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Iraq run on dollars { April 18 2003 } Original Source Link: (May no longer be active)
http://www.nytimes.com/2003/04/18/business/18BANK.htmlhttp://www.nytimes.com/2003/04/18/business/18BANK.html
April 18, 2003
Iraq to Run On Dollars Till It Gets New Currency
By EDMUND L. ANDREWS
WASHINGTON, April 17 — As the focus in Iraq shifts from waging war to paying wages, the Bush administration plans to run Iraq on dollars until it fosters a replacement for today's nearly worthless "Saddam dinars."
American military officials are already paying Iraqi civil servants in dollars, and they expect to continue doing so for at least the next several months. But a team of experts from the Treasury Department is already commuting to Baghdad from Kuwait City, trying to determine the fastest and smoothest way for Iraqis to have a new currency and a central bank to control it.
Today, a senior administration official said it was in discussions with Peter McPherson, who was a deputy Treasury secretary under President Ronald Reagan, to serve in Iraq as a coordinator on financial issues during reconstruction. A Treasury Department spokesman declined to comment.
The model is Afghanistan, which had several competing currencies and a financial system in shambles. Working with Afghan leaders, Treasury officials laid the groundwork for a unified Afghan currency and contracted with printers in Germany and Sweden to produce the actual bills.
"We will pay in dollars initially," John B. Taylor, assistant secretary of the Treasury in charge of international affairs, said in an interview today. "It's an interim measure, and we're not going to do it any longer than we have to. But the dollar has value and it's a stable currency."
The most likely strategy, Mr. Taylor said, will be to expand the use of old Iraqi dinars that were used before the first Persian Gulf war decimated Iraq's economy.
Iraq replaced the old "Swiss dinars," as they are known, with Saddam dinars, and then printed ever-larger quantities to make up for the government's chronic budget shortfalls. Though the government maintained the official exchange rate of Saddam dinars at 0.3 to the dollar, the black market exchange rate reached 2,000 to the dollar by the time American forces attacked Iraq last month. Today it is 3,000 to the dollar.
The older dinars continue to circulate in the autonomous Kurdish regions of northern Iraq, and they have kept most of their value because nobody has printed new bills since about 1990. The old dinars are now ragged, sometimes held together with tape, and there is no central bank that controls their supply. They simply recirculate in the regions.
Treasury officials are in the process of assessing the possibilities for printing new batches of the old dinars either in Iraq or abroad. Though Iraq did have printing and engraving plants, officials say they do not yet know how many of them are still functional or whether they can produce bills with modern anticounterfeiting features like holograms.
Many countries have created new currencies in the aftermath of war and upheaval over the last decade. Republics that broke free of the former Soviet Union have mostly adopted new currencies, as did countries like Bosnia that broke free from Yugoslavia. Kosovo, now an autonomous region of Serbia, has essentially adopted the euro.
Establishing a new currency is only a step in rebuilding Iraq's financial system. Iraqi prices have become almost entirely divorced from normal market forces. Inflation roared along at 60 percent a year, and perhaps much more, but the government also kept prices for many staples and for electricity and water far below their actual cost.
Until a new system is established, Iraq will be doing business in dollars, which have circulated widely in Iraq for years. By some estimates, Treasury officials say, as much as $500 million in American currency may be in Iraq.
Administration officials say the choice of a new currency ought to be made by Iraqis, and they insist that the administration is neutral on many basic issues of monetary policy. For example, Iraq could adopt a system of flexible exchange rates, which move in response to market forces. Or it could adopt a fixed exchange rate, which would require the central bank to intervene with its own reserves to keep the exchange rate at a constant level.
"This is something the Iraqis will have to decide and have a lot of ownership on," Mr. Taylor said.
Copyright 2003 The New York Times Company |
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