KTFA Members "News and Views" Saturday 1-20-2021

KTFA:

Don961:  Deputy determines the final position on the possibility of changing the exchange rate and comments on the increase in sales of the Central

Posted 2 minutes ago  Baghdad today - special

A member of the Parliamentary Finance Committee, Jamal Cougar, commented today, Saturday, January 30, 2021, on the high sales of the Central Bank of the US dollar, indicating that what is happening is a normal matter with the assurances sent by the Finance Committee and the government regarding the stability of the exchange rate of the dollar against the Iraqi dinar and that it will not be changed. In the 2021 budget.

Cougar said in an interview (Baghdad Today), "The central bank's sales declined after changing the dollar exchange rate against the Iraqi dinar, which generated great concerns among trade and importers and created instability in the market."

He added that "the return of sales to the increase means that merchants have realized that the exchange rate will be fixed in the draft of the country's general federal budget for the year 2021, with government assurances and assurances in this regard."

And that "high sales does not mean that there is the slightest doubt to raise the exchange rate before or after the budget is approved."

Last Wednesday, the central bank’s sales of the US dollar witnessed a significant increase, reaching 111 million dollars. On the following Thursday, the central bank sold 103 million, after nearly two months of fluctuating under the $ 20 million, due to the change in the exchange rate that I made. The government, as a step to address the country's fiscal deficit.

Last Tuesday, a member of Parliament, Ammar Tohme, submitted a request to the Presidency of Parliament, which included 16 amendments to the 2021 budget, including a demand to reduce the exchange rate to 1,300 dinars and to cancel deductions for certain categories of employees.

And (Baghdad Today) obtained a document for the request of Deputy Ammar Tohme, addressed to the Presidency of the Council, which included a request to reduce the exchange rate to 1,300 dinars, and to cancel deductions for employees with salaries below a million and a half.

Tohme’s request was supported by 113 deputies in the House of Representatives. LINK

DeepWoodz:   Imo....Wasn’t this a benchmark we were told to keep an eye out for?

Don961:  The British ambassador talks about his country's role in "supporting reforms" and arranging an Iraqi meeting with the IMF and the World Bank

12:03 2021/01/30  Baghdad today - Baghdad

The British Ambassador to Iraq, Stephen Hickey, said that the visit of the Prime Minister, Mustafa Al-Kazemi to London witnessed the agreement with the International Monetary Fund and the World Bank to support economic reforms in Iraq, indicating that the Ministry of Finance is now in negotiations with the International Monetary Fund to obtain loans to support the economy and hold elections .

Hickey said in a televised interview on Friday and followed by (Baghdad Today), that "during the visit of the Iraqi government delegation, headed by the Prime Minister, Mustafa Al-Kazemi, to Britain, London took it upon itself to support the Iraqi economy and brought together the International Monetary Fund and the World Bank with the Iraqi government delegation, To support the economic reforms undertaken by Baghdad, and this is what is happening now, "indicating that" Al-Kazemi has an opportunity to achieve economic reforms and he receives security support from Britain and the European Union countries . "

He added, "The Minister of Finance, Ali Allawi, is now in negotiations with the International Monetary Fund, to obtain loans, to support the economy and prepare for elections ." The International Monetary Fund had recently announced that it had received a request for emergency aid from Iraq .

"The Iraqi authorities have requested emergency assistance under the Rapid Financing Instrument, in a long-term arrangement, to support the planned economic reforms," ​​the fund said in a statement, adding that "discussions are ongoing regarding the authorities’ request for emergency assistance . "

On January 24, Finance Minister Ali Allawi told Bloomberg that Iraq was in talks with the IMF to obtain a $ 6 billion loan .

Allawi indicated that Iraq may request an additional $ 4 billion in low-cost loans from the International Monetary Fund's government reform program .   LINK

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Edna:  People are tIred of being disappointed and they fear to believe that Iraq this time...this time...not like the countless other times..but This time...Iraq might actually due what we are told they must do. 

Now anyone who's been in this thing for awhile has learned that Iraq don't "Have to do nothing" with their currency, in fact one could argue they prefer not to increase purchasing power, why? because governments don't give a rip about The people, they only care about themselves IMO.

