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The Exchange Rate of Foreign Currency in Economic Feasibility Studies

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Post by Ponee Wed Jul 20, 2016 1:37 pm

The Exchange Rate of Foreign Currency in Economic Feasibility Studies

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?sid=1&id=308&lng=en

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Post by GypZ Wed Jul 20, 2016 1:52 pm

How old is this article? Ponee ? Do you know?
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Post by Ponee Wed Jul 20, 2016 2:49 pm

It isn't an article.  It is a page from the Ministry of Planning website.  But, I think it has been posted quite a while.  I do not believe it is very current.  I can't find a date.

The date of the website being created is 2012



http://www.mop.gov.iq/mop/index.jsp?sid=1&id=308&lng=en

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Post by GypZ Wed Jul 20, 2016 2:50 pm

Thanks i clicked on the link.I cannot find a date either say what?
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Post by Ssmith Wed Jul 20, 2016 4:22 pm

It was being discussed in 2012 and thought to be at least 10 years old at the time.

http://dinarvets.com/forums/index.php?/topic/98574-the-exchange-rate-of-foreign-currency-in-economic-feasibility-studies/

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Post by GypZ Wed Jul 20, 2016 5:18 pm

Thought to be 10 years old is only a assumption "Mmm" Thank you ill stick to facts!
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Post by Sam I Am Wed Jul 20, 2016 7:02 pm

It was originally written in 1984 and revised in 1990.  It's talking about the old Saddam dinar when the official value was $3.20 and the recommendation was to lower it to $1.13.  Gurus tried to use that to say that they're going to RV to 1.13 or 3.20 but it has nothing to do with the IQD.

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Post by GypZ Wed Jul 20, 2016 7:09 pm

WRITTEN IN 1984,but it is still up there on their web site ? That raises A question of why?My point is if it is indeed as old as you say .Then why is it even up there,at all?
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Post by Kevind53 Wed Jul 20, 2016 7:29 pm

Yes things that make you go hmmm .... I'm pretty sure this has been posted before at least a couple of years ago.

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Post by Sam I Am Wed Jul 20, 2016 7:36 pm

Hey, it's Iraq.  No idea.  I wondered that myself when I first saw it, but if you click at the top where it says Planning Budget it takes you back a page in the URL path.  There the second paragraph reads "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."  Then you click "The Exchange Rate of Foreign Currency in Economic Feasibility Studies" to take you back to the feasibility study.  If you think about it, it states that the official exchange rate is 3.20 but the IQD has never been worth more than .00086 so it's obviously not talking about the IQD.

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Post by GypZ Thu Jul 21, 2016 7:38 am

PRETTY STRANGE ACTUALLY! say what?
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Post by tawney Thu Jul 21, 2016 5:20 pm

Also from that site....different exchange rates for arab countries...

Additional Foundations and Standards in Economic and Complementary Feasibility Studies

(Additional or complementary standards that are required to be used, that take into consideration the specificity of the distinguished concept of the overall economic development process adopted by the country).
 
As much as the matter is attached to the method of evaluating projects, the specificity of the distinguished concept of the overall economic and social development process including the standards connected to the national dimension for investments, the country’s standards and long-term strategic objectives linked to food and national security, strategic industries, transportation projects and joint Arab projects, can be identified as following:
 
1.        Socialist sector is a leading sector.
2.        Get the economy from a single economy to an open economy.
3.        Contribute to strengthen the country’s military force.
4.        Fairness in spatial distribution of investments.
5.        Achieving further steps towards the security of Iraq and the Arab nation.
6.        Technological development and technology transfer.
7.        The Iraqi economy is part of the Arab economy heading towards integration with it to the maximum limit.
 
The focus must then be aimed at achieving this concept of development practically, through transferring the above-mentioned definition to a set of rules that can be applied in the evaluation and comparison of projects, and the access to the required rules will be gradual and through [illegible] seven points above, as following :
 
1.      The Socialist sector is a leading sector: this means that the allocation of investments in a manner that would make the socialist sector a leading sector and capable of directing national economy as a whole, by economy means and in the  direction desired by the state which comes from the size of production sectors held be the socialist sector and types of production divisions it owns, therefore following foundations must be adopted:
 
a)     There are no non-economic restrictions on investment in the socialist sector, for that the responsible entities should not avoid accepting any project that is economically viable under the evaluation standards adopted in these instructions in the socialist sector.
 
b)     There is a minimum investment limit done by the state and affiliated entities in each division of the economic activity divisions and the plan assigns the volume of this limit, and commits concerned entities each according to its specialty by arranging proposed projects that compete under evaluation standards adopted to ensure this level of investment.
 
c)     There are some divisions that are exclusively left to the socialist sector.
 
