KTFA:

Don061:  Dr.. The appearance of Muhammad Salih *: monetary adjustment in Iraq: visions and perspectives in monetary policy

04/18/2020

In the conditions of the current economic stagnation, which indicates the availability of unemployment at two decimal places and falling prices at the zero level, supported by indicators of dual deficit, one of which is internal in the general budget and the other is external in the current account of the balance of payments, the controversies between the economists tend to adopt something from the fiscal adjustment that works To correct the exchange rate and according to a temporary floating mechanism that helps to target the target and defend stable exchange rates at other levels.

Thus, the exchange rate adjustment comes in disciplined degrees to address the imbalance of two basic budgets in the overall economy:

The first is to correct the current account of the balance of payments and reach a point close to the balance between inflows and outflows.

The second is to provide a leverage to finance the budget deficit with the differences in correcting the dinar exchange rate to the dollar in order to fill the deficit in the general budget in whole or in part and another source from the corrected exchange rate rest, and count those differences as a final revenue for the treasury.

Such revenues are, in all cases, an inflation tax, whose money is a pure cash issuance commensurate with a reduction in the exchange rate.

The spending arising from the collection of resources for such an inflationary tax (in the form of rentier cash surpluses generated by the new exchange rate) is not without underlying inflation factors in a market that generates expectations leading to continuous price fluctuations.

But at the same time it may move some aspects of public finance and real macro activity to some extent.  

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The appearance of Muhammad Salih - cash conditioning in Iraq - edited

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MANY THANKS AGAIN TO SAMSON FOR THE TRANSLATION ...

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Don961:   This is the appearance of Mohamed Saleh *: The optimal monetary policy: between dual tools and two signals: past measures and present controversy extended 

The school’s economic debate in Iraq widened over the relationship between cash exposure or the Ura Bazaar rather growth in the monetary basis as an internal variable and an independent endogenou (i.e. Internal cash supply) and between the effects of direct financial policy on monetary developments, or even the effects of hostile markets, incomplete markets in the birth of an extreme hegemony in the behavior of the cash demand function in general and government over trends and movements of the economy's liquidity and potential price turmoil. It is a case that corresponds to the updated Keynesian thinking on the issue of the growth of local liquidity components by the impact of monetary behavior and its functions.

Monetary internal rentier financial instruments (represented by treasury transfers in foreign countries and external rentier financial instruments) represented by the United States dollar disrupted a limited field of monetary policy maneuvering between the two main financial instruments are treasury mobile In Iraqi dinars and the two dollar matters on the one hand and between two signals from the Sharana non-discretionary monetary policy (which is based on the rules of luck) - rules based and is represented by the buyer the interest rate and the exchange rate 

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The mechanisms related to monetary policy operations and the endogenity of the money supply have made the monetary policy in controlling liquidity levels and imposing monetary stability taking place with restrictive motives to implement monetary policy and adapting it to work with two types of unilateralism: Dualism and in accordance with monetary conditions, which require the harmonization of the two signals together with high compatibility and harmony with more than one financial instrument in the mostly regulated cash market 

Thus, and based on the foregoing, monetary policy has only two quarterly financial instruments that affect the growth of the monetary basis and the exercise of its interventionist policy to control stability and economic growth, and at the same time they are the main major monetary component mentioned in the asset side of the balance sheet of the monetary authority ( That is, foreign currency, treasury transfers and some parallel central bank bonds) but with a very weak double. )

if the monetary policy measures continue to liquidate local assets (transfers of m | treasury) and generate liquid dinars as liabilities or liabilities for the central bank that were clearly done within the framework of the QE policy for Iraq, especially in the past five years, to be immediately reflected through the government’s operational spending to request a surplus commodity and services follows from the share of foreign exchange in the components of the cash basis within the portfolio of assets or assets in the balance sheet of the Central Bank of Iraq.

