Don961: Reducing the dinar price and its impact on the Iraqi economy
Wednesday 22 April 2020 Engineer Mohamed Sahib Al Daraji
In light of the current economic conditions accompanied by government failure in managing the file of monetary and financial policies in Iraq, the issue of devaluation has emerged, which is the devaluation of the Iraqi dinar vis-à-vis the US dollar and other currencies in a deliberate and deliberate manner, noting that this differs from the change in the exchange rate that is subject to For the supply and demand process in the currency markets.
I looked at a period of time before a study prepared by the Central Bank on this issue and after scrutiny in this matter and many discussions with experts and specialists and I believe that Iraq needs such economic solutions at the present time I thought that I clarify a realistic point of view may contribute to the crystallization of a specific opinion among the decision-makers in this matter.
In normal circumstances, this type of solution must be the last drug. Unfortunately, the country’s economy is mismanaged, the absence of economic doctrine, the continued dependence on oil as a single source, and the exploitation of the economy as an electoral tool that has led to a near collapse in the economy whenever the price of oil decreases, and the failure of successive governments to support the product The industrial and agricultural patriotic pushed the specialists to resort to this kind of thinking.
I may agree with the study conducted by the Central Bank on many points that talk about the need to find other economic solutions other than reducing the value of the Iraqi dinar, but through experience and extrapolation of the Iraqi political situation I do not see on the horizon any ability of the owners of the solution and the contract to bring about a fundamental economic change because of the lack To truly understand the problem in Iraq and look at it from a single perspective, which may be factional, partisan, or personal.
Therefore, my article will focus on discussing a paragraph devaluing the local currency vis-à-vis foreign currencies and responding to factors that affect or are related to the reduction process. For the purpose of taking note of the topic from all sides, the factors associated with this reduction must be discussed. Among the most important of these factors are: –
First: the balance of payments
I do not think that Iraq has a strong position in the balance of payments because Iraq’s exports are only 99 percent oil. If we raise or delete the value of the exported oil and we calculate the balance of payments without it, Iraq’s position will be very negative. It is worth noting that the Central Bank study on the percentage of surplus in the balance of payments, which was estimated to be 5, is discussed. 75 percent of GDP for 2019, from the first two aspects in terms of whether to include the balance of oil exports or not and this balance changed by changing world oil prices.
On the other hand, discussing a real and important question, which is how to calculate GDP in Iraq? What is the proportion of the value of oil exports in it?
This question also applies to the proportion of foreign reserves available in Iraq, which is estimated at $ 70 billion, which represents 30 percent of GDP, according to the study.
Here, the same problem lies, which is how to calculate the domestic product, and thus how to calculate the ratio of the adequacy of reserves in International Monetary Fund standards or other traditional measures, from It is clear that there is a deficit in the balance of payments because the balance of our payments depends on a very large percentage on oil and consequently the deficit, surplus or strong position depends on the global oil price, the amount of production and the amount of oil exported from Iraq, therefore the study that gave measures for 2019 Totally corrupted from the current year
Second: consumer prices
There may be an effect of the devaluation of the Iraqi dinar on consumer prices, but there are many positive aspects in this framework that can be benefited from and turn this challenge into a real opportunity to build an economic doctrine that fits the current political and social situation.
The rate of imports in Iraq is very large and the annual rate of amounts of hard currency that goes out of the country for the purpose of import is estimated at 48 billion dollars annually and in the case of reducing the price of the dinar, these imported materials will be more valuable in Iraqi dinars than their current value in the local market, which will lead to a decrease in demand On them, and here is the stall of the Persians to refute all allegations that are expected to be high in life due to the devaluation of the Iraqi dinar, because this reduction must accompany a set of economic measures that are supportive of it, the most important of which is controlling the prices of the value of food and fuel.
In the imported consumables, which are considered a factor in the ruin of the country’s economy, it can be addressed and accept a certain increase in the prices of some unnecessary luxury items.
