hello again my friends. its your bud here with another worth of a take on what i see happening within the borders called iraq. and it is really good news from my vantage point! the topic of this opinion piece is the '6 major factors that influence an exchange rate'. i will cover each factor briefly in reference to iraq and hope to derive whether or not those invested are either in a good or bad position.
as many know, the importance of an exchange rate revolves around one country's trading relationships with other nations. trade relationships is the sole purpose of an exchange rate. where there is no international trade, an exchange rate tied to a currency has no domestic significance. with this in mind lets peer into the 6 factors of exchange rate influence between iraq and its trading partners.
1) Inflation - iraq has done a fantastic job steering its inflation rate. the latest report (aug 2015) has inflation at 2.2%. some economists would mark this as the ideal inflation rate. this places iraq is a great position with trading partners for determining a strong exchange rate to the iqd.
2) Interest Rates - iraq has maintained a steady interest rate of 6% over the last 5 years. compared to other nations, it is a phenomenal rate. the importance here is the attractiveness it has to foreign investors. should iraq sure up the security situation with daesh and clean up political corruption, foreign investors might feel confident enough to pour funds into iraq at these rates.
3) Current-Account - iraq has done quite well between trading partners and has held a positive current account balance (exports vs imports) over the previous 9 years except for 2010. oil is its primary export and it has been strong enough a commodity to keep iraq experiencing gains in its current accounts. as iraq build its non-oil sector through the plan for increased industry and agriculture, exports should increase and it will be reflected in the current account.
4) Public Debt - this is where the hidden gem is revealed and the reason for the title of my opinion piece. everything in the papers speak to iraq's "deficit financing". however for some reason it appears to be seen in a negative light. my opinion is much different. not all debt is good but in this instant i definitely believe it is. when most developing nations look to expand its economic markets as iraq is doing, there will be an inevitable deficit to fiscal policy (the budget). in the short term, this is a very very good thing! where most under developed nations utilize deficit financing for payment of domestic and foreign loans, this does not hold true for iraq. iraq is using this tool as developed nations would, for capital formation for economic growth and boosting the private sector. this type of debt is the best stimulate for the economy in the short term. (here is a good slide-show presentation explaining deficit financing.)
5) Terms of Trade - balance of trade for iraq is simply outstanding and last reported at approximately $40B usd ($44B previous year). compared to turkey (-$6B usd), japan (-$268B yen), germany $24B eur. i would say that iraq comparatively has a case for a strong dinar. its current accounts and balance of trades are unbeatable (maybe a little exaggeration there).
6) Political Stability & Economic Performance - well, you can't shine everywhere . unfortunately this important piece is dragging iraq down.....and i mean wayyyyyyyy down. nobody in their right mind want to stick hundreds of millions in an environment like this. this area alone is holding iraq back the most. all things considered, if this one area is corrected there is no reason why foreign investment wont flood the country and the domestic currency surge in demand.
there you have it gang. hopefully this piece wasn't too long. this should give us all a solid overview of the factors that influence the dinars TRUE exchange rate the most. from it we should be able to make a sound judgement on where the currency is headed and whether or not we want to remain involved.
Current events in Iraq reveal the government is preparing to privatize in an effort to liberalize the market or best put institute a market economy. Why would Iraq decide such drastic change to its centrally managed economy? One short answer is that its budget deficit revealed economic fragility. Iraq finds itself in a precarious situation since its macroeconomic stability, as recently revealed, is tied to factors outside of its own control.
A critical factor of oil price volatility, and the affect it has on developing oil producing economies pegged to the dollar, is known as terms-of-trade shock. (Nikola Spatafora and Andrew Warner completed an interesting research paper addressing this specific issue - read more). In a Sebastian Edwards article "Flexible exchange rates as shock absorbers", he states:
We find evidence suggesting that terms of trade shocks get amplified in countries that have more rigid exchange rate regimes. We also find evidence of an asymmetric response to terms of trade shocks: the output response is larger for negative than for positive shocks. Finally, we find evidence supporting the view that, after controlling for other factors, countries with more flexible exchange rate regimes grow faster than countries with fixed exchange rates.
