The exchange rate in Iraq .. real or not?

[6ly410]

 hours ago

The exchange rate in Iraq .. real or not?

 

 

Hamed Abdul Hussein Al-Jubouri

https://annabaa-org.translate.goog/arabic/economicarticles/30616?_x_tr_sl=auto&_x_tr_tl=en&_x_tr_hl=en

 

 

The exchange rate represents one of the policies that governments can resort to to address an economic problem afflicting the country, as happened in Iraq after 2003 and the last of which was in 2020.

Where the Iraqi government, through the Ministry of Finance and in agreement with the Central Bank, reduced the value of the Iraqi dinar in exchange for raising the price of the US dollar to 1450 instead of 1182 at the end of 2020, for financing (deficit financing), monetary (maintaining foreign reserves) and economic (improving production competitiveness) reasons. national) in the medium term as well as the long term.

The source of the dollar, the state or the private sector?

By virtue of Iraq owning a large oil reserve estimated at more than 145 billion barrels, producing more than 4 million barrels per day, and exporting more than 3,400 thousand barrels per day, in 2020, the Iraqi economy has become an oil economy.

It depends on oil in large proportions, more than 40% of the output and more than 90% of public revenues, and more than 99% of merchandise exports.

The state also dominates over oil, as all dollar oil revenues are recorded in the general revenues section of the budget after being converted into the Iraqi dinar to feed public expenditures.

The neglect of the private sector, due to the lack of an attractive investment environment for national as well as foreign private investment, means a rise in production costs and prices, respectively, a decline in competitiveness and other commodity exports, and a recent decline in the dollar returns of the private sector.

Given the economy's dependence on oil on the one hand, the state's dominance of oil on the other, and the neglect of the private sector on the third, the state has become the main source of dollars in the Iraqi economy.

mechanism

Where the state exports oil through the Ministry of Oil and SOMO in particular, and the Ministry of Finance receives the oil dollar, and since it needs the Iraqi dinar to finance the general budget, it will sell the dollar in exchange for the Iraqi dinar.

At the same time, the Central Bank buys the dollar at a specific price (official exchange rate) from the Ministry of Finance as the main source of the dollar, and then sells it through the currency window in order to satisfy the demand for the dollar and achieve the stability of the exchange rate, which is one of the goals of the Central Bank.

Assuming that the central bank did not enter as a seller of the dollar, at this moment we will notice a significant increase in the dollar exchange rate, due to the increased demand for the dollar to meet imports, and that the main source of the dollar is the state and the central bank buys it from it, and the private sector cannot satisfy the demand for the dollar because it Basically weak, as mentioned above, and therefore the exchange rate in Iraq is not real.

The real exchange rate is determined by the real forces of supply and demand

Because the real exchange rate is determined according to the forces of supply and demand in the market without the intervention of the central bank, meaning that it reflects the reality of the economy, is it a strong or weak economy? Because a strong economy will be able to provide the dollar through its competitiveness, increase exports, and provide the dollar in a way that balances the demand for it.

And the opposite is true, as is the case of Iraq, given the weakness of its real economy away from the state. It cannot provide the dollar in a way that achieves a balance because it loses production, competitiveness and export. Rather, it imports most products from abroad, which means there is an increase in demand for the dollar in order to satisfy the import in exchange for the weak supply of the dollar from Before the real economy, and if the Central Bank did not intervene to provide the dollar in the market, the price of the dollar would have risen to record numbers.

In other words, the Iraqi dinar exchange rate is a price supported by the Central Bank by entering it as a seller of the dollar, providing it in the market, through the currency window, this saving means the lack of scarcity of supply and thus achieving (imaginary) balance because it was not achieved by the forces of supply and demand on the dollar that depend Mainly on the real economy.

Reforming and running the economy

It is not possible to liberalize the exchange rate and leave it to be determined according to the forces of supply and demand for the dollar in order to reach the real exchange rate without working first to provide the drivers of dollar savings in the real economy.

This requires reforming the real economy, by working to increase the contribution of non-oil revenues, increasing the contribution of other productive sectors to the gross domestic product, increasing the contribution of the private sector to the economy, and employing oil revenues in a way that contributes to revitalizing and stimulating the economy.

This reform requires, first of all, fighting corruption, providing an attractive investment environment for private investment in various real productive sectors, and engaging the private sector in investment to be more capable of taking action and investing.

Conclusion

Operating the economy with high efficiency means increasing production at a lower cost, increasing exports, and providing the dollar away from the state, in a way that achieves balance with the demand for it, and here the exchange rate will be a real price because the bank did not intervene through the currency window to achieve balance.

* Researcher at Al-Furat Center for Development and Strategic Studies/2004-Ⓒ2022
www.fcdrs.com

[screwball]

so if russia are pegging their currency against gold and selling oil in ruble, and china, and saudia arabia are about to do the same then Iraq could be close?

[screwball]

8 hours ago, 6ly410 said:

The real exchange rate is determined by the real forces of supply and demand

Because the real exchange rate is determined according to the forces of supply and demand in the market without the intervention of the central bank, meaning that it reflects the reality of the economy, is it a strong or weak economy? Because a strong economy will be able to provide the dollar through its competitiveness, increase exports, and provide the dollar in a way that balances the demand for it.

this is all lies every country is bankrupt and printing money handover fist! If iraq having a string dinar is part of the GCR then this is what will happen! If iraq choose to value their currency against gold as per law and sell oil in dinar like russia, this is what will happen! time will tell!

[screwball]

dont forget with russia doing the gold thing and oil think Iran will also be set to go, their currency was valued against gold and silver and then want to sell their oil for Euro hence the sanctions........Iran said they will be a super power and yes they will! They will however want to sell their oil in rial!!!! price against oil, gold and silver!

[coorslite21]

It is very clear.... asset backed currency is coming.

 

Gold seems to be the "go to" commodity for that....as it has been for 5000 years.....

 

Follow the yellow brick road!    CL