Therefore, there must be packages in the application of this reduction in order to encourage the national product, and we can give a simple example in this framework.
If there is material that we import from neighboring countries, and the value of this material was only one dollar, i.e. its value is 1,200 Iraqi dinars at present, and the cost of producing it is from Local raw materials may cost the owner of the Iraqi factory 1300 Iraqi dinars, so the local product cannot compete with the imported product price due to the relatively high value of the dinar, but if the value of this material is one dollar in light of the exchange rate of 1500 Iraqi dinars and the value of the local product remains for the same article 1300 Iraqi dinars It will be a pain
The domestic product is cheaper than the importer at the local value and thus this will encourage the owners of factories or farms to produce locally and run the workforce and run the macroeconomic cycle again so this reduction will have a significant role in supporting the local product, and it was noted that the central bank study spoke about the extent of Provides local products As an alternative, here we say that the egg and chicken base must end in Iraq, meaning do we work in a local industry in order to stop the import or stop the import in order to encourage national production? I think that the time has come to break this rule and for the state to put an end to imports in order to encourage production and because capital is coward and factory owners will not risk their money in order to provide material that does not have a market or has no consumer or competing foreign producer at a lower price and the state must be firm and legalize the import in order to Factory owners are able to produce and make the local product a competitor.
It is worth noting that there will be a specific time period in which some products will be less available in the markets, but I believe that the national product will soon fill the void and we will start a new phase of the Iraqi economy.
Third: the level of inflation
Iraq currently does not suffer any rise in the level of basic inflation; therefore, the effect of reducing the currency devaluation level in the basic inflation level will be limited, meaning that if we reduce the currency by 30 percent, the prices of some luxury items will increase by 12 percent, and this price increase can be addressed by moving the economy even if we have to Increasing nominal salaries and moving the wheel of the economy by pumping cash into the street to move some industrial, agricultural and construction sectors.
Fourth: Increasing economic growth and trade
The study prepared by the Central Bank on the effect of currency devaluation on increasing trade growth showed that the relationship between devaluation and the deficit of the trade balance and stimulating the national economy is a conditional and specific relationship with factors including:
A- The extent of the national productive capacity, technologically, financially or humanly, to manufacture the same goods imported from abroad with similar quality and at competitive prices and to replace them with national products.
I think that Iraq can achieve a return from this reduction in this framework, which we mean by the growth and trade framework, because Iraq’s exports are limited to only crude oil, the devaluation of its currency may increase its exports from other materials that encourage the national product, whether industrial or agricultural, to increase its production, specifically some Exportable materials so that there will be new non-oil dollar revenues that can be used as a hard currency to increase the domestic product of the homeland.
Also, this reduction will increase and strengthen the local Iraqi industries to be able to compensate for imports. Therefore, reducing the value of the Iraqi dinar will reduce a large percentage of the import. Revenues and maintains the hard currency coming from selling oil inside Iraq and these amounts are transferred instead of sending them out of the country through the currency auction to pump them into the local market to move the economy wheel, the banks that operate with the currency auction and those behind it may be affected.
Fifth: The effects of reduction on vulnerable social groups
It is also known that the number of people dependent on the government for their income from employees, retirees and those covered by the social protection network is around 6 million citizens. If we take the average of five individuals per family, 30 million citizens depend entirely on their income for government support, and this represents 75 percent of the Iraqi people. The negative effects of this reduction on the purchasing power of this group are limited, because the cuts will have measures to support the ration card and an increase in the minimum salary for the job grades and the welfare network grants.
At the same time, the state must act as a food merchant in the sense that it imports food or provides it from local production and stores it and pushes it to the market at any time there is a deliberate raise in prices or a specific monopoly process, and thus there will be food security for these vulnerable groups and the state also works To support fuel and medicine and direct the general budget to the ration and medicine, and sterilize water and infrastructure.
As for other luxury goods, there is no harm in accepting the cost of some non-essential materials, for example, a mobile phone by 12 percent, or a rise in the price of perfumes, for example, 12 percent.