So all week we have seen articles talking about the Budget this and the Budget that, with numbers all in Trillions not Billions. But "the rider" yeah, another mechanisms IMO to delay giving purchasing power to the citizens, Sure there is a rider, how long now do they get to sit on 1460 or 1190 or whatever before they must go one to one?  and IMO that's the Million Dollar  (Go to the Bank) question.

We know we got the budget..Big deal! What's it coming out at is what the....fear is..IMO. 1190, 1460 and Delta's position gains a lot more weight IMO...As always I pray I'm wrong....all

Zeeman:  edna i do agree with you. it is not the negativity imo but  its the constant hearing  one thing then reading the opposite makes people undecided what to believe. If the GOI really is as stupid as they act and do not approve the budget they are screwing the people and the country.

The loans and help that was promised will not be there as promised  due to lack of trust and corruption    . you can just look in the past how much that was promised and how much of it was recieved.

 IMO…  as far as  the budget being approved i do believe it will pass. but as far as the rate who knows . we will find out real soon on both

DeepWoodz:  Funny how a storm RAGES the hardest.....RIGHT BEFORE it ends and the Son comes out shining brightly! Everythiiiiiing is gonna be alriiiiiiiiiiight....some daaaay!   A little tune I sing sometimes..

Edna:  This is a question...NOT an opinion. Silly me, I tend to ask the questions everyone wants to know (IMO) but are afraid to ask. So Monday or Tuesday comes and goes, they pass the budget at a program rate  (Most likely IMO) because it's Iraq, How long can they SIT on an open budget at a program rate before they add value? or what is their intention of coming out a program rate?  In other words, how much time can pass before they actually implement..activate....start...use...proceed. ..with "the rider"?..These are questions not Opinions. Secondly, why do all the articles refer to the Budget in Trillions?..."Inquiring minds would like to know"

Patriots12:  Imo and imo only they can go on with little value to their currency and continue on the path of 1460 or 1190 with the same results they have now ... no middle class , poverty, ruling elite parties , Iranian control and more corruption  .... open the auctions back up ... let More corruption gain in the political system and not be "International"... imo could happen but will be a mess !!!  Or IMO fulfill what we have studied   , complete their destiny and change the rate ...  IMO has to happen now , where are the international companies poring in  ?   ATM's have to be full of lower category notes , border taxes, payroll taxes , Kurds happy , Saudi Border to open ect ect ..   nothing to wait fior ... imo   Now  citizens need to see the show me the money as it can not fail with them IMO ...

Don961:  The results of the devaluation of the Iraqi dinar

 Friday January 29, 2021 - 18:32  Economic Researche
The Iraqi government decided, through the Ministry of Finance, to reduce the exchange rate of the dinar to finance the fiscal deficit with monetary issues. This decision has serious negative consequences, foremost among which is the deterioration of the citizens' already deteriorating living standards. However, the Ministry sees the reduction in several positive aspects.

On March 12, 2020, the Central Bank of Iraq website published a report by the governor entitled “Reducing the exchange rate of the Iraqi dinar. Limitations and alternatives. He highlights many disadvantages of lowering the exchange rate of the dinar, concludes that it is necessary not to resort to this process and suggests alternative mechanisms. This report, despite the valuable efforts exerted on it, does not address the real crisis of widespread corruption and mismanagement of financial affairs, especially from the spending point.

On December 19, the Ministry of Finance issued a decision to lower the exchange rate. And it listed various financial, commercial, investment, industrial and tourism gains.

Why is this apparent contradiction?

It appears that the central bank report was written before the outbreak of the Corona pandemic, which led to a decline in oil prices and thus to a decline in general budget revenues and a deterioration in the trade balance. These revenues decreased as of last May.

But the difference is wide between two things: The first is the timing of the currency devaluation decision. The second is the pros and cons of this process. The above justification is related to the first and not to the second. It is inconceivable that the devaluation of the dinar would lead to negative results before and after the Corona epidemic. The negatives and positives are related to the Iraqi economy and how it is managed.

The devaluation of the dinar resulting from issuances to finance the fiscal deficit necessarily leads to an inflation of the monetary mass, thus reducing the purchasing power of citizens. This negative impact across the board occurs in the presence or absence of this or that epidemic.

