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The prospects for economic conditions in Iraq under the global recession - an early vision
First, preamble :
Looking forward to the country's economic map shows that it is still under the profile of the oil rents isolation and its contraction from the joints of macroeconomic activity and the possibility of this decline continuing for more than a year or years, to drag the country into two different scenes according to the approved economic (financial, monetary and commercial) policies that will be addressed later .
As Standard and Garter International Bank warned, for example, not limited to, according to its recently published studies, predicting that the Iraqi economy will witness a contraction of about 7.5% in 2020 as a result of the agreement (OPEC +) and the repercussions of the price war in the oil markets and the corona wounds that are currently hitting the country. As the aforementioned bank had previously predicted positive growth of Iraq of (+2.1 percent) for the year 2020 at least, and there are other expectations that estimated that growth with more optimistic conditions to reach (+ 4.7 percent) in the current year according to the expectations of Fitch International .
The World Bank has already built its forecasts for the Iraqi economy on the basis of its oil exports, local currency exchange rates against the dollar and non-oil imports .
“Our classification (of the Iraqi economy) was based on both the signing of the (OPEC +) agreement and the trend towards a deeper recession in the non-oil sector in light of the turmoil related to Corona or others .
The aforementioned bank also raised its expectations regarding the budget deficit and the current account of the balance of payments to 13 percent and 11 percent of GDP, respectively, after it had previously expected it to be 10 percent and 8 percent, respectively.
And that bank was more likely to face difficulties in facing the prolonged decline in oil prices without external support, as claimed .
Second, potential economic policy .
There is no doubt that the early caveats of what the macroeconomics will lead to external financial stress tests or the current account deficit of the balance of payments in relation to GDP and the variation of other pessimistic forecasts in this regard in the year 2020, which the maximum (i.e. the current account deficit to GDP) increased by 16 percent Due to the deterioration of oil revenues, and this is linked to the deficit of the public budget and the emergence of twin deficit, that is, the internal deficit in the general budget and the external deficit in the current account of the balance of payments simultaneously. Thus, there are two scenes explaining the possible economic policy of Iraq in the circumstances of the international recession, namely :
: The first scene
Finance inflation Inflationary finance
Addressing the conditions of economic stability in this scene will be very complicated in light of the decline in annual GDP activities to the level of growth (negative 5%) as most studies expect and the annual population growth to (positive 2.6%). If fiscal policy resorted to adopting the expansionist doctrine In government spending (i.e. financing the fiscal deficit and according to cheap cash policies) with a continuous deterioration in the current account of the balance of payments, accompanied by following monetary policy flexible measures in maximizing the liquidity of the economy and enhancing its levels.
The way Seal liquidation continued in the internal public debt instruments usual Treasury Khawwalat and others, the expected economic prospects will indicate in this scene to get runaway inflation hyper inflationWith two decimal places, either expressed in the general level of prices or inverted, and we mean the deteriorating purchasing power of the monetary unit and the birth of a parallel exchange market leading the prices that control the price path of the country.
The central bank reserves will then decline as a way to defend the constant stability of the exchange rate by being nominally fixed . nominal anchor. Then, the parallel market, as we mentioned, will lead the price leadership as an alternative to the intervention of the central bank and once again show the dominant (commercial) forces that generate (for inflationary expectations) and the drivers of price turmoil. The acquisition of profit opportunities and harvesting the economic surplus, by using pass through toolsAnd turn it into the gates of the national economy through an upward inflationary movement .
The second scene or the second scenario
Financial dripping method
It is the austrization approach in managing the public budget and public spending and ridding it of a large deficit that is outside the bands and international practices (which depend on narrow limits to the deficit in the public budget that does not exceed 3% of the gross domestic product). The Central Bank Law in force includes interference in the money market and secondary markets in buying and selling different financial instruments.
We believe that this approach will generate stagflation .Inevitably and its beginnings are that unemployment jump to double limits (greater than the twentieth rank for the current unemployment levels which currently stands at 18%). Prices of imported or foreign goods will become inflamed due to the difficulties of financing foreign trade in foreign exchange, and there is an apparent scarcity of foreign goods and services that will remain scarce. High value and linked to inflationary expectations (which may be launched by the parallel market) about weak demand in general.
Nevertheless, inflation will witness gradual growth, but it will be slower in its decline than was diagnosed in the first scene and for two reasons, first, that the continued scarcity of domestic liquidity b The majority and fear of unknownty uncertainty among individuals will generate a liquidity trapsAnd keeping the cash will be a broad case consistent with the economic stagnation but accompanied by inflated interest rates that are proportional to the liquidity traps, which are the near-real interest. In a prosperous rentier economy, in the short and medium term in the least, and for example, agricultural activity, whose inputs will remain dependent on foreign supplies and are very expensive unless they receive wide support from the state ??? .
This necessitates extreme caution towards radically reviewing the budget structure and avoids the country resorting to the risks of excessive financing with a deficit to support the operational budget budget through borrowing or external borrowing or resorting to more flexible internal borrowing.
Financial indicators of debt bearing capacity still confirm that the ratio of debt to GDP is about 56% and that what we call him , is not a call for austerity but there is a call for the re - engineering of the Iraqi public finance and set aside the general budget equation of the so - called fragile budget constraints - the problems of soft budget constraintsIn which spending has become smoothly through the expansion of government advances, overdraft and borrowing in the hope of obtaining possible quick government revenues.
All of them are from good government customs in the history of the Iraqi public finance in the last forty years, and inevitably help to accumulate debt and expand the deficit in public revenues what The issue of fiscal consolidation loses its basic manifestations, such as reducing the gap in the deficit in public revenues or reducing the amount of accumulation in public debt. In other words, the country's financial construction loses the potential for sustainability to achieve the overall macroeconomic and social goals. Rh ..
In conclusion, we see and certainly that even in light of the scenario of distillation or fiscal austerity and the extent of the total economic contraction, the priorities of economic policy will remain constant support, especially for the agricultural sector producing food security, as well as to secure the humanitarian and necessary needs in the minimum through international cooperation and its financial leverages inevitably .
(*) Academic Economic Researcher, former Deputy Governor of the Central Bank and financial advisor to the Iraqi government
Quoted from the Iraqi Economist Network
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