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Lower oil prices and the specter of stagflation in the Iraqi economy
Jawad Kadhim al-Bakri
The dramatic decline in world oil prices (from $ 100 beginning in 2014, to $ 56 in her last days) made from oil-producing countries that depend to a great extent on their budgets biggest losers oil revenues, and the most prominent of these countries, of course, Iraq, which has been in the last convoy As a result of the lack of seriousness in creating a variety of sources of income, thus came the 2015 budget to reflect the state of confusion and fear in the following days met.
This fear sourced from big deficits that the budget, the deficit, which the government has failed to describe Maagath in a scientific manner based on sound economic reasoning, we find that it is not specified methods of disability cover in detail, but came in a loose, internal and external Kalaguetrad or increase the export of oil or increase the price of a barrel of oil source, and we are here follows a statement:
A. The government did not explain what are the internal borrowing methods, you are:
* Deficit financing (ie, government borrowing from the central bank) that this type of financing has adverse effects on the economy, as this type of financing leads to severe monetary inflation due to the weakness or lack of productive apparatus in Iraq, and the marginal propensity to consume is high, and the consequences for this Inflation encourage speculation, the weakness of the savings, and the deterioration of the standard of living for low-income earners, which leads to increased inequality between members of the community.
* Or through the new release cash (currency printing), and this type of financing also lead to high rate of inflation.
* Or put bonds by the central bank to institutions and individuals (whether mandatory or optional), and this type is very useful for the economy, because it reduces inflation.
* Mother of the Iraqi reserves of foreign currency, which is owned by the Central Bank, who was reached $ 76 billion in 2013.
* But the economic reality that must be known in this regard is that when the resulting deficit for a sharp decline in exports, which depend on the government to finance its spending public resources (as is happening in Iraq today), the financing of the deficit does not lead to inflationary pressures. On the contrary, the reluctance to finance leads to a decline in the deficit is not justified in the levels of income and welfare.
B. As for the increase in the export of oil, this is the responsibility of two directions:
The first. Iraq within the Organization of Petroleum Exporting Countries (OPEC), and the organization has a production ceiling agreed among its members, is not in favor of the Iraq out of OPEC consensus.
II. If Iraq decides to export a larger share of the blister, the member states of OPEC may follow suit, and this will increase the drop in oil prices, this represents a drain oil wealth first, and perhaps not to catch the quantities exported down prices Secondly, this in light of the limited export capacity Iraq.
C. As regards paragraph price of a barrel of oil, the increase in the price of a barrel of oil is not, however, Iraq's unity, not, however, oil-producing countries only, but that oil prices today are subject more than ever to monopolize the buyers and not the monopoly of vendors as it was in the seventies of the last century.
D. The calculation of the revenues derived from the export of crude oil (which accounts for 95% of the Iraqi budget) on the basis of the average price of 60 dollars a barrel is far from reality because of the expectation that oil prices constantly going down since August 2014 and up until now
Reached 56 dollars a barrel until the end of December 2014, as well as the failure of the OPEC members in the November 27, 2014 an agreement on the reduction of the production ceiling (of 30 million barrels per day) for the purpose of the return of oil prices to the previous nature.
E. In previous years was calculated revenues from export of crude oil less than its price in the world market, so the Iraqi budgets did not suffer from a significant deficit.
And. If what has been calculated by the revenues derived from the export of crude oil price of $ 50 (which is the expected price that reached him in world oil prices over the next few months, if not up to less than that) would be Iraq's oil revenues for 2015, according to energy export of $ (3.2) million barrels per day is estimated at (57.600.000.000) Fifty-seven billion six hundred million dollars, while the 2013 budget amounted to more than $ 100 billion and was the terrorist threats with low compared to the years 2014 to 2015, these estimates cancel altogether the budget, and should be re- calculating oil revenues within the expected rationality border and is less than 50 dollars per barrel, and this applies to the budget deficit is calculated in paragraph (II-C Chapter II) as the deficit will increase greatly according to real estimates.
G. In the second chapter door expenditure and deficit / Article 2, first, the expenses are divided into two parts: First, current expenditure which is 79 trillion dinars (trillion worth a thousand billion dinars, and a billion is equal to a thousand million dinars), II: project expenditures (investment budget), which (45) trillion, and the total is equal to the total expenditure in the budget, which is 142 trillion, while the expected revenue is equal to 84 trillion, then the deficit is equal to the difference between the income and expenditure of a 58 trillion dinars.
We believe that the government today a range of options:
* If what has been reducing investment expenditure increased by 100%, and current expenditures by 49% the projected deficit will end up, but reducing the investment budget of this size means stop
Investment projects in the country for a whole year, and reduce the current budget of this size means that the government's ability to repay a large part of the employees' salaries, and that means reducing consumer spending by 59% and this causes great economic recession with high unemployment rates.
* If what has been reducing government spending by 59% on all aspects of expenditure (provinces, ministries, the Kurdistan region, development of the regions, the investment budget), this option also means reducing government spending, which leads to a recession, but at rates lower.
