Hussein Atwan *: cover the 2016 budget deficit by reducing the Iraqi dinar exchange rate: the consequences and effects



- PUBLISHED IN 01/31/2016

Drop in world oil prices, a lot of Iraqis economists led to the search for funding sources to cover the 2016 budget deficit, as it spins much debate between two teams of Iraqi economists calls for one of them to reduce the retail dinar exchange Ministry of Finance's price in order to increase dinar her revenue, which covers a certain percentage of 2016 budget deficit, while the second team goes to the reservation to reduce the dinar exchange rate at the present time is not for the sanctity of the stability of the dinar exchange rate, but because while creating the objective conditions for it.

Require scientific discussion to the question of reducing the Iraqi dinar exchange rate (retail Ministry of Finance to buy the dollar versus them) a proposal to cover the deficit in the public budget for the year 2016, or part of it to clarify some of the relevant issues and is as follows:

1. When the price of oil reached in 2015, on average approximately ($ 50) a barrel, the Ministry of Finance sales reached from the dollar to the Central Bank of Iraq (32.45 billion dollars) and the price (1,166 dinars per dollar) and became the price at the beginning of 2016 (1,180 dinars per dollar ), so it is expected the Ministry of Finance of the sales decline in the dollar to the Iraqi Central Bank during the year 2016 to (25-30 billion dollars) at the very least.

2. The total revenue in the budget of 2016 (84.07 trillion dinars), of which oil revenues are calculated based on the price of a barrel of oil ($ 45) and the volume of export production (3.6 m b j), while expenditure was estimated at (113.5 trillion dinars) and Gr estimated (29.43 trillion dinars).

3. The price of oil at the moment is between ($ 20-25), which was declining.

4. If the oil price continues as it is during the 2016 deficit will be established (the extra deficit) is added to the estimated deficit (planned deficit) resulting from the difference between the price of the world's oil, first: the current price, which ranges between (20-25), second: Price, who built it in 2016 budget ($ 45 per barrel), which means that the difference between the two rates of between ($ 20-25), and an estimated deficit of about overtime (20-26 billion dollars) (multiplied by the difference between the price of oil output above 3.6 m in size by me in the number of days of the year).

After these points with the relationship, which is the basis for the discussion of the proposed reduction in the Iraqi dinar exchange rate to cover the deficit in the budget of 2016, can be illustrated by the cases of coverage planned Aladzen (and / or) extra.

The first case:
to bridge the planned budget deficit in 2016 by the Central Bank of Iraq by reducing the dinar exchange rate, and in case attainment of the Ministry of Finance sales of the dollar ($ 30 billion) during the year (based on point 1 above), the exchange rate, which should the Iraqi Central Bank to buy its dollar from the Ministry of Finance is the (2160 dinars / dollars), a difference of the price of the (1,180 current) by (980 dinars) and in turn sells the central bank to banks at a price (2.170 dinars / USD) and becomes the dollar in the market price approximately (2,200 dinars / USD) as well as the expectations that raise the price to more than that, and this is reflected directly on the prices of goods and services that mostly imported and thus ignite the fuse of inflation and is difficult to control the inflation of the first wave is followed by other waves. This is going on all subsequent scenarios.

The price should the Iraqi Central to buy its dollar from the Ministry of Finance which ensures dam planned deficit in the event of financial sales amounted to a central $ 25 billion is (2,355 dinars per dollar) a difference of the price of the (1180) by (1,175 dinars) and in turn sell Central Bank to banks at a price (2.365 dinars / USD) and becomes the dollar in the market price by approximately (2,390 dinars / USD) or more.

Second case:
bridge caused by the price of oil - teams extra deficit as previously described - (point 4 above) only, which is estimated at about (31-38.5 trillion dinars) (about the dinar at a price of 1,180 dinars / USD exchange rate), and assuming that The original deficit (planned) has put his sources of funding in the budget of 2016, should the CBI that the dollar buys from the Ministry of Finance at the exchange rate of between (2,213 - 2,472 dinars / dollars) in the event that the Ministry of Finance sales of the dollar to the Iraqi central convergence ( $ 30 billion), while in the event that the Ministry of Finance of the dollar sales to the Iraqi central convergence ($ 25 billion), the CBI should buy the dollar from the Ministry of Finance at the exchange rate of between (2,420- 2,730 dinars / USD).

