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A deputy reveals a set of options regarding the 2022 budget, including the price of the dollar


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The Iraqi government announces the completion of the current year's budget

 

 

1,919 Economie 01/31/2022 10:09 Baghdad today -

Baghdad Today, Monday, the financial and economic advisor to the Prime Minister, Mazhar Muhammad Salih, issued a new comment regarding the draft budget law for the year 2022. Salih told (Baghdad Today), that "the draft budget law for the year 2022, has been completed for a long time, and that the last legislative year faced the election year." Early and it was supposed to be presented during the month of October (the tenth) and that Parliament has dissolved itself and there is no legislative body to legislate the budget." He added, "In the first session of the House of Representatives, upon completion of the formation of the government, the budget will be on the priorities of legislation in Iraq, and the current financial situation of Iraq is an opportunity to operate projects, invest and promote growth in GDP, and the other thing is the market share of these increases because the market is the engine of the economy." ". And the financial and economic advisor to the Prime Minister indicated that "there is an opportunity to establish a joint development fund, as well as to hedge in the drop in oil prices, as there must be hedging through a fund and surplus reserves in the event the budget is exposed to a decline in oil prices."

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 Baghdad: Imad of the emirate
 
 
Article 57 of the Iraqi constitution indicated that the legislative chapter in which the general budget is presented does not end until after it is approved. In other words, the state’s general budget must be approved before the start of the new fiscal year, and that approval means the legislative authority’s ratification of the terms and programs of this budget so that the executive authority can work according to it ,
 
The lack of approval means the delay in the state of the market and economic activity in the country, which paves the way for the national economy to enter a stagnation stage. In addition, the failure to approve the budget on its known dates affects the investment programs and curriculum and creates a state of uncertainty.
 
investment program
The expert in economic affairs, Dr. Ahmed Al-Rawi, said: “The state budget is an annual plan by which the government aims to implement its service and security programs within a year, especially budgets.”
Countries that depend mainly on oil revenues, such as Iraq, as these budgets are characterized by allocating an investment program of no less than 30% of the budget size to implement development programs in the infrastructure of electricity, water, roads, transportation, education and health. Any delay in approving the budget has significant repercussions on the level of allocation and spending. Which negatively affects the implementation of service and development programs, as happened in the failure to approve the 2022 budget on time.
 
Define spending
He added: "We expected a delay in approving the budget for several months due to the delay in Parliament sessions and what accompanied them, and this delay will have negatives, including the work ratio of 1/12 in spending until the approval of the new budget, i.e. work on the expenditure rates that were implemented from each month of the last year, meaning that Spending is limited by the conditions of the previous year, and accordingly, it cannot include the developments that occur during the new year. Determining spending at a rate of 1/12 will be reflected on the level of employment for the required degrees and their appointment during the year. Rather, the promotions and bonuses that employees are entitled to during this year will stop until the approval of the new budget.
 
service projects
Al-Rawi added that “the delay in approving the general budget extends its negative impact on the level of implementation of service projects to be implemented from the previous budget and which will continue to be implemented for subsequent years, and that delaying the budget means disrupting the investment program and this disrupts the development activity that negatively affects economic activity in general, especially In the transport, employment and services sector, and that the failure to approve the general budget represents a restriction on the government in implementing its programs that it promised its citizens, which puts it in a critical political, moral and social position.
 
investment spending
In the same context, the expert in economic affairs, Dr. Amr Hisham, stated that “the failure to approve the general budget was repeated and not passed.”
For a full year in the 2014 budget and the 2020 budget, in general, the general budget is divided into two parts: the current or operational spending budget and the investment spending budget. The question of salaries, which constitutes the most important paragraph of 
Paragraphs are not affected by the lack of approval of the budget, and the effect falls on the non-approval of upgrades, promotions, transfers and deletions
and creation.”
He continued, "The problem is usually in investment spending, as the issue of releasing financial payments to contractors in investment projects is affected, which generates a loss of confidence by contractors and local and foreign companies and raises fears of recession. 
economic".
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The framework announces the move towards collecting parliamentary signatures to change the dollar exchange rate%D8%AF%D9%88%D9%84%D8%A7%D8%B1-1.jpg