And if there was a diversified and mature financial market for the tools, it would have made the instrument (the interest rate) as an indication of an effective intervention like the exchange rate blast, so the monetary economy would move to coordinated bilateral dealings in achieving optimization of monetary stability instead of mono and single use of each instrument and with a separate signal and the rakkun to the bilateral Emirates in Exchanging, impact and full interaction between them. Color balance, optimum stability and lower costs .

Thus, monetary policy was unable to offer treasury mobiles from its portfolio of assets and other financial instruments with the public through the secondary market and adjust liquidity levels and stabilized. With interest) and procedures for window operations dealing with the secondary market, similar to the second Habha capacitance dollar window sterilization and excess liquidity and exchange rate stability).

The dollar has a secondary market that is influential in Al-Buraq for dealing in foreign currency, while bonds and remittances are debt instruments that do not possess this market except on a small scale that does not help it to deal widely and form a reliable leadership price structure.

The central bank has tried to practice the policy of diversifying financial instruments by issuing a bond for itself and opening night accounts and others to adjust liquidity levels A parallel and encouraging channel, but the financial market itself has not diversified except in a limited way to the rentier domination of the foreign currency instrument over the economic activity of the country, and the fact that the public from outside the banks does not have in His mind is only the jurisprudence of the foreign currency instrument.

The financial market deals with two instruments that are mostly weak in their reciprocity and by one foreign instrument in the policies of intervention and controlling the levels of liquidity of the economy and۔ 

Aftham is a non-reciprocal relationship between the dollar and treasury transfers, and that the two financial instruments deal individually and completely with isolation, and exchange negative effects in the phenomena of substitution between them and indirectly.

Therefore, on the contrary, you find that financing the government deficit with treasury transfers (which is the expensive tool that was deducted with the central bank by banks through open market operations in years of crisis 2017 - 2019) has generated, after spending, a single derivative demand for foreign currency mostly and an indirect reciprocal relationship Without any demand for any other domestic financial instrument within the assets or assets constituting the primary cash sources.

Also, the Ministry of Finance could not, during the previous two years, in spite of the improvement of the oil budget revenues by stopping the amortization of the internal debt according to the maturity dates and rescheduling it, which is in terms of value, equivalent to about $ 40 billion currently (being the main aspect of the components of public debt held in the portfolio of the banking system)

In addition to the current limited borrowing capacity, however, keeping the debt in a position without repayment did not disturb the balance of the asset portfolio at the Central Bank of Iraq, but that province remained operating as foreign interest and not the domestic assets interest, i.e. in terms of proportions, composition and ability to interfere with the instrument of Foreign exchange in the financial market and the exchange market in particular, but it can be said that the assets of the central bank have improved relatively in favor of foreign currency, especially in the two years 2018, الاج and the national reserves rose to nearly 70 billion dollars at the beginning of the year 1920 after it decreased to 41 billion dollars during Years of the previous double crisis in Iraq 2017 - 2019. 

Above it is related to the modern monetary history of Iraq and the duplication of tools and signals. The past decade years that established rules for combating activities generating inflationary expectations have come in a slightly different direction in the work of monetary policy using two highly sophisticated and correlative tools that are (local currency and foreign currency) And with two signals from the money market signals (the exchange rate signal and the interest rate signal) and they have nominal anchors to replace the monetary balance and withdraw the growth in inflation from the case of increasing by two decimal places to the case of price growth with one decimal place And suppressing high inflation levels. 

The monetary policy delivered by the construction to extravagance in the years 9, 10 10080 s use at the exchange rate, similar to what we mentioned, which came to achieve stability in the general level of prices, given that the external value of money is the basis of that stability, which led to the attempt of order exchange from a semi-flexible system to a fixed system for the first row of the fact that when the nominal benefit fixer came by adopting an interest signal e monetary policy to maximize the return on the dinar itself through diversification of the central bank’s instruments to maximize the return on the dinar.

This is by opening night, weekly, and monthly deposit accounts as part of the indirect monetary policy means in achieving the stability goals.

