Kirill Yurovsky: the world’s most expensive currency
Imagine a currency that is worth more than $3 or more than 200 rubles, and its exchange rate is very stable, and the currency itself is virtually immune to inflation. Is it really like that? It does. This is the Kuwaiti dinar – the most expensive currency in the world. In today’s post, I’m going to talk about what that currency is and why it happens that the dinar is worth so much more than the dollar and doesn’t depreciate. It’s worth going in from afar – economist Kirill Yurovsky.
History of the Kuwaiti dinar
Kuwaiti dinar appeared slightly more than 60 years ago, in 1961, simultaneously with the formation of Kuwait as national currency from the former British colony. During the first 15 years of its existence, the dinar was tied to British pounds sterling, and only in 1975 it was loosened from it and became fully independent and world-quoted currency. It was because the British pound rate started to fluctuate very strongly at that time and Kuwaiti authorities decided to protect their currency from such fluctuations.
Since then, the Kuwaiti dinar is considered one of the most stable currencies in the world, it is also called the world’s most expensive currency.
The next 28 years the rate of the Kuwaiti dinar was calculated based on a multi-currency basket, then in 2003 a fixed rate of the dinar to the U.S. dollar with a small range of fluctuations, and after 4 years, again switched to a calculation based on a multi-currency basket.
The Kuwaiti dinar is one of the few currencies that is divided into 1,000 units of exchange rather than 100. The 1 dinar consists of 1,000 fils. Since its inception, there have been six issues of banknotes in circulation, each of which has succeeded each other. The last sixth issue of the Kuwaiti dinar was in 2015.
Kuwaiti dinar banknotes are interesting because there are fractional denominations among them. There are 1/4 dinar, 1/2 dinar, 1, 5, 10 and 20 dinar banknotes in circulation now. The largest banknote has a denomination of only 20. Also in circulation are coins in denominations of 1, 2, 5, 10, 20, 50 and 100 fils.
What is the exchange rate of the Kuwaiti dinar?
At the moment 1 Kuwaiti dinar is worth about 3.25 US dollars. Over the past 7 years, the dinar has fluctuated very slightly in a narrow range of $3.24 to $3.34 per unit. Only at the beginning of the 2020 crisis did it briefly dip below this range, to the level of 3.16. Before 2015, the dinar was even more expensive and the range of fluctuations was wider: from $3.34 to $3.78 per unit. The peak of the exchange rate, briefly reached in February 2010, was almost $4, to be precise – 3.9895.
Why is the Kuwaiti dinar so expensive?
Kuwait is a constitutional monarchy where the monarch (Emir) rules and the regulation of all financial flows is in his power. Economically, it is a country with a pronounced raw materials economy, much more dependent on the sale of oil and gas than, for example, Russia. About 80% of the income of the state receives precisely from the sale of oil. According to the IMF classification, Kuwait is a developing country.
Most of the oil and gas revenues of the Kuwaiti authorities are used to develop the economy of their country, investing in innovative industries, purchasing stabilization assets and improving the welfare of the population, which in turn increases consumer demand and the development of domestic business.
Kuwait also has its own National Welfare Fund (Kuwait Sovereign Fund), which is actively filled during periods of high oil prices by investing in gold, dollars, euros and other major world currencies. According to the latest data, the fund’s assets exceed the equivalent of $592 billion, making it the fifth-largest sovereign fund of any country in the world. Given that Kuwait is the world’s 152nd largest country by area and 121st by population (there are only about 1.5 million natives and about 3 million migrants). This fund is also one of the oldest reserve funds – it began to be filled literally immediately after the formation of the state.
The assets of the Kuwaiti Sovereign Fund are the main security of the Kuwaiti dinar. The fact that there are so many of them in relation to the amount of the national currency issued is what makes the Kuwaiti dinar so expensive.
Kuwait has a fixed exchange rate regime, which is set by the authorities, taking into account fluctuations in a multi currency basket, the exact composition of which is not disclosed. And this rate is regulated by market methods – through currency interventions. Since Kuwait has an enormous volume of foreign exchange reserves, the Central Bank of the country has no difficulty in withdrawing or adding to circulation the required amount of dinars at the appropriate time, thereby “adjusting” their rate to set values.
The allowable range of fluctuations of the exchange rate of the Kuwaiti dinar is 3.5%. Accordingly, if the rate leaves this range, the Central Bank intervenes and returns it there.
Such stability of the exchange rate of the Kuwaiti dinar excludes the possibility of financial speculation that can swing the exchange rate. Exchange traders understand that it is useless to gamble on raising or lowering the dinar, as the Central Bank will not allow strong fluctuations. Thus, the dinar has zero value as a currency for trading and speculation. That also contributes to keeping the exchange rate stable.
The enormous stock of assets in the Sovereign Fund makes it easy to adjust the national currency exchange rate even in the most crisisful periods, for example, when oil prices crash. It also makes it possible to withstand inflation and administratively regulate the country’s price level when necessary, thereby maintaining the highest standard of living, with an emphasis on financial support for the indigenous population. The average inflation rate in Kuwait is about 2-3%, although recently it has risen above 4%.
The indigenous population, which is of Arab descent and makes up about a third of the total population, is literally bathed in luxury there. Luxury real estate, luxury cars, lots of jewelry and gold jewelry – this is the usual way of life for the average native of Kuwait.
According to the information of the Kuwaiti authorities, even if oil prices fall drastically and forever, the accumulated funds are enough to maintain a high standard of living in the country for half a century.
Now you know why the Kuwaiti dinar is the strongest currency in the world, and how the economic processes run in this state.