Which will Iraqis prefer - dollar or dinar?

The military operations have stopped in Iraq, yet another confrontation is taking place on the quiet on Iraqi streets and market places.

But this time, the confrontation is between the U.S. dollar and the Iraqi dinar.

Indeed, since the end of the fighting another battle of a different scale has started between the two currencies to determine which one will gain the confidence of Iraqis and which will supersede the other in the Iraqis' wallets. Although it is recovering now, the Iraqi dinar seems to be the big loser in this battle.

In fact, the dinar has been fluctuating enormously against the dollar. During the fighting it peaked at nearly 4,000 to the dollar, but it has since been steadily gaining strength, varying from 3,300 dinars to 2,600 and even reaching 1,200 to the U.S. dollar.

Things appear even more absurd when one considers that the currently strong dollar used to exchange at a rate of 3 dinars not long ago - in 1990 before the invasion of Kuwait.

One the main reasons for this wild fluctuation is the loss of confidence and uncertainty of consumers regarding the Iraqi dinar which has lost at least half of its value with the collapse of Saddam's regime.

Another explanation is the injection of about $ 50 million into the economy, which is considered by American officials as a great boost to the economy while others see it as a destabilisation factor for the dinar's value.

The American administration has recently decided to pay Iraqi government employees their first salaries in two months. The U.S. administration has allocated $20 per person to be paid to about 2.5 million employees, totalling $50 million.

The money comes from Iraqi assets frozen abroad after Saddam Hussain's 1990 invasion of Kuwait. At the current ex-change rate this amount is considered slightly above the average salary.

Yet, U.S. officials have an-nounced that new salary scales based on qualifications, merit and years of service will soon be adopted to remunerate government employees, permitting them to collect higher salaries than they did under Saddam's regime.

According to these new scales, salaries will range between 100,000 and 500,000 dinars a month (about $80-$400).

Schoolteachers who were making an average of 20,000 dinars will now receive 100,000, or about $80. Policemen will make 120,000 dinars on average, or about $100, which is twice what they previously made. But even with such an increase in salaries the situation remains very difficult due to the staggering jump in the food prices, which are fluctuating from day to day as if they are stock market shares.

The situation becomes even more complicated if we take into consideration the existence of two sorts of dinars, the Saddam dinar bearing the portrait of Saddam Hussain which is used in the southern and central parts of the country, and its predecessor known as the Swiss dinar because it was printed in Switzerland and is used in the Kurdish-controlled area in the north of the country and whose value stands between 10 and 6.5 dinars to the U.S. dollar.

Consequently, the battle promises to be long and fierce especially with mounting speculation over what will replace the weakening dinar in daily transactions.

In fact, one of the main priorities and, of course, the biggest challenge for any new government in Iraq is to adopt a new currency that will have a stable rate of change.

The enterprise of changing the country's currency is a very ambitious one but it is also vital to revive the falling economy. This is because both the devaluation and depreciation of the currency affect all sectors of the economy, raising the prices of goods and services, reducing the purchasing power of consumers and leading to an infernal cycle of inflation.

Thus, as we all know, inflation occurs when the quantity of money circulating in the economy exceeds the amount needed by companies and households, forcing them to increase their spending to minimise the amount of money in their possession, increasing the demand for goods and, consequently, provoking an increase in prices.

In other words, it means that each unit of money will be worth less than before in its purchasing power so consumers will have to give a bigger amount of money in exchange for goods they want to acquire.

Furthermore, it appears that Iraq has experienced more problems such as hyper-inflation through the years due to the inadequate supply of goods generated by the insufficient domestic production and the lack of imports due to the sanctions.

Hence, because of Iraq's small agricultural sector and heavy reliance on imported food, the devaluation of the dinar meant a decrease in imports, leading to higher food prices in the short run.

Prices of goods increased by several hundred per cent. According to some economic reports, the inflation rate was 1,000 per cent per year in 1993, and it has been skyrocketing ever since due to the government printing money without real value to finance its spending commitments.

Between 1991-1995, inflation averaged 300 per cent and between 1996-2000 it reached 108 per cent. The inflation rate fell to 60 per cent at the end of 2001, and there are all indications that high rates of inflation will persist in the postwar period.

This situation reflects the imperative need for reform of the monetary system of the country in the postwar period.

The elected government should concentrate all efforts on resolving this issue because it is the basic foundation for any economic revival.

In this regard, any decision should be based on Iraq's previous monetary experience in order to determine the most appropriate type to enhance the dinar credibility and rehabilitate the country's economy.

From 1982 through to the 1990s the Iraqi government opted either for a peg to the dollar or a managed float against the dollar because Iraq is an oil exporter and oil prices are quoted in dollars per barrel.

As a matter of fact, the postwar Iraqi government will face a number of significant challenges in the process of rebuilding the country's economy. But the major dilemma it will have to confront is which monetary system to adopt - a currency board or a managed regime.

The Iraqi government could opt for a currency board which is a monetary regime commissioned to maintain a fixed exchange rate peg to a hard currency, with the obligation to hold adequate foreign exchange reserves and with the disadvantage of limiting monetary flexibility.

Or it could decide to maintain the regime of managed peg against a hard currency, most probably the dollar, in an attempt to resume Iraq's role as one of the main oil exporters. Such a regime could provide greater flexibility but at the same time it would be more exposed to speculative threat unless concrete measures are taken to guarantee the stability of price.

By adopting either regime the new government could enhance the credibility of its national currency and give greater stability to its economy, both essential to overcome its economic crisis, especially the burden of external debt evaluated at more than $300 billion.

Indeed, according to certain estimates, this is almost an insurmountable ta