Analysis by Neo

[GreginTexas]

Revaluation & Inflation – Analysis by Neo from Dinar Speculator 10/14/2011 Inflationary controls in Iraq to date have been managed within a framework of fiscal soundness as evidenced by Shabbi with the currency auctions. This has been a reliable tool to regulate both liquidity and reduce exchange rate volatility as we have seen. As you all know, Iraq is one of the 8 member countries of the International Monetary Fund that has exchange controls governing exchange rate arrangements applying to the Crawling Peg Arrangement . Iraq is also one of the 186 member countries that has exchange controls governing capital transactions applying to direct investment. Ok that being said let’s look at the limitations or the down side of this current Crawling Peg regime in Iraq.

The limitations on fiscal policy created by the crawling peg system became overly restrictive imo when the the rate of crawl could not be set to adjust for measured inflation or other indicators. Gee does this sound familiar. You have to remember that their currency is adjusted periodically in small amounts at a fixed rate or in response to changes in selective quantitative indicators, such as past inflation differentials in relation to major trading partners, differentials between the inflation target and expected inflation with major trading partners. Here in lies the rub.

Ok so now you ask yourself who establishes this monetary framework? The IMF staff assigned to Iraq, provides members countries like Iraq several exchange rate regimes and monetary policy frameworks to provide greater transparency, and well hey they have a vested interest in getting their money back dealing with safeguards over Fund resources on so many levels.

The CBI cannot continue to aim at keeping inflation low, predominantly by maintaining a stable exchange rate in this environment of low level financial intermediation. In the past, the low level of inflation and the relative stability of inflation did not suggest any significant over or undervaluation of the Iraqi dinar as related to the aggregate components of liquidity and isolation from international trade. Now the good stuff. The De Facto Classification of Exchange Rate Regimes and Monetary Policy Frameworks created and administered by the IMF are wide ranging. There are Conventional fixed peg arrangements, Pegged exchange rates within horizontal bands, crawling peg, independently floating and the list goes on. I believe that if the regime should change and is beginning to, they are moving to the Inflation targeting framework.

By definition from the IMF it states:

The Inflation targeting framework involves the public announcement of medium-term numerical targets for inflation with an institutional commitment by the monetary authority to achieve these targets. Additional key features include increased communication with the public</U> and the markets about the plans and objectives of monetary policymakers</U> and increased accountability of the central bank for attaining its inflation objectives</U>.(sound familiar) Monetary policy decisions are guided by the deviation of forecasts of future inflation from the announced target</U>, with the inflation forecast acting (implicitly or explicitly) as the intermediate target of monetary policy.

Relating this approach to what we have witnessed in the media reports and statements from the CBI would in my opinion explain this as a possible transitional element. Can you think of a better environment to introduce a currency revaluation and denomination scheme that builds confidence in their economy?

[Markinsa]

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