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Your IMF Update: Country Report No. 13/21 - Iraq


hablrob
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In staff’s view, accelerating the liberalization of payments for current transactions would therefore be the best approach to eliminating distortions in the foreign exchange market, the exchange rate spread, and the rents it creates. It would also allow removing the exchange restrictions and the multiple currency practice, with a view to accepting the obligations under Article VIII. The improvement of the AML/CFT framework, in line with the MENA-Financial Action Task Force (FATF) recommendations, and FATF standards, together with the ongoing efforts in strengthening AML/CFT supervision by the CBI, would help address money laundering and terrorism financing concerns.

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Ugh is right. But this is huge... It's talking of Article 8 status which means eliminating the dual currency system.

Correct me if i am wrong but if Article 8 status is inforced that would mean the dinar becomes the only currency they can use. So the program rate would have to be dropped and the real rate posted correct?

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The original link was the wrong doc, had to find it, but no worries. Did anyone really read all 59pgs of the PDF? Ridiculous...

The real exchange rate has been appreciating over the past three

years, and remains broadly in line with fundamentals (Appendix 1).

Page 9

Yup

Edited by TQueezy
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B. Monetary, Exchange Rate, and Financial Policies

With a severely underdeveloped financial system, high bank liquidity, and administered interest

rates, the usual channels of transmission of monetary policy are largely ineffective. Therefore, the principal instrument available to the CBI is foreign exchange intervention, but its effectiveness has been hampered by CBI regulations. Discussions focused on (a) distortions in the foreign exchange market, (B) exchange rate policy, © foreign asset management, and (d) banking system restructuring.

14. The de facto fixed exchange rate has served Iraq well. The authorities agreed that a stable nominal exchange rate provides a valuable anchor for inflation expectations in an uncertain environment, and intend to continue implementing this policy for the foreseeable future. In the medium term, staff encouraged the authorities to consider creating the conditions which would make possible a move to a more flexible exchange rate policy. Such flexibility could allow a predictable and gradual appreciation of the nominal exchange rate, triggered by strong oil revenues and the Balassa-Samuelson effect, to accommodate a possible real exchange rate appreciation while keeping domestic inflation low.

15. However, the authorities have been limiting foreign exchange supply to address concerns related to money laundering and terrorism financing. The CBI has recently taken steps to simplify foreign exchange market regulations, but has not eliminated all existing exchange restrictions and the multiple currency practice.3 The CBI continues to rely on controls to ration the supply of foreign exchange, which have contributed to the increase in the spread between the official auction and parallel market rate. The authorities aim to liberalize the foreign exchange market over the medium term. However, given the limited capacity of the financial sector to implement Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) preventive measures, they consider restricting the supply of foreign currency necessary to stem illegal outflows triggered by regional developments and increased import demand financed by illegal sources.

16. In contrast, staff recommended liberalizing the foreign exchange market and improving the AML/CFT regime. Staff noted that effectively limiting supply might be inconsistent with a de facto fixed exchange rate regime. The CBI has ample international reserves to maintain the de facto peg. Furthermore, AML/CFT standards do not contemplate ex-ante controls on foreign currency transactions, but focus on customer due diligence and reporting suspicious transactions to an operational and fully independent Financial Intelligence Unit. In staff’s view, accelerating the liberalization of payments for current transactions would therefore be the best approach to eliminating distortions in the foreign exchange market, the exchange rate spread, and the rents it creates. It would also allow removing the exchange restrictions and

3 See Section IX of Annex I of the Informational Annex for a list of the exchange restrictions and multiple currency practice subject to Fund

the multiple currency practice, with a view to accepting the obligations under Article VIII. The improvement of the AML/CFT framework, in line with the MENA-Financial Action Task Force (FATF) recommendations, and FATF standards, together with the ongoing efforts in strengthening AML/CFT supervision by the CBI, would help address money laundering and terrorism financing concerns.