Last update 02/02/2022 | 11:23 AM

Information / Baghdad..
The deputy of the coordination framework, Ibtisam Al-Hilali, revealed, on Tuesday, the framework’s move to collect parliamentary signatures to restore the dollar exchange rate to its previous rate, surprising at the government’s insistence on maintaining the exchange rate, especially with the recovery of oil markets during the past weeks.
Al-Hilali said in a statement to "The Information", "The coordination framework is moving towards collecting parliamentary signatures in order to restore the exchange rate of the dollar against the Iraqi dinar or reduce its current price."
She added that "the framework's movement in this regard is still continuing until the will of the Iraqi people, who were affected by the high exchange rate of the dollar, is achieved," noting that "the government raised the exchange rate in order to supplement the 2012 budget, and now it has obtained additional funds due to the high oil price."
And the representative of the State of Law coalition, Firas Al-Maslmawi, confirmed in a previous statement, that his coalition and a number of members of Parliament within the same direction will not allow the budget to be passed for the current year except after a reduction in the dollar exchange rate against the dinar. finished/25 h

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The Kurdistan government discusses its obligations and rights in the federal budget                 10:05 - 02/02/2022

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Baghdad - Mawazine News
The Kurdistan Regional Council of Ministers held its weekly meeting, headed by Masrour Barzani, on Wednesday. During which he discussed a number of topics, including the work of the joint team of the federal and regional financial audit bureaus, which prepares its joint report on the region's obligations and entitlements in accordance with the budget law.

In a statement received by Mawazine News, the regional government said that at the beginning of the meeting's agenda, the Prime Minister presented a summary of his visit to the United Arab Emirates, referring to his meeting with the Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces, Sheikh Mohammed bin Zayed Al Nahyan. And a number of senior Emirati officials, in which the importance of expanding the horizons of relations between the Kurdistan Region and Iraq with the UAE was emphasized, especially in the economic, investment and human development fields to serve development and construction efforts.

The Prime Minister touched on other files that took place during the talks with senior Emirati officials, including the political process in Iraq, overall developments in the Middle East, and the importance of supporting efforts and efforts to consolidate the pillars of peace and stability in the region and build a better future of coexistence.

Subsequently, the head of the Department of Foreign Relations, Sven Dizayi, shed light on the conditions of the migrants of the Kurdistan Region abroad in general, especially the recent disaster that resulted in the death and loss of a group of citizens of the Kurdistan Region as a result of the capsizing of three boats late last year, some of whom are still missing .

The head of the Foreign Relations Department referred to the efforts made by the Kurdistan Regional Government to return the bodies, as well as to return the survivors and search for the missing in cooperation with the Greek Consulate General in Erbil and the Greek Embassy in Baghdad, as well as the department's continued communication with the International Organization for Migration, the United Nations Mission (UNAMI) and the Union Office European in Erbil.

In this regard, a delegation from the Department of Foreign Relations visited Greece, and met with the official in the migrant file in Greece, and on the basis of those efforts, and under the direction of the Prime Minister, the bodies of nine migrants were handed over to their families, and the delegation of the territorial government will also conduct another visit to Greece to deliver DNA samples The DNA of the families of 29 victims, in addition to discussing the case of 11-year-old Rewar Rebwar and returning him to Erbil.

The Council of Ministers commended the efforts of the Department of Foreign Relations and the Ministries of Interior and Health, and directed the same authorities to continue their efforts in this regard. It also instructed the Ministry of Interior to continue to follow up and investigate individuals and companies that trade in human beings and endanger the safety of the citizens of the region, while taking legal measures against them. At the same time, the Council of Ministers called on Greece to continue searching for the missing, and expressed the regional government's readiness to take any necessary measures in this regard.

In the third paragraph of the meeting’s agenda, Health Minister Saman Barzanji reviewed a report on the outbreak of the mutated Omicron from the Corona virus in the region, the level of ministries’ commitment to receiving vaccinations by employees and workers in the government sector, and the necessary preparations to protect teachers, educational cadres, students and students after the resumption of the educational process. The Cabinet praised the Ministry of Health, doctors, health staff and ministry employees who succeeded, with the support of the international partnership and the World Health Organization, in combating the epidemic during the peak of its spread. It also stressed the importance of continuing vaccination campaigns and adhering to preventive measures by citizens with the aim of containing the epidemic and protecting public health.

In the fourth and final paragraph of the meeting’s agenda, Minister of Finance and Economy Awat Sheikh Janab highlighted the progress made in the work of the joint team of the Federal and Regional Financial Supervision Bureaus, which in the meantime is preparing its joint report on the region’s obligations and entitlements in accordance with the budget law.