 It appears that the Central Bank has retreated from its point of view, as it participated, along with the Ministry of Finance and other institutions concerned, to prepare the white paper calling for the devaluation of the dinar and defending it vigorously.

The Ministry of Finance issued a statement addressed to citizens in the form of questions and answers. The ministry’s opinion includes the implications of lowering the exchange rate of the dinar. We will discuss this opinion here and focus on five points.

Imported goods

According to the ministry's statement, the prices of "some commodities will rise at once to compensate for the exchange rate adjustments. The exchange rate adjustment should encourage the growth of domestic alternatives to imports. In due time, this will lead to price stability ..." The Ministry believes that the growth of these alternatives will lead to many positive results, including an increase in job opportunities.

The ministry's answer is vague, raises many questions, and is inaccurate. When do commodity prices rise once, twice, or multiple times? What is the meaning of good time? In fact, the devaluation of the exchange rate leads in all countries to higher prices for imported goods. Which affects the standard of living of citizens. And the vulnerability increases because of the importance of imports in the Iraqi rentier economy. The matter does not stop at various industrial tools, but rather extends to the main food products and energy.

Naturally the imports are in dollars. And since the rate of reduction of the dinar was 22.6%, the prices of imports rise, as a general rule, at the same rate.

The ministry is trying to link the devaluation of the dinar to improving local products. This link was repeated in the statement under study six times. This indicates the ministry's keenness to convince citizens of the positive results of the reduction. In her estimation, it increases domestic production, and thus unemployment and poverty. The balance of payments position improves as imports decrease, thus increasing foreign exchange with the central bank. Then the exchange rate rises.

In fact, these conclusions drawn from theory and applications of industrialized countries are not valid in Iraq. One of the peculiarities of Iraq is that the value of manufacturing industries is continuously declining, until it is currently at 2% of GDP. This is a weak rate compared to even the poorest countries in the world. Agriculture suffers from the same decline. Note that agricultural and industrial commodity production was occupying a prominent position at the end of the eighties of the last century.

This deteriorating situation resulted from the combination of several factors, foremost among which is the almost total dependence on oil revenues in all fields. Neglecting spending on scientific research and technological development. Widespread financial and administrative corruption. Violent internal conflicts that exhausted citizens and led to a decline in the country's international rankings in all fields. Discouraging local laws. The infrastructure is deteriorating. Iranian hegemony against the progress of Iraq.

Only after effectively addressing these factors can monetary policy play a role in the advancement of the industry. On this basis, the devaluation of the parity of the dinar necessarily leads to a rise in the prices of imported goods without improving domestic production. It also reduces the value of people's savings.

Savings

The Ministry of Finance differentiates between two cases:

The first case if the savings are in dollars. Adjusting the exchange rate leads to an improvement in its value.

The second case if the savings are in dinars. A person would earn a return on it if it was in the banks.

According to the ministry, the devaluation of the dinar leads in both cases to gains. This position has nothing to do with scientific analysis and objectivity in the proposition. It neglects the most important and broader case of the savings of individuals without going through the banking institution or in a foreign currency. This money necessarily loses its purchasing power.

Nor should it be said that the reduction leads to an improvement in savings in dollars. The ministry confuses value with quantity. There is an increase in the number of dinars, but there is no improvement in its value.

As for bank deposits that receive interest, they have lost their value due to the depreciation. The exchange rate of the dollar moved from 1182 dinars to 1450 dinars, meaning the value of the dinar decreased by 22.6%. Thus, in order for the value of these funds not to be affected, the interest rates must be at least equal to this ratio. At present, the deposit interest rate is only 7%. Meaning, these deposits lost 15.6% of their value. The lower the incomes, the greater the suffering.

Those with limited incomes

The Ministry of Finance poses the following question: What is the effect of the exchange rate on people with limited incomes? It provides the following answer: The government will take measures to offset the negative consequences of the exchange rate adjustment on the poor: increase social welfare allocations.

Indeed, social welfare allocations increased from 3.1 trillion dinars in 2020 to 5.0 trillion dinars in 2021. However, this increase does not address the problem created by the devaluation of the dinar for three reasons: First, because the amount of the increase is small compared to the size of this problem. And secondly, because the rise includes a fake increase equivalent to the rate of the dinar reduction. And third, because the draft budget for 2021 imposed several additional taxes that would put pressure on the citizens' standard of living.