Supporters of flexibility, on the other hand, have argued that under floating exchange rates the economy has a greater ability to adjust to external shocks. According to this view, which goes back at least to Meade (1951), countries with a flexible exchange rate system will be able to buffer real shocks stemming from abroad. This, in turn, will allow countries with floating rates to avoid costly and protracted adjustment processes.
continued research reveals that Edwards is not alone in his findings concerning the dangers of rigid exchange rates for market based economies. Jbili of the IMF's Finance & Development Magazine wrote an article entitled "Should MENA Countries Float or Peg?" examining 6 MENA countries and their exchange regime. I note some of the identical remarks.....
The prevailing view now is that increasing flexibility in exchange rate management would help countries deal with external shocks, reduce the risk of banking crises, and contribute to financial stability. There are, of course, dissenters who argue in favor of intermediate regimes, stressing the difficulty developing countries have in meeting the preconditions for a successful float and the negative impact of excessive exchange rate volatility on investment and growth.
The above country-by-country analysis indicates that exchange rate regimes in the six countries had varying degrees of success. Exchange regimes in Jordan, Morocco, and Tunisia have not recently come under pressure, because real shocks were relatively manageable and macroeconomic policies were generally consistent with the choice of exchange rate regime. In contrast, the recurrent pressures in the foreign exchange markets of Egypt and Lebanon demonstrate that vulnerability to real exogenous shocks, volatile capital inflows (Egypt), and large structural fiscal deficits financed by heavy domestic and foreign borrowing (Lebanon) are incompatible with a pegged exchange rate.
Popular opinion through much research shows that it is quite favorable for developing countries to free themselves from a fixed peg toward a more flexible exchange rate regime in order to protect their economies from terms of trade shock. A great example of this is Egypt by 1986 where the country began to experience serious macroeconomic imbalances and a dramatic fall in growth characterized by budget deficits of 17% of GDP. Egypt launched its Economic Reform Program to address dire economic conditions which really took off by 2003 for further liberalization of the economy. In 2003, the government began floating the rate of exchange of the Egyption pound, releasing it from its peg to the dollar (read more). Although Egypt continues to struggle with its economy for numerous reasons, it stands to reason that Iraq would be in a much better place should it head in the same direction.
There are preconditions to a successful release from the peg and toward a flexible exchange regime. The country must establish a sound market economy, political energy must be aligned with it, a sound financial sector must be established, and capital markets should be in operation. Everything we see Iraq doing tells us the country's intent is to float the dinar. Government controlled economics with rigid exchange regimes can be the death of a country whose economy is subject to highly violatile exogenous terms of trade shock. It's tie to the dollar can create years of deficits. Iraq must take control of its economic future. It must liberalize its economy, harmonize its political landscape and float its currency.
all of this is my 2c on the matter through my own research. take it for no more than that.
be blessed my friends
Economics Committee: orientation private banks to sell the dollar at a rate less than the central bank will support the stability of the dinar exchange rate
20-06-2013 03:36 PM
Baghdad (news) .. Praised the committee of economy and investment parliamentary by-step some private banks to sell foreign currency at a lower price from price announced by the central bank, which will contribute to the stability of the Iraqi dinar exchange rate against the U.S. dollar. said decision of the Committee MP / coalition Aktl Kurdish / Mahma Khalil (of the Agency news): The private banks and government have a link with the Central Bank on the subject of buying and selling foreign currency in order to taking him to the citizen, whether inside or outside Iraq. added: that the price of the dollar at the Central Bank of Iraq and the installer in the federal budget (1166) dinars, and sold to local banks at (1179) to be (13) dinars per dollar commission, and the banks in turn sells to the citizen and the owners of capital at a price (1189) dinars. between: the trend that has done some private banks to sell the dollar less than Advertised price is a positive step towards supporting and price stability dinar which is witnessing a sharp fluctuation its price during the current period. This has three banks announced a civil sell the dollar at a lower price than announced by the central bank, so as to support the exchange rate of the Iraqi dinar. / End / 8. j. n /