"Tidbits From TNT" Tuesday Morning 1-12-2021

TNT:

Tishwash:  Exchange rate and public reflections

The issue of the exchange rate has sparked widespread controversy in the economic and non-economic environment, given the effects it has on all economic activities from 19/12/2020 to the present day, as short-term and long-term changes in the exchange rate reveal various speculations of speculative capital movement, which in turn may be the result of pessimistic or optimistic expectations and in turn depend on expectations in economic, political or social trends.

The refore, the foreign exchange rate market is particularly important in the feedback between real and monetary markets, which affects the trends of the national economy, as the exchange rate is defined as its currency rate in another currency, and in a clearer sense, for example, a number of units of cash from the Iraqi dinar are matched by one unit of the US dollar.

Therefore, we note the result of the change in the exchange rate from 1190 to 1450 (as sent to the House of Representatives in the 2021 budget) there were mostly pessimistic expectations among the public as a result of the rise of most food items as well as construction and other materials, so we find that most of the public (market participants) mostly ask economic specialists do we keep the dinar or the dollar?

Each of its positions will be analyzed as it pleases, the value of the Iraqi dinar will be reduced to 1300 or return to what it was previously 1200, but the final decision remains in the hands of the House of Representatives either to refuse to devalue the Iraqi dinar or to approve the new exchange rate of (1450), which is sold by after the approval of the exchange rate 14 50 At (brokerage firms) at 1500 dinars per dollar, so the exchange rate is the link between both domestic and foreign economies as a means of linking domestic trade with foreign trade and increasing the competitiveness of the national economy, and is an influential factor in economic policy trends at the foreign and domestic levels at least in the medium and short term.

Iraq has been experiencing monetary instability since the decision to devalue the currency to date due to news and analysis by specialists and non-specialists, as well as media statements and social media sites in all its forms. In conclusion, the relevant authorities must show the public at any exchange rate that is fixed so that the public can know the decision through which their daily financial transactions are traded, and the most important decision to be central to the (monetary authority) represented by the Central Bank of Iraq, which is the only institution that operates under financial crises and always a shelter to solve all the financial problems that occur with the government, which is represented by the Ministry of Finance (Financial Authority).   link

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Tishwash:  Surprisingly, the price of the dollar goes back to 120,000, but: for specific categories only

The Economic and Investment Committee confirmed its submission of a proposal to activate development projects, indicating that excluding some groups in order to advance the industrial and agricultural sector will not affect the budget.

Committee member Hamid Al-Mousawi said in a press statement, "The committee submitted a proposal that adopts the rounded pricing, meaning that the Central Bank is working on a policy of revitalizing industrial and agricultural development projects by giving concessions to companies that transfer their production lines to Iraq, within a specific time period."

He added, "For example, when a credit document is opened in the Industrial Bank for each company based on an exchange rate of 1200 dinars per dollar, the difference from the currently circulating price will be an incentive for these companies to come to Iraq, and thus it will be a national product and Iraq will turn into a destination that attracts international companies."

He continued, "The Agricultural Bank can allow the entry of agricultural companies into Iraq, and also allow the Iraqi investor to import productive devices and agricultural equipment in order to advance the agricultural and industrial reality," noting that "excluding some groups in order to advance the agricultural and industrial reality in Iraq will not affect the budget   link

Tishwash:  Exchange rate regulations and policies

In order to finance international trade and financial exchanges across borders, banks and financial institutions around the world exchange no less than $ 5 trillion in currencies every day in the foreign exchange markets. 

That amount represents about $ 600 for every person who lives on planet Earth. The currency exchange market is a market that is transacted 24 hours a day without stopping and almost universally.

 Usually banks exchange their deposits in exchange for real large amounts of currency. For example, a US bank might exchange dollar-denominated deposits it has with deposits held by an Iraqi bank that are denominated in dinars

. In fact, the foreign exchange market is characterized as a hypothetical market (or what economists call across the table), meaning that most transactions in it take place between major banks through computer networks that link them instead of physical exchanges. Despite the enormous size of these exchanges, most of them are concentrated in limited places and within a relatively small number of currencies. 

More than half of the world's foreign exchange exchanges involve financial institutions in the United States or the United Kingdom. About 85% of the exchanges are made using the US dollar, 39% of the euro, 19% of the Japanese yen, and 13% of the British pound sterling.

