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In light of the current economic conditions accompanied by government confusion in managing the file of monetary and financial policies in Iraq, the issue of devaluation of the currency, which is to reduce the price of the Iraqi dinar against the US dollar and other currencies, has emerged in a deliberate and deliberate manner, noting that this differs from the change in the exchange rate that is subject to For the supply and demand process in the currency markets.
Engineer Abdel-Saheb Al-Darraji
I came across a period ago on a study prepared by the Central Bank regarding this subject, and after scrutiny of this matter and many discussions with experts and specialists, and my belief in Iraq’s need for such economic solutions at the present time, I decided to clarify a realistic point of view that might contribute to crystallizing a certain opinion of the decision-makers on this. Matter. In normal circumstances, this type of solution should be the last medicine, but unfortunately the mismanagement of the country's economy, the absence of economic doctrine, the continued dependence on oil as the only source and the exploitation of the economy as an electoral tool led to a near collapse in the economy whenever the price of oil decreased, and the failure of successive governments to support the product The industrial and agricultural national pushed the professionals to resort to this kind of thinking.
I may agree with the study conducted by the Central Bank in many points, which talks about the need to find economic solutions other than the devaluation of the Iraqi dinar, but through experience and extrapolation of the Iraqi political situation, I do not see on the horizon any ability of the owners of the solution and the contract to bring about a radical economic change due to the lack of To truly understand the problem in Iraq and look at it from a single perspective, which may be factional, partisan or personal. Therefore, my article will focus on this to discuss the paragraph of devaluation of the local currency vis-à-vis foreign currencies and respond to the factors that affect or are related to the reduction process. In order to inform the subject from all sides, the factors associated with this reduction must be discussed, and the most important of these factors are:
First : the balance of payments
I do not think that Iraq has a strong position in the balance of payments because Iraq's exports are oil only and by 99%. If we increase or eliminate the value of exported oil and calculate the balance of payments without it, Iraq's position will be very negative. It is worth noting to discuss what was stated in the Central Bank's study about its surplus rates in the balance of payments, which were estimated at 5.75% of the GDP for the year 2019, On the one hand, with regard to including the balance of oil exports or not, and the change in this balance due to changes in world oil prices, on the other hand, a real and important question is discussed, which is how to calculate the gross domestic product in Iraq? What is the percentage of the value of oil exports in it? This question also applies to the percentage of foreign reserves available in Iraq, which is estimated at $ 70 billion, which represents 30% of the gross domestic product according to the study. Here, the same problem lies, which is how to calculate the GDP, and thus how to calculate the adequacy ratio of the reserve according to the International Monetary Fund or other traditional measures. ,
Second: Consumer Prices
There may be an impact of the devaluation of the Iraqi dinar on consumer prices, but there are many positive aspects in this framework that can be used and transformed this challenge into a real opportunity to build an economic doctrine that fits the current political and social situation.
The percentage of imports in Iraq is very large and the annual rate of the amounts of hard currency that go outside the country for the purpose of import is estimated at 48 billion dollars annually, and in the case of reducing the price of the dinar, these imported materials will be worth more in Iraqi dinars than their current value in the local market, which will lead to a decrease in demand On it, and here is the case for refuting all the allegations that expect an exaggerated high cost of living due to the devaluation of the Iraqi dinar because this reduction must be accompanied by a set of economic measures that are supportive to it, the most important of which is controlling the prices of the value of food and fuel. Importing them, which is one of the factors that ruin the country's economy, can be treated and accepted a certain increase in the prices of some unnecessary luxury items.Here we say that the egg and chicken base must end in Iraq, meaning should we do local industry in order to stop the import or stop the import in order to encourage national production? I think that the time has come to break this rule and for the state to put an end to imports in order to encourage production and because capital is cowardly and factory owners will not risk their money in order to provide a material that has no market or no consumer or foreign producer competing at a lower price, and the state must be firm and legalize import In order for the factory owners to be able to produce and make the local product competitive, it is worth noting that there will be a specific period of time during which some products are less available in the market, but I think that the national product will soon fill the void and we will start a new phase of the Iraqi economy.
Third: the level of inflation
Iraq is currently not suffering from any rise in the basic level of inflation; Therefore, the effect of reducing the scale of devaluation on the level of basic inflation will be limited, meaning if we reduce the currency by 30%, the prices of some luxury items will increase by 12%, and this price increase can be addressed by moving the economy even if we have to increase nominal salaries and move the economy wheel by pumping Cash on the street to move some industrial, agricultural and construction sectors.Fourth: Increasing economic growth and trade
The study prepared by the Central Bank on the impact of currency devaluation on increasing trade growth showed that the relationship between devaluation, trade balance deficit and stimulating the national economy is a conditional and specific relationship with factors including:
- The extent of the national productive capacity, technologically, financially, or humanly, to manufacture the same goods imported from abroad with comparable quality and at competitive prices, and to replace national products.
B - The extent of price flexibility of exports and imports, meaning the extent to which the demand for exports and imports responds to the price change resulting from the change in the currency value.