17. The size of Iraq’s foreign assets (both CBI and DFI) is fueling a domestic debate on their most productive use. Staff projections show that, while CBI reserves are broadly appropriate over the forecast period, fiscal buffers will achieve an adequate level only in the medium term. Furthermore, the legal framework and governance arguments do not support pooling of CBI and DFI reserves. Moreover, the low execution rates of public investment, owing to limited administrative capacity and

domestic absorptive capacity, suggest that

there is little scope for accelerating the

spending of foreign assets in the domestic

economy. Increasing the returns to

sovereign foreign assets might imply

adopting some form of sovereign wealth

fund (SWF) as exemplified by international

experience (see accompanying Selected

Issues paper). On balance, in light of the

need to preserve the independence of the

CBI and maintain a high level of liquid

reserves to address possible pressures on

the Iraqi dinar, and given Iraq’s weak capacity and governance, it seems appropriate to maintain the current two-tier architecture composed of CBI reserves (invested following prudent guidelines) and fiscal reserves held in the DFI. Should the DFI reserves increase beyond the recommended level of fiscal buffers, it should be possible to modify the DFI structure to allow for a more active management of excess fiscal reserves. The authorities agreed that the management of Iraq’s sovereign assets should continue to be cautious, and that a separate SWF would not be appropriate at this stage.

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http://www.imf.org/external/pubs/ft/aa/

 

Frankly, I'm too tired to spell this out (I'm walking dogs all day in the heat, not looking for sympathy, just sayin'...)..If you'd like to do the research, you'll see that no matter what the IMF states, or in the case of Iraq, tries to impose, the enactment of dropping the APR and instating the exchange regime falls to a country's respective decision. The IMF cannot force them to do anything. As you  know, as long as Maliki still has the power of veto and collusion with the judges, I don't think we'll see this. We need the Federation Council enacted and in force, in order to greatly weaken him and his reach (further). 

 

Also, it's the supposition of researcher's I respect, who state that they believe that as Ch 7 release is a UN issue, Iraq may have been coerced to choose an exchange regime with the IMF ( a division of the UN) not only to benefit their and by proxy, the world's economy, but also so that they can prepare for WTO ascension by having first assigned a value to their currency, which would then allow them to develop their private sector according to wto requirements.



As you can see, I'm pretty opinionated on this matter. I know there are those who don't agree with me, and that's cool. This is JMO.



BTW - I truly hope I'm wrong on this.

Edited by TBomb
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http://www.imf.org/external/pubs/ft/aa/

 

Frankly, I'm too tired to spell this out (I'm walking dogs all day in the heat, not looking for sympathy, just sayin'...)..If you'd like to do the research, you'll see that no matter what the IMF states, or in the case of Iraq, tries to impose, the enactment of dropping the APR and instating the exchange regime falls to a country's respective decision. The IMF cannot force them to do anything. As you  know, as long as Maliki still has the power of veto and collusion with the judges, I don't think we'll see this. We need the Federation Council enacted and in force, in order to greatly weaken him and his reach (further). 

 

Also, it's the supposition of researcher's I respect, who state that they believe that as Ch 7 release is a UN issue, Iraq may have been coerced to choose an exchange regime with the IMF ( a division of the UN) not only to benefit their and by proxy, the world's economy, but also so that they can prepare for WTO ascension by having first assigned a value to their currency, which would then allow them to develop their private sector according to wto requirements.

As you can see, I'm pretty opinionated on this matter. I know there are those who don't agree with me, and that's cool. This is JMO.

BTW - I truly hope I'm wrong on this.

You are dead on, Tbomb.

We need the Federation Council... It is the only way to wrangle Maliki and his goons. I have not seen any word on if it was passed or not. Have you?

