Central Bank of Kuwait: the dinar basket «secret» to protect it from speculative

Posted: March 23, 2012 in Iraqi Dinar/Politics

Sakka: Currency does not provide stability in the exchange rate if trade were concentrated with a particular State

16 / March / 2012 sources reported that the Central Bank of Kuwait, the components of a basket of currencies dinar confidential, although the countries of the world that follow the system determine the rate of exchange on the basis of a basket of currencies are the announcement of the basket, noting that the goal is to protect the local currency of the speculative pressures in the event of predicted weights change due to change in the distribution of trade, which displays the local currency to speculative attacks, particularly if it comes to the currency of a country that has great weight in the basket.

The sources pointed out that the selection of the Central Bank to a group of major currencies to a basket, is based on the intensity of bilateral trade between the State and the States claiming the currency, where the Central Bank of the order of the partner countries in the trade as percentage of total imports and exports to and from this state to the total foreign trade of the State , and then given to each currency in the currencies of the most significant weight in determining the exchange rate between the currency and the currencies of these countries.

For his part, a professor of economics at the Faculty of Administrative Sciences, Kuwait University that many of the countries of the world follow the principle of transparency in the disclosure of components of the basket price their own depending on the developments that occur in the relative importance of the geographical distribution of foreign trade with major partners in trade, but on the other favors Some countries, including Kuwait dinar basket components to keep in secret in order to concealment.

And hit the Saka an example, saying: «If we assume that the most important partners of the state in foreign trade are the United States (ratio of exports and imports to the total foreign trade of the country is 50%, will call this percentage weight), and the proportion of trade with the countries of the European Monetary Union is 20%, and the proportion of trade with Japan is 20%, and the ratio of trade with the UK is 10%, it is based on these data is to give the U.S. dollar and the weight is equal to 50% in the exchange rate of the local currency, the euro and the weight is equal to 20%, and the Japanese yen and the weight is equal to 20%, and the pound Sterling equal to 10% by weight (note that the total weights equal to 100%).

He said that assuming that the pound sterling has fallen by 20%, in such a case will go down the currency by 10% of the decline of the pound sterling, which represents only 2%, and so on, with the change of weights, or change the value of currencies consisting of the basket change the exchange rate of currency local extension.

On the most important advantages of the basket of currencies, said Sakka, that it is in helping to maintain the rate of real exchange of the state in the face of trading partners, and helps to avoid any exaggeration in the rate of exchange Overvaluation or undervaluation in the value of the currency Undervaluation, as it ensures the relative stability of the exchange rate of currency for the currencies of trading partners with the state, as the high value of a particular currency in the basket, means lower other currencies for that currency and vice versa.

But he stressed that the defects of this system as well; where it does not provide the required stability in the exchange rate if trade was concentrated with a State, and then the weights determine the rate of exchange based on a particular currency (eg the dollar). In such a situation suffers a system to determine the rate of exchange of the same disadvantages of the system to link rigid, and that the system of the basket of currencies does not reflect the imbalances of cash in the market for money, because the exchange rate is mainly related to trends in trade and not the trends of supply and demand of money in the national economy, more so, it deprive policy-maker of a basic instrument of economic stability which is the national currency exchange rate, because the rate of exchange is determined by trends in trade only.

As for the system determine the exchange rate of the Kuwaiti dinar, drew out that the currency component of the basket is not limited only to the currencies of the partner countries of Kuwait in the trade, but also enters in the composition of the basket currencies of most countries of Kuwait financial transactions (investment) with it, which makes it difficult to guess composition of the basket because the relative distribution of the foreign investments of the State of Kuwait is declared.

Systems to determine the rate of exchange
Meanwhile, between Sakka that the national currency exchange rate is determined according to the system adopted by the central bank to determine the value of the currency. There are various systems, the rate of exchange in general, but it can be summarized in a system to rate the free exchange or floating Floating, and system installation rate of exchange (or peg) for an international currency like the dollar Pegged, may determine the rate of exchange through the use of a basket of currencies Currency basket, or may be determined by the exchange rate through government intervention, according to market trends, with intervention from time to time to guide the direction of this volatility, the so-called floating dirty Dirty floating, which is the aim of ensuring that the change in the value of the currency is going the direction desired by the government , as well as some other forms to determine the marginal rate of exchange.

He referred in this context that the Kingdom of Saudi Arabia, for example, pegs its currency to the U.S. dollar linked static, where not allowed to exchange rate of riyal to the dollar change up or down, which puts the Saudi riyal to the high volatility in exchange for other currencies than the dollar, given the volatility of the great suffering from the dollar in the foreign exchange market currently, According to the system of linking the Saudi riyal, the price is the central 3.75 riyals for every dollar, are not allowed Real to rise or fall against the dollar for this price.

And on ways to maintain this price if they deviated market price for this level set by the monetary authorities, said Sakka, it is often through the intervention of central bank in the foreign exchange market to sell the dollar, if there is pressure on the dollar to rise for the Real, or the purchase of dollar, in the case of a pressure on the dollar to decline for the Real, which means that the monetary authorities monitor the exchange rate of one for a Real exchange rate of the riyal to the dollar.

With regard to the relationship for the rest of the riyal currency, is determined for these currencies over the dollar itself, as the currency peg. He added: «For example, if we assume that the dollar decline in value for the euro by 20%, this would mean an extension down the value of Saudi Riyals for the euro in the same proportion, and then take the prices of goods that are imported in the euro to rise by the same percentage, while drops in commodity prices Saudi Arabia, which exported to the euro area at the same rate, and vice versa in the case of high value of the dollar for the euro, the Saudi riyal rises at the same rate, such a system are its negative impact is high if the currency of the peg are highly volatile, which lacks the currency of the country to stability objective of the linking process » .

And the reasons for the possibility of countries such as Saudi Arabia to the system in spite of disadvantages, said Sakka, that is that this system is simple and easy to apply in practice, and does not require technical expertise in the follow-up rate of exchange to determine the exchange rate just for the local currency against foreign currencies, as well as it is easier to follow this system in the countries that have sufficient reserves from dollars to intervene in the foreign exchange market in a timely manner.

But the problem with this system is that the state will not have an independent monetary policy, meaning that it will adopt the interest rate which is specified with the Federal Reserve to maintain the margins of interest rates between the dollar and the riyal.

On the other side, custom system floating orbit Managed Floating System as another system to determine the rate of exchange by which it leaves to determine the rate of exchange for the forces of supply and demand, but in the framework of limits and the minimum rate of exchange or what we might call the scope of oscillation, when the rate exceeds the exchange maximum or minimum specified the scope of the oscillation interferes central bank to restore the rate of exchange to the domain oscillation using different tools such as the sale or purchase of foreign currency or change the interest rate on national currency, and is characterized by this system linkage system that provides a great deal of freedom to the state in determining the value of its currency, local, and it helps to maintain the real value of the coin and then the degree of competitiveness of the state.

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