The government budget deficit and its financing in Iraq: a simplified view

[6ly410]

The government budget deficit and its financing in Iraq: a simplified view

 

 

https://annabaa.org/arabic/economicarticles/23223

Friday May 16 2020

Dr.. Ahmed Ibrahimi Ali

 

The difference between government spending and revenue is called the budget deficit, and it is a topic familiar to readers that governments have long known, and has become the most prominent expression of the shock of corona. Data from mid-April and April indicate that all developed countries in 2020, with the exception of Cyprus, Luxembourg, Singapore and Hong Kong, manage their spending with an unparalleled deficit after the Second World War. All countries that are classified as rising or developing, with the exception of Qatar, face the same problem; Likewise, low-income countries except the Republic of the Congo. The deficit is usually measured by a percentage of GDP to show its weight in the national economy and its potential impacts.

In the ordinary economy, revenue from public budgets comes from: direct taxes on wealth, profits, and wages; Fees for licenses, transfer of ownership and sovereign services; Indirect taxes that are levied on various forms of disposition of income, including imports and sales, such as value-added taxes ... and others; Also, the budget share of the profits of the state's financial and non-financial companies. Therefore, revenues decrease with the decrease in economic activity. On the other hand, the crisis imposed on the countries additional expenditures for the health sector, unemployment compensation and the assignment of losing companies, etc., thereby widening the deficit and highlighting the difficulties of financing it and the negative effects of financing with exceptional measures.

But the deficit of the general budget of Iraq differs from that in the typical economy, the usual, and for this we refer to financing the deficit in general and we move to Iraq and compare its economic content in the end with the typical model.

Deficit financing:

The deficit is usually financed by issuing government debt papers of them for the short term, one year or less, called Bills Remittances; Other, for the medium and long term, are usually called Bonds, and there is a category of them between two to ten years, which the US government calls Notes Notes. Remittances are often attributed to the government’s treasury and bonds, which are no more than designations. Remittances are discount cards, so the buyer pays less than the nominal value, for example 970 to receive 1000 upon payment. While the bonds are interest, i.e. the buyer pays the full face value of the bond and receives interest regularly, for example every six months, until the term. And interest on bonds from them at a fixed price, and in others, the interest rate is divided into fixed and variable according to the rate of inflation. And all interest rates and discount rates on an annual basis, when it is said that a three-month treasury transfer at a rate of 4% is intended annually, i.e. over the three months, 1% of the nominal value of the transfer, and all interest rates, the discount, on an annual basis.

In the hard currency countries, which are the international reserve currencies, such as the United States, the eurozone countries, Britain, Switzerland, Japan ... and a few other countries, government debt papers are issued in the currencies of those countries and are acquired by citizens, national institutions, foreigners, and foreign institutions. Therefore, the distinction between internal and external borrowing disappears. To clarify all the central banks of the emerging, developing and even developed countries, they invest most of their international reserves with government bonds and treasury transfers: issued by the US government, which is the largest component, and then debt papers for high-creditworthy eurozone governments, and from Britain, Japan, Switzerland ... and so on. This is because the currencies of those countries have a global use in foreign trade and cross-border financial investment, and when international financial markets are said, they are intended primarily for financial asset markets denominated in those currencies.

The rest of the world, especially emerging and middle-income and poor people, issue debt securities in their national currencies for domestic borrowing. It is rare for foreigners to acquire these securities for financial investment. When resorting to external borrowing, they resort to issuing debt papers in the above-mentioned hard currencies, yet they face difficulties in marketing them even at high interest rates because the assessment of the sovereign creditworthiness of most of these countries is low and in a way that exaggerates the credit rating agencies that are well known and approved in international financial markets. Therefore, it is forced to borrow directly from the governments of developed countries and banks on difficult conditions.

The necessary question is why are the governments of developing countries borrowing from abroad to finance their public budget deficits. Unfortunately, there is a wrong and misleading answer that was spread among the people and that is the lack of sufficient internal resources to finance the fiscal deficit. While the truth is that borrowing from abroad, even if the financial budget has a form, it is to finance the external balance of payments deficit, which is called the current account. The main part of it is the trade balance because the imports of these countries from goods and services are greater than their exports and there is no automatic compensation financing that accommodates the trade deficit such as foreign investment or large income transfers, and at the same time they do not have sufficient foreign currency reserves to bridge the gap.

In other words, payments in foreign currency are greater than receipts, and therefore it is necessary to borrow in foreign currency to finance this deficit and not the public budget deficit. It became clear that the developing country does not borrow from abroad when the balance of external payments is surplus or balanced, regardless of the deficit of the general budget; Also, even if governments anticipate a large deficit in the external balance, they do not borrow from abroad if they have sufficient foreign currency reserves to finance it.