* Float bonds by the central bank to individuals and institutions, such as bonds that have been put forward in the eighties of the last century at the time of the Iraqi-Iranian war.
* Raise tax rates progressively to enter, although this option will to dysfunctional to obtain large tax revenues because of our system is flexible.
We believe that the projected image of the Iraqi economy during 2015 will be as follows:
* Central Bank will -bla the factor reducing the daily currency auction dramatically, if not already revoked, due to lower revenue in hard currency, and this will cause a decline in the value of the local currency (the dinar) The US dollar significantly, perhaps more than the Iraqi dinar exchange rate against the dollar barrier of 200 dinars to the dollar.
* Significantly the unemployment rate will increase due to lower government spending, particularly in the area of the investment budget.
* Inflation rates will increase because of the low value of the Iraqi currency First, the potential monetary authority of the Central Bank, which would eventually have to release the new monetary policy (currency printing) which affects significantly higher rates of inflation.
* Suffer the Iraqi economy from recession due to the decline in buying and selling movement, as well as the absence of domestic production, then the state of unemployment among the people of the country show, and with the recession, have Atnkhvd prices, because the cost of production of goods, be much more than ever before, for lack of demand those goods exceeded the price therefore does not fall, and that affects a lot of recession
People from harm, especially those of workers in the private sector, and the construction sector and construction, in particular, those who lose their jobs as a result of shrinking government expenditures.
This situation is called stagflation Stagflation, which is the case of weak economic growth and high unemployment, an economic recession, accompanied by inflation, and spoke this case when there is no growth in the economy, but there is a rise in prices, and it was thought that this is impossible to happen, because the the impact of the recession will reduce wages and thus prices, but in practice this has happened in the early seventies in the American economy, owing stagflation to one or more of the economic policies pursued by the government, including the deficit financing and its accompanying monetary version leads to increased rates of inflation, or increase interest rates in order to encourage the entry of foreign capital investment, or economic behavior is doing the citizen as a result of worker expectations, such as increasing the marginal propensity to save and declining marginal propensity to consume, which contributes to a reduction in aggregate demand, or low enough marginal capital, which contributes to reducing the size of the investment and increase the number of unemployed for work.
The options available to the government on the best bitter, they are at a crossroads, either to paralyze the parties to address the deficit of the Iraqi economy, which is already suffering from chronic diseases, thereby increasing the suffering of Iraqis, particularly the middle classes and the bad, or rely on scientific solutions to leave her long time ago.
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Jawad Kadhim al-Bakri
The dramatic decline in world oil prices (from $ 100 beginning in 2014, to $ 56 in her last days) made from oil-producing countries that depend to a great extent on their budgets biggest losers oil revenues, and the most prominent of these countries, of course, Iraq, which has been in the last convoy As a result of the lack of seriousness in creating a variety of sources of income, thus came the 2015 budget to reflect the state of confusion and fear in the following days met.
This fear sourced from big deficits that the budget, the deficit, which the government has failed to describe Maagath in a scientific manner based on sound economic reasoning, we find that it is not specified methods of disability cover in detail, but came in a loose, internal and external Kalaguetrad or increase the export of oil or increase the price of a barrel of oil source, and we are here follows a statement:
A. The government did not explain what are the internal borrowing methods, you are:
* Deficit financing (ie, government borrowing from the central bank) that this type of financing has adverse effects on the economy, as this type of financing leads to severe monetary inflation due to the weakness or lack of productive apparatus in Iraq, and the marginal propensity to consume is high, and the consequences for this Inflation encourage speculation, the weakness of the savings, and the deterioration of the standard of living for low-income earners, which leads to increased inequality between members of the community.
* Or through the new release cash (currency printing), and this type of financing also lead to high rate of inflation.
* Or put bonds by the central bank to institutions and individuals (whether mandatory or optional), and this type is very useful for the economy, because it reduces inflation.
* Mother of the Iraqi reserves of foreign currency, which is owned by the Central Bank, who was reached $ 76 billion in 2013.
* But the economic reality that must be known in this regard is that when the resulting deficit for a sharp decline in exports, which depend on the government to finance its spending public resources (as is happening in Iraq today), the financing of the deficit does not lead to inflationary pressures. On the contrary, the reluctance to finance leads to a decline in the deficit is not justified in the levels of income and welfare.
B. As for the increase in the export of oil, this is the responsibility of two directions:
The first. Iraq within the Organization of Petroleum Exporting Countries (OPEC), and the organization has a production ceiling agreed among its members, is not in favor of the Iraq out of OPEC consensus.
II. If Iraq decides to export a larger share of the blister, the member states of OPEC may follow suit, and this will increase the drop in oil prices, this represents a drain oil wealth first, and perhaps not to catch the quantities exported down prices Secondly, this in light of the limited export capacity Iraq.
