The Exchange Rate of Foreign Currency in Economic Feasibility Studies

[trooper]

The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Can someone please enlighten me on this...

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 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 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 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 re-appreciation by the competent authorities.

http://www.mop.gov.iq/mop/index.jsp?...pid=295&lng=en

[Alex38]

I think it means 1.13 dollars per dinar? What is the date on this?

Edited January 5, 2012 by Alex38

[JWJW11]

I think it means 1.13 dollars per dinar?

Thats the way i read it!!!

[Alex38]

Thats the way i read it!!!

where is the date???

[Shick]

SO THIS IS WHAT THE RATE WILL BE FOR THE NEXT THREE YEARS? IF SO THAT WILL BE GREATER THAN GREAT. GO RV GO!

[Alex38]

SO THIS IS WHAT THE RATE WILL BE FOR THE NEXT THREE YEARS? IF SO THAT WILL BE GREATER THAN GREAT. GO RV GO!

WHERE IS THE DATE??? I can't find it!!!

[JWJW11]

where is the date???

Not sure....im on my phone...but it is from the ministry of planning which if i recall at one point listed it at 1.17

[truthful1]

This is about ten years old. its referring to a time when the exchang rate was 3.20. They give a reason for not using the official exchange rate and using a lower rate. hope that helps

[Up North]

WHERE IS THE DATE??? I can't find it!!!

I do not recall the exact date but I read this article atleast 6-9 months ago, so it is pretty old.

[HopefulTxn]

WHERE IS THE DATE??? I can't find it!!!

There's not a date on the study, but if you go back one page to HERE where it explains the study was done as a process of planning the budget, the most recent date listed is 1990. Unfortunately if the study was done at anytime around that period it would be completely useless to use for determining any plans with the current currency, given all the changes that have happened in their economy and banking systems since that period.

[truthful1]

This is about ten years old. its referring to a time when the exchang rate was 3.20. They give a reason for not using the official exchange rate and using a lower rate. hope that helps

I had better change my statement. its at least 10 years old.

[trooper]

Regardless of the date At least we know studies started at $1.13.. It's not the ten dollars everyone is looking for but., it's a start and can only go up..

[HopefulTxn]

Regardless of the date At least we know studies started at $1.13.. It's not the ten dollars everyone is looking for but., it's a start and can only go up..

Regardless of date? Unfortunately the date has a lot to do with the validity of the numbers. Wish there was something that shows this was a post-Saddam study, as it could have more validity as if it is not post-Saddam, it is essentially useless due to the vast changes in policies, banking, etc. since his reign.

[caz1104]

Regardless of date? Unfortunately the date has a lot to do with the validity of the numbers. Wish there was something that shows this was a post-Saddam study, as it could have more validity as if it is not post-Saddam, it is essentially useless due to the vast changes in policies, banking, etc. since his reign.

It's not a negative, its just not realative to the economic situations of today. Things change drastically on a daily basis in Iraq due to circumstance.Best to all

[trooper]

The last sentence in the article stated:

"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 re-appreciation by the competent authorities.

The initial take on this article was that the information was outdated and no longer applicable. The website where the information was found is the Ministry of Planning and Development Cooperation (MoPDC). This agency is responsible for planning and prioritizing development and reconstruction activities in Iraq by providing the technical and management criteria for implementation of the funding. It deals mainly with the donor reconstruction funding and the capital budget. Billions of dollars from the reconstruction fund and other programs have been donated to Iraq for the purpose of reconstruction. In addition, the capital budget has also allocated billions of dollars to be used for capitol projects. To qualify as a major project the cost must be in excess of one million dinar. Examples of major projects are.

Petroleum, gas, mining, energy generation stations and distribution/ transport networks, big irrigation projects, agriculture production, transportation, tourist hotels and resorts, domestic trade such as shopping centers, hospitals, education and universities, etc.

The program that MoPDC now requires for all capitol project planning includes the Criteria for the Assessment of Feasibility Studies and the Central Control Measures for Adjusting Market Prices on Project Inputs and Outputs for all feasibility studies.

