Strategy of monetary policy in Iraq, c 1 / / d. The appearance of favor
By: management of the Centre
on: Sat 25/02/2012 14:43

A - I have put monetary policy of the Central Bank of Iraq

Specific Bakannouna number (56) for the year 2004 issue of inflation targeting and to address the rates rising and work to reduce the priority objectives to reach a state of lasting stability in the general level of prices, so by influencing the levels of liquidity and public control of the trends and at the same time to strengthen the financial sector and its balance and stability and stimulated to respond to market signals fired by the Central Bank through its monetary policy.

So he held the Iraqi Central Bank an amendment to the interest rate adopted has a (rate policy), which has become 20% since the beginning of 2007 before declining to 15% in 2008 to stimulate the interest rates overall in the economy in order to achieve the levels of savings high and desirable to suit the level of revenues that stimulate public and businesses to increase Aidaatha the banks as well as to address the high levels of liquidity through the role played by the reference rate of interest in strengthening the mechanical transition from cash to curb rising inflation.
Also rose at the same time the exchange rate of Iraqi dinar against the U.S. dollar (by buying and selling auction of foreign currency since the fall of 2003) at a rate of 34% in part to curb inflationary expectations as of November 2008 and the establishment of equilibrium in the money market between the desire to retain cash balances JD and the real supply of such assets by making the Iraqi dinar more attractive and more likely in the face of the phenomenon - dollarization - and its implications in the deepening problems of replacement cash and hit the elements of stability in the demand for money, which deepens the disruption of the money market. In order to view the realities of the current monetary policy and its results in reducing inflation and stabilizing, this paper comes to the expression of some aspects of central bank policy and the main frame according to the approved cash at the moment. Stating the following: -
B - trends and signals of monetary policy during the era of inflation
- Reflects the inflation phenomenon continuously increasing in the level of prices of goods and services, which exceeded the rates of annual rate of 76%, especially in the month of August of 2006, regardless of supply bottlenecks macro and its contribution to the phenomenon of inflationary monetary policy on addressing this phenomenon and lower levels, in particular the inflationary pressures generated by the by aggregate demand or total spending in the economy.
- If we exclude the two paragraphs of fuel and lighting, transport and communications of the index of consumer prices, as an indicator of inflation, could reach the so-called inflation-basis core inflation , which reflects the pressure of aggregate demand, which stood at the end of 2006, including more than 32% per year (less than half the proportion of annual inflation referred to in the above) came after a decline of about 13.6% annually in the month of October 2008.
- The case of deep-rooted phenomenon in which inflation and inflation Eshrha basically caused by the pressure of aggregate demand led to an imbalance of Amehal exchange market in terms of the public's desire to retain cash balances over the supply of those assets. Reflecting an increase in the speed of money circulation and an increase in inflationary expectations at a time, as it became the final source of inflationary persistence of the phenomenon.
- And now money is no doubt confounded, is good value in light of real interest rates (negative) made ​​people inclined to hold foreign currency as a store alternative to value over the spread of the phenomenon of substitution of cash (Dollarization Dollarization ) any use of foreign currency in domestic transactions over the narrow and weak in market operations Finance and limited their instruments prior to impose stability (due to the unstable nature of the cash demand, which came under the influence of the continuing rise in inflationary expectations, which is pushing the negative real interest rate).
- In spite of the great abilities exhibited by monetary policy in controlling the stability of the foreign exchange market and the stability of the exchange rate of Iraqi dinar against the U.S. dollar during the years 2005 - 2006 and as Achertha exchange rates in the Central Bank auction of foreign currency (as a market exchange central is their prices are the price-oriented or the leader in the exchange market), but the limited contact with their effects in the treatment of deep-rooted in the inflationary phenomenon in general and inflation in particular, the foundation is due to the following reasons: -
- Decline in the real dinar exchange rate below its nominal intervention which the central bank to defend its stability through the auction of foreign currency over the two years mentioned above. Note that this discrepancy between the nominal exchange rate and real was the result of improved oil revenues of Iraq over the past two years and until the present time plus the expenses of the multinational forces high and other foreign currency inside Iraq, which contributed to the deepening of the phenomenon of dollarization and find a gap or difference between the price of the dinar exchange real ( high) and the nominal exchange rate of the dinar (low in spite of its stability), which was then in the depth of the phenomenon of inflation.
- If the oil sector is responsible for generating 55 to 65% of the gross domestic product in Iraq, that was reflected strongly on the size and installation expenses of the state budget, which strengthened the root of inflation basis, after becoming a paragraph of salaries and wages and flows downstream are alone on the For example 60% of the gross domestic product, a non-oil part of the national income is responsible for generating the proportion of 30 to 40% of the total GDP. And that this percentage of GDP is made up mostly of non-oil (no more than 60%) of the service activities of a weak link in the productive sector commodity.
- Since the monetary policy of the country aims to reduce the levels of inflation, the package adopted by the Central Bank of Iraq in the face of inflationary conditions inappropriate began steps in the face of inflation mainly through the creation of influence on the desire to trends in demand for real money stock, which is less than stockpiling available of those assets to achieve a balance between supply and demand of them and lead to stability and balance of the money market as we have indicated in advance. As well as reduce the case of replacement of cash and to address the problems of dollarization (ie, raise the level of desire to keep in cash balances down to the level of inventories by the supply of such assets). And at the forefront of that, comes the importance of providing an atmosphere between the two activities disproportionate economic and price so that the ratio of money to income (ie, the cash demand) grow in a stable and consistent goals of financial growth and macroeconomic stability.
- Comes on top of that package, work to strengthen the Iraqi dinar exchange rate (which represents the external value of the Iraqi dinar as well as face the phenomenon of substitution of cash and the requirements of the availability of a tight monetary policy tighten policy two-way or across the two signals powerful are the reference exchange rate and the signal of interest, which is enhances the mechanical effect of moving cash in the balance of the money market and then the stability of real activity and as follows: -
First - raising the external value of the Iraqi dinar (ie, the nominal exchange rate) in a manner commensurate with the real exchange rate to contain inflationary expectations, taking into account the trends emerging inflation and the level of acceptance and availability of reserves, inflation and the level of acceptance and availability of international reserves with the Central Bank of Iraq and on to curb inflationary expectations referred to above and to reduce the speed of circulation of money.

II - modify the interest rates the Iraqi Central Bank policy rate in a given financial market signals robust to changes in proportionate and popular with the evolution of structure in time of the interest rates, which helps to ensure positive returns to public savers with the banking system and reduce the status of the spacing between savings and investment by borrowing equal between the supply of money intended for lending and demand.
Stating in this regard that the benefit is not a monetary phenomenon, but is a real phenomenon is also related to the decisions of investors and investment returns, so the spacing mentioned the savings desired and desired investment caused real interest rates negative during the years 2005 - 2006 (before it becomes positive since the beginning of the year 2008) which was due to the impact of inflationary expectations high compared to low interest rates of cash in banks and public financial market. Also, the elimination of the gap between savings and investment is through access to the interest rates static subject consistently inflationary expectations and contained something adopted by the Central Bank to adopt Sticky nominal Nominal Anchor for the exchange rate to stabilize public expectations of inflation and at the same time for the benefit of the Iraqi dinar over the monetary framework adopted flexible exchange policy, but under the influence of central bank intervention in order to achieve high nominal exchange rate to the level of the real.