After that, Cabinet Secretary Amanj Rahim reviewed a detailed report on the obligations of the Kurdistan Region in light of Article 11 of the Federal General Budget Law for the year 2021. Balances of the Commercial Bank of Iraq by the region’s banks, follow-up of non-oil revenues in the region, and preparation of the unified trial balance in the region’s departments for all months of 2021, and it includes all the region’s revenues and expenses, in addition to presenting the biometric project for the registration of salary recipients, as the Cabinet Secretary indicated the importance of submitting Information and tables for the joint team of the Financial Supervisory Bureaus in a clear and transparent manner, so that there is no excuse for the federal government not to disburse the financial dues to the region according to the budget law.

The Council of Ministers confirmed the implementation of the region's obligations in the budget law, and directed the ministries in coordination with the Ministry of Finance and Economy and the Office of Financial Supervision. The joint team of both offices is scheduled to start its work on the 6th of this month. Ended 29 / p. 87

 
 
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  • Time: 02/04/2022 16:04:35
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Economist: Finance must raise the budget ceiling with the global oil jump
  
{Economist: Al Furat News} Economic expert Salah Nouri said, on Friday, that the Ministry of Finance should raise the ceiling of the 2022 budget after the significant rise in oil prices.

Nuri told {Euphrates News}, "The rise in oil prices to those rates that exceed $91 per barrel are positive indicators." 

He added, "It is incumbent on the Ministry of Finance to raise the ceiling of the 2022 budget, because it is logical to change the price of a barrel of oil in the budget."

Today, Friday, oil prices reached record levels not seen in 8 years, as Brent contracts reached $92 a barrel.

Analysts this week suggested that crude oil prices would exceed $100 a barrel due to the strength of global demand, pointing to a possible war between Russia and Ukraine as one of their main concerns for markets in 2022.

Three analysts said that oil prices will rise if global supplies are disrupted, as well as with the recovery in demand due to the escalation of natural gas prices in Europe and Asia, in addition to the resumption of activities after the closures imposed to limit the spread of the Corona pandemic.

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An advisor to Al-Kazemi reveals the first measure that the new government will take, "of its utmost importance"
  
{Economic: Al Furat News} Adviser to the Prime Minister for Financial Affairs, Mazhar Muhammad Salih, revealed today, Saturday, the first measure that the new government will take due to its utmost importance.

Saleh said in a statement to {Euphrates News} that "80% of the labor force is currently in the market, and it is these large sums that move the economic market." 

He added, "The work of Law 12/1 will continue until the approval of the budget for 2022." 

Al-Kazemi’s advisor expected, “The first measure and government law that the new government will take is to present the budget law due to its utmost importance,” noting that “the budget law will be one of the priorities of the government and parliament because of its importance and its impact on the lives of citizens, especially since the law is prepared and ready, and some amendments may be added to it.” 

 

Raghad Daham

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Planning: We did not include any projects in the 2022 budget, and we focus on completing the current ones

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  •  Today, 19:04
 

Baghdad - conscious - Amna Al-Salami

Today, Saturday, the Ministry of Planning announced that projects will not be included in the budget for the current year 2022, while confirming its work to complete the projects that are ongoing.
A spokesman for the Ministry of Planning, Abdul-Zahra Al-Hindawi, told the Iraqi News Agency (INA), that "the ministry did not include new projects in the 2022 budget, and there are ongoing projects within the investment plan and the regional development plan."
He added, "There are quite a few projects that are ongoing and are currently being worked on according to the funds allocated in the 2021 budget, and work continues in the current year until they are completed according to the timelines allocated to each project, whether implemented by ministries or local governments in the governorates."
He continued, "As for the suspended projects, there is work to resume them by solving the problems that led to their suspension and restarting them."
The Ministry of Planning announced, earlier, that there are more than 6000 projects under implementation.
Ministry spokesman Abdul-Zahra Al-Hindawi told the Iraqi News Agency (INA): "There are more than 6000 projects under implementation," noting that "the priority of the ministry is the continuation of these projects and ensuring that they do not stop in front of any financial or any other circumstance."
He added, "There is a focus on service-oriented projects with high rates of implementation and projects that provide job opportunities, including health, housing, education, roads, irrigation, water and sewage projects," noting that "these projects are essential because they represent a service to the citizen while providing job opportunities."
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 money and business