I think that Iraq can achieve a return from this reduction in this framework, which we mean by the framework of growth and trade, because Iraq's exports are limited only to crude oil, the depreciation of its currency may increase its exports of other materials that encourage the national product, whether industrial or agricultural, to increase its production, specifically some Exportable materials in order for there to be new non-oil dollar incomes that can be used as a hard currency to increase the homeland's domestic product.
Also, this reduction will increase and strengthen the local Iraqi industries to be able to compensate for imports. Therefore, reducing the value of the Iraqi dinar will reduce a large percentage of imports and preserve hard currency. Those coming from selling oil inside Iraq and transferring these sums instead of taking them outside the country through the currency auction to pumping them into the local market to move the wheel of the economy.Fifth: The effects of reduction on vulnerable social groups
It is also known that the number of employees and retirees who are dependent on the government for their incomes covered by the social protection network is about 6 million citizens. The negative effects of this reduction on the purchasing power of this group are limited because the reduction procedures will be with measures to support the ration card and an increase in the salaries of the lowest job ranks and grants for the social welfare network.
At the same time, the state must act as a merchant of foodstuffs, meaning that it imports foodstuffs or provides them from local production, stores them and pushes them to the market at any time there is an intentional price hike or a certain monopolistic process, and thus there will be food security for these vulnerable groups and the state also works. On subsidizing fuel and medicine, directing the general budget to the ration, medicine, water sterilization and infrastructure.
As for other luxury goods, there is no harm in accepting the high price of some non-essential items, for example, the mobile phone by 12%, or the increase in the price of perfumes, for example, by 12%.
On the other hand, I do not think that this reduction leads to an increase in government expenditures in general, but it may lead to an increase in the expenditures of the ration card, which does not represent 3% of the total budget of the country, and at the same time you can benefit from the increase in revenues in Iraqi dinars in operational and investment expenses Another rate of up to 25%, for example, if the dollar becomes 1500 Iraqi dinars.
At the same time, this reduction will have positive effects on the transfers of expatriate citizens from abroad to their families, so that the value of what they transfer from hard currency into Iraq is greater than the current value, and this leads to a treatment to put a certain group in front of the potential relative cost.Sixth: The impact of the reduction on the public debt
Iraq's foreign debts in foreign currency amount to about $ 23 billion (excluding pre-2003 outstanding debts amounting to $ 41 billion). As for domestic debts in dinar currency, they are up to 40 trillion Iraqi dinars, including treasury transfers and bonds, and since 95% of the general budget depends on oil imports. It is sold in dollars, so the foreign debt will not be affected, negatively or positively, by reducing the price of the Iraqi dinar, as it is dues paid in US dollars.As for the domestic or domestic debt, certainly the reduction in the price of the dinar will have a positive effect in favor of the state, as the value of the domestic debt against the petroleum dollar, and if the top of the internal debt of 40 trillion is currently equal to approximately $ 33 billion, it will be about $ 26 billion if the value of the dinar is reduced by 25%. The state’s profit is about $ 7 billion, and this indicates that the devaluation of the currency has a positive effect on the public debt and thus strengthens the country's economy without any negative impact on the foreign debts, and therefore there will be no negative impact on the Iraqi situation with the international community as a result of this devaluation local currency.
Seventh: The impact of the reduction on confidence in the national currency
I do not think (in my personal opinion) that this devaluation of the Iraqi dinar will affect the confidence of global markets and economies in the Iraqi local currency because this planned reduction must be accompanied by a set of economic decisions that support this reduction and reduce its impact, whether on the internal or global economy, in the Iraqi currency and most importantly. These reforms are to control expected inflation, as mentioned above, through controlling food, fuel and medicine. Demand pressures for the dollar may not escalate, but on the contrary, the local exchange rate for the dollar unit may be more than before, so the process turns into a process of selling the dollar and trying to keep the local currency in particular. If we raise interest rates on deposits in local currency as a measure among the structural decisions that must accompany the process of devaluation, then the pressure on the dollar exchange rate will be alleviated.
The study of the Central Bank indicated that there has been a stable exchange rate of the Iraqi dinar for a number of years, and in this context I think that this stability is not real, but rather it is pressure on the price of the dollar by the monetary policy of the country, and therefore this stability in the result gave negative repercussions on the Iraqi economy, so stability can remain, but On another exchange rate, it is less than the current price.
If we notice that the Lebanese experience has lasted for decades at the exchange rate of 1500, which is stable, but at a real price for the Lebanese pound, while it is believed that the price of the Iraqi dinar, at its current stability for the past years, was not a real price, but rather a price that was engineered by those in charge of the monetary and financial policy of the country, I mean Here the central bank and the exchange rate set in the annual general budget by the government and the Finance Committee in the Iraqi parliament.
Eighth : monetary and fiscal policy
Before we go into the details of this factor, we must answer the following question: Do we expect that Iraq will have a political capacity to manage monetary and financial policy in facing the pressures that may result from reducing the price of the Iraqi dinar against the unit of the dollar? What determines this is the power of the political administration in the country and the understanding of the political forces, the reality of the problem. The monetary policy tools represented by the interest rate, the discount rate, the open market operations and so on, these can be controlled by coordination between the owner of Iraqi money who is the Ministry of Finance and between the keeper of this money, which is the bank As for the fiscal policy, the government and parliament must collectively control expenditures and work to increase revenues (and we have already talked a lot, as others have talked about how to increase revenues) in order to appropriate control of the monetary mass in order to reduce Effects of inflation on the citizen.