C. As regards paragraph price of a barrel of oil, the increase in the price of a barrel of oil is not, however, Iraq's unity, not, however, oil-producing countries only, but that oil prices today are subject more than ever to monopolize the buyers and not the monopoly of vendors as it was in the seventies of the last century.
D. The calculation of the revenues derived from the export of crude oil (which accounts for 95% of the Iraqi budget) on the basis of the average price of 60 dollars a barrel is far from reality because of the expectation that oil prices constantly going down since August 2014 and up until now
Reached 56 dollars a barrel until the end of December 2014, as well as the failure of the OPEC members in the November 27, 2014 an agreement on the reduction of the production ceiling (of 30 million barrels per day) for the purpose of the return of oil prices to the previous nature.
E. In previous years was calculated revenues from export of crude oil less than its price in the world market, so the Iraqi budgets did not suffer from a significant deficit.
And. If what has been calculated by the revenues derived from the export of crude oil price of $ 50 (which is the expected price that reached him in world oil prices over the next few months, if not up to less than that) would be Iraq's oil revenues for 2015, according to energy export of $ (3.2) million barrels per day is estimated at (57.600.000.000) Fifty-seven billion six hundred million dollars, while the 2013 budget amounted to more than $ 100 billion and was the terrorist threats with low compared to the years 2014 to 2015, these estimates cancel altogether the budget, and should be re- calculating oil revenues within the expected rationality border and is less than 50 dollars per barrel, and this applies to the budget deficit is calculated in paragraph (II-C Chapter II) as the deficit will increase greatly according to real estimates.
G. In the second chapter door expenditure and deficit / Article 2, first, the expenses are divided into two parts: First, current expenditure which is 79 trillion dinars (trillion worth a thousand billion dinars, and a billion is equal to a thousand million dinars), II: project expenditures (investment budget), which (45) trillion, and the total is equal to the total expenditure in the budget, which is 142 trillion, while the expected revenue is equal to 84 trillion, then the deficit is equal to the difference between the income and expenditure of a 58 trillion dinars.
We believe that the government today a range of options:
* If what has been reducing investment expenditure increased by 100%, and current expenditures by 49% the projected deficit will end up, but reducing the investment budget of this size means stop
Investment projects in the country for a whole year, and reduce the current budget of this size means that the government's ability to repay a large part of the employees' salaries, and that means reducing consumer spending by 59% and this causes great economic recession with high unemployment rates.
* If what has been reducing government spending by 59% on all aspects of expenditure (provinces, ministries, the Kurdistan region, development of the regions, the investment budget), this option also means reducing government spending, which leads to a recession, but at rates lower.
* Float bonds by the central bank to individuals and institutions, such as bonds that have been put forward in the eighties of the last century at the time of the Iraqi-Iranian war.
* Raise tax rates progressively to enter, although this option will to dysfunctional to obtain large tax revenues because of our system is flexible.
We believe that the projected image of the Iraqi economy during 2015 will be as follows:
* Central Bank will -bla the factor reducing the daily currency auction dramatically, if not already revoked, due to lower revenue in hard currency, and this will cause a decline in the value of the local currency (the dinar) The US dollar significantly, perhaps more than the Iraqi dinar exchange rate against the dollar barrier of 200 dinars to the dollar.
* Significantly the unemployment rate will increase due to lower government spending, particularly in the area of the investment budget.
* Inflation rates will increase because of the low value of the Iraqi currency First, the potential monetary authority of the Central Bank, which would eventually have to release the new monetary policy (currency printing) which affects significantly higher rates of inflation.
* Suffer the Iraqi economy from recession due to the decline in buying and selling movement, as well as the absence of domestic production, then the state of unemployment among the people of the country show, and with the recession, have Atnkhvd prices, because the cost of production of goods, be much more than ever before, for lack of demand those goods exceeded the price therefore does not fall, and that affects a lot of recession
People from harm, especially those of workers in the private sector, and the construction sector and construction, in particular, those who lose their jobs as a result of shrinking government expenditures.
This situation is called stagflation Stagflation, which is the case of weak economic growth and high unemployment, an economic recession, accompanied by inflation, and spoke this case when there is no growth in the economy, but there is a rise in prices, and it was thought that this is impossible to happen, because the the impact of the recession will reduce wages and thus prices, but in practice this has happened in the early seventies in the American economy, owing stagflation to one or more of the economic policies pursued by the government, including the deficit financing and its accompanying monetary version leads to increased rates of inflation, or increase interest rates in order to encourage the entry of foreign capital investment, or economic behavior is doing the citizen as a result of worker expectations, such as increasing the marginal propensity to save and declining marginal propensity to consume, which contributes to a reduction in aggregate demand, or low enough marginal capital, which contributes to reducing the size of the investment and increase the number of unemployed for work.
The options available to the government on the best bitter, they are at a crossroads, either to paralyze the parties to address the deficit of the Iraqi economy, which is already suffering from chronic diseases, thereby increasing the suffering of Iraqis, particularly the middle classes and the bad, or rely on scientific solutions to leave her long time ago.
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