Dollar-Dinar Exchange Rate Gap: Causes and Treatments
Iraq relies in its monetary policy to monitor the change in the value of its dinar against the dollar on a fixed exchange rate peg system, as the overall policy aims
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to reduce the gap between the official and actual exchange rates and stabilize it close to the target exchange rate, curbing inflation, stimulating markets, commercial, financial and investment transactions, and stimulating growth. Therefore, reducing the exchange gap at the target exchange rate level is one of the prominent issues facing the economic policy maker in Iraq in order to limit the major repercussions that go beyond the economic scope and crystallize significantly in the social stability of the country. This gap becomes more evident through the variation in the dollar exchange rates and the fluctuation of the real value of the dinar, either positively generating revenue or negatively generating additional costs that cause repercussions on purchasing power without taking into account individuals and economic units, negatively affecting local and foreign savings and investment. The more the gap varies, the greater the economic cost of investment and the higher the levels of inflation, which increases the suffering of the limited-income family sector.
It has become known that the size of the Iraqi economy's GDP depends very heavily on the oil dollar, which is the main source of the Ministry of Finance's resources, instead of the non-oil dollar, which is called the non-oil export dollar, which has very low flexibility, resulting in a sharp decline in credit deposits in the accounts of traders exporting goods in Iraqi banks in exporting countries. This dependence exposes the exchange gap to fluctuations in the global oil market. When global oil prices rise, we witness a decrease in the exchange gap due to the increase in the supply of the dollar, while in contrast, during periods of economic recession or when oil prices fall, the gap increases significantly when the government is unable to provide an adequate supply of dollars in the official window for buying and selling dollars. In such cases, traders are forced to search for alternatives through the parallel market, which exacerbates price pressures on the weakest groups.
Referring to the reasons that widened the exchange gap, they are multiple. In addition to what was mentioned above, the reasons can be traced according to the axis of indirect reasons that are linked to the country's trade policy and the problems of border crossings related to dollar smuggling, including those related to activating the role of crossings as an authentic source of revenue. There are also indirect reasons that have a political and security nature and medium- and long-term repercussions on the movement of money and investment.
While economic and monetary reasons stand out at the forefront of direct or technical reasons, some of them are related to the nature of the banking system and the extent of its credit capacity and the level of banking compliance with the monetary and credit conditions of the Federal Reserve, which affects the levels of supply of the petrodollar. Therefore, we find that many international banks refuse to work as correspondent banks due to the low credit rating of our banking system as a result of smuggling operations, money laundering and sanctions that affect a third of Iraqi banks. Therefore, we find that they do not stand up in this regard, except for banks that have external partnerships with Arab banking capital. They derive international acceptance from the quality of the credit rating of those countries, which facilitates the process of opening accounts with correspondent banks. Therefore, there is fear that pressures on the dollar exchange rate will increase, widening the gap.
It is also noted that among the technical reasons that led to the widening of the gap are the successive changes in the official exchange rate threshold taken by successive government administrations. The gap witnessed a transition at the end of 2020 from the stable situation in which the gap between the official exchange rate of 0.118 dinars per dollar and the actual exchange rate of 1,200 dinars narrowed, to raise the threshold in 2021 to 1,450 due to the decision of the Central Bank at the time. Then the threshold rose this time after the Council of Ministers approved in February 2023 the decision of the Board of Directors of the Central Bank of Iraq to amend the official exchange rate of the dollar against the dinar, to the threshold of 1,300 dinars per dollar.
By following the parallel dollar exchange rate in November of this year 2024, we find that it has reached the limits of 1500 dinars per dollar and exceeded it, and that the Central Bank’s selling price for cash dollars, transfers, documentary credits, and international settlements for electronic cards is at the threshold of 1300 dinars per dollar. Therefore, it is concluded that the gap in the dollar exchange rate against the dinar is still widening despite the pressures of the Federal Reserve and the Central Bank’s efforts towards compliance.
Therefore, dealing with the gap between official and actual spending should require comprehensive, integrated policies that target technical and non-technical treatments within medium- and long-term planning, the most important of which are:
Reforming the structure of the banking system, developing its efficiency, and raising the levels of its credit capacity and the flexibility of its banking compliance.
Developing tools for targeting inflation and exchange rates, which would help reduce the exchange gap and achieve price stability.
Implementing solid reforms in the financial and monetary sectors to enhance the flexibility of banking performance in accordance with the SWIFT global financial settlement system.
Coordination between fiscal and monetary policies to achieve the target exchange rate by rationalizing government spending and tightening control over the money supply.
Economic policy should enhance transparency in all financial and banking operations, by implementing clear and strict control systems to contain opportunities for corruption and exploitation of the exchange gap.
Deepening the mechanisms of border control and combating administrative corruption to increase total revenue.
Government authorities must maintain and enhance security and political stability to contribute to building confidence between local and foreign investors on the one hand and the investment environment on the other, which will stimulate further stability and growth.