Economy News _ Baghdad

The Ministry of Planning announced, on Sunday, that projects will not be included in the current year’s 2022 budget, while confirming its work to complete the projects that continue to work.
The spokesman for the Ministry of Planning, Abdul-Zahra Al-Hindawi, said in a press statement, "The ministry did not include new projects in the 2022 budget, and there are ongoing projects within the investment plan and the regional development plan."
He added, "There are quite a few projects that are ongoing and are currently being worked on according to the funds allocated in the 2021 budget, and work is continuing in the current year until they are completed according to the timelines allocated to each project, whether implemented by ministries or local governments in the governorates."
He continued, "As for the suspended projects, there is work to resume them by solving the problems that led to their suspension and restarting them."
The Ministry of Planning announced, earlier, that there are more than 6000 projects under implementation.

 
 
Views 202   Date Added 02/06/2022
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 Baghdad: Ahmed Janjun
 
Yesterday, Saturday, the Secretary-General of the Council of Ministers, Hamid Al-Ghazi, directed the governorates to prepare a strategic plan to implement projects away from relying on the annual budget, noting the importance of the presence of unions and federations to communicate the demands of segments of society to decision-makers. In Babylon: It is "must pay attention to the province of Babylon, as it is the gateway to Najaf and the holy Karbala," noting that "the citizen is looking forward to a real urban and service renaissance in many sectors." The country suffers from the problem of reliance on the budget, and its approval depends on political consensus and material capabilities from a rentier economy, which leads to a restriction of many services provided. The budget is approved in the middle of the year, and then the instructions are approved by the ministries of planning and finance. It takes a month to show the amounts allocated to the ministries and governorates, and after that, the preparation of projects, as well as the issues of referral, approval, contracting, handing over land and directing, are all bureaucratic matters that are fatal to the aspirations of the people and must be overcome to achieve renaissance And he stressed, "He will conduct weekly visits to the governorates, in order to inform them of the preparation of projects for a period of three years, and to end reliance on annual budgets."
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I am searching but yet to have seen anything on the meeting today about releasing Iraq. Reached out to a friend at the UN and was sent this. Not even sure if this is what we are looking for, What committee is in charge of releasing. If anyone have info. Please share.

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2 hours ago, Woldopep said:

I am searching but yet to have seen anything on the meeting today about releasing Iraq. Reached out to a friend at the UN and was sent this. Not even sure if this is what we are looking for, What committee is in charge of releasing. If anyone have info. Please share.

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By this itinerary looks like the February 9th meeting at the UN about releasing Iraq, was goo- roo poo-roo! Seems like that would be a line item by itself, on this Itinerary! What BS these people put out! JMHO! 🤠

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The Undersecretary for Multilateral Affairs and Legal Affairs meets the Director-General of the United Nations Office in Geneva

 

09/02/2022

 

The Undersecretary for Multilateral Affairs and Legal Affairs, Dr. Qahtan Taha Khalaf with Ms. Tatiana Valovaya, Director of the United Nations Office in Geneva, to discuss UN preparations for a formal meeting to end the work of the United Nations Compensation Committee (UNCC) and to close the Kuwaiti compensation file permanently after 31 years of issuing the relevant UN resolutions.

It is expected that the UN Security Council will adopt a UN resolution later this month, according to which the compensation file will be closed permanently, and thus Iraq will exit from all its obligations stipulated in the Council's decisions within the provisions of Chapter VII of the Charter of the United Nations.

It is worth noting that the Undersecretary of the Ministry heads an official delegation that includes in its membership the permanent representative of Iraq to the United Nations in New York, Ambassador Dr. Muhammad Bahr Al-Uloum, the Permanent Representative of Iraq to the United Nations Office in Geneva, Ambassador Abdul Karim Hashem, and the Ministry’s advisor, Dr. Muhammad Al-Hajj Hammoud.

 

 

https://www.mofa.gov.iq/2022/02/?p=29523

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It is expected that the UN Security Council will adopt a UN resolution later this month, according to which the compensation file will be closed permanently, and thus Iraq will exit from all its obligations stipulated in the Council's decisions within the provisions of Chapter VII of the Charter of the United Nations.
 

