Kuwait’s financial and trading partners, has low volatility and high value because the dinar exchange rate only fluctuates within a small range.
Since the currency is not pegged to other global world currencies—like the United States dollar, the Euro, the Pound Sterling, the Japanese yen, the Swiss franc, or hundreds of other global currencies traded in the Forex market—the value of the Kuwaiti dinar is not affected by the volatility of the supply and demand of the world money market. The Central Bank of Kuwait can control the current monetary worth of the Kuwaiti dinar because it doesn’t float freely. They are free to issue any policy that increases the currency’s stability and decreases the risk of inflation.
3. The Central Bank of Kuwait Has Preserved the High Value of the Currency Because Kuwait Is an Oil-Rich Country with a Stable Economy
The Kuwaiti dinar has maintained its growth and stability because the country of Kuwait is one of the most prosperous in the world. An oil-rich country with a petroleum-based economy, Kuwait is the fourth most prosperous country on earth per capita and the second richest Gulf Cooperation Council (GCC) country per capita after Qatar.
After Kuwait was liberated from Iraq, its GDP was less than $20 billion dollars. However, by 2014, it had risen to $174 billion dollars. It then experienced a decline because of a drop in global crude oil prices during the next two years, and its GPD fell to $110 billion.
Kuwait’s economic stability allows the Central Bank of Kuwait to issue monetary policies that minimize the impact of inflation, encourage economic progress, and progressively improve national income growth.
WHAT DOES THIS MEAN FOR THE IRAQI DINAR?
If you have been following dinar recaps, then a dinar guru may have led you to believe that what happened to the Kuwaiti currency will happen to the Iraqi currency, too. Unfortunately, many dinars gurus have convinced investors to have confidence in the Iraqi dinar for the wrong reasons. One of these includes confusing the concept of the revaluation of a currency with the concept of the redenomination of a currency.
This is not the first time that gross inaccuracies show up during dinar updates. Some dinar gurus have also misled investors by implying that Donald Trump bought Iraqi dinar. But nobody knows whether he did as news stories only speculate that possibility.
Although a revaluation and a redenomination may seem similar on the surface, they are two distinctly different concepts. The Kuwaiti currency surged in value because of a redenomination, not a revaluation. A redenomination changes the entire series, resetting the entire financial system in one go. A central bank will not issue new units, denominations, dinar coins or devise any other ways to change the value of a currency.
During a revaluation, a central bank will change the value of a currency. However, during a redenomination, the value of a currency is not changed. Instead, the old series is invalidated, and a new series issued. In Kuwait, this was necessary because Hussein’s government forcibly pegged the Kuwaiti dinar to the Iraqi dinar and because Iraqi forces had stolen Kuwaiti dinar out of the country’s central bank.
In summary—in a redenomination, there is no change in value. One series is voided and replaced by another, thus restoring the lost value. In a revaluation, the currency has not changed but its value has increased.
Another major difference between the Kuwaiti dinar and the Iraqi dinar is that the Kuwaiti dinar is pegged to an undisclosed basket of weighted currencies while the Iraqi government pegs the Iraqi dinar to the world money market. Consequently, the value of the Iraqi dinar is not tightly controlled by a central bank. Instead, the world market determines the value of all floating currencies.
The parallel between Kuwait and Iraq also breaks down when you consider economic growth. While military invasions devastated the economies of both countries, they both responded to this invasion in very different ways. Kuwait chose to rebuild its economy despite the damage inflicted on its oil fields by the Iraqi invasion. Many fires had to be extinguished because Iraqi forces set oil wells ablaze during the invasion.
Iraq has failed to rebuild. The reason for this is not clear. Different sources claim different reasons. Senior Iraqi government officials claim that the US occupation did not follow through on its promise to rebuild Iraq. Contractors misspent millions and wasted a year on ill-conceived engineering projects that accomplished little after ten years. These bungled projects cost Iraq about $1.5 billion in lost oil revenues. However, other sources claim that the fault lies with Middle Eastern sectarian divisions that make it difficult to unify the country under a federal government stable enough to rebuild Iraq.
New Hope for Iraq
The big takeaway here is that if you’re interested in an Iraqi dinar RV, base it on the likelihood of an Iraqi reconstruction. Don’t do it because you imagine there are sufficient parallels between Kuwait and Iraq to suggest that Iraq might achieve an economic comeback similar to Kuwait.
With the election of Barham Salih as the new president and Adel Abdul Mahdi as the prime minister after the 2018 Iraqi parliamentary election, the reconstruction of Iraq appears far more probable than ever before, as both these leaders are determined to end the political partisan and the Islamic sectarian squabbles that have prevented Iraqi reunification until now.
WHY DID THE KUWAITI DINAR SURGE AFTER THE IRAQI INVASION?
Kuwait survived the massive shock to its economy, financial system, and banking industry after the Iraqi occupation because of the sound policies of the Central Bank of Kuwait. Before the invasion, the Central Bank of Kuwait had already established an excellent reputation among the banking institutions of the world because the exchange rate of the Kuwaiti dinar had already been pegged to a weighted basket of currencies. After Kuwait regained its independence, it could restore the value of its currency by rebuilding its economy and reissuing the Kuwaiti currency.
Kuwaiti dinar did not surge in value because of a revaluation after an American-led military coalition ousted Iraqi forces out of Kuwait. Instead, the rebuilding of Kuwait’s oil fields and the re-denomination of the Kuwaiti dinar restored its value.
The only parallel that can be drawn between Iraqi currency and the Kuwaiti dinar is that Iraq could follow the example of Kuwait. If Iraq develops a robust central banking policy and rebuilds its economy, too, an economically strong Iraq will then have the economic stability to sustain a stronger currency.