Shabibi: Discusses Iraq’s monetary policy, exchange rate, and banking reform

Posted: July 23, 2013 in Iraqi Dinar/Politics
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D. Sinan Shabibi Mohammad Reza *: determine the exchange rate .. Initiatives banks is good, but monetary policy is the foundation
– POSTED ON 07/21/2013

The central bank faced some problems at the beginning of 2012 represented an increase demand for the dollar as a result of the withdrawal of U.S. forces and increasing regional demand, especially by Syria and Iran. Has such a sense of economic shock led to a large increase in demand for the dollar and thus rising amount of foreign currency auction. The phenomenon of external shocks is not strange in developing countries, it is a fundamental property of their properties because of the openness of their economies to the outside. The face of these shocks take a long time which fluctuates affected by the exchange rate and other economic variables.

That these shocks are focused on the demand for the dollar, and is no stranger to the resort witnessed by the countries to some restrictions aimed at demand management. And successes vary as a result of these measures. This means that the fluctuation in the exchange rate in 2012 was mainly due to external shocks and not because of internal policy. Restrictive methods were not effective, but effective treatment which resulted in great success was through the lifting of all restrictions and exchange rate liberalization and meet the demand for foreign currency as is fully described in the statement No. 19 in 1/10/2012 where the “Bank has committed to maintain the value of Iraqi dinar and stability as part of its policy for the protection and growth of the Iraqi economy, and in this context ensures that the Iraqi Central Bank to meet the demand for foreign currency in full, including not intersect with the law of money laundering and money crime and terrorism No. 93 for the year 2004, instructions and regulations issued in this regard. “

If the crisis the central bank in the previous period is a result of an external shock violent the oscillation, which happened in the time of the current administration was the result of its policies, and treatment that we have seen recently was not the result of the policy of this administration cash, but as a result of initiatives banks represented by the reduction in the exchange rate offered by the dealers end by reducing profits. I’ve been to restrict the supply of foreign currency starting (in the tenth month of 2012). This continued restraint so as not to desire the new administration to meet demand fully believing that thus avoiding wastage of public money, and was not this administration is aware that the main objective of the central bank, according to its law is to stabilize the exchange rate, so it is very essential that you are interviewed every demand except So which involves banking and administrative irregularities or so large that involves money laundering operations and the financing of terrorism.

So price has continued to rise and became up to 1280 dinars to the dollar at the end of the fifth month of 2013. We do not know how to be in front of a waste of public money and we we meet a demand for the dollar and take currency Iraqi suit and the resulting stability of the exchange rate. the current administration is now selling amounts beyond what was sold by the previous administration in duration recent why there was waste in the past – as has been said – and not There are wasting now!?

The new administration has adopted a cure is not consistent with the principles of monetary policy. This treatment represents that the banks cut the price of the dollar, which means that the procedure was the same on the exchange rate and not on the exchange rate fundamentals (of supply and demand of foreign currency). The target price directly price may ignore the basics and therefore it is merely a holding administratively by. But relying on the basics of price means the use of reserves to meet the demand, which will lead to a reduction in the price of the dollar, and this is a market issue and not an administrative issue, and if the reserve falls as a key parameter for the basics of price, baptize to increase the price of the dollar. So it was on the monetary authority to lower the exchange rate of the dollar by pumping the money supply through the reserve and not by the banking sector downwardly directly. In other words, that the treatment must be within the monetary policy mainly.

The treatment through the reserve will be more stable and enduring. Change the price or reduced in this case must be due to the effect of monetary policy, especially the money supply and exchange rate policy. It should not be this reduction due to reduced profits of the banks it is not characterized by stability and permanence of the hand, as it is not within the means of monetary policy on the other. This has resulted in style (by banks) low exchange rate of 1280 dinars to 1225 dinars, the price is still high.

On the other hand, the monetary treatment by banks will impose some restrictions on the central bank, will increase the bargaining power when private banks when asked the central bank to apply some developmental measures, such as increasing the capital of banks or ask them to activate brokerage to regulate the banking reality.

Finally, the exchange rate policy is the policy of total while the area in which they operate is a partial area banks. Determine the exchange rate and the basic function of the functions of the central bank, which is certainly not the of missions banks, especially since the central bank has large reserves which can meet all the demand levels. It is possible to get to the same result, any reduction of the dollar, through the reserve and thus be in front of a monetary policy to maintain the stability of the exchange rate, led by the central bank.

That trading with the banks on the issue of the exchange rate is needed, but that this trade must go out to the governmental and parliamentary bodies and the private sector as well, and can be trading covers other elements of monetary policy.

* Central Bank Governor article

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