On the other hand, I do not think that this reduction leads to an increase in government expenditures in general, but it may lead to an increase in the ration card expenditures, which do not represent 3 percent of the total general budget of the country. At the same time, you can benefit from the increase in revenues in the Iraqi dinar in other operating and investment expenses.
By up to 25 percent, for example if the price of the dollar becomes 1500 Iraqi dinars.
At the same time, this reduction will have positive effects on the remittances of expatriate citizens from abroad for their families, so that the value of what they convert from hard currency into Iraq is greater than the present value and this leads to addressing the status of a particular class in front of the potential relative costly.
Sixth: The effect of the reduction in public debt
Iraq’s foreign debt in foreign currency is about 23 billion dollars (except for pre-2003 debts of 41 billion dollars). The domestic debt in the dinar currency is around 40 trillion Iraqi dinars, including treasury transfers and bonds, and since 95 percent of the public budget depends on imports of oil that is sold In dollars, therefore, foreign debts will not be affected, either negatively or positively, by the devaluation of the Iraqi dinar, as they are receivables payable in US dollars.
As for the domestic or domestic debt, surely the reduction of the dinar’s rate will have a positive impact in the interest of the state, as the value of the local debt against the petroleum dollar. The state is limited to 7 billion dollars, and this indicates that the devaluation of the currency has a positive impact on public debt and thus strengthens the country’s economy without affecting the external debt by any negative impact and therefore there will be no negative impact on the Iraqi situation with the international community due to this reduction in Local currency value.
Seventh: The effect of reducing confidence in the national currency
I do not think (in my personal opinion) that this devaluation of the Iraqi dinar will affect the confidence of global markets and economies in the Iraqi local currency because this planned devaluation must accompany a set of economic decisions that are supportive of this devaluation and reduce its impact, whether on the internal or global economy in the Iraqi currency and the most important
These reforms are to control the expected inflation, as we mentioned earlier through controlling food, fuel and medicine.
The pressures of demand for the dollar may not escalate, but on the contrary, the local counterpart to the dollar unit may be more than before, so the process turns into a process. The dollar and try to keep Aa local currency, especially if we raised interest rates on deposits in local currency rates as a measure of the structural part of the decisions that must accompany the process of devaluation Vtkhvv thus the pressure on the dollar exchange rate.
The central bank study indicated the existence of the stability of the Iraqi dinar exchange rate for a number of years. In this context, I think that this stability is not real, but it is pressure on the dollar price by the country’s monetary policy, and therefore this stability as a result gave negative returns on the Iraqi economy, so stability can remain, but On another exchange rate that is less valuable than the current price.
If we note that the Lebanese experience has lasted decades for an exchange rate of 1500 that is stable but at a real price for the Lebanese pound while it is believed that the Iraqi dinar price on its current stability for the past years was not a real price but rather it was a price engineered by those responsible for the country’s monetary and financial policy, I mean Here is the central bank and the exchange rate is set in the annual general budget by the government and the finance committee in the Iraqi parliament.
Eighth: Monetary and Financial Policy
Before we get into the details of this factor, we must answer the following question: Do we expect Iraq to have a political ability to manage monetary and financial policy in the face of pressures that may result from reducing the price of the Iraqi dinar against the unit of the dollar? What determines this is the strength of the political administration in the country and the understanding of the political forces, the truth of the problem. The monetary policy tools represented in the interest rate, the discount rate, open market operations, etc.
These can be controlled by coordination between the owner of the Iraqi money, which is the Ministry of Finance, and between the custodian of this money, which is the bank. The Central Council of Ministers shall be the judge and judge in the approximation of views between the owner and the governor.
As for the fiscal policy, the government and parliament must collectively control expenditures and work to increase revenues (and we have talked a lot as others talked about how to increase revenues) in order to control m Suitable for the cash block in order to reduce the effects of inflation on the citizen.