Thanks Carrello 🐫

 

Go RV

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Carrello

I think the answer to this is the meeting on Feb 22 this month. As the date above shows Feb 22 for the agenda Provisional Programme of work of the security council showing Iraq/Kuwait  Briefing (PM) (UNCC) UN Compensation Committee. That I believe is the date for release of the Resolution 692 of 1991. So we wait as usual for things to happen and hope things start to happen. Plus the government needs to be formed & laws need to be passed. Oh don't forget they have Ramadam  starting in April which nothing happens for another month and a half. Have a good day tomorrow.

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NO RV until Article VII Section 3 of the Articles of Agreement of the International Monetary Fund (March 2020) is met.

 

Article VIII. Section 3.  Avoidance of discriminatory currency practices

No member shall engage in, or permit any of its fiscal agencies referred to in Article V, Section 1 to engage in, any discriminatory currency arrangements or multiple currency practices, whether within or outside margins under Article IV or prescribed by or under Schedule C, except as authorized under this Agreement or approved by the Fund. If such arrangements and practices are engaged in at the date when this Agreement enters into force, the member concerned shall consult with the Fund as to their progressive removal unless they are maintained or imposed under Article XIV, Section 2, in which case the provisions of Section 3 of that Article shall apply. (March 2020, IMF)

 

They will need to de-dollarize and get the green light from the IMF to go into Article VIII before they can even think of an RV that we all hope for.

 

They can remove all the sanctions they want to from Iraq but until the IMF says okely-dokekily, not gonna happen. Until that time, we wait and hope Sleepy Creepy Biden's shadow doesn't cause 3 more years of darkness on the United States and the World. And Biden retreats back into his tree stump....err... the WH basement.

 

 

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My understanding of the MCP is not Dinar vs Dollar as some say, but it is the different pricing if the dinar in the many provinces and cities.  They need to get the dinar = to a unified price.  Once they give the dinar purchaing power, the Iraqi's will not want to deal in the dollar.  That is my undersanding of the MCP.

Edited by RJG
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2 hours ago, RJG said:

My understanding of the MCP is not Dinar vs Dollar as some say, but it is the different pricing if the dinar in the many provinces and cities.  They need to get the dinar = to a unified price.  Once they give the dinar purchaing power, the Iraqi's will not want to deal in the dollar.  That is my undersanding of the MCP.

Here this should lead you to a better understanding (from the IMF Library)

 

What Does It Really Mean?—Multiple Currency Practices
Author: W. John and R. Woodley
Publication Date: 
01 Jun 1966
ISBN: 
9781616352820
Language: 
English
Keywords: 
FD; F&D; country; government; rate; fund; bank member country; export rate; rate system; rate practice; market rate; buying rate; Imports; Exchange rate arrangements; Multiple currency practices; Middle East; Central Asia; East Asia

Abstract

Many countries in the last 30 years have experimented with “multiple currency practices,” by which different kinds of international transactions are carried on at different rates of exchange. In this article these practices are explained, and the Fund’s attitude toward them is outlined.

W. John R. Woodley

 

THE ARTICLES OF AGREEMENT of the Fund prescribe a system in which the international value of a currency (the “par value”) is fixed in terms of gold, and no transaction in foreign exchange may differ from this rate by more than 1 per cent. But the system is not universal; many members of the Fund have separate exchange rates for different groups of exchange transactions—that is to say, they have resorted to “multiple currency practices.” These practices may be quite simple; for example, in the Philippines until recently there was one exchange rate for major exports and a single free market rate for all other transactions. Or they may be very complex, as in Colombia, where the exchange rates range from about 9 pesos = US$1 to about 18 pesos = US$1. Simple or complex, multiple currency practices are widespread. Their traditional locus is Latin America, but they frequently occur in Asia and the Middle East and occasionally elsewhere as well.

 

But the Fund is opposed to them; their abolition and replacement by a unified exchange system is now, as it always has been, one of the Fund’s objectives. The bias against multiple rates is based upon the lessons of history, drawn from exchange experience in the 1930’s. During the depression years, multiple rates were used, particularly in Germany and in Latin America, as an export promotion device, and this led to retaliation by other countries and to a general environment of exchange instability and uncoordinated exchange rate policies. (For a description of these conditions, see Frank A. Southard, Jr., “International Financial Policy, 1920-44,” Finance and Development, Vol. II, No. 3, pp 135-43.) The Fund issued a general statement in 1947 to all its members, expressing its attitude toward multiple rates. Since that time it has made a number of general decisions, and in these, as well as in its Annual Reports and other public statements, it has urged countries to simplify complex exchange rate systems and to make a par value system effective.

