Float the Iraqi dinar

by **Ponee** Wed Aug 17, 2016 12:15 pm

Special - NEN Iraq

"Floating" instrument of monetary policy tools countries, used only with currencies that determine the value of governments, be left to other factors not.

The flotation is different from the "devaluation", which is determined by the open market on the basis of supply and demand.

And reverse flotation connectivity, Currencies pegged against major currency or basket of currencies are floated through the "decoder" linkage partially or completely.

The currency devaluation Fksh high value, as it happens for major currencies in free markets like the US dollar or the euro or other. As the value of those currencies rise or fall in the market according to supply and demand, and the strength of the fundamentals of economies they represent, and the actions of speculators in the currency markets.

For example, China has linked its national currency, the yuan to a basket of currencies and the US dollar, essentially, it is under pressure from the West to lift this link and let its currency to rise worth or fall based on market factors, which means that "float the yuan."

Indeed, China has recently resorted to float its currency against the dollar, in response to criticism during the American presidential campaign of the policies of China's cash and its impact on trade with America.

Float the Iraqi dinar

I suggest the economy and banks Rahim al-Adli expert on the Central Bank of Iraq and the government "unrestricted flotation" Adoption in the auction currency instead of "limiting factor" that determines a fixed exchange rate to the dollar price, trying to keep it fill the market need of hard currency, but officials at the bank argue the latter to undergo economic variables and the movement of the market, noting that Iraq's cash reserve covers the needs of the private sector in foreign currency, as well as the currency bloc, the Iraqi dinar by 160 percent.

Adli explained, "There are three ways to deal with the central banks of hard currency; the first is made up of" limiting factor "to be adopted by the CBI, which includes a fixed exchange rate to the dollar, and inject dollars into the market to maintain the stability of the price.

The second method is called "flotation", explains al-Jubouri as "thumb market is controlled exchange rate," noting that "this way pose a threat to the exchange rates, being exposed to the collapse of the Iraqi dinar."

The third method involves a "flotation orbit," or restricted, according to al-Jubouri, the "Select a certain price for the dollar, and another represents a maximum him, to leave that currency floats between these two prices."

Banking expert continued that if exchange rates exceeded the maximum the central bank to pump quantities of the dollar as needed for the domestic market, noting that his committee suggested the central bank and the government to adopt this way "being the best, and supported in most countries of the world."

On the other hand saw Observer of money market auction CBI Hamid Salim said the bank is trying to maintain the stability of exchange rates, adding that the monetary policy and instructions, "according to the economic conditions faced by the country are changing."

And see world oil prices since the middle of last year continuous decline, due to the use by some countries to increase Marodha against the lack of demand for it.

He says the bank's cash reserves fell to $ 60 billion due to falling crude prices, but he assured that this decline does not threaten the collapse of the local currency, "being blocked 160 percent of the money supply of the Iraqi dinar."

The governor of the central bank on the Keywords may Hoon earlier fears, which says that the continued downward pressure the Iraqi dinar, which sells "the central bank" for banks and dealers who obtained the licenses at a price fixed in 1166 dinars to the dollar.

"If we look at the markets these days, we will see that the price is very stable, and very reasonable."

The local currency plunged to about 1400 dinars to the dollar on the parallel market in mid-June 1228 from the week earlier.

As part of the government's efforts to bridge the budget deficit, Baghdad marketed the first version of its international bonds in nine years in Europe and the United States this week.

The government Taml collect six billion dollars of those dollar-denominated versions, but Keywords said that the first phase will be to collect two billion dollars, and the expectation that the interest rate exceeds the eight percent because of security concerns.

Baghdad also plans to issue local bonds worth five billion dollars, starting from the last quarter of this year.

The effect of flotation

The float of the dinar that reduces pressure on the central bank in relation to the size of the foreign currency reserves, but this factor in the overall economy is not so much important, but more importantly that the devaluation of national currency as a result of the flotation will lead to increased exports.

Products are Iraqi will become much cheaper in foreign markets (because of the Iraqi dinar depreciated significantly against the dollar and the euro, etc.) and thus become more competitive.

