Hello, friends! Now, $1 is about to be equal to ₹76.96. And €1 has crossed the mark of ₹81. And £1 is more than ₹100. But do you know, more expensive than these currencies is the World’s Most Expensive Currency? Can you guess which currency it is? Kuwaiti Dinar. 1 Kuwaiti Dinar is almost equal to ₹250. Does the question then arise what is so special in Kuwaiti Dinar? That it has become the most expensive currency in the world. Whereas the US Dollar, the most popular currency in the world, is not as expensive as the Kuwaiti Dinar.
In today’s topic, let’s try to understand it. Before talking about the Kuwaiti Dinar, we have to look into the history of Kuwait. You might be shocked to know friends that 70 – 80 years ago, the currency used in Kuwait was issued by the Indian Government. Yup, you heard that right. The Reserve Bank of India used to print Kuwait’s currency at the time and that currency was named Gulf Rupee. It was quite similar to the Indian Rupee. It looked like this. And on the note, you can see that ‘Government on India’ is written.
The numbering in the Indian Rupee and the Gulf Rupee differed only by a letter. The number of the Gulf Rupee used to start was a ‘Z’ The specialty of the Gulf Rupee was that it could not be used in India. It was used in foreign only. The next question to arise here is; Why did Kuwait need to use a currency that was being issued by the Indian Government? Friends, the answer to this is hidden in history. For almost 200 years, from 1763 to 1961, the British Empire had control over the Persian Gulf area. In this area, lies the country Kuwait. Kuwait wasn’t totally under the control of the British Empire, throughout the years, there were varying degrees of control over Kuwait.
Here, the British India Government saw that the economy of Kuwait was quite small. They didn’t see the need to have a new currency for it. It was much easier to use the same currency that was being used in India. So the initial decision was of the British Indian Government to use the same currency. But in 1947, when India got independence, India saw this practice and permitted Kuwait to continue using the Indian Rupee till this point, the same Indian Rupee was being used in India and Kuwait. Remember, this was the time when Kuwait’s economy was small because the Oil Boom hadn’t happened yet. Even though oil was discovered in Kuwait in the late 1930s, because of World War II, Kuwait couldn’t sell much oil to the rest of the world. This started happening in the 1960s. But some years after India’s Independence, India faced the problem of Gold Trafficking.
Large scale gold trafficking was happening in the Gulf area, The smugglers would sell the gold in India, They got Indian Rupee in exchange they would then take the Indian Rupees into the Gulf countries to get it exchanged into other foreign currencies. The Indian economy had to suffer huge losses because of this. For this reason, in 1959, the Indian Government decided to introduce a different currency for the Gulf area, called the Gulf Rupee. It could be converted with the Indian Rupee in a 1:1 ratio, but the Gulf rupee would not be allowed to be used in India. With this, smuggling could be controlled to quite an extent.
After this, in 1961, Kuwait got independence from the British, and in 1963, Kuwait becomes the first Arab country, to conduct its Parliamentary elections and to create a Constitution by the 1970s, it progressed so well that Kuwait became the most developed country in the area. In fact, in terms of Press Freedom as well, Kuwait becomes one of the top countries at that time. You may find it unbelievable, but this is the truth, friends. Once, Kuwait was known for its liberal values. The situation isn’t really bad now, even now, the Press Freedom Index ranking of Kuwait is much better than India. That is, today in Kuwait, journalists have more freedom to speak than compared to India.
Anyway, I diverted quite a bit from the main topic, coming back to the original topic of currency. In the early 1960s, Kuwaiti Dinar is introduced by the new Kuwaiti Government. And it’s priced at ₹13.33 = 1 KD. By 1966, Gulf Rupee remains in circulation, but after that, the Indian Government had to devalue the Indian Rupee for several reasons. One, India had to go through wars with China and Pakistan, why India had to devalue the Indian Rupee. But because of this devaluation, these Gulf countries are affected. And they are forced to create their currencies. Oman, Qatar, and UAE, and all these countries create their currencies after this.
In 1975, the exchange rate of the Kuwaiti Dinar is fixed to a basket of currencies. What it means to ‘Fix’ the exchange rate, I explained to you in the same video. There are three types of exchange rates, Fixed, Floating, and Mixed. Fixed means that you fix the exchange rate of your currency with some other currency. And based on that currency’s value, the value of your currency fluctuates. Suppose you create a new currency, and you fix the value of your new currency to be $5. With the fluctuations in the Dollar, the value of your currency will also fluctuate.
The floating exchange rate means that with the supply and demand in the market, the value of the currency will fluctuate. It’ll ‘Float.’ And Mixed is the combination of the two. The Indian Rupee also had fixed exchange rates till the 1990s. Only after the liberalization of the economy happened in India, the Indian Rupee was brought under the Floating exchange rate. Today, most of the currencies of the world, are on floating exchange rates or fixed exchange rates. Except for the currencies of the Gulf countries. Like the Kuwaiti Dinar, which is still working on a fixed exchange rate. It is not fixed to a single currency, instead, it is fixed with a basket of currencies. There is a basket of currencies with like 30% Dollars, and 20% Pounds different currencies in different proportions. And their combined ratio is the one fixed to the Kuwaiti Dinar.