Let’s assume that you own a business where you sell a product or service. In calculating your budget you must identify your expenses i.e.: products purchased, utilities, payroll, rents, insurance, taxes etc. The sales price of the products or services is calculated to project an income that provides the revenue to pay the bills as well as provide a profit. I know this is a simplistic version of the process but I am conveying a concept with this example. Let’s further assume that your product or service is now marketed internationally and there is a difference in the value of your money vs. the international currency. If you want to purchase a product that is 100 in international currency, you must spend 300 of your money. What if, however, you knew the value of your money would change? Instead of spending 300 of your money to make that same purchase you would only have to spend 100. Consider also the impact on any contracts that includes payment for purchased products or services or the revenue from the sale of products or services. Any change in the value of your money would make a huge difference in the structure of your budget and contractual agreements.

Adjusting the value of the dinar is exactly what MoPDC has set up in their instructions for capitol project feasibility studies. They have adjusted the value of the dinar for the calculation of the return on investment. They placed that value at one dinar =1.134 dollars. Keep in mind that capitol projects are several years in development starting with the initial feasibility study to the completion of the project. This is not old data, but instructions that are currently being used for capitol project planning.

To quote: “The MoPDC set up central controls for adjusting market prices to assess a project’s inputs and outputs of goods, services and employment, which are used to calculate the net present value and return on investment in the economic analysis. The pricing rule is to evaluate the inputs using the export price FOB (FOB) and convert the foreign currency to its equivalent in dinars using the amended exchange rate.”

This is identified as the shadow price of foreign currency:

To quote: “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.”

Now this is where this section of the instructions for the feasibility study really gets interesting. Instead of a recommendation to increase the value of the dinar, it actually recommends decreasing the value from 1 dinar=$3.208 dollars to 1 dinar=$1.134 dollars. The document further identifies the official exchange rate as $3.208. In other words, they are under estimating the value of the dinar for planning purposes.

"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 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, etc."

It is also significant that the programmed rate from the CBI is not mentioned in any document or section of this website.

[zigmeister]

Trooper I am going to ask probably a dumb question. Is this article implying there are two exchange rates? This is very interesting and I agree it doesn't matter the date it was published, it's the plan for the future. So having said that, it is why the dinar is exchange rate is consistently the same? Or why they controled it all these years, before they brought in the real exchange rate?

Just trying to wrap my head around this.

[HopefulTxn]

It's not a negative, its just not realative to the economic situations of today. Things change drastically on a daily basis in Iraq due to circumstance.Best to all

Exactly. Unless it can be shown that the study is much newer than the oldest date available to us, which is 1990, then the study data is unusable to determining anything on the value of the dinar given the current economic situations within Iraq.

[zigmeister]

My link

My link

[DinarDaddy83]

This is a few years old.

[caz1104]

Exactly. Unless it can be shown that the study is much newer than the oldest date available to us, which is 1990, then the study data is unusable to determining anything on the value of the dinar given the current economic situations within Iraq.

My guess many other studies since then. Conclusions may or may not be different,my guess they would be due to changes.

[trooper]

Feasibility study - Evaluation of a contemplated project or course of action, according to pre-established criteria. (such net present value, internal rate of return, and payback period) to determine if the proposal meets management requirements.

It takes years of planning not just months to start up a government...

My link

My link

Nice find, Never seen that one,

Sorry about the double post.. The study thing was to be a separate post..

Thank you so much

Edited January 5, 2012 by trooper

[zigmeister]

Feasibility study - Evaluation of a contemplated project or course of action, according to pre-established criteria. (such net present value, internal rate of return, and payback period) to determine if the proposal meets management requirements.

It takes years of planning not just months to start up a government...

Nice find, Never seen that one,

Sorry about the double post.. The study thing was to be a separate post..

Thank you so much

Got lucky.

[HopefulTxn]

Feasibility study - Evaluation of a contemplated project or course of action, according to pre-established criteria. (such net present value, internal rate of return, and payback period) to determine if the proposal meets management requirements.

It takes years of planning not just months to start up a government...

I don't think you looked at the page the study is linked from, since the study is not associated with starting a government or anything like that. The study was created because it was required by a regulation passed in 1984, amended in 1990, for determining the annual budget:

In turn, The Guidance For Technical And Economic Feasibility Studies And Post-Project Assessment Of Development Project (Regulations No. 1 for the Year of 1984 and it’s amendment for the year of 1990) has specifies a series of steps to be undertaken, which lead to the completion of a Capital Budget.

http://www.mop.gov.iq/mop/index.jsp?sid=1&id=295&pid=259

Wish there was something that states that the study isn't from Saddam's era, but since the newest date on any of those documents is 1990, it looks like this is from an economic era that no longer exists.

Edited January 5, 2012 by HopefulTxn