Formulating an economic policy that targets technical solutions to expand the non-oil production base, and serious planning on how to diversify sources of income for the overall economy. The path of developing the agricultural and industrial sectors will be the decisive factor in reducing imports and stimulating the growth of fixed capital accumulation for the private sector. Hence, the demand for the dollar for consumer import purposes will decrease.
Economist: Government should exploit rising oil prices and implement sound financial management
Rashid Al-Saadi told Al-Furat News Agency: "The rise in global oil prices is due to the impact of political circumstances. With the intensification of the Russian-Ukrainian war and the challenges facing the region, in addition to the decision of the International Criminal Court regarding Netanyahu and his Minister of War, and Israel's threats to Iraq and the pressure in the region, oil importing companies are being prompted to take precautions and be careful, and the political and security factor is the decisive and influential factor in the rise in oil prices."
He explained that "Iraq's benefit from this rise is that every dollar in which oil rises serves Iraq by no less than a billion dollars annually and strengthens its budget according to the size of its production."
Al-Saadi stressed, "The government must exploit the circumstances and the rise, because as soon as there is stability in the near or distant future, oil prices may drop significantly. This is a call for the government to manage the state's finances in a rational manner."
Parliament resumes its sessions next week... and clarification of the mechanism for extending its legislative term
Aref Al-Hamami told Al-Furat News Agency that "extending the legislative term of the House of Representatives does not require a vote, but rather only a decision from the Speaker of the House and his deputies to decide the legislative term."
He added, "The next session is scheduled to include the general amnesty and personal status laws, and work will be done to resolve them."
He added, "There is nothing new regarding the 2025 budget schedules, and we are waiting for them to arrive from the government."
The Speaker of the House of Representatives decided on the fourth of this month to resume sessions next week after the completion of the population census operations in the country.
Iraqi government to Baghdad Today: We must adapt to the new political situation in the United States
Iraqi government spokesman Bassem Al-Awadi confirmed today, Friday (November 22, 2024), that the current signs after the victory of US President Donald Trump are positive, indicating that it is the duty of the Iraqi government to adapt to these governments and coordinate with them in order to protect the interests of the Iraqi people.
Al-Awadi said in an interview with Baghdad Today, "There are dozens of readings for the next stage, but in the end, some political analyses are applicable and others are not. In many cases, they are similar to predictions that may come true or may not come true. There is a very large percentage of fear among some people based on President Trump's first experience. Therefore, many of the analyses are presumptive analyses that go back to reading the first experience."
He added, "We believe that the matter is different now. The signals so far during the past days since Election Day until today are acceptable and good signals through the Prime Minister sending congratulations to Trump on the occasion of his victory in the elections. He also made a very important phone call with President Trump, which was also positive and included many compliments and talk about Iraq, the economic situation, Iraqi strategic projects, and the promises made by Trump."
He continued, "We do not want to rush into readings as a government with a very important issue. The duty of governments is to work with the facts. It is not their duty to raise fear and criticize a certain president and encourage a certain president. The duty of the government is to protect the interests of the Iraqi people." He noted that "there are many countries in the world, some of which are large, and all of these countries, especially the large ones, have moods and elections, and different types of presidents come to power. Therefore, it is the duty of the Iraqi government to adapt to these governments and coordinate with them in order to protect the interests of the Iraqi people, and this is what we are working on."
Protecting Iraq is an American duty: Security agreements are not just ink on paper
In a tense atmosphere that portends an unprecedented escalation, news continues about intensive security and diplomatic moves to prevent a confrontation between Israel and Iraq, against the backdrop of attacks by armed factions on Israeli sites. While Israel has filed an official complaint with the UN Security Council against Iraq, fears are growing of an “imminent” Israeli strike that could open the door to escalation in the region.
The political advisor to the Iraqi Prime Minister, Fadi Al-Shammari, said in press statements that “the Israeli threats have become tangible after the complaint that Tel Aviv filed with the Security Council.” He explained that the Iraqi government is working on more than one level to contain the crisis and avoid its disastrous repercussions.
Sources said that Baghdad received direct warnings from Washington that Israel was prepared to take military action unless the government could rein in the armed factions.
A source said that the Security Council is witnessing intense discussions regarding the Israeli complaint. He added: “Israel is trying to provide justifications for a possible military strike, claiming that the attacks are being launched from Iraqi territory with Iranian support.”
Washington in the circle of pressure
For its part, Washington finds itself in a sensitive position under the “Strategic Framework Agreement” with Baghdad, which imposes on it the responsibility to defend Iraq against any external threat.
However, observers believe that the American position may be less clear than it seems, as an analysis published by a Washington research center indicated that “Israel may resort to limited surgical strikes without waiting for a public green light from the United States.”
Between the field and diplomacy
A citizen named Ahmed Al-Saadi spoke about the tense atmosphere in a Facebook post, saying: “What is happening now brings to mind the atmosphere of war in the nineties. People here are afraid of the repercussions of any new confrontation.” In a tweet on the “X” platform, an account said: “If the news of an imminent Israeli strike is true, Iraq may witness one of its most complex crises since the fall of the former regime.”
