Why is IMF Article VIII so important and what are the obligations…


There seems to be many who cannot grasp or don’t want to grasp the process between the IMF and CBI under IMF Article XIV.
So this post will explain why “compliance” is so important before Iraq can move to Article VIII and what that compliance entails…
The CBI is a member of the IMF Charter under what is known as “transitional arrangements” or Article XIV. The objective under this charter is meant to be temporary as soon as the CBI is prepared to accept the obligations of Article VIII, they should avail itself of the transitional arrangements. In other words, Article XIV is meant to train and learn and prepare for the obligations under Article VIII.
Article VIII is very important. And Article VIII is what will make the dinar internationally recognized, convertible and tradable worldwide. The CBI simply cannot transition to Article VIII until they have demonstrated to the IMF that they can comply under the Article VIII guidelines (they have to show the IMF that they can meet the conditions of Article VIII before they will get Article VIII). So the bottom line is, until the CBI can show the IMF that they can follow the rules the IMF will not accept them into Article VIII.


Let’s get in the 2013 Article IV Consultation…
During the 2013 Article IV Consultation between Iraq and the IMF the following paragraph was stated..
“30. Staff welcomes the CBI’s objective to liberalize the foreign exchange market and the recent steps to simplify market regulations. However, staff urges the CBI to take immediate further measures to liberalize fully the supply of foreign exchange, with the objective of lowering the exchange rate spread, removing distortions, eliminating rents, and ultimately complying with Article VIII of the Fund’s Articles of Agreement. Staff also encourages the authorities to refrain from introducing any new regulation that could lead to a breach of obligations under Article VIII. In parallel, the authorities need to strengthen the AML/CFT framework in line with MENA/FATF recommendations and FATF standards, to support their efforts to deter money laundering and financing of terrorism. Against this background, staff does not recommend approval of the exchange restrictions and the multiple currency practice listed in the Informational Annex.”
I am going to explain what this paragraph means…
This paragraph is talking about the daily currency auctions conducted each day of business in Iraq. The concept of these auctions primarily is to provide foreign currency to merchants for out country purchases to allow the countries economy to function (as Iraq is currently primarily an importer of goods). Liberalizing the foreign exchange means to minimize restrictions, or make it (dollars) readily available. This purpose of doing so will lower the exchange rate spread in the country. The spread being the difference between the Official Rate of the dinar (1166) and the Market Rate (currently 1197). The reason for this is simple..its an IMF rule that the spread be within 2%. Many people confuse this discussion with other issues like inflation, etc. but this is specific to the exchange rate of the currency.


As we move through the Article IV Consultation we come next to this…
IMF Executive Board Concludes 2013 Article IV Consultation with Iraq - Executive Board Assessment
“Directors supported the objective of the Central Bank of Iraq (CBI) to liberalize the foreign exchange market and the recent steps to simplify market regulations. Further measures are needed to liberalize fully the supply of foreign currency, with the objective of lowering the exchange rate spread, removing distortions, and complying with Article VIII of the Fund’s Articles of Agreement.”
This is direct from the executive board at the IMF. They are telling them to relax your foreign exchange rules for your daily currency auctions. And as I said above they need to minimize restrictions, or make it (dollars) readily available. This is clear as day with the sole intent of… “complying with Article VIII of the Fund’s Articles of Agreement.” In other words..you need to do this so you are in compliance with Article VIII before we will give you Article VIII.


As I mentioned before, the IMF requires the spread between the Official Rate (1166) and the Parallel Rate (also known as the Market Rate) to be within 2%. During this consultation the following statement was mentioned…
“..official rate and the parallel market rate—which had been up to that point below 2 percent— started to climb, passing 9 percent in May 2013.”


Now, as we conclude the report the following statement is made…
“Iraq continues to avail itself of the transitional arrangements under Article XIV. Eight exchange restrictions (plus one exchange restriction maintained for national or international security) and one multiple currency practice (MCP) are subject to IMF jurisdiction and approval.”


What this means is that Iraq is continuing to try to comply with Article VIII and avail itself from the current transitional arrangements under Article XIV. But unfortunately at the time of this report they had 8 violations or restrictions preventing them from moving to Article VIII. Once of which is described as MCP or Multiple Currency Practice which is a result of the currency spread exceeding 2% and a violation of Article VIII. Here is a the actual statement describing the violation below…
“The MCP arises from the absence of a mechanism to ensure that the official exchange rate and the market exchange rate do not deviate by more than 2 percent.”


It is very clear that a condition for Iraq to move to Article VIII is that they comply with the 2% rule. That rule is very clear that the Official Rate (CBI rate) and the Market Rate cannot exceed 2%.
This is soooo important, why? Because until they comply with the conditions set forth for Article VIII, the CBI will never be allowed to transition to Article VIII.


Now I am going to move into another area. The question has been asked once they comply with the 2% rule, how long must they sustain that for? Here is the answer from another IMF document…
“The exchange rate may fluctuate within narrow margins of less than ±1 percent around a central rate, or the maximum and minimum values of the exchange rate may remain within a narrow margin of 2 percent for at least three months.”
So there you have it..at least 3 months or 90 days.
So the question is…when will the CBI be compliant with the IMF so they can transition?


We get an answer earlier this week with the IMF Press Release titled…
Statement at the End of an IMF Mission on Iraq
The following paragraph is below…
“The central bank has maintained the peg with the U.S. dollar. The spread between the official and parallel exchange rates narrowed to 2.6 percent in September, thanks to steps taken by the CBI towards the liberalization of the foreign exchange market.”


This is very telling and many would probably overlook it..but the IMF is telling the CBI..you were not in compliance in September 2014 because you exceeded 2%. In fact, they state it clearly… “The spread between the official and parallel exchange rates narrowed to 2.6 percent in September”
2.6% is not good enough, but clearly better than past months for sure. Since they stated the month, we can visit the CBI website and look at the daily currency auctions for the Market Rate (which is posted daily).
We see that during the month of September, 2014, two rates were reported by the CBI for Market Rates 1203 and 1206. Meaning the Market Rate was 1203 dinars to $1 . And at another point during the same month the Market rate fell even further to 1206 dinars to $1.
According to the IMF during the month of September, the spread between the Official Rate (1166) and the Market Rate (1203) and (1206) is at 2.6%. Because this number is beyond the 2% threshold we can say with certainty that at the end of September 2014, the CBI is not in Article VIII compliance.
If we continue to review the CBI daily auctions we can see that the Market Rate fell November 30th, 2014 to 1197 and the CBI has sustained that number for the past 11 days. We can reasonably conclude if 1203/1206 was 2.6% then a reduction to 1197 would at or about 2% according to the IMF.
So we have a starting date of November 30th, 2014 that the CBI is in Article VIII compliance with the IMF.
And we can then apply the 3 month or 90 day minimum requirement to this date and see that the very soonest the IMF would allow the CBI to avail itself and accept the obligations under Article VIII would be February 28th/March 1st 2015.


* I remind everyone that the CBI must sustain this rate for the entire 3 month period with limited fluctuation as the IMF states.. “The exchange rate may fluctuate within narrow margins of less than ±1 percent around a central rate, or the maximum and minimum values of the exchange rate may remain within a narrow margin of 2 percent for at least three months.”





IMF docs…



http://www.imf.org/external/pubs/ft/...13/cr13217.pdf



http://www.imf.org/external/pubs/ft/...ues38/ei38.pdf





CBI exchange rate information…



http://www.cbi.iq/documents/CBI_FORE...E_AUCTIONS.pdf