Upon returning to the Ministry's question and answer, we notice the weakness of the methodology from two aspects: The first aspect is that the question must relate to the effect of reducing the exchange rate and not the effect of the exchange rate. And such imbalance is repeated in several paragraphs. The second aspect is that her answer is not related to the question posed. It was necessary to refer to the negative repercussions and not to government measures. Undoubtedly, those with low incomes suffer from the consequences of the devaluation of the dinar represented by the increase in the prices of goods and services more than those with higher incomes.

 Retired

The Ministry divides retirees into three categories according to their place of residence.

First class: Residents of Iraq. The ministry does not see any negative impact on the level of their salaries.

The second category: Residents of the Gulf, Jordan and European countries. The purchasing power of their salaries changes due to the reduction.

Third class: Residents of Turkey, Egypt, Lebanon and Iran. The purchasing power of their salaries will not change because the currencies of these countries have fallen against the dollar.

Once again the answer suffers from a clear methodological flaw. It depends on the salary level when it comes to retirees residing inside. While it is based on the purchasing power of the salary when it comes to retirees residing abroad.

There is no doubt that the reduction does not affect the salary level, whether the person is employed or retired, and whether he is residing inside or outside the country. The cash reduction has nothing to do with the size of the salary but rather to its purchasing power. Of course, the size of the salary may decrease, but not because of a cash cut, but as a result of completely separate procedures.

Because of the high prices of goods and services, the retired person is harmed in this, the case of any other person residing inside. As for those who reside abroad, the purchasing power of their salary falls wherever it is found. What applies to the retired resident abroad is true for the Iraqi tourist.

Travelers abroad

The ministry believes that Iraqis traveling to Turkey, Lebanon, Egypt and Iran will not be affected by the devaluation of the dinar because the currencies of these countries fell against the dollar. Meanwhile, costs for travelers to Europe, America and other industrialized countries are rising. 

The ministry compares the sums in the currency of the host country, which the Iraqi used to obtain years ago, and the sums in the same currency that he is currently getting. For example, an Iraqi allocates one million dinars for tourism in Egypt. Before November 2016, the dollar exchange rate was 11.5 pounds in Egypt and 1182 dinars in Iraq. One million dinars was equivalent to 9,729 pounds. Now, the dollar exchange rate is 15.7 pounds in Egypt and 1450 dinars in Iraq. That is, one million dinars became equivalent to 10817 pounds.

Of course, this comparison is incomplete and inaccurate. Deficient because it does not take into account the implications of the devaluation of the pound on consumer prices. The goods and services that an Iraqi tourist in Egypt gets in a million dinars is now much less than the goods and services that he used to get before 2016. It is inaccurate as it is necessary to know the value of one million dinars in the pound before and after the reduction of the dinar exchange rate. This is what is important. Six weeks ago, the value of one million dinars was 13282 pounds, then it has become now, due to the devaluation of the dinar, 10,817 pounds. That is, the dinar lost 22.6% of its value against the pound. It is, of course, the rate of decline of the dinar exchange rate against the dollar. The same analysis applies to an Iraqi residing in Egypt who received remittances from Iraq. There is no difference in that between one country and another.

It should be noted that transportation fares for Iraqi tourists have risen in dinars because they are specified in dollars.

The decision to reduce the par value of the dinar was taken for one reason only, which is to finance the budget deficit, which reached an unprecedented amount. The matter has reached such a degree of danger that the government has become the next option: either to stop fulfilling its financial obligations, foremost among which is not to pay employees' salaries or to reduce the exchange rate.

For this reason, the reduction does not yield positive results regarding local production, tourism, investment or employment opportunities. On the contrary, this monetary measure has several effects, all of which affect the decline in the standard of living of citizens, especially those with low incomes.

The devaluation of the dinar does not represent a solution to the financial crisis that the country has been suffering from for several years due to the failure of economic policy due to government options and rampant corruption. Rather, it is a logical and inevitable consequence of this policy. Hence, this crisis can only be addressed with a fundamental change in this policy.

Morning coffins  Economic Researcher link