Global Policy Forum

The US has denied it is dollarising the Iraqi economy as the Federal Reserve reportedly flies in tens of millions of dollars. "This is not an issue of dollarising the economy, but to get money into desperate people's hands that has real value," a US official said on Wednesday.

With Washington planning to pay up to 2.5 million Iraqi civil servants $20-per-head within the next days, the initial injection into the economy would be about $50m. Reuters reported the air-lift of dollars had begun, quoting an unnamed US official. The disbursement of dollars would go some way to providing a benchmark for prices in Iraqi, thereby becoming the standard.

The sudden influx of dollars is likely to impact the perceived worth of Iraq's existing two currencies. In Afghanistan, for example, the local currency dropped dramatically in value after dollars entered the economy via aid agencies. The widespread use of dollars rather than a local currency is also a politically sensitive issue.

Economic annexation?

The influx of US dollars comes as speculation mounts over what will replace the two Iraqi currencies currently in circulation, "Saddam" and the pre-Saddam "Swiss" dinars. The US has been at pains to stress that a new currency will be introduced, to placate neighbouring countries and critics who fear dollarisation signals the annexation of Iraq.

But the US estimates it would take a new Iraqi authority between 90 to 180 days to design a new currency but that it would take longer to introduce. It is unclear when such an authority would take power.

Economic stimulus

US officials said on Wednesday that the dollar payments will be critical to getting the economy moving again. Iraq, which hold the world's second largest oil reserve, cannot raise cash from oil exports until legal sanction by United Nations are lifted. The US officials added Iraqis will also be able to use other currencies, including those of neighbouring countries and the euro.

Since US troops took Baghdad on 9 April, Iraq's central bank has been ransacked and millions of dinars bearing Saddam Hussein's face were destroyed or looted. Also on Thursday, a riot erupted at a Baghdad bank after thieves blew a hole in a vault containing about $4m, which was then confiscated by US forces.

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