Iraq budget deficit:

The financial deficit in Iraq is always associated with a deficit in the balance of payments, and unfortunately, senior officials and experts are satisfied with describing the problem in insufficient oil export revenues for government spending, but it has become fashionable to compare the value of oil sales with salaries, with an odd omission of the external balance of deficit. While everyone knows that oil revenues are almost the only source for financing Iraq’s governmental and private imports of goods, services and other external payments. The deficit of the public budget is not new to Iraq, but it appeared from late 1983 to 2003, passing through the years of the entire blockade. And in 2009 and since 2014.

The deficit of the public budget in all of these years was accompanied by the deficit of the external balance. It is evident that the deficit in Iraq is double or twin, as it is said, because oil exports are revenues for the government budget and are, at the same time, almost all of Iraq’s foreign currency receipts, except for borrowing from abroad and a little foreign investment.

We wonder why the public budget deficit was not important to the general public in the 1980s, and the answer is simple because the external balance deficit found easy financing in foreign loans at the time. Also, in 2009 and in recent years, because the central bank’s international reserves sponsored the gap between foreign currency payments and receipts. Whereas, during the time of the blockade, as Iraq did not prepare for easy financing for the external balance deficit, after the oil resource was cut off or severely restricted, the Iraqis lived a life of hardship and extreme hardship. Iraq witnessed unbridled inflation that was not imagined in a country like it, linked to the deterioration of the external value of the national currency and expressed by the continuous and accelerating rise in the price of the dollar, which led the movement of the general level of prices for those years.

Oil revenues decreased a lot in 2020 on May 12, May, the price of Brent oil was $ 29.63, and expectations point to the exclusion of it exceeding $ 37 until the end of the year, thus reducing the value of oil exports below the minimum amount necessary for public spending to reach the deficit of at least 45 trillion dinars, and without External payments by a large margin perhaps, half the international reserves of the Central Bank or more.

The general budget deficit in Iraq as a result of the low price of oil on the world market and not to reduce taxes or increase spending. The opposite is true with budget surplus when the price of oil rises to exceptional levels. Revenue of the general budget in Iraq is a variable completely independent of the national economy: the total production capacity of goods and services, the operation of the workforce, costs and prices, and the surplus and deficit is dependent on the movement of the oil price abroad and not as a result of reducing or raising government spending.Balanced budget in Iraq does not mean never that the public finances are stable, but can include high levels of government spending that raise aggregate demand with a multiplier effect and cause severe inflationary pressures as in the days of the explosive development of the seventies of the twentieth century and for the years 2003 - 2008; And if Iraq adopted in 2020 the balance of the public budget, this means the low level of total demand without the productive capacity of the national economy, the breadth of unemployment, and even social ruin and political tension, usually the deficit of the public budget in Iraq is associated with a low level of government spending and not only with the Corona crisis.

The balance of the general budget in Iraq, its deficit and its surplus. Its economic implications differ radically from the typical economy, because Iraq represents the properties of oil rents with the highest attained in the world, most notably the independence of the general budget, between the deficit and the surplus from the national economy. Whereas in the typical non-oil economy, the balance of the general budget means, to a large extent, its neutrality towards the level of aggregate demand, employment and output; While the public budget deficit includes, in one way or another, a net addition to the total demand of government spending stimulating the national economy to approach full employment and production capacity. If aggregate demand exceeds the limits of economic potential, represented by the possible supply of goods and services, inflationary waves are released, and only then it is said that financing the budget deficit was the cause of inflation.

The central bank's role in monetary debt:

Central banks buy government debt securities from the secondary market, which is the dominant general rule, and few of them allow it to be acquired directly by the law from the initial issuance. Government debt appears on the asset side of the central bank’s balance sheet. The moment he buys the debt securities, the bank account of the seller who is open to him strengthens the value of the securities he acquired new. As for when he buys those papers directly from the initial issue, which is a rare case, he strengthens the government's account, the treasury is running, with the same amount. Bank and government accounts are on the liabilities side of the central bank’s balance sheet. That process, the central bank’s lending to the government, is called Debt Monetization, meaning converting it into cash.

Money, by definition, is the currency in circulation plus deposits, and hence are liabilities on the banking system: the currency in circulation is liabilities of the holder of the central bank, and deposits are liabilities of their owners on banks. When it is said, liabilities on banks are comprehensive for institutions similar to banks and liabilities similar to deposits. The narrowest definition of money is: currency in circulation, outside the banking system, and current deposits with banks. The amount of currency in circulation is the amount of currency issued by the central bank, which is apparent on the liabilities side of its balance sheet, minus what the banks hold as a hedge for their clients ’requests. The currency exits and enters, over the hours of the working day, to and from the central bank coffers, the interior is subtracted from the issued currency and the outside is added to it. In sum, the issued currency increases or decreases according to the withdrawals and deposits of banks and the government, deposits reduce the issued currency and the withdrawals increase in their amount.