We believe that the pessimistic view of financial and monetary management in Iraq must change, otherwise the situation will remain as it is. Yes, there is a great failure in managing these two files, but everything has a limit and an end, and I think the time has come to end the state of failure of monetary and financial policy.Ninth : The impact of reducing the dinar on the general budget
The general budget is revenues and expenditures, and since the main source of revenues for Iraq is oil sold in dollars, the reduction in the price of the Iraqi dinar will certainly increase the revenues by the reduction in the price of the dinar, so when the price of one dollar is 1500 dinars instead of 1200 dinars, every billion dollars of oil revenues will be worth In the budget it is equal to one and a half trillion dinars, compared to one trillion and two hundred billion dinars at the current exchange rate. This increase in revenues will have a clear and positive effect on the general budget.
As for expenditures, I would like to refer here to the report of the Central Bank and discuss it again as it mentioned that the reduction will witness an increase in expenditures due to the following points:
1- The government’s import of goods and services
This is beneficial because, as we said earlier, the government must be the first to reduce imports and depend on the local product, whatever the circumstances. This is an opportunity to create a local economy and increase the domestic product by increasing agricultural and industrial production and reducing imports.2- Paying foreign debt interest
We have already mentioned in this topic that the external debts will not be affected by the reduction in the price of the dollar, but rather the internal debts will be less valuable in relation to the petroleum dollar.
3- Foreign investments and subscriptions
This is not a significant percentage and it is also in dollars and we are our resources in dollars, so this is a payoff as well.4- Paying oil-related investments
Everyone knows that paying oil companies' dues is in kind with oil, and the dollar or dinar have nothing to do with that.
5- The ration card
I do not agree with the Central Bank report, which stated that most of the ration card materials are import. The ration card, which must now be developed, depends on four main materials, namely, rice, flour, oil and sugar, three of which are flour, oil and sugar, which are purchased locally, so reducing the value of the dinar will save money for the ration card Buying these materials and the only material that is imported is rice, and by the same logic that we spoke about in this article, the oil dollar will not be affected because Iraq sells oil for dollars and imports rice in dollars. Overall, the reduction of the dinar will have a positive effect on the ration card.
6- Social protection salaries
In the event of a reduction in the dinar, the government must increase the social protection salaries with the same expected inflation rate, which is 12%. In so doing, we remove the impact of potential inflation from the shoulders of vulnerable groups in society.
In the end, a gradual devaluation of the dinar will have positive effects on the country's economy that can be benefited from and negative ones. Prior measures must be taken to avoid them in order for the total output to be positive for the national economy and to avoid the expected economic shock.
As for the positives, they are as follows:
1- Encouraging the local agricultural and industrial product.
2- Moving the microeconomic wheel in the country.
3- Employment of manpower and absorption of unemployment.
4- Increase general budget revenues and reduce import expenditures.
Naturally, this procedure will have negative effects, so the government must take a series of measures in parallel with this reduction, which are represented as follows:
1- Stopping the currency auction to preserve the hard currency inside the country and that the dollar and other foreign currencies are sold and traded directly in the currency markets or through the stock market in order to get a real price of the Iraqi dinar against the US dollar and that the guarantor of the prices is the value of the reserve available at The Central Bank of Iraq is a hard currency.
2- Establishing an import approach, stopping some imports, controlling customs ports, supporting the tax system, and exempting the local product from income tax for a period of two years.3- Building the budget on a fixed oil price for the operational budget and moving for the investment budget, directing the budget to salaries, purchasing the ration, medicine, water sterilization and the educational process only.
4- Postponing the dues of oil companies or paying them in kind outside the OPEC quota.5- Selling oil coupons locally. At the prevailing price now and buy it a year later at the prevailing price then.
6- Increasing nominal salaries by 10%, reviewing the high allocations in order to achieve social justice, and increasing the salaries of the Social Protection Network by 12%.
7- The state importing commercial foodstuffs to the market and injecting them into the ration program in case of price increases And activating the role of economic security and entering the competent government agencies to control the cash rhythm in the currency market and markets for selling foodstuff.
8- Supporting fuel for transport and factories and giving high relative importance to food industries.9 - The injection of hard currency to the exchange markets to maintain the price level of the Iraqi dinar, to prevent the price slipping through, so that its decline exceeds 30% within two years.
10 - The Ministry of Finance issues an electronic dinar for the purpose of collecting government revenues and fees owed and what distinguishes them is that they are not tradable in the markets as cash, and thus we have reduced corruption in this aspect, as well as the state's knowledge of the value of those imports quickly, provided that it is issued by a government bank and not through companies His family.
In conclusion, such a procedure needs a courageous decision by statesmen who are able to manage a phase that the world in general and Iraq in particular is going through, statesmen who lead society and manage state institutions professionally without paying attention to war, factional or electoral interests. But they put the interest of Iraq first.
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