We believe that the pessimistic view of financial and monetary management in Iraq must change. Otherwise, the situation will remain as it is. Yes, there is a big failure in managing these two files, but everything has an end and an end, and I think the time has come to end the failure of monetary and financial policy.
Ninth: The effect of reducing the dinar on the public budget
The general budget is revenue and expenditures, and since the main source of revenue for Iraq is oil sold in dollars, the reduction of the Iraqi dinar will certainly increase the revenue by the amount of the rate of the dinar, so when the price of one dollar is 1500 dinars instead of 1200 dinars, every billion dollars of oil revenue will be worth In the budget is one trillion and a half trillion dinars, compared to one trillion and two hundred billion dinars at the current exchange rate. This rise in revenues will have a clear and positive impact on the general budget. As for expenditures, I would like to refer here to the central bank’s report and discuss it again as He mentioned that the reduction will witness an increase in expenses due to the following points:
Government import of goods and services
This is beneficial because, as we said above, the government should be the first to reduce imports and depend on the local product, whatever the circumstances, and this is an opportunity to create a local economy and increase local production by increasing agricultural and industrial production and reducing imports.
-2 Paying the interest of the external debt
We have previously mentioned in this topic that external debt will not be affected by the dollar’s devaluation, but internal debt will decrease in value relative to the petroleum dollar.
3 – Foreign investments and contributions
This does not represent a significant percentage, it is also in dollars, and we are our resources in dollars, so this is considered beneficial as well.
4- Paying the oil related investments
Everyone knows that paying the dues of oil companies is my eyes with oil, so there is no relationship with the dollar or the dinar.
5- The ration card
I do not agree with the report of the Central Bank that stated that most of the ration card materials are imported. The ration card that must be developed currently depends on four main materials, which are rice, flour, oil and sugar, three of which are flour, oil and sugar purchased locally. Reducing the value of the dinar will save money for the ration card when purchasing These materials and the only material that is imported is rice, and in the same logic that we spoke in this article, the oil dollar will not be affected because Iraq sells oil in dollars and imports rice in dollars. In sum, the reduction of the dinar will affect the ration card positively.
6 – Social protection salaries
In the event that the dinar is reduced, the government should increase the social protection salaries with the same expected inflation rate, which is 12 percent. In this way, we remove the potential inflation effect from the socially vulnerable groups.
In the end, gradually reducing the value of the dinar will have positive effects on the economy of the country, from which it can be taken advantage of, and other negative things that must be taken in advance to avoid them so that the gross product will be positive for the national economy and to avoid the expected economic shock.
The positives are as follows:
1- Encouraging the local agricultural and industrial product.
2- Stir the wheel of the country’s microeconomics.
3- Employment of labor and absorption of unemployment.
4- Increasing the revenues of the general budget and reducing import expenditures.
Naturally, this measure will have negative effects, so the government must take a series of measures in parallel with this reduction, as follows:
1 – Stopping the currency auction to maintain the hard currency inside the country and that the dollar and other foreign currencies are sold and traded directly in the currency markets or through the stock market, in order to get a real price of the Iraqi dinar against the American dollar, and that the guarantor of the prices is the value of the available reserve The Central Bank of Iraq has hard currency.
2- Setting an import platform, stopping some imports, controlling customs outlets, supporting the tax system, and exempting the local product from income tax for a period of two years.
3- Building the budget on a fixed oil price for the operational budget and moving to the investment budget, directing the budget to salaries, purchasing the ration and medicines, and sterilizing water and the educational process only.
4- Delaying the dues of oil companies or paying them in kind outside OPEC’s share.
5- Selling oil coupons locally, at the prevailing price now, and buying them a year later at the prevailing price then.
6 – Increasing nominal salaries by 10 percent, reviewing high allocations to achieve social justice, and increasing salaries of the social protection network by 12 percent
7 – The state imports commercial foodstuffs into the market and injects it into the ration program in the event of high prices. And activating the role of economic security and entering the competent government agencies to control the cash rhythm in the currency market and the markets for the sale of foodstuffs.