That is money, and the monetary base is the currency in circulation plus bank reserves. Bank reserves consist of its obligatory and free deposits with the central bank in addition to the currency it holds. In other words, the monetary basis is the deposits of banks with the central bank plus the currency issued from it. The monetary basis can be viewed by the assets in the balance sheet of the Central Bank, which is the net international assets plus net domestic credit.

The domestic net credit paragraph includes the government’s net central bank loans. When the central bank buys government debt, the monetary basis from the assets side and from the liabilities side increases, by the same amount, by strengthening the current account of the bank that sold the papers, i.e. increasing its free deposits with the central bank. It has now become clear that the meaning of monetary debt is that increasing the central bank’s debt to the government requires an increase in the monetary basis. The monetary basis may be described as ultra-strong money or central bank money. The most common methodologies of analysis in the monetary economy are based, until recently, on the assumption that the central bank is able to control money through the monetary basis through a factor called the cash multiplier, so the money moves according to the movement of the monetary foundation and consequently rises due to the central bank lending to the government.

Possible consequences of monetary debt:

Monetary debt increases the monetary basis, with the steady effect of other factors. But elements of the central bank’s balance sheet are constantly changing, and just as the monetary basis increases as a result of government lending, it may decrease by other operations. In Iraq, when the value of oil exports decreases, the foreign currency transferred from the Ministry of Finance to the Central Bank shrinks, while the central bank continues to sell foreign currency, thus depleting its reserves to bridge the difference between what is sold to the private sector and what is transferred from the Ministry of Finance. The budget deficit is always associated with the deficit of the external balance in Iraq, and therefore the process of monetary debt coincides with the depletion of international reserves to bridge the external deficit. Since the monetary basis is the net foreign assets plus net domestic credit, we note its decline as a result of the contraction of foreign assets and their increase due to lending to the government.When adding money-multiplication operations in banks through credit, or vice versa by its decline, or reluctance to bank deposit and currency preference, it becomes very clear that debt monetization takes place in conjunction with other operations, and the outcome may not be an increase in money. Also, quantitative data and research do not support a close link between the amount of money and the general level of prices, the change in money from goods and services, or the extent of unemployment in productive capacity and unemployment in the workforce. We recall the large volume of central bank loans to governments since the last international financial crisis until the beginning of 2018, and inflation did not rise, but the opposite is true, as the governments of developed countries want to increase it, it has fallen below the desired rates.Also, quantitative data and research do not support a close link between the amount of money and the general level of prices, the change in money from goods and services, or the extent of unemployment in productive capacity and unemployment in the workforce. We recall the large volume of central bank loans to governments since the last international financial crisis until the beginning of 2018, and inflation did not rise, but the opposite is true, as the governments of developed countries want to increase it, it has fallen below the desired rates.Also, quantitative data and research do not support a close link between the amount of money and the general level of prices, the change in money from goods and services, or the extent of unemployment in productive capacity and unemployment in the workforce. We recall the large volume of central bank loans to governments since the last international financial crisis until the beginning of 2018, and inflation did not rise, but the opposite is true, as the governments of developed countries want to increase it, it has fallen below the desired rates.

After the recent financial crisis, the governments of most countries wanted to facilitate liquidity and through the purchase by central banks of various instruments of government and private debt or what is called quantitative easing; In conjunction with low interest rates and with the intention of stimulating demand with cheap financing to revive the economy. And there are many indications to deny the necessary correlation between debt monetization and inflationary pressure in the typical economy. In Iraq, financing the general budget is originally external to the national economy, and not by deduction from the income stream through taxes and other similar matters.

And the Iraqi economy is heading towards a decline in the level of demand and activity, and the expected size of monetary debt remains without the required financing to avoid more unemployment and apathy. No matter how much debt is being spent in Iraq, government spending does not increase to a size that raises aggregate demand to the extreme frontiers of domestic production capacity and generates inflationary waves, this is completely unlikely. On the other hand, however, the level of aggregate demand must be kept low in order for demand for imported goods and services to remain within the possibility of central bank reserves to bridge the foreign currency gap.

* Al Furat Center for Development and Strategic Studies / 2004-2020
www.fcdrs.com

Edited May 18, 2020 by 6ly410

[Mary B]

thanks 6ly410

[Floridian]

8 hours ago, 6ly410 said:

The government budget deficit and its financing in Iraq: a simplified view

 

Okay, here I go again!

I read this thing and I didn't find this to be "a simplified view" at all.

 

After all these years of trying to understand these people, I still don't get it.

First, they tell you most of the population is under 20 years old.

Then, they tell you that the average workforce is 14 to 64 years old.  (How's that again?  Did you say 14 years old?)

Therefore, I'm pretty sure this "simplified view" is not an explanation for Iraqis.

 

So, what is the purpose of publishing this dissertation in the newspaper?

What are they trying to tell us?

Are they trying to "throw us off" the trail, or is there some kind of clue hidden in this "simplified view"?

 

[haymon]

May be simple version, but still long on my reading list. 😆.