Is the foreign currency window an economic lever for Iran?

Is the foreign currency window an economic lever for Iran?

Dr.. Haidar Hussein Al-Tohma / Al-Furat Center for Development and Strategic Studies

The media arena is witnessing an exciting revival of economic experts, as they usually call specialists or non-specialists in economic sciences. Although the spread of economic culture is a benign advantage for developed peoples, economic policy and economic analysis with populist rhetoric full of illusions and simplification exaggerates the landscape and weakens the rigidity of economic knowledge, especially when these populist trends and trends infiltrate academic institutions and are academically debated as absolute economic facts.

In this context, a recent article on “The sale of the currency in Iraq, the destruction of the Iraqi economy and the revival of Iran’s economy” was recently published on social media. The fact of the matter is that the intellectual content of this article has been raised repeatedly in the media and on various economic occasions, leaving firm convictions with the negative role played by the exchange rate on the Iraqi economy and its positive role in reviving and developing the Iranian economy exclusively. Which increases the uncertainty and confusion about the actual independence of the central bank, not only the Iraqi government, but the economic interests of the neighboring countries.

The fact that the reactions and discussions on the management of the exchange rate of the Iraqi dinar and its dynamic association with the Iranian economy was an incentive to write this article, in a simple attempt to remove the ambiguity and confusion in a neutral scientific (and modest) and in the form of the following axes.

1- The name of the foreign currency auction has been changed to the foreign currency window. The window is not one of the instruments of monetary policy, but rather an administrative measure intended to stabilize the price levels.

2 – The currency window is not an ideal tool to manage the exchange rate in Iraq, but due to the economy and the depth of structural imbalances and weak national production in meeting the growing domestic demand for goods and services was to stabilize the exchange rate by feeding the demand for imports with oil dollars, Central Bank’s main bidder in the foreign exchange market.

3 – The overvaluation of the dinar exchange rate actually works to drain the dollar reserve in the Central Bank (assuming the relative stability of oil revenues) due to the positive relationship between the supply of the dollar and the dinar exchange rate, but this is the task of foreign reserves, at least in the exceptional situation that he lives Country.

4- Why was the exchange rate of the Iraqi dinar appreciated in this amount ??? The argument of the Central Bank (supported by the International Monetary Fund) is to raise the standard of living of citizens because the components of the consumer basket of citizens are fully imported. In addition to the goal of pushing banks to exercise their economic role desired as bridges to finance investment and economic growth in the country rather than engage feverishly in the auction (window) foreign currency in order to benefit from the differences between the price of the official exchange rate and the market price.

5 – Many believe that raising the standard of living of the citizen was at the expense of the advancement of the domestic product, which can not compete with foreign producer (Iranian, Turkish and Chinese) because the production costs are high in Iraq. Does this mean that reducing the value of the Iraqi dinar (1500 dinars for example, one dollar instead of 1,200 dinars) will support industry and increase the rates of production ???

The answer is no … because there are many requirements that need to be secured until the national product rises. Therefore, the policy of reducing the exchange rate of the dinar may be sustainable but after the availability of other requirements including (providing infrastructure and facilitating government legislation supporting investment and activating customs taxes and supporting the national product … ).

6. Finally, the question is: Is the excessive exchange rate suitable for the revival of Iran’s economy exclusively ???

The answer is both … because the excessive exchange rate revives all imports and from different countries (China, Turkey, Egypt, Jordan, the Gulf and many Asian countries), which gives these countries a comparative advantage in marketing their products to Iraq due to high unsatisfied domestic demand supported by high purchasing power. On the level of tourism, the strength of the Iraqi dinar increases the delegation of Iraqi tourists to different countries of the world, not just Iran, given the relative (unreal) power of the Iraqi dinar.

In conclusion, we would like to point out that neighboring countries, including Iran, do not rely heavily on the exchange rate of the Iraqi dinar in raising the rates of exports and achieve economic growth for several reasons, including:

1. The experience of recent years indicates that political and economic decision-making in Iraq fluctuates unpredictably and out of order.

2- The exchange rate of the Iraqi dinar is linked to the dollar reserve in the Central Bank, which is mainly related to the revenues of the Iraqi government from the oil exports, which is a function of the frequent fluctuation of oil prices in the world energy markets.

For years, the trading partners of Iraq (China, Turkey, Iran, Jordan and other countries) have been engaged in fierce competition to acquire the Iraqi market by reducing costs and prices or raising the quality of the product or reducing the prices of national currencies to achieve Comparative advantage of their national products.

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