Home
Independence of the central bank and international reserves and the general budget in Iraq
Date: Monday 05/07/2012 19:55
Dr. Ali Mirza
Third, the international reserves at the Central Bank
A. Known as the balance of international reserves (reserve balance of foreign currency) as the net assets (assets minus liabilities) Foreign available off of the monetary authorities and under their control to adjust the imbalance in the balance of payments, or regulation is direct for this imbalance by intervening in the exchange market to influence the exchange rate and / or and for other purposes. Include international reserves on foreign currency assets (in cash deposits or bonds or securities) and assets of the monetary gold and special drawing rights and reserve the International Monetary Fund and other assets of the claims.
B. In oil-producing countries, is linked to high or low international reserves, mainly oil and returns determined by the State / Ministry of Finance on how to use the revenues as well as private sector demand for local currency and foreign currency than on the central bank (other than revenue reserves). In the absence of serious restrictions on currency conversion, the central bank according to its rules is a party to respond to the request of foreign currency exchange. This is only if the balance of international reserves came down for a critical threshold, which requires him to re-impose restrictions on foreign exchange. The key point here is that what determines the size of reserves, above a critical minimum, not the central bank, but returns from foreign currency and their uses, whether by the state (and is important in the case of Iraq is the uses of the state) or the private sector.
C. For this reason, international reserves have grown significantly in the oil countries and slower in other oil countries despite the high oil revenues in all of them. For example, total international reserves in the Russian Federation about 484 billion dollars, at the end of 2010, while the $ 39 billion just in the UAE. The growth of the reserves in Russia and not Tname in the UAE was not up to the monetary authority (central bank), but, mainly, to the way they act by the state budget surplus. Has reached the UAE foreign investments at the end of 2010 is about 709 billion dollars while the corresponding figure of the Russian Federation $ 143 billion. If the Russian financial authorities wanted, for the assumption, that investments in the State up to $ 150 billion, instead of $ 143 billion, it has to invest $ 7 billion abroad. Which is equivalent to 29.34 × 7 = 205 billion rubles. On the assumption that it has sufficient surplus Russian currency you will pay for Russian monetary authority (or use all or part of the accounts sterile / inert) by 205 billion rubles to provide the monetary authority in the amount of $ 7 billion to invest abroad. If that happens, will drop the balance of international reserves in Russia of 484 billion dollars to 477 billion dollars (484 minus 7). This is the mechanism by which changes the balance of the reserve: a national currency against foreign currency, and vice versa. In this example, because, presumably, that the Russian Ministry of Finance had «sold» and / or »sterilized / put down» 7 billion dollars of oil revenues in dollars compared to 205 billion rubles.
D. Grown in recent years the volume of international reserves with the Central Bank of Iraq as a result of the increasing oil prices and export revenues, which then helped him to absorb the demand for foreign currency and more recently the additional demand, which seems to have been a result of instability in the countries surrounding Iraq. The central bank governor said recently, according to the magazine «weekly» (22 to 28 April 2012 Number 217), that the volume of international reserves reached $ 60 billion. If true, the International Monetary Fund projection contained in the report of the deliberations of the precautionary loan, issued in March 2011, imports in 2011 increased by 54-61 billion dollars, this reserve represents the need 12-13 months of imports. International standards and this size is still low, especially in light of the lack of «reserve» Last can be used by Iraq, in times of need, as in the countries that have sovereign funds / investment foreign countries, such as the Gulf, Norway, Russia, etc..
Fourth, the budget deficit and its financing
A. As a result the budget deficit «planned», which is emerging laws of public budgets at the beginning of each year (and which has proved so far that is mostly subject to funding from the surplus accumulated accounts of the Ministry of Finance and / or high oil revenues from what was assumed when developing the budget, see next paragraph) appeared invitations for the use of international reserves with the central bank to cover the deficit. In fact, these calls involve a breach in the function of these reserves and their role and the mechanism used, as demonstrated in the previous paragraph. The most important work of the central bank is to maintain the value of the currency through stability. And that comes from the stability of its exchange rate. And, in turn, come to meet the demand for foreign currency at this price. Therefore, the call to use international reserves to cover the deficit in the best of intentions to be translated into practice, the central bank lends directly to the Ministry of Finance which is can be expressed in non-technical terms the «money printing» print any of the Iraqi dinar.
Economy and a low flexibility of the production machinery (especially the services sector by the stores), this leads to disruption of the budget spending / production, which is already dysfunctional as a result of the predominance of budget revenues from oil revenues to other revenues. This in turn means inflation will shift gradually toward lust. Please note that the article (26) of the Bank Act prevents him from lending to the government (as shown directly above).
B. We do not believe that nobody forgets what happened during the period 1991-1995 from the printing of money so that the inflation rate reached about 237 percent annually during that period. It is also inappropriate to forget what dragged him from the consequences of this (or indeed the scourge of) economic and social consequences are profound.
C. Maintaining a low interest rate benefit of the public sector facilities, because it reduces the mandated operational and thus reduces the requirements to help them by the general budget. Therefore, raising the interest rate (interest rate monetary policy) from 7 percent in 2005 to 20 percent of his arrival in 2007 must have increased the operating costs for some facilities, the public sector. However, the Bank reduced the price later, so he returned to the 6 percent since April 2010. Whether we agree or disagree with the Central Bank in the effectiveness of interest rate to combat inflation, the Bank has the right under law to use the means it deems appropriate in the fight against inflation. I tend to the view that the more neutral than those who are trying to reduce mandated by reducing the interest rate (or raising the dinar exchange rate?) Is the more effect to the requirements of the overall economic balance of it to the need for these entities to finance the cheap.
D. It is appropriate to mention that the central bank has already facilitated lending to the executive indirectly, but in proportion, in one form or another, Bakannouna and the rules of his performance through the reduction of legal reserve has to a bank in order for the bank loan in Iraqi dinars more than the equivalent of $ 2 billion to one ministries. As a result, the loan is returned to the banking system and then to the Central Bank is a demand for foreign currency had to be funded from the balance of international reserves.
[You must be registered and logged in to see this link.]