 

Yet in spite of its general attitude, and its efforts to persuade countries that single exchange rates are in their interest, the Fund has approved multiple rate practices for many of its members. Frequently this approval has been on a temporary basis, and the Fund has remained in consultation with the member regarding the practice. Yet the paradox remains, and calls for explanation.

ARGUMENTS FOR MULTIPLE RATES

The following table sets out an imaginary, but fairly typical, multiple exchange rate system. In it, the “buying rates” are the prices that the monetary authorities in the country pay for foreign exchange earned by exporters and others; the “selling rates” are the rates at which the authorities sell foreign exchange, e.g., to importers.

 

In order to understand such a system of exchange rates, we need a reference point or norm. Such a reference point, here assumed to be P 7.00 = US$1, is the equilibrium exchange rate—a rate which would permit exchange receipts to finance exchange payments without excessive use of foreign exchange reserves, without undue reliance on restrictions on trade and payments, and without internal policies inconsistent with the relatively low degree of unemployment.

 

If a country moves away from such a rate, the effects would be similar to those of taxes or subsidies, as explained below. Governments do not necessarily object to this; on the contrary, taxing or subsidizing through the exchange system often appeals to them, particularly to the governments of less developed countries which find it difficult to implement effectively other tax and subsidy devices. Multiple rates have the advantage of being enforceable through the banking system where the officials who administer them are experienced in similar work. Moreover, the rates can usually be introduced and changed by the central bank, whereas a change in import or export taxes usually needs the approval of the legislature, which is not likely to be obtained quickly or easily.

Exchange Rates

(Pesos per U.S. dollar)

article image
View Table

The general way in which a multiple exchange rate system can be used to raise substantial amounts of tax revenue for the government will be apparent from the table. If the average price in local currency that the monetary authority (e.g., the central bank) pays for foreign exchange is less than the price at which it sells foreign exchange, it will make a profit in local currency which can be diverted to the government. For example, if the central bank pays P 5.00 for each dollar it buys from coffee exporters, and sells all these dollars to importers for P 8.00 or P 10.00 each, the profit will be handsome. There are, moreover, other advantages for a government in such a system of rates.

Exports

The case for taxes or subsidies varies with the commodity involved and the particular situation of the economy. In the table, the exchange rate of P 5.00 = US$1 for coffee exports involves a tax in two senses. Coffee exporters receive from the central bank P 2.00 less for each U.S. dollar they earn than they would receive under the equilibrium rate, i.e., the rate which notionally they would receive if there were no multiple exchange rate system in operation. More specifically, as the table shows, they receive fewer pesos for each dollar than do exporters of other major commodities. Governments may favor such a tax on several grounds. By giving exporters a less favorable rate of return, the tax may discourage the production of coffee. It may well pay the country to produce less coffee for higher prices. The tax may also be wanted because coffee growers are a relatively high-income group that may reasonably be called on to pay taxes. Another justification may be that the tax is easily collectible and productive of large amounts of revenue for economic development. Considerations like these underlie the penalty export rates for such products as coffee in Brazil and Colombia and wool and wool tops in Uruguay.

 

On the other hand, since commodities that sell for US$ 1 abroad would on average sell for P 7.00 in the imaginary country to which the table applies, exporters who receive P 10.00 for each dollar earned are being subsidized. Subsidies for certain exports—for example, the rate of P 10.00 = US$1 in the table—are advocated as a means of encouraging new industries, particularly those which process raw materials or develop nontraditional exports. One example of the encouragement of processing industries would be the use of the rate of P 10 = US$1 for exports of powdered coffee. By exporting powdered coffee, a businessman would earn (for each dollar received) twice the amount of local currency that he would earn by exporting unprocessed coffee. Obviously, he would have a powerful incentive for processing coffee beans into powdered coffee.

 

Countries that are themselves too dependent on exports of a few primary products which are subject to wide price fluctuations in international markets are eager to develop new export products; in those countries, special exchange rates (such as the P 10.00 rate in the table) may induce the development of new export products. They may even encourage industries that are currently producing for only the domestic market to expand their output and sell abroad; thus they may achieve the economies of large-scale production. Such considerations have influenced the granting of subsidy rates in the past to manufacturers in countries such as Colombia, Korea, Venezuela, and Yugoslavia, and they are important in Pakistan at the present time.