And that both signals (hair exchange and price | interest) have been done in the interest of the Iraqi dinar and at high rates during the aforementioned period to meet the forces that generate inflationary expectations.

As the emblem achieved the exchange rate of the Iraqi dinar, an increase in the external value of the dinar was desperate, 22% and the public financial cost in foreign currency was due to the rise of the dinar value during the years 2008 - 2009 and in the interest of monetary stability in the amount of more than 5 billion dollars, while the interest signal recorded a rate of return on the dinar increased over : 2% annually.

Therefore, high interest rates have made the sake of monetary demand more stable, as well as market balance and falling inflationary expectations. With this the year ended 2008 and the rates of increase or growth in prices have become decreasing disinflation, and annual inflation has not exceeded 1%, i.e. reaching one decimal place instead of two decimal places and exceeding على% in the year 2005.

Thus, Keynesian tools and modern classic and classic tools (specifically the Swedish school theory) worked in building the price-benefit duality, i.e. the role of the natural interest rate (or the so-called Wicksell effect), by combining the stability of the relative prices of goods and services with the real interest rate to create a positive wealth effect for investing in the dinar wealth effect and maximizing the internal value of money (and in a dual two way) in integration with the exchange rate badge as a representative of the external value of money in narrowing the transitional effect of inflation. And with new mono extreme monism at one time.

Such mutual monetary exchange has come to achieve the equilibrium of the money market in Iraq, using the exchange rate and the interest rate, and they are considered toxic toxic and inflation expectations at the same time. 

In this regard, many people constantly ask me and the stability of the dinar exchange rate against the dollar in Iraq’s current economic conditions in which there is no inflation, asking about opportunities to benefit from events of artificial inflation through floating or lowering the value of the dinar in an attempt to reform the economy and support economic activity in such a severe financial condition and the country suffers Of a twin deficit gap, a deficit in budget revenues due to its large expenditures (due to falling oil revenues and a price war in the oil market) as well as a deficit in the current account of the balance of payments

And for the same reason the irrigation, the theoretical and applied foundations of the international monetary economy all indicate that if there is a deficit in the current account of the balance of payments attributed to the gross domestic product exceeding 0 - 0% upwards it should reduce the currency exchange rate in order to adjust the external balance through The exchange rate and its impact on the cost of external flows, unless available Large foreign exchange reserves with the Central Bank in which it is preparing to intervene and defend the stability of the dinar exchange rate even in light of an external deficit (temporary or long lasting) in order to achieve the objectives of monetary policy in stabilizing the general level of prices and ensure the purchasing power of income and address the deterioration in prices against the phenomenon of expectations Inflation expectations, where the recent jobs of central banks are summarized as having the art of managing expectations for stability towards the generating market forces .

In a country like Iraq, floating the currency towards a reduction in the exchange rate will provide contradictory results and may be equivalent at the same time. Negative and other collector. May lead to tie with the loss of general stability in the economy and sacrifice in the purchasing power of income cash for individuals.

Sometimes positive results may be achieved, but it has limited effect in stimulating the overall economy.

Different periods of time except for making two minor adjustments for homogeneity in calculating external conversion. A devaluation of the foreign currency, i.e. its exchange rate, may really stimulate the domestic economy if the country has a very flexible and high export diversification, such as Turkey, China, or even Egypt.

In the mono rentier economy of Iraq, the matter reminds us of the mon effects and consequences, especially in the issues of (benefits) and (costs accrued from the reduction, or as follows: 

"In the event that the dinar exchange rate is lowered against the dollar, the direct effect will definitely be on the side of the public financial benefit, and the benefit is to increase the proceeds of government flows in the Iraqi dinar to the budget as a result of transferring its oil revenues in foreign currency from oil revenues from the high-value dollar to the low-value dinar (provided that The government faces at the same time an increase in its obligations or external costs) especially in some budget expenditures, such as all external payments to the government, all from debt service to external obligations and financing government trade in foreign currency such as importing food and For medicines, weapons, etc., the net from the outcome of the reduction (in my view) will be distributed at AM% benefit for the budget and ... a cost to the budget at the same time. 

