Speculators and exchange rate stability

by **claud39** Sun Jun 06, 2021 10:17 am

Speculators and exchange rate stability

06/06/2021

* Sameer Al-Nusairi

Several days ago, a new wave of criticism began from some media outlets affected by rumors launched and driven by speculators in the currency exchange market with the aim of creating a state of confusion and instability and trying to drag the money market into instability and thwarting the Central Bank's plans to control the rates announced by the Central Bank of exchange rates Specific to the Ministry of Finance, banks and the public, and from these rumors is that the Central Bank will make a new change to the current rate.

Although the stability of the exchange rate is determined by supply and demand according to the effects and repercussions of the economic reality in a country like Iraq that suffers from challenges, repercussions, economic and financial crises, and structural and systematic defects in the management of the economy and money that the central bank does not bear alone because its role is clear, specific and independent focused on stimulating the economy according to the tools and applications of monetary policy But this cannot be achieved without joint coordination with fiscal policy and other economic sectors, activating the real economy, diversifying sources of national income, and leaving the unilateral economy based on oil as a major resource, which constitutes 93% of the revenues of the general budget and 57% of GDP.

Therefore, those who criticize the Central Bank must return to the statement of the Central Bank in which it determined the new exchange rates on December 2020, and in which the Bank clearly and transparently specified the reasons and rationales for determining the price, what measures it will take and what other parties must take in order to maintain the stability of the new rate Because the bank cannot work alone without a coordinated economic and financial approach supported by the Central Bank in accordance with the tasks and objectives stated in Law 56 of 2004, and here we can repeat what was mentioned in the Central Bank’s statement, which is the definitive answer to those who hold the bank responsible for the instability in the exchange rate

Where the bank announced in its statement that during the last months of 2020, intensive deliberations took place with the Prime Minister, the Minister of Finance and the legislative authority, regarding the economic situation in general and the financial crisis that the public finances are going through due to the decline in oil prices and production, and the economic and health challenges.

The Board of Directors of the Central Bank also held a number of meetings, some of which hosted the Minister of Finance for the same purpose. He explained that the reasons for adjusting the exchange rate and maintaining its stability in the future are as follows:-

1- It is the structural distortions in the Iraqi economy that have impoverished public finances and restricted the ability of reform that the government and the Ministry of Finance are seeking.

It is not a coincidence that the financial situation is so bad, but it took root more than a decade and a half ago due to the political leadership of the economy, the priority of political thinking over economic thought, development priorities and the rules of the relationship. Thus, fiscal policy failed to perform its roles, and monetary policy was preoccupied with restoring the confused financial policy outcomes.

2- The dependence of economic and financial policy on the ambitions and concerns of politicians led to the latest accepted models of financial management in Iraq, and the role of that administration was limited to distributing oil resources to life-sustaining requirements such as salaries and operational requirements.

3- Because of these combined conditions, the Central Bank had no choice but to intervene on more than one occasion to support public finances and save critical public spending requirements.

4- The Central Bank understands the difficulties facing the government’s reform intentions, but this does not prevent it from tying any steps that the monetary authority can take to effective steps to carry out reforms that inevitably affect the institutions of the financial authority, especially the effective collection institutions, customs and tax institutions, and other institutions. The other public levying, and that spending be streamlined and rationalized, all of which depends on the political will of the higher state institutions that support the financial authority’s directions to achieve this.

This requires the government's direction to support the vulnerable groups, which will inevitably be directly affected, especially by any measure to change the exchange rate.

5- The legislative authority will have an important role in supporting the Central Bank’s direction to adjust the foreign exchange rate, as failure to take such a decision may make us obliged to take difficult decisions that may put Iraq in a situation similar to what neighboring countries have been exposed to.

It should also be emphasized here that this change (devaluation) in the value of the Iraqi dinar will be for one time only and will not be repeated.

6- The financial crisis that Iraq was subjected to due to the Corona pandemic and the resulting deterioration in oil prices and the decline in oil revenues, this led to a large deficit in the general budget and the Ministry of Finance had to borrow from banks and re-discount them with the Central Bank in large amounts, for the purpose of paying salaries. And meet the other spending needs related to services provided
to citizens.

* Economic and banking consultant

https://economy-news.net/content.php?id=25301