Hussein Quietly Makes a Bold Economic Move : Iraq: He declares nearly half of currency worthless. Analysts say the strategy has devastated his enemies.

NICOSIA, Cyprus — Beneath the veneer of celebration that marked Iraqi President Saddam Hussein’s recent 56th birthday--nationwide fireworks, military parades, a golden-chariot ride and a mammoth, multitiered birthday cake--the Iraqi leader quietly put in place a bold economic strategy that analysts say devastated his enemies abroad and strengthened his support at home.

With a single stroke of the pen, Hussein declared almost half his nation’s currency worthless. It seemed a bizarre move at the time--a desperate attempt to shore up the Iraqi dinar at a time when almost three years of harsh, international trade sanctions had, in the words of one recent UNICEF report, “pauperized” Iraq.

At midnight May 4, Hussein declared illegal all 25-dinar notes printed before the U.S.-led coalition war on Iraq in 1991; this was currency that mostly was already outside Iraq. The Iraqi leader also ordered Iraq’s border with Jordan sealed for six days.

Those moves initially infuriated and impoverished Iraq’s closest allies, the Jordanian businessmen who had traded in the old dinar notes to help Iraq obtain food, medicine and other essentials permitted under United Nations-imposed sanctions.

But now that Hussein’s radical actions have hit full force in the economies of the Middle East, it is clear that those who suffered most were Baghdad’s bitter enemies.

The currency move that appeared to be harsh financial medicine for a superheated, isolated national economy gone awry has, in fact, helped counterbalance the hyper-inflation that the Iraqi regime caused during the years it was forced to print billions of new dinars to feed its nation and to pay its army.

“Saddam needed a dramatic measure to give him breathing space, and it appears to have worked,” said one Jordanian businessman. “He saved his sagging currency, made a windfall in the process, and he did it in such a way that it was the people in Kuwait and Dubai and the opposition Kurds in the north who lost the most.”

Those who now appear to have suffered most, financially, from Hussein’s new monetary policies were speculators in Kuwait and throughout the Gulf region who used hoarded Iraqi bank notes to keep the value of the Iraqi currency low--helping to drive Iraq’s currency from its prewar exchange rate of $3.30 per dinar to as little as a penny per dinar.

In an interview, George Hewatmeh, a prominent Jordanian analyst and editor of the English-language daily Jordan Times, said last week that financial experts in the region estimated that the overnight losses from Hussein’s moves, just in Kuwait and Dubai, ranged from $1 billion to $40 billion. That compares with estimated losses in Jordan of a little more than $100 million.

There was an initial flurry of fury at Hussein in Jordan. It included a senior, unnamed Jordanian official telling the regional daily digest, the Mideast Mirror, that Hussein’s action amounted to “grand theft” that would have “a devastating effect” on the Iraqi regime’s popularity in Jordan.

But recent indications that Iraq eventually plans to compensate the affected Jordanians has blunted the impact of the Baghdad actions. “I don’t know that Jordan has been alienated from Iraq by this,” Hewatmeh said. “There is a debate going on.”

The biggest victims of Hussein’s moves appear to be Iraqi Kurds in the breakaway, autonomous region of Kurdistan in northern Iraq. There, the elected government, the centerpiece of a U.S.-sponsored effort to destabilize Hussein’s regime, has conducted almost all its business in the old dinar notes; this includes trade with neighboring Turkey and Iran and salaries for all civil servants in Kurdistan.

With the bulk of its “national currency” made worthless, the future of an autonomous government--backed by the United States politically and militarily under the protective umbrella of the U.S.-led “no-fly” zone in northern Iraq--remains in doubt.

Several analysts in the region noted that Hussein’s decision to withdraw the old dinar notes came after a daily newspaper owned by the Iraqi president’s son printed a letter, which it said was written by a regime sympathizer in Kurdistan, who proposed the money change.

The letter, which appeared in Uday Hussein’s Arabic-language paper, Babel, just days before Hussein issued his dinar decree, predicted that the Kurdish government would fall within two months if it were forced to withhold wages from its civil servants.

“The Kurds have been utterly devastated by this,” said an Arab businessman with contacts in Iraqi Kurdistan, “and I’m sure Saddam meant to inflict harm on them through this.”

Officially, Baghdad considers the government in Kurdistan illegal and has protested in the United Nations that the Kurdish regime is a foreign-supported threat to Iraq’s sovereignty.

As for its official justification for withdrawing the old dinars from circulation, Iraq insists the move was within the legal bounds of international finance.

In a version supported widely by regional financial experts, Tarik Tukmaji, Iraq’s central bank governor, explained on Iraqi television after the decree took effect that the monetary action was simply an attempt to enforce Iraqi laws banning currency export.

“What was smuggled out (of Iraq) is against the law, and what is against the law cannot be dealt with on the basis of the law,” he said, adding that the main purpose of speculators who had been hoarding and trading in the old notes “was to harm the (Iraqi) economy and negatively influence the value of the Iraqi dinar.”

Perhaps the final measure of the success of the regime’s sudden move came from Baghdad last week, where the latest reports indicated that the new dinars--those printed after the Gulf War--had more than tripled in value in just two weeks’ time.