As for the macroeconomic level (the cost) due to the reduction will lead to higher commodity prices. All imported services, including production requirements for spare parts, capital supplies, and raw materials, and this is called an inflationary cost tax. As for the benefit from the reduction, it will lead to recycling imports of permanent goods and benefit from their use in the operation, repair and maintenance cycle, but taking into consideration that the cost of work will also increase gradually, especially The more general For not skilled

Third: On the monetary policy side, the reduction called the conduct of monetary adjustment policies will provide a more positive foreign currency to the central bank when selling the dollar in exchange of dinars from its windows. That is, selling amounts of dollars less in exchange for equivalent amounts in dinars more than before, i.e. after the reduction and from foreign currency windows.

But we will find an adverse situation in the results, as the central bank will pay more dinars than the foreign currency window when buying the dollar from the government or others, which increases the liquidity of the economy and becomes a tool in surpassing demand or excess demand in the economy. In other words, the effect of the cost reduction on monetary policy will push the central bank to double its intervention in the exchange market by raising its sales volumes of foreign currency through its investigation windows, a stable level of the exchange rate, and curbing inflationary expectations. In other words, using a nominal fixator to narrow expectations and limit the price bounces of the parallel exchange market, as it is a market that generates volatile price expectations or inflation. 

Fourth : Notices that the Central Bank of Iraq has incurred the government’s cost of handling potential inflation due to debt and financing the deficit during the years 2017 - 2019, that is, inflation resulting from fiscal policy and financing methods and agreement thereon in accordance with the tracks of the Keynesian theory updated in the analysis of the effects of financial policy at the general level of prices . Was it not before the monetary policy makers only two options: Either the spending increases from the voluntary sources of borrowing and the expansion of exchange and spending and the creation of general inflation that comes from the fiscal policy and that is a burden on the monetary policy in maintaining stability, or the currency value is reduced by the monetary policy so that inflation reaches one of its actual cases Through a tax called inflationary tax.

The Central Bank of Iraq has the option of using a monetary policy in support of stability by intensifying secondary market operations in foreign currency to absorb excess government spending sources that came from mostly local borrowing to finance the budget deficit.

As it was used as part of the foreign reserves to defend the value of the dinar and its stability. As a result, the proportion of domestic assets increased and foreign assets decreased, despite the fact that the public finances received foreign cash loans to support the budget support and entered into the channels of the dinar purchase window from the central bank.

And thus remained a measure of the exchange between assets as a measure of the degree of potential inflation, because local assets are financial instruments based on treasury transfers that are in the possession of the investment portfolio of the Central Bank of Iraq.

Without expanding the local assets of debt instruments (which helped in the growth of the monetary base), there would be an absolute contraction and a persistent recession that the Central Bank had resisted with an additional, expansionary step by launching an off-lending project to the directly at about billions of dollars within the credit easing policy and it has remained Monetary Policy monitors the evolution of the phenomenon of domestic assets and their growth in the balance sheet of the bank while preserving foreign assets at their prevailing rates of safe and secure way to avoid the birth of actual inflation actual inflation 

Therefore, the high state of stability in the respondents to prices achieved during the financial and security crises of 2014-2017 to which Iraq was exposed was monitoring the state of recession as an unstable state, using a monetary or semi-accommodative policy for economic activity semi-accommodative policy, but it came with cautious amounts that helped in At the same time, address the phenomenon of potential price inflation potential inflation motivated by higher financial spending, as noted above.

That is, by monitoring the development of an inverted growth of the relationship between domestic assets (the source of inflation when rising) and the use of foreign assets (the source of sterilization, domestic liquidity added as a source of price stability). The relative decline in the levels of foreign assets due to the cautious monetary policy in sterilization of excess liquidity levels from budget expenditures did not prevent sterilization and the decrease of foreign balances to impose price stability and the nominal fixed of the dinar exchange rate throughout the dual crisis 14 - 2017. 