Exchange rate policies:

Different countries have different exchange policies for their currencies. Some countries, such as the United States and Canada, allow the exchange rate to be determined by the forces of the foreign exchange market, as is the case with the prices of most other goods and commodities. Countries that take this approach have a floating exchange rate

. Other countries prefer a fixed exchange rate, or what is also called a pegged exchange rate, between a country's currency and another country's currency. For example, Iraq has a fixed exchange rate of 1,450 dinars to the dollar. When countries adopt certain exchange rate policies, economists say there is regulation of the exchange market, or exchange rate regime.

Countries around the world usually follow one of three exchange rate regimes:

Fixed exchange rate system.

Floating exchange rate system.

Managed Floating Exchange Rate System (or Intermediate Exchange Rate System)

 In a fixed exchange rate system, the exchange rate is set at certain levels and maintained by the monetary authority in the country, i.e. the central bank. Historically, the two most important fixed exchange rate regimes were the gold cap and Bretton Woods system.

 Under the gold cap system, which lasted from the nineteenth century to the thirties of the last century, countries ’currencies contained quantities of gold and paper currencies that governments committed to repurchase in exchange for gold if their holders so desired. The gold cap system was a  fixed exchange rate system because the currency exchange rates were determined by the amount of gold that each country had to cover its currency

. Under the gold cap system, the size of a country's money supply depends on the amount of gold available. In order to achieve an expansion in the amount of currency used in the economy during periods of wars or economic recession, any country must abandon the gold cap system.

 During the Great Depression in the thirties of the last century, many countries, especially the United States of America, decided to abandon the gold cap system in order to increase the flexibility of exchange rates for their currencies and to achieve greater control over the money supply. 

However, some policymakers in several countries around the world are still calling for a return to the gold cap system, as US presidential candidate Ron Paul demanded in 2012 because he believes that the money supply should depend on something, gold, for example, so that the government does not control the money supply. Completely. 

But the truth is said that there are no serious attempts to return to the gold cap system for several reasons, including the great restrictions that this system places on the use of monetary policy to deal with economic recessions.

Towards the end of World War II, many economists and policymakers argued that a return to a fixed exchange rate regime would help the global economy to recover from the effects of fifteen years of depression and war

. The result of this was the Bretton Woods Conference in New Hampshire in 1944, which laid the foundations for a new exchange system in which the United States pledged to buy or sell gold at a fixed price of $ 35 per ounce. The central banks of the other countries that participated in the drafting of the Bretton Woods system pledged to sell or buy their own currencies at a fixed exchange rate against the US dollar. By fixing the exchange rate of currencies against the dollar, these countries have practically fixed the exchange rate of their currencies against each other.  

 A fixed exchange system can face real problems because the exchange rate is not free to adapt quickly to respond to changes in the demand for currencies. By the early 1970s, the difficulties encountered in attempts to maintain a fixed exchange rate led to the collapse and then abandonment of the Bretton Woods system.

 After the collapse of the Bretton Woods system, most countries of the world allowed their currencies to float, meaning that exchange rates became determined by the forces of buying and selling currencies in the foreign exchange markets. However, some countries saw that the floating exchange rate regime that resulted from those operations led to much instability in exchange rates. As a result, some central banks intervened from time to time in order to influence the exchange rate of their countries' currencies by selling or buying currencies in the foreign exchange markets.

 When the central bank of any country sometimes intervenes in the currency exchange market to affect the exchange rate, that exchange rate system is called the administered floating exchange rate system (or the intermediate exchange rate system). Under this system, sellers and buyers in the foreign exchange market determine currency rates in most cases.

Sometimes, with the intervention of the monetary authority. Many economists question the effectiveness of that intervention to determine the exchange rate by the monetary authority in relation to the currencies that are widely exchanged. For example, the Bank of Japan can try to influence the exchange rate between the Japanese yen and the US dollar by buying and selling quantities of the yen. However, these operations are small compared to the total quantities bought and sold from these two currencies in the foreign exchange markets. 

Therefore, it is unlikely that the central bank will be able to influence the exchange rate through its intervention in the market for currencies that are widely exchanged for more than a short period.

 Policy options in relation to exchange rate regimes:

Current exchange rate regimes reflect three options in countries ’policies:

The United States and other developed countries such as the United Kingdom, Canada, and Switzerland allow their currencies to float against other major currencies.

Nineteen countries in Europe have adopted the euro as a single currency.

Some developing countries fix the exchange rate of their currencies against the dollar or other major currencies.