Faction movements and internal balances
Field reports indicated that some armed factions have begun taking precautionary measures in preparation for any possible attack. A source close to one of the factions said in a private interview: “We are ready to defend Iraqi territory if Israel targets it.” But a citizen from Baghdad named Zainab al-Ali expressed her fears about the repercussions of these moves, saying: “Iraqis always pay the highest price in such conflicts.”
Future analysis and escalation expectations
According to strategic analyses, Israel is exploiting the escalation to impose a new equation in the region, which was confirmed by a reliable source, who said: “Any Israeli strike could be the beginning of an expansion of the conflict, as the factions will not only respond from within Iraq, but we may witness other fronts igniting.” He added: “The biggest fear is that Iraq will turn into an arena for settling regional scores.”
Iraq needs a unified position from political forces to ward off the Israeli threat, away from the divisions that have weakened the country over the past years.”
Al-Fath: Whoever attacks Iraq will pay the price
Al-Fatah Alliance leader, Adi Abdul Hadi, confirmed on Thursday that whoever attacks Iraq will pay the price.
Abdul Hadi said in an interview with Al-Maalouma, “Iraq is a sovereign country and an attack on any of its cities and towns is a sinful aggression and Baghdad will not hesitate to respond and the aggressor will pay the price.”
He added, "The Zionist entity would not have launched its threats had it not been for Washington's support for an arrogant entity that has been a deviant seed in the body of the Arab nation for 70 years," stressing that "whoever attacks Baghdad must realize that the response will inevitably come.”
He pointed out that "America's collusion with the Zionist entity is what is pushing the latter to continue the series of crimes of genocide against the Palestinians and the Lebanese," adding that "all Iraqis support the steadfastness of the peoples who are facing Zionist arrogance and its crimes."
It is noteworthy that the Zionist entity has continued to threaten more than once to target Iraq in light of the crimes of genocide against the Palestinians and the Lebanese.
Foreign Minister Fuad Hussein confirmed on Friday that the Iraqi government does not want war and that Iraq is not part of the bloody conflict taking place today. He revealed that Baghdad is in continuous contact with many influential Western capitals to stop the attack on Iraq, as the Israeli threats are serious, clear and tangible, in addition to intensive contacts with Tehran and responsible dialogue with the factions.
Minister Fuad Hussein explained during his participation in the Fifth Forum for Peace and Security in the Middle East organized by the American University in Duhok, that he is not talking today about pressure cards, but about the continuous communication between the Prime Minister with political leaders, especially the leaders of the Shiite framework, to explain the situation and its seriousness, and also to the leaders of the factions, in addition to his continuous contact with the Iranian side.
The Foreign Minister stressed that the current reality reveals that there is a tangible threat, so Iraq must not be pushed into war, and this is what is being explained in detail, whether to political leaders or leaders of the framework, and these issues are being explained in detail about the danger of moving against any country from within Iraqi territory.
Expectations of an "elite" Iranian delegation arriving in Baghdad.. 3 files on the table
An informed source expected, today, Friday (November 22, 2024), the arrival of an elite Iranian delegation to Baghdad within the next 72 hours.
The source said in an interview with "Baghdad Today", "Tehran has indirect lines of communication through 3 Arab countries, including Baghdad, with the White House to convey messages and positions regarding developments in the Middle East and ways to prevent it from reaching the stage of comprehensive war."
He added that "an elite Iranian delegation may arrive in Baghdad within the next 72 hours to discuss Tehran's positions on three files, most notably Gaza and Lebanon, the importance of stopping the war, and its vision of the situation and the roadmap that could stop the tensions at a certain point."
He pointed out that "Tehran is very open to the issue of stopping the war as quickly as possible and pressuring Western countries, including America, in order to move the pressure tools on the entity and stop the genocide machine," noting that "all indicators show that the Middle East is facing rapid changes, and the language of diplomacy may be slightly higher for the first time than the language of war."
In a related matter, an informed source revealed, on Thursday (November 21, 2024), an Iranian message with positive content to Washington through Iraqi mediators.
The source said in an interview with "Baghdad Today", "Tehran sent yesterday, through Iraqi mediators, an indirect message to America about its vision for resolving the crisis and the dangerous escalation in the Middle East, starting with ending the war of extermination in Gaza and southern Lebanon, stopping the bombing in Beirut and seeking a roadmap with an international vision."
He added that "the Iranian message carried diplomatic signals in most of its lines, which means that it wants to reach a solution that ends the current conflict according to a vision with specific dimensions, while indicating that it does not want a comprehensive war, but will engage in it if it is imposed on it directly."
He pointed out that "it can be sensed that the Iranian military option on Tel Aviv has been postponed at the present time in light of undeclared international efforts to prevent the explosion of the Middle East, in addition to waiting to see the new American president and how he will deal with the files of the East and his promises to end the war."
The source said that "Iran has begun to tone down its rhetoric towards diplomacy, through which solutions can be reached that contribute to stopping the bloodshed, while declaring a firm position that it will not abandon the axis of resistance."
Iraq played the role of mediator in the indirect dialogue between Washington and Tehran, and contributed to preventing events from developing into a major regional comprehensive war.
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