Imports

Similar considerations apply to the granting of special exchange rate treatment for imports. The import subsidy rate of P 6.00 = US$1 in the table might be used for particularly desirable imports—for example, raw materials or capital equipment needed to foster the expansion of local industry, or essential items in the diet of the lower income groups. Also, government purchases from abroad might be subsidized in this way in order to reduce the impact of foreign exchange expenditures on the budget. These factors were of particular importance in the Philippines prior to the exchange reform of 1959.

 

A tax rate for imports, such as the rate of P 10.00 = US$1 shown in the table, might be used to reduce imports of automobiles, Scotch whisky, and other luxury items regarded as undesirable in a poor country, or to increase the cost of imports competing with domestic production and thus to provide protection for domestic output. Argentina, Indonesia, Uruguay, and Yugoslavia have frequently used multiple rates for these purposes.

Capital Controls and Revenue

A number of countries, particularly in Latin America, have introduced into their multiple rate systems a special market for international movements of capital and other “invisibles” (international transactions which do not show up in customs returns; for example, personal services). Such a market now exists in Chile, Colombia, and Ecuador. In most countries having this special market, the exchange rate has been left free to fluctuate; as a result, the value of the local currency (in terms of foreign exchange) for these transactions has been less than its value for trade transactions. The market is justified as providing a “safety valve,” since both inflows and outflows of capital, which are usually more volatile than trade transactions, can occur without disturbing trading relations. If capital flight develops, the increased demand for foreign exchange in the capital market makes it more expensive to acquire exchange and so acts as a deterrent to sending funds out of the country.

ARGUMENTS AGAINST

Multiple exchange rates, then, have several functions that make them appear as an admirable weapon of government financial policy. However, the Fund’s long observation of the experiences of its members with such rates suggests the opposite conclusion. Multiple rate systems have, in practice, seldom operated effectively either to meet balance of payments problems or to provide the tax and subsidy effects desired by governments. Such systems have proved basically unstable, they have been difficult to administer, and they have frequently disguised problems rather than solved them.

Exchange Rate Instability

Most of the countries using complicated multiple rate systems have been subject to inflationary pressures and to a more or less rapid rise in domestic costs and prices. Such an environment greatly complicates any exchange policy, because the exchange rate has to be adjusted frequently to keep an appropriate relation between domestic and external costs and prices. The difficulties are particularly acute if multiple rates have been adopted for the purpose of providing taxation and subsidy. The underlying monetary instability continually disturbs the exchange system and destroys the function that the exchange rates are supposed to be serving. For example, many countries imposing tax rates on their principal exports, such as coffee, have found themselves paying out to producers, through price support or storage schemes, more than the amount of tax collected through the exchange system. Multiple rate systems designed to produce revenue for the government have sometimes in fact caused large government losses. In our imaginary example, this happens if the number of pesos that the monetary authority earns by selling dollars to importers is less than the number of pesos that the authority has paid to exporters to acquire the dollars. Such a situation occurs if the government, in response to inflationary pressures, depreciates the exchange rate for exports in order to keep them moving (e.g., alters it from P 5.00 = US$1 to P 8.00 = US$1), but does not adjust the exchange rate for imports. There may be a good reason for not adjusting the latter rate. Higher prices for imports could raise the cost of living; for example, to shift the exchange rate for imports from P 6.00 = US$1 to P 7.50 = US$1 would raise the wholesale price of imports by 25 per cent. One of the great drawbacks of multiple rates is that, once they are introduced, decisions about export and import rates can be taken separately. Virtually no one favors depreciation of the import rate (i.e., increasing the number of pesos that importers must pay for a dollar), even though its general effects might be highly advantageous for the long-term development of the economy. On the other hand, exporters are keenly interested in depreciating the export rate. Although problems like these are not inherent in multiple rate practices, these practices do frequently coincide with domestic inflation, and the danger of such difficulties is therefore considerable.