8 – Supporting fuel for transport and factories and giving high relative importance to Food industries .
9 – Pumping a hard currency to the exchange markets to maintain the price level of the Iraqi dinar, preventing the price from slipping so that its decrease exceeds 30 percent within two years.
10 – The Ministry of Finance issues the e-dinar for the purpose of collecting government revenues and fees due and what distinguishes them from being non-negotiable in the market as cash and thus we have reduced corruption in this aspect as well as the state’s knowledge of the value of those imports quickly to be issued by a government bank and not through companies Eligibility.
In conclusion, such a procedure requires a courageous decision by statesmen who are able to manage a stage through which the world in general and Iraq in particular, statesmen who lead society and manage state institutions literally without paying attention to partisan or factional or electoral interests, but rather put the interest of Iraq first.
Member of the Finance Committee link
Walkingstick: Thanks, Don….F….. note. ~ WS
Frank26: KTFA FAMILY AND INTERNET ……….. WALKINGSTICK AND I …………. TOLD YOU THIS WAS HAPPENING…….. CBI AND FAB 4 MEETING NOTES ………… NOW WE ARE READY FOR ……….# 7
(Note: We beleive the Fab 4.is the IMF, World Bank, U.S. Treasury, and the President of the United States of America..?.)
“The official, who preferred to remain anonymous (read Care Taker Gov), added that “continuing to hold auctions to sell currency and pump tens of millions of dollars per day to preserve the value of the dinar leads to great risks for the country’s economy, and it is better for the central bank to cancel the currency auction and install its local currency, since most of the beneficiaries are Of these auctions are not businessmen and merchants, but banks, banks and private sector companies dominating the market, a large part of which has been transferred out of Iraq.”
“There are daily discussions to reach a road map that enables the country to maintain an acceptable exchange secret of the dinar against the dollar.”
The SMART option
This option starts with confidential price policies based on reducing the external value of the currency as a proactive measure and providing financial obligations in the general budget recording a final revenue that can be agreed to leave its inflationary effects as a waste
The two levels will support the additional financing agreement for the deficit to be in the form of balances intended to exchange foreign goods, services and benefits, and thus the demand for foreign currency will increase at rates that change with the inflationary expectations and the fluctuation in the stability of the cash demand function.
Nevertheless, the matter will depend, in all cases, on the growth of foreign reserves and their installation in the central bank’s investment portfolio.
If the growth in demand for foreign currency, for example, exceeds the growth of foreign reserves themselves, then this means that there are inflationary expectations leading inexorably to a series of continuous reductions in the exchange rate through the stages of late lags and the opposite happening, the money market may reach a state of balance and stability, especially when the growth in supply and demand is equal to the foreign currency supply and demand .
Here, the stability of the exchange rate (as it is a nominal stabilizer for inflationary expectations) depends on the degree of current account balance, the balance of payments, or its ability to achieve a surplus in excess of the most important in that account relative to GDP and at that time , the Iraqi dinar exchange rate and its purchasing power is growing again (via mirror and foreign inflationary currency) and we may find in the monetary conditioning the possibility that the intervention window in the central bank will take over by using and buying in a dollar that will be more expensive in relation to the dinar than a previous level or a higher degree of sterilization in liquidity levels, which will lead to the stability of the money market, but at a new, guided exchange rate compatible with the internal and external equilibrium situations, as long as foreign reserves begin with some stability in their adequacy and relative abundance.
Finally, we must realize that the conditions of fiscal adjustment (i.e. maximizing non-oil revenue), and we mean actual taxes, have become a cloudy issue in Iraqi public finances and that imposing them may cause a fiscal cliff to pose a serious fiscal stagnation, the monetary illusion in nominal dinars in spite of inflation tax and inflation according to the monetary option will give it stability in many internal contractual transactions and will remain on the formalities of nominal contracts in dinars, such as debts, rents, salaries, wages, etc without change as long as they are denominated in contractual prices, and this is a preference or first best
Auto (*) Researcher, economist, and financial advisor to the Iraqi government. All rights reserved. Republishing is permitted provided that the source is indicated, April 19, 2020 OFF http: / iraqieconomists. net /
MilitiaMan: The above snippets are in line with the fresh article out above from a member of the Finance Committee. Above they are talking about pumping hard currency into the markets to maintain pricing of the Iraqi dinar.
