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Decision Looming on Iraqi Currency - 2003-04-25

The collapse of the Iraqi government has meant the collapse of the Iraqi currency. U.S. officials charged with reconstruction are now bringing in U.S. dollars as a stopgap currency. But a decision has to made soon about Iraq's money.

The Iraqi dinar, with its picture of ousted leader Saddam Hussein on the bill, has become a hot item on E-Bay, the Internet auction website. But for Iraqis, the dinar is now a discredited currency of worth primarily to foreigners seeking souvenirs of a toppled regime.

What Iraq's monetary unit will be is a key question facing the U.S.-run temporary administration in Iraq.

Steve Hanke, a professor of applied economics at Johns Hopkins University and columnist for Forbes Magazine, says the currency issue is an urgent one and should be a high priority for Jay Garner and his team of U.S. administrators in Iraq. "I think they should be moving right now. I mean, it's something that you have to do. Can you imagine running an economy where people didn't know what kind of money was suitable, was acceptable, so people don't know how to price things? If you're running a business, what price tag do you put on it? Do you put them in euros or dollars or old dinars or the so-called "Swiss dinars" or Saddam dinars? What do you do?"

What the U.S. administration in Iraq is doing is airlifting in U-S dollars. U-S officials are using small denomination U-S bills to dole out emergency payments to civil servants, such as police, to being stability to the streets and the economy.

Patrick Conway, a professor of economics at the University of North Carolina at Chapel Hill, says the introduction of the dollar is not exactly a shock to Iraqis. "I would guess that the U.S. decision to do that is simply ratifying something that is probably widespread in Iraq already, and that is the dollarization of the economy," he says. "If you're an Iraqi citizen and you had savings and had any way of converting your dinars to dollars, you probably would have done so long ago. The dollar is a currency used for savings in most countries in the world. And so the number of dollar bills in circulation in Iraq right now is probably quite high."

But officials are not saying what will happen beyond that. U.S. Treasury officials are quoted as saying the choice of currency will be left up to the Iraqi people. Still, say financial analysts, the U.S. administration in Iraq has to lay some groundwork.

The new Iraqi interim authority, whenever it comes into being, can decide to introduce a new dinar. Several analysts suggest this should be done by a currency board, which would give the dinar a fixed exchange rate and have it fully backed by euro or dollar reserves. Such an arrangement, analysts say, has worked well in other countries, such as in the former Yugoslavia.

Re-establishing a central bank, Mr. Hanke says, is asking for trouble since central banks in developing countries tend to be open to political manipulation and abuse. "Most developing countries have lots of smart people. But you have to remember a central bank is a political organization," he says. "And politics will drive what the central bank and the technocrats are required to do. And usually they're required to produce a lot of bad money."

The other option is for Iraq to adopt use of a stable foreign currency, such as the dollar or euro, as its monetary unit. After their wars, Bosnia and Kosovo adopted the German mark as their currency, then started using the euro.

But some analysts feel that while that may be practical, nationalistic sentiment in Iraq will be powerful for adoption of its own currency this time, without the portrait of Saddam Hussein.