In contrast, imports will become much more expensive, and then it will be difficult for Iraqis to buy a lot of imported goods to rise in prices of hard and this consequently will increase the consumption of local goods and the increase of the domestic economic activity

But the disruption of exports and imports features often leads to the so-called "collective doubled demand", which in turn leads to higher inflation, and, of course, according to theoretical calculations, "he wrote the economy."

But add to that that the proportion of "parallel economy" (ie, that is outside the book) in Egypt is almost equal to the proportion of the informal economy, which means that the real inflation rates will be much higher than is caused by the collective demand doubled, may mean further impoverishment of the poorer classes already in the community .

Forms of flotation

Either be floating or purely be directed:

- Pure flotation: are left to determine the exchange rate to market forces and the mechanism of supply and demand in full, and the state refrain from any direct or indirect intervention.

- Flotation prompt: is left to determine the exchange rate to market forces and the mechanism of supply and demand, but the state intervenes (via the central bank) as needed in order to guide the exchange rates in certain directions by influencing the size of the offer or demand for foreign currencies.

Supporters of flotation

For as long as theorists monetary school defended in economics (Milton Friedman model) for floating currencies, claiming that the liberalization of exchange rates will make it reflect the economic fundamentals of the various countries (growth, trade balance, inflation, interest rates), and will lead it thus to restore the balance of relations and business accounts of current transactions continuously and automatically.

And they see these economists, like the neoclassical trend in the economy, that the liberation of all prices -osar goods and services, interest rates, labor prices (wages), foreign exchange rates (exchange rates) - and leave the identified markets without any interference or direction from the state, always ensures access to state of balance.

This stems from the belief in blind efficient markets, despite the fact that economic reality has proved more than once that the markets in the absence of oversight and control lead to disaster (subprime mortgage crisis in the United States model).

And justify those convinced the currency float, saying that any trade deficit will lead to an intense demand for foreign currency, which will lead to devaluation of national currency against foreign currencies, and thus to enhance the competitiveness of the country concerned.

This sponsor, they say, increase exports and reduce imports, Viatdl so the trade deficit is due to a state of balance. The same logic works in reverse direction if there is a trade surplus.

Supporters of the flotation was welcomed very much the adoption of major economies in the world to systems of floating exchange rates (flexible), after the collapse of the Bretton Woods agreement in the seventies of the last century, which had been laid down by the International Monetary system based on fixed exchange rates (but adjustable) between currencies.

Disappointment

After several decades of the adoption of a floating exchange rate systems and disseminated to a large number of countries around the world (including developing countries), the currency was floated promises rebalancing has been done to the trade balances of the world, the hopes of his supporters did not materialize.

Artificially low exchange current moved far from the supposed level that leads to a balance, and the biggest proof of that is the size of global imbalances (Global Imbalances), which reached record levels and still are resistant to treatment.

The United States and some European countries as well as many developing countries known as the case of a structural trade deficit for several decades. In contrast, China, Germany, Japan and oil-exporting countries known as a trade surplus structurally.

Instead of floating currencies that ensures a rebalancing of international trade relations, the world knew the case of monetary instability due to the continuing exchange rates and fluctuations big change, which is sometimes subject to any rational logic because of the psychological factors that frame the movement of global speculators.

Equivalent to float the currency we could call the free exchange rate system Free or flexible exchange rate system, which is under which system the central bank of the state to leave the exchange rate (exchange) currency local (dinar) in foreign currency (dollar) is determined according to the trends of demand and supply on the dollar, if the increased demand for the dollar in the foreign exchange market (dollar market), the dollar exchange rate tends to rise, and if the demand for the dollar has fallen, the dismissal rate tends to drop.

This means that the dollar exchange rate will be subject to waves of demand and supply of them, so it was on this system Floating float the currency, which let a floating currency value rise and fall with demand and supply waves.

And it is preferred to follow the float currency policy in weak economies or unstable due to the lack of equal competition between the local currency and foreign exchange in the market and the weakness of the industrial structure and the lack of tradable goods for export and the provision of foreign currencies increases the complexity of the issue.

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