In an attempt to put up two scenarios to reduce the Iraqi dinar exchange rate against the dollar to fill part of the arising from the current price of oil and the price difference extra budget deficits are offering the following:

In the case where the Ministry of Finance sales are 30 billion dollars and buys the Central Bank of the dollar from the Ministry of Finance at a price (1,300 dinars per dollar), it covers approximately (3.6 trillion dinars) of extra deficit, which ranges between (31-38.5 trillion dinars) a rate ranging between (9-12% of the extra deficit) and not (9) trillion as Chancellor Dr. Abdul Hussein Al-Anbuge thought (in his statement published in the network of Iraqi economists, citing the agency all of Iraq (Wayne) 01.23.2016), because the provision of this amount ( 9 trillion) requires the Ministry of Finance of the dollar volume of sales of the Iraqi Central Bank by ($ 75 billion)] is calculated by dividing 9 trillion / 1.300 to 1.180 and the difference between deep (120 dinars). And this is not possible as the highest volume of sales and the Ministry of Finance was in the year (2013) amounted to ($ 62 billion), which did not reach the threshold ($ 75 billion) and this is not expected to occur in 2016 which is about the price of a barrel of oil the ($ 25 ) compared to (2013), where the average price of a barrel of oil approximately about ($ 100) or more.

In light of the volume of sales by the Ministry of Finance ($ 25 billion) and the central bank to buy dollars at the (1300), it covers approximately (3 trillion of additional deficit) Any rate ranging between (8-10%) approx.

In the case where the Ministry of Finance sales are 30 billion dollars and buys the Central Bank of the dollar from the Ministry of Finance at the exchange rate (1,500 dinars per dollar), it covers approximately (9.6 trillion dinars) of extra deficit, which ranges between (31-38.5 trillion dinars), an increase of ranging between (25-31% of the extra deficit). In light of the sales volume by the Ministry of Finance ($ 25 billion) and the purchase of the Central Bank of dollars at the (1500), it covers approximately (8 trillion of extra deficit) Any rate ranging (21-26%) approx.

In the midst of the above, the reduction Iraqi dinar exchange rate against the dollar does not accelerate the process of depletion of foreign currency reserves because it does not create additional expenditure is reflected in additional demand for foreign currency the central bank should be covered for the stability of the exchange leading to price stability price. In spite of the reduction of the Iraqi dinar exchange rate will cover a very small proportion of the public budget deficit has this coverage be closer to the illusion of them to the truth, but that the reduction in the exchange rate will be reflected directly in the general price level rise, because the degree of transmission of the effects of price exchange to the general level of prices increase the more flexible domestic demand for foreign goods and service and low elasticity of foreign supply is high, as well as higher share of goods and services in the main consumer basket (expressed by Pal CPI), meaning that the economic opening-up of Iraq and a large measured last through rate import quota to the total activity or to the total of goods consumed a high degree in the Iraqi economy, no doubt.

And double the rise in the price level when entering the expectations Expectations into stimulus inflationary phenomenon and difficult to combat inflation Anti-Inflation with ignition fuse inflationary process and overlapping causes him to continue, especially since the Iraqi economy, a net importer of goods and services in light of the complete absence of local production, dumping witnessed internal markets due to the absence of customs tariff Allajmh or ballasts that limit the import and stimulate production, even a few percent. Thus, the Aldkhalih the Iraqi economy and the strength of the economic structure significantly hindered the ability to cope with inflation. The most affected and those affected by the general price level rise are the owners of fixed income, who are the largest in the segment of Iraqi society.

All of the above does not mean the sanctity of maintaining the stability of the Iraqi dinar exchange rate, but he urgently needed at least until the creation of conditions necessary for the purpose of the reduction and procedures, the most important (tariff Kmarkip oppressive for some imports - is Aldharorah-, effective tax policy, a framework to control public spending policy Finance responds to circumstance Iraq Financial: Otherwise what it means to implement the 2014 budget without approval and legislation, and the balance in 2015 relative reduction of spending at least a real decline in revenue? reducing foreign currency reserves of almost $ 78 billion at the end 2013 to nearly $ 54 billion the end of 2015). The stability of the Iraqi dinar exchange rate policy is total stability policy across variables and trading exchange in the market which is not a monetary policy contractionary contradiction policy or project (6) trillion posed by the Iraqi Central Bank, as described by Dr. Anbuge (in his statement published in the network of Iraqi economists, citing Agency for all of Iraq (where)). It is true that monetary policy is always measured in the final Bmahsaltha.

(*) Economic Researcher - The Central Bank of ethnic
Copyright network of Iraqi economists. Permission to quote and re-deployment, provided reference to the source. 01/31/2016

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