The Exchange Rate of Foreign Currency in Economic Feasibility Studies

[furk]

Below are the central controls related to the exchange rate of the foreign currency to convert the project inputs and
outputs from foreign currency to its equivalent in the local currency, and that is by calculating the net discounted
present value standard and the internal return on investments in economic analysis that governs investment projects
that costs excess one million dinars.
Estimate the shadow price of foreign currency:
1. It is necessary to put central controls to amend the official exchange rate * to reflect the shadow
price of the foreign currency, and that is considered one of the necessary requirements to implement the net
discounted present value standard and the internal return rate on investment in the economic calculation stated in
the instructions, paragraph nine.
The central controls for adjusting market prices distinguished a gro

 group of outputs and inputs traded internationally,
where the projects production or usage of them is reflected on the abundance of foreign currency in the economy
and thus project outputs or inputs used of such are considered purely foreign currency output

y in the economy
and thus project outputs or inputs used of such are considered purely foreign currency outputs or inputs.

* What is meant by exchange rate: the number of units of foreign currency, expressed in
dollar per one dinar.
In particular the following outputs and inputs of foreign currency were distinguished:
• Export-outputs.
• Outputs marketed locally that substitute imports.
• Imported inputs.
• Inputs produced locally that usually go to exports.
• Foreign labor.
According to the pricing rules the value of the output and input (traded) is calculated using
export prices (FOB) and import prices (CIF), according to what is listed in the pricing rules.
In other words the pricing rules calculate what the project produces from foreign currency
(quantity of exports multiplied by the export price (FOB) in foreign currency or the quantity of
substitute imports multiplied by the import price (CIF) in foreign currency, as well as what the
project uses from foreign currency and imported inputs multiplied by the import price (CIF) in
foreign currency .... etc.).
In a later step, project outputs and inputs must be converted from the foreign currency to its
equivalent in local currency (dinars) by using a specific exchange rate for the foreign currency.
2. Justifications for exchange-rate adjustment: there are a number of important and powerful arguments
which support the view that the official exchange rate reduces the real value of foreign currency for purposes of
calculating the economic national profitability for investment projects and hence for the purposes of investment
planning. It is demonstrated in this context to call for assessing the dinar for less than (3.208) dollar (official
exchange rate) when assessing project outputs and inputs of traded goods of exports, substitute imports and
imports... etc.
The justifications to call for the use of an exchange rate that is lower than the official exchange rate are:
• The use of an exchange rate that is lower than the official rate is the appropriate action at the investment
planning level to translate the country’s economic strategy aiming at stimulating central investments in the
sectors that encourage the development of non-oil exports, as well as sectors that encourage the expansion of
domestic production base in order to reduce imports and compensate it with local commodities. This helps to
reduce reliance on foreign exchange earnings from crude oil exports and increases the share of non-oil sectors in
the local production.
• The application of the amended exchange rate on project imported inputs will assist in directing investments
away from aggregated sectors dependent on imported inputs and the preference of those sectors that rely on
locally produced inputs.
• The use of the amended exchange rate helps to correct the balance in favor of the traded goods sectors
compared to non-traded goods.
• The real exchange rate has declined rapidly since the early seventies, through rapid rise of the level of prices
and local costs which led by the steadiness of the official exchange rate to change in prices and actual local rate
costs that gave an advantage for imported goods at the expense of locally produced goods, meaning that it led to
deterioration of the competitiveness of alternative replacement goods and export commodities.
• This action shows that the official exchange rate overestimates the value of the dinar, compared to the
http://www.mop-iraq.org/mopdc/index.jsp?sid=1&id=308&pid=295&lng=en (2 of 3) [3/31/2010 12:57:23 PM]
Ministry of Planning
foreign currency and from the promoting goods substituting imports and export commodities point of view of.
And in support to this view is the state’s utilization and in a broad approach to the customs and quantitative
protection policies especially for consumer goods, as well as export subsidies that exports have through an
amended export exchange rate.
3. Estimate the amended exchange rate of the Iraqi dinar to be used in technical and economical feasibility studies and for (1.134) dollar per dinar. This price should be approved for 3 years until reappreciation by the competent authorities.

[GregHi]

This was from a 2010 article. Let’s hope they still think it’s worth over a buck!

[blueskyline]

I think its FEASIBLE.........

[screwball]

easy over $2.00

[gregp]

1 hour ago, screwball said:

easy over $2.00

The only thing easy over $2.00 in Iraq is the goat rental.