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I've not seen anything official. I've only been reading articles stating that the law needs revision of the amount of rep.'s chosen from each province, increase in age limitations (change from min 30 yrs to 40 yrs of age) and also, an opinion piece came out stating that the state law is opposing it because they want great alignment or power given or retained by the judicial system and the author stated, (paraphrasing) "that's a big no no". I posted it today, here, somewhere..lol.  I had a feeling they wouldn't be reading it again yesterday, and I was right. The law is going to go through the mangle ...again...it's state law holding it up IMO.  We need a vote of 217 or more for it to pass. I watch this daily, as do many here.  It's very important. 



New item about your countries of interest:

Country Report No. 13/217: Iraq: 2013 Article IV Consultation

http://www.imf.org/external/pubs/cat/longres.aspx?sk=40803.0

I forgot to thank you hablrob..thanks so much!!!

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http://www.imf.org/external/pubs/ft/scr/2013/cr13218.pdf

 

7. Oil revenues feed the DFI and are partly transferred to the CBI reserves through
government spending. Oil revenues which accumulate at the DFI as fiscal reserves become
international reserves of the CBI when the government repatriates the foreign exchange and sells it
to the CBI to finance domestic spending. The foreign currency amount adds to the international
reserves of the CBI, and domestic currency spent by the government increases domestic currency
liquidity in the economy, which in turn creates demand for foreign exchange. Given the high
dollarization of the economy, the size of the additional demand for foreign currency (the rate of
transformation of the DFI reserves into CBI foreign assets) is estimated by staff at about 40–50
percent of domestic government spending assuming that (a) a large share of goods consumed by
households is imported, (B) durable consumption goods and real estate are paid in dollars, and ©
most savings, except for small working balances, are converted into dollars or directly transferred

 

 

"C. Adequacy of Reserves

8. Central bank international reserves are adequate. The level of reserves meets with large
margins standard measures of adequacy (months of imports, ratio of short-term foreign currency
obligations, and coverage of monetary aggregates).7
Maintaining extra buffers compared to the
standard thresholds for these metrics is justified in light of the exceptional political and security risks
in the country and in the region and the dependence on a single source of balance of payments
revenues. Over the medium term, as Iraq’s difficult situation and oil sector dominance is likely to
continue, maintaining these buffers would require rising absolute levels of international reserves
that broadly keep the metrics at their current range."

 

9. But, fiscal buffers are not yet sufficient to withstand large oil revenue shocks. At $18
billion, or 6 months of salaries and pensions at end-2012, Iraq’s current fiscal buffers held in the DFI
would be sufficient to absorb a relatively small short term revenue shocks (as laid out in the
downside scenario of the 2013 Article IV Staff Report) without socially destabilizing disruption to
public finances. Buffers are not sufficient, however, to absorb a shock of the magnitude of the 2008
oil price shocks, or a collapse in production or exports that severely limits Iraq’s earnings in foreign
currency. Staff projections show that building adequate buffers would only be possible over the
medium term. As a result, excess reserves, i.e., reserves over and beyond the level of fiscal buffers,
would not be accumulated in the foreseeable future.
10. The need for high fiscal buffers—separate from CBI international reserves—is
heightened in Iraq by the government’s lack of access to international capital markets and
central bank lending. These financing sources would allow absorbing fiscal shocks, but currently
they are not an option for the government. In particular, Iraq’s legal framework forbids central bank
lending to the government (and therefore, use of international reserves) to buttress central bank
independence, which is particularly important to avoid fiscal dominance given Iraq’s weak
governance and low administrative capacity.

Edited by TBomb
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Absolutely. Thanks Totalnewb

Wanted to thank all three of you ..... TotalN, Tbomb and Hablrob !!!!! Great info. I'm curious as to the meeting Maliki had with his Irainian buddy ????? They have to be in cahoots on keeping things as is !!!

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Wanted to thank all three of you ..... TotalN, Tbomb and Hablrob !!!!! Great info. I'm curious as to the meeting Maliki had with his Irainian buddy ????? They have to be in cahoots on keeping things as is !!!

Hey Shelley!  We can only hope progress runs over them like a train!

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