They will use the intervention window to sterilize the currency. In other, words they are going to defend the new exchange rate and for about two years within a 30% range.
The new guided exchange rate.. Guided is the key word.
The CBI is going to use the intervention window to guide the new exchange rate. So, once they set the rate they will use the stock or currency markets to defend the rate. As in to keep the price range steady and stable.
Sterilization is used for appreciation of currency and or the depreciation of currency pricing.. In this case once they raise the new exchange rate they will use sterilization techniques to intervene in the market when and where needed to support the price. A very good thing my friends! Very good! imo
We already know the Auctions have changed as we knew them and there are no cash sales now. So the Auctions are not status quo, as some may feel..
Imo, they have knocked that item down from the list of things to do. The CBI will need to have another venue to make money. They have one..
Once they make the move to RI, they will sell the Dinar and make oodles of cash in doing so. Hence, they will not be selling dollars. They will want the Dollars for their own foreign currency reserves. Thus, supporting the local currency, which the Customs and Taxes at the borders will do as well.
The Customs and Taxes at the borders will be electronic and transparent, (Block Chain) and the revenues from them will be able to take up the slack in oil revenues that are presently lacking..
Them telling us they will be using oil coupons to leverage contracts is a very good sign they have the Secondary Markets in mind. They can use contracts to hedge risk when pricing goes up in oil or down. For that, matter it won’t only be for oil but many other commodities too. E-Dinar is going to be used.. Safe, sound and secure.. Less corruption…
Next thing to support them heading into the secondary market is that the ISX is slated to open on the 26th of the month.
Their office opens on Saturday, fwiw.. Then, think about the Board of Directors of the CBI told us they have EQUILIBRIUM.. Then, we see the CBI adjusted the the values on the ISX Indice. It was not the ISX that did the adjustment. It was the CBI that did it. They have equilibrium by 1,045.71% real close per there data. See the difference..? It was not the ISX’s job to change the Indice it is the CBIs job and they have equilibrium and show it there.
Notice lately that they seem to tell us things when the Banks are closed and the ISX is down? Last weekend was the same with CBI articles for Al Nassery and Mahmoud Saleh… Both were very loud, just as this article is above.. I don’t know about you all, but, this is looking very promising. That data from the CBI adjusting the Indice was for a reason and the below fits the bill imo..
One more thing. There is indirect implications in respect to the SDR. I am not sure but, the way I look at it is this way. At a program rate the IMF would never talk about Iraq being placed into a position to use the SDR basket.
But, if they RI and the rate is agreeably strong and supported they may be allowed access the SDR basket. Then they could use the SDR for a borrowing facility to also support the IQD from future shocks. This is a very well designed and orchestrated turn of events if it plays that way. Imo, it may very well be spot on.. imo ~ MM
“Such mutual monetary exchange has come to achieve the equilibrium of the money market in Iraq, using the exchange rate and the interest rate, and they are considered toxic toxic and inflation expectations at the same time. “
“Here, the stability of the exchange rate (as it is a nominal stabilizer for inflationary expectations) depends on the degree of current account balance, the balance of payments, or its ability to achieve a surplus in excess of the most important in that account relative to GDP and at that time , the Iraqi dinar exchange rate and its purchasing power is growing again (via mirror and foreign inflationary currency) and we may find in the monetary conditioning the possibility that the intervention window in the central bank will take over by using and buying in a dollar that will be more expensive in relation to the dinar than a previous level or a higher degree of sterilization in liquidity levels, which will lead to the stability of the money market, but at a new, guided exchange rate compatible with the internal and external equilibrium situations, as long as foreign reserves begin with some stability in their adequacy and relative abundance. “