The next question to arise is Why has Kuwait kept the exchange rate of its currency even today? And why hasn’t India kept it fixed? Why has India put its currency on the floating exchange rate? And are the pros and cons to it? Fixing one’s currency, or pegging it, It’s also known as Peg. The downside is that you have to depend on other currencies regarding the economy of your country. If you peg your currency to the US Dollar, then if the US Dollar crashed tomorrow, if the US’s economy falls, the economy of your country will also fall because your currency is based on the US Dollar.
To avoid this to a large extent, Kuwait has pegged its currency with a basket of currencies instead of pegging it with the US Dollar only. But now the second problem is that, when you peg your currency, then you have to maintain that peg. And to maintain that, you need a sufficient supply of foreign exchange reserves in your country. What does maintaining mean? Look, for any currency, to bear the changes in the demand and supply in the market is unavoidable. Irrespective of whether you’re on a floating exchange rate or fixed.
The only difference is that on the fixed exchange rate, the forces of supply and demand, need to be counteracted by your government by using foreign exchange reserves to maintain the value of your currency. When India shifted the Indian Rupee to a Floating exchange rate in the 1990s one of the reasons for it was that India’s foreign exchange reserves were so low that they could support only 3 weeks’ imports. This is the benefit of the floating exchange rate, if the unemployment in the country is rising, or the economy is in a bad state, then the Central Bank can control the supply of money by increasing the supply or reducing the interest rates, or by devaluing the currency to revive growth.
These are not possible with the fixed exchange rate. I’ve listed out so many disadvantages of the fixed exchange rate system, but why do the gulf countries still use this system even today? The simple reason for it, friends, is that the economies of these countries are based on Oil. And like all of us know, the price of oil is very volatile. It fluctuates rapidly. If these countries start using the floating exchange rate, then with the demand and supply of oil, the currencies of these countries, will keep on fluctuating rapidly their values will change every moment.
To avoid this, they still use the fixed exchange rate system. And Kuwait does not lack foreign exchange reserves. Because this country has earned a lot of money by selling oil. And they have a lot of US Dollars in reserve. So they wouldn’t struggle to maintain the peg. Kuwait has one of the largest global reserves of oil. And based on this oil industry, Kuwait can maintain its high-value peg.
Speaking theoretically, Why doesn’t Kuwait keep its currency on a much more ‘fixed’ exchange rate? Today, ₹250 = 1 KD. Why doesn’t Kuwait say that ₹1,000 should be equal to 1 KD? That they want to ‘fix’ the exchange rate of their currency at that high a level. Theoretically speaking, Kuwait can do this. But then it will be difficult to maintain that peg because that much foreign reserve would be needed to maintain it.
Today, the forces of supply and demand in the market, there are multiple forces, I talked about them as well in the other video, and based on those, the value of a currency is calculated as the most appropriate point to maintain the peg on. For example, a major factor here is the Balance of Payments. The money that is coming into Kuwait, through foreign investments or exports, is much more than the money going out of Kuwait. Through imports or investments of the locals in foreign countries. It means that foreigners are buying more goods and services from Kuwait and are investing there.
So the demand for the currency is high, thus raising its value. By the way friends, among all these currencies if we include the non-government-owned currencies as well, then the most valuable, the most expensive currency in the world, will be the Bitcoin. Because the value of 1 bitcoin is almost in comparison with the other currencies, why is the value of Bitcoin so high? For the same reason. Because it has a high demand. People want to buy it day by day, and the adoption of cryptocurrency is growing exponentially. Last year it was estimated that $6.6 billion was invested in cryptocurrencies by people around the world. And with the governments around the world accepting it, like, in our country, a Crypto BIll may be presented in the Parliament soon, the RBI has already ordered the bank to continue the crypto-transactions, it is helping to motivate more people into investing in cryptocurrencies. In our country, a few crore (ten million) people have already invested in crypto. The term ‘invest’ is very critical here. Notice that they are investing in a currency. Before Bitcoin and other cryptocurrencies, people didn’t think about it that they would buy currencies to invest in them.
Normally, one uses currency in one’s day-to-day life. But today, the way that cryptocurrency is evolving in the world, it seems like people see it as more of an asset than as a currency. And it is an investment that is very risky. It is very risky because it is much more volatile than the price of oil. But perhaps this is the reason why people love to invest in it. If you are aware of the risks and want to invest in them, then you can invest in cryptocurrencies by using apps like CoinSwitch Kuber. The user interface of this app is really simple. It is similar to ordering food online, it is that easy to invest in crypto.
Before concluding, I would like to tell you another thing. Always remember that the value of the currency is not an indicator of the economic performance of a country. Historically, £1 has always been more valuable than $1. But this doesn’t mean that the economy of the UK is stronger or that the UK is more powerful than the US.
All of us know that the US is a bigger economy than the UK. And today, the US is more powerful than the UK. And this is the reason, friends, that despite having the world’s most expensive currency, Kuwait is now going through an economic crisis. That started with the Covid-19 pandemic when the oil prices crashed. The oil prices remained low for a significant amount of time, and Kuwait is now at a loss. There is no personal income tax in Kuwait. Also, Kuwait spends a lot of money on the welfare of its citizens. In Kuwait, people get free healthcare, free education, cheap electricity, cheap gasoline, and several benefits and subsidies in addition to these. But now, the government has no other source of income since the oil prices are so low.
The government is trying the people are also demanding that the revenue sources should be diversified. That they come up with other ways to invest in renewable energy. And to stop their dependency on oil. It is to be seen how Kuwait overcomes this crisis in the future.
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