 

A further disadvantage of multiple exchange rates is that there is a high correlation between them and exchange instability. This is partly because the multiple rates are a response to payments difficulties and therefore are likely to require frequent adjustment, and partly because, if several rates of exchange exist, adjustment of one or a few of the rates is less difficult—because it has less widespread effects—than is a change in a unified exchange rate. (Adjustment of a unified rate always involves the government in a careful balancing of conflicting interests, since exporters and importers are then interested in the same rate. Exporters favor a more depreciated rate, to increase the local currency return from exports, while importers and local producers oppose depreciation because higher local currency costs will discourage sales and, at least in the short run, investment in capital equipment.) Now, instability in the exchange rate structure has inherent disadvantages. If exporters believe there is a likelihood that the export rate will be depreciated (changed in their favor), they will be tempted to withhold exports in the hope of securing better treatment. If their product is a major export and traders in this product act in concert, their speculative activities will do so much injury to the balance of payments that it may force the government to allow the relevant exchange rate to depreciate, and thus reward the speculators. Similarly, unstable exchange rates for importers make local producers of competitive goods uncertain of the degree of protection they can count on if they should invest in expanding their plants or building new ones, and thus foster the development of the economy.

Administrative Problems and Policy Dilemmas

The administration of multiple rate practices is far from easy. First, to enforce multiple rates, exchange controls must be applied to segregate various types of transactions. In the illustration that we have been using, for example, exchange controls would have to be used to force coffee exporters to sell exchange at the P 5.00 = US$1 rate. The pressure to evade such controls would obviously be strong. And in addition to evasion, there will be strong political pressures to obtain more favorable exchange rate treatment. If some exporters are receiving P 7.00 for each U.S. dollar that they sell while others are receiving P 10.00, the former group will naturally make every effort to obtain equally favorable treatment; they may easily spend more time on this than on taking steps to improve efficiency of production or to sell more. Many countries have found that the more they differentiate their exchange rates, the greater is the pressure for further proliferation of the rates. This has sometimes resulted in an exchange rate manual as big as a large reference volume.

The use of multiple rates for imports also involves the government in a number of policy dilemmas. One of the apparently more valid arguments for very depreciated rates for luxury imports is that they discourage the import of these articles. These same exchange rates, however, provide abnormal protection for domestic industry and thus stimulate scarce local capital to invest in the production of the luxury goods that would otherwise be imported. A contrary disadvantage arises if favorable exchange rates are provided for imports of essentials. While this ensures their availability cheaply as imports, it means that there is little incentive to produce such goods domestically. The harmful effects of such low rates are accentuated if they apply (as they frequently do) to imports of foodstuffs; the consequential cheapening of food represses incomes and development in the farm community where incomes are normally the lowest, and fosters migration from the farms to the towns.

Some International Implications

The use of multiple rates by a country also has implications for the international community. To use one of the examples given above, a subsidy rate for exports of powdered coffee may achieve its purpose and result in a new industry producing powdered coffee. Such an industry may, however, injure the powdered coffee industry established in another country and lead the government of that country to protest, or even to take countermeasures. In the early 1950’s, there was a lengthy international dispute over the use of different export rates for wool and wool tops in Uruguay, a number of governments arguing that the Uruguayan exchange system was destroying the wool top industries established in their countries. Changes in one exchange rate in a system of rates—for example, a more favorable rate provided for exports of cocoa—may lead other countries to protest that the country introducing this rate is seeking to obtain competitive advantages in the world market. The introduction of international commodity agreements for some commodities has meant that export rates have less effect on their sale; but the possibilities of competitive devaluation of exchange rates are still real and are of particular importance when a number of countries are trying to develop new exports. Another type of international difficulty may arise if a country grants a preferential exchange rate to imports from a second country in order to obtain preferred access to the markets of that country. In these circumstances, a third country that has export products competitive with those of the first may protest against the discrimination created by this special exchange rate because it effectively limits its own export marketing possibilities.

 

This outline of multiple currency practices indicates some of the many complex questions raised by a country resorting to more than one exchange rate. There have been occasions when the Fund has not entered objections to a proposal for a simple multiple rate scheme (i.e., a scheme with only two or three different rates) because the country was unable effectively to introduce a valid single rate. In such circumstances the Fund has been prepared to treat multiple exchange rates as temporary responses to presently insoluble problems, and has been willing to provide financial support to countries with multiple rates, including even fluctuating multiple rates. The Fund has found, however, that in most countries multiple rates sooner or later create as many problems as they solve and that such apparent solutions are seldom lasting ones. The aim of establishing a single rate that provides a uniform price incentive for export and import transactions is still a vital one for both the country concerned and the international community.

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