As the International Monetary Fund estimated in 2016 in the credit preparedness program with Iraq (SBA), the Central Bank directed to provide local loan liquidity to cover the government fiscal deficit and indirectly in exchange for accepting TB treasury transfers through open market operations and counting treasury transfers as important assets in a portfolio The central bank and revenue generation as a result of the bank investing its money in those government tools and without the monetary authority practicing cheap money policy

This is a interest rate structure and at the exchange rate for a dinar. The promise of this policy is that people are willing to accept a general interest structure that is based on developmental expectations based on lowering the exchange rate.

"Thus, monetary policy has moved away from the devaluation of the dinar and financing the government deficit with a low-value purchasing power dinar and a negative real interest that pays the conversion of inflation from public finance to monetary policy.

Despite this, the central bank sacrificed more foreign reserves to defend the stability of real income Iraq Because of the decline in oil prices after the year 2019 until the level of the foreign reserves of the bank reached just above the red line and according to coverage ratios and efficiency indicators 0 approved foreign reserves during the period 2011 - 2017 to return the foreign reserve and its rise again to the level V optimal safe current 

Fifth: Regardless of the hypothesis of a devaluation of the local currency and the benefits, costs, or balance of costs generated with benefits, the inflationary effects will remain as an unknown economic risk and the dark side in controlling stability is at the balance point between the cost of the reduction and the benefit of the reduction in our rentier economy, 

As for financial policy, we find that there is a so-called (fiscal adjustment), which is the weak aspect of government financial management that still exists until the moment. As the country has been losing annually from customs revenues and unpaid electricity lists, for example, due to negligence or financial turmoil, around 13-14 billion dollars. When some consider strengthening the government’s finances in easy collection through the inflation tax (i.e., reducing the value of the national currency against the foreign currency and a government decision (taken in minutes) and generating price disturbances that take long years that are not guaranteed stability), the public financial administration’s inability to build a tax structure and import collection system The public touches the vessels and all the taxpayers will remain the center of waste by neglecting non-oil revenues and relying on public expenditures funded by oil to the farthest extent.

In conclusion, despite the foregoing, indications of an accelerated inflationary stagnation may appear if the current financial crisis continues to Dah 6 months or more and if Taazlmt Internal debt instruments in financing the deficit and generating a local student’s surplus, which causes a shortage of foreign reserves in exchange for the accumulation of local public debt instruments in the central bank’s portfolio and its transformation into so-called lower quality assets, including the continuing scheduling of the existing balance from them and the achievement of a potential exposure that affects their quality as assets and Then its implicit credit rating falls as the literature says.

Likewise, if the local assets or assets reach, for example, more than half, or exceed 75% of the total assets portfolio at the Central Bank, then the monetary authority may resort to the so-called monetary adjustment necessary for each recent accident.

(*) Former Deputy Governor of the Central Bank and financial advisor to the Iraqi government (*) Researcher, economic writer and financial advisor to the Iraqi government 

Copyright reserved for the Iraqi Economist Network. Republishing is permitted provided that the source is referred to April 16, 2020 http: // iranieconomnists. net /

The GreentreeMusic: Boy oh boy!!! if I ever get back off floor i will frame this one! music to my ears!
Thank you Frank KTFA all for keeping us in the game and in the positivity!!!

 YoungSC:  Frank, Delta and his teams had been explaining to us since late of last year that the only thing we seek now is a new rate from the CBI. Now we are seeing the very few last steps being shown to us within the last 4 weeks. Everything is based on what the CBI is doing since March. CBI has been coming out with tons of information for its citizens and for us investors and as MM and Delta had already stated numerous times that the CBI is losing money right now because of the no cash sales in the Auctions. CBI will have to show a new rate very soon imo and ISX being shut down for 5 weeks just to reopen back up with the old program rate intact dosent seem logical to me. All imo