 
2.      Moving the Iraqi economy from a single economy to a diversified economy, this principal is a general development one that means expanding and diversifying the divisions of industry and increasing agricultural production towards creating new sources of foreign currency. And reducing dependency on importing and creating new streams for financing government expenditure. There are paths for development that urge reaching the desired objectives in this regard by making the hub of economic activity local as much as possible. The assessment methods (traditional) greatly help in selecting a group of projects that strengthen the trend toward diversifying the Iraqi economy, projects with a higher rate of return in industry and agriculture make the production rate in the non-oil commodity sector to the total gross national product higher, and when using shadow prices especially for foreign currency the higher rate of return for these projects is attached with higher compensation of imports or increase of exports of non-oil source, or both.
 
In addition to the above this trend can be strengthened by making the minimum required return in production activities of production machines in particular, and industries with innovative technologies less than the rest of the activities. This action is as considering the shadow price of the foreign currency made available through compensating imports or diversifying exports in the basic and heavy industry divisions higher than in other activities, which will increase national economy integration with itself.
 
3.      The economic development to contribute in strengthening the Iraqi military force: this goal also reflects on the evaluation mechanism and that is in reducing the minimum required return in divisions that produce military supplies or help in the producing them, as well as in projects of military uses.
 
4.      Fairness in spatial distribution of investments: preparation of the investment budget in away that ensures reducing disparities between developed and less developed areas in the country. It is known that any evaluated group of projects will be at the end listed in the annual investment plan budget and in the five-year investment plan, and the evaluation is done according to technical methods that become known. As indicated by these instructions. There are also methods for budget preparation that substance is selecting optimal group of projects within the imposed restrictions, the fairness in spatial distribution of investments between areas can be considered another restriction to be added to the restrictions that is fixed beside the objective indicator when preparing the budget. For example, the process of budget preparation is described: selecting a group of projects that make the net present value as high as possible with adhering to several restrictions for example: the total investment amount allocated for all purposes is not more than a certain amount. And the average investment per capita in each province is not less than 50% of the average investment per capita labor required for the implementing projects in the first year of the plan is not more than...... The foregoing means that the evaluation of the project must become part of a wider system which is the evaluation and selection of projects and the budget preparation.
 
5.      The development seeks to achieve further steps towards achieving food security for Iraq and the Arab world: and in this area are different kinds of grains of necessary agricultural commodities that development in Iraq and the Arab world should seek self-sufficiency from and be partial to investment projects that promote grain production. Grain shadow price requires – average dunum yield in the world / average dunum yield in Iraq x CIF price in foreign currency (it is converted to the local currency by multiplying it with the shadow price of the foreign currency).
 
6.      Technological development and technology transfer: as technology in the production method and technological development is the evolution in the production of earlier goods and services, or to develop new products, it will be all expressed as costs and revenues. The assessment methods (traditional) ensure calculating the economic impact of technology for that. But there is an impact of technology thst is not calculated in the project evaluation process which is the dissemination of experience and new skills and these should be considered as imports compensation of skill and foreign expertise is added to net revenues of the project. As for the effects of technology on the environment they should be viewed from two angles: first, the costs of cleaning up the environmental contamination caused by the project technology and these are added to the cost of the project itself if it involves equipment or treatment followed by the project. Second, when preparing the budget constraints add appropriate environmental conditions at the district level, which ensures no to select a group of projects that contradict the minimum terms, whatever the their returns are.
 
 
7.      The Iraqi economy is part of the Arab economy heading towards integration with it: this principle can be addressed on two fronts first joint Arab projects that should accept the plan where the average return on investment in it is lower than in country projects of similar divisions. Second, the country projects that import inputs or export product to and from other Arab countries. And to strengthen Arab economic integration under the project evaluation mechanism frame, the shadow of foreign currency required to import raw materials from the Arab world is less than that what is used for importing from foreign countries. In return, the price of the shadow of foreign currency, which is aggregated from exporting to the Arab world, is higher than that used to export to other countries. This procedure gradually reflects on projects that promote Arab economic integration. This action may have a positive measure that pushes for similar conduct in other Arab countries.

http://www.mop.gov.iq/mop/index.jsp?sid=1&id=309&pid=295

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