Since the collapse of the Bretton Woods system, the Federal Reserve (the central bank of the United States) has rarely intervened in the foreign exchange market in an attempt to influence the exchange rate of the dollar. As a result, we could see large fluctuations in the exchange rate of the dollar against other major currencies since 1973.

Because of this, countries that export their products to the United States argue that US monetary policy has made the dollar exchange rate unrealistically low. However, it is well known that the Federal Reserve does not intentionally achieve a fixed exchange rate for the dollar.

 What has now become known as the European Union began as an entity with the six European states signing the Treaty of Rome in 1957, and has grown to now include twenty-seven countries, including many of the formerly communist Eastern Europe. In 1999, the European Union decided to go ahead with a single currency, and on January 1, 2002, the euro currency was launched. 

By 2012, seventeen member states of the European Union, including all major economies in Europe except the United Kingdom, had adopted the euro. The European Central Bank was established in 1998. Although the central banks of the member states of the European Union are still operating, the European Central Bank is responsible for monetary policy and the issuance of the European currency. 

The euro suffered great difficulties, especially in 2012, when its fate became unknown when some European Union countries, such as Greece, Spain and Ireland, began to suffer from severe financial crises and became unable to pay the debts of their governments.

 Many developing countries have tried to keep their exchange rates fixed or pegged to the US dollar or other major currencies. 

A fixed exchange rate can provide significant benefits to a country that has trade links with the other country. When the exchange rate is fixed, business performance planning becomes much easier. For example, if Iraq raised the exchange rate of the Iraqi dinar against the dollar, Iraqi companies that export goods to the United States might be forced to raise the prices of their dollar-denominated goods that they export to that country, leading to a decrease in their sales. 

Whereas if the dinar had a fixed exchange rate against the dollar, planning these Iraqi companies to perform their business would be much easier.

In the 1980s and 1990s, there was another reason for stabilizing the exchange rate for some countries. During that period, the influx of foreign investments to developing countries, especially the countries of the Asian continent, increased dramatically. It is now possible for companies from countries such as South Korea, Thailand, Malaysia, and Indonesia to borrow dollars directly from foreign investors or indirectly from foreign banks. 

For example, a Thai company might borrow dollars from a Japanese bank. If the company wanted to use that money to set up a new factory in Thailand, it would have to change those dollars into the equivalent in Thai currency, the baht. When the company starts selling the plant's production, it will get additional units of baht that it needs to exchange for dollars in order to pay the interest due on the loan.

The problem arises if the baht depreciates against the dollar. Suppose the exchange rate is 25 baht per dollar when the company borrowed the amount. In order for the company to pay the monthly interest on the loan, and let's assume that it is 100 thousand dollars, the company must buy those dollars at 2.5 million baht. If the baht exchange rate drops to 40 baht per dollar, the company will need 4 million baht to pay the monthly interest on the loan. These high payments could be a fatal burden for the Thai company. Therefore, the Thai government had strong incentives to avoid these problems by keeping the baht exchange rate constant against the dollar.

 In the 1980s and 1990s some countries feared the inflationary consequences of the floating exchange rate regime. When the price of the local currency falls, the prices of imports rise. If imports constitute a large part of the goods and commodities that local consumers buy, then a depreciation of the local currency may cause significant inflation. 

In the 1990s, a key component of Brazil and Argentina's anti-inflationary policy was to establish a fixed exchange rate for their currencies against the dollar. However, there are many difficulties to follow a fixed exchange rate system because the central bank must be constantly prepared to buy and sell local currency against the dollar or other hard currencies at a fixed price, which exhausts the hard currency reserves it has.

 Suppose that the Central Bank decided to peg the Iraqi dinar to the dollar, as most Gulf countries do. If there were currency dealers who want to sell quantities of dinars in order to obtain more dollars than the amounts of dinars that other currency dealers want to buy against the dollar, then the Central Bank of Iraq will have to buy the surplus dinars in exchange for dollars from its cash reserve

. In the opposite case, the Central Bank of Iraq must buy the surplus dollar in exchange for Iraqi dinars. In real practice, central banks often find it real difficulties to keep the exchange rate pegged for long periods because, ultimately, they will face a decline in their hard currency reserves. Another downside of a fixed exchange rate is that it cancels out an important means that countries can use to recover from recessions. During a recession, the exchange rate can depreciate

   If the country were to adopt a flexible exchange rate, which would increase the country's exports and reduce its imports. In the past two decades, there were a number of countries around the world, including many countries in Asia, Africa and South America that adopted the fixed exchange rate system, but found it unsustainable, which led them to eventually abandon it  link

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