A Fixed or Fixed Exchange System for the Iraqi Dinar
KTFA:
Clare: A fixed or fixed exchange system for the Iraqi dinar
Mahmoud Dagher 4- 29-2024
First: a fixed system:
Rentier countries seek to adopt a fixed exchange system (pegged) to a strong foreign currency or several currencies (a basket of currencies) to ensure the stability of foreign transactions, as long as they export one depleted commodity and import many goods and services, and they are called “small open countries.”
Despite the agreement that the floating currency system is considered the best in terms of relative response to the performance of the external economy and the lack of need for sometimes excessive use of foreign reserves to defend the official value in the peg system, the abundance of reserves and the need for stability in foreign transactions have a major impact on the economy. Overall, rentier countries are likely to adopt a fixed exchange rate system.
Iraq is one of the economies whose monetary authority adopts an openly fixed exchange rate system (De jure) and strives to be realistically fixed (De facto). The Iraqi dinar’s peg is classified as a “soft peg” peg that includes accepting a fluctuation of no more than 2% during the period. The last 6 months of IMF audit and 1% average volatility continuously (ereare,IMF,2021).
When dealing with the dinar exchange rate, a distinction must be made between the fixed exchange rate that affects the market, and the contractual exchange rate between the central bank and the Ministry of Finance when selling its dollars to the central bank (which is proven in the budget for the public revenue account), and the market exchange rate remains the most important because it is dealt with in the markets as a value. Reference.
The official dinar exchange rate went through (roughly) the following stages:
From 2004 – December 2020: Buying: 1190 Selling: 1200
From the end of 2020 - February 2023: Buy: 1460 Sell: 1470
From February 2023 until now: Buying: 1310 Selling: 1320
It is noted that there are 10 points (10 dinars) between purchasing banking and non-banking financial units (exchange companies) and selling them to merchants (transfers/credits) or to individuals (in cash) (noting that there is a change within the ten points for motivational purposes, but it is not extensive)
Therefore, during the years 2020-2023, the monetary authority did not leave the fixed exchange system, but rather moved from one fixed exchange rate to another fixed exchange rate, according to what it saw fit in the interest of the overall economy and well-being.
It is natural that the repeated transfers from one constant to another over a short period of time had an impact on the balance levels of the dinar and the size of the gap between the official and market exchange rates. This was reflected in the shifting of financial positions in favor of those holding the dollar again and again in favor of those holding the dinar
. It even had an impact in changing The financial positions of creditors and debtors at each change, noting that those with dinar salaries and income are most affected by the gaps and fluctuations between the official value and the market value of the dinar, especially since changing the amount of the assessment was reduced (12-20-2020) and then raised (2-7-2023). It has a clear positive impact even on the macroeconomy, in addition to being a deviation from targeting stability by essentially adopting a fixed exchange rate system.
Second: An installed system
There is no doubt that the dinar exchange rate is determined through the dealings of the banking or non-banking financial units that buy the dollar at a fixed dinar price from the central bank (cash or promotion) with the importing public (merchants) or travelers (cash), that is, whoever determines the market dinar exchange rate ( Then the dollar exchange rate) these units deal with customers, and then following up on what happened since entering the platform at the end of 2022 until now, we find that the dinar’s story took two stages:
- The merchants’ stage: In the beginning, the importing merchants were obtaining dollars (remittances, credits: which are the largest part of daily currency window sales), at a price of 1,320 dinars/dollar, but the merchants set the margins of their imported sales according to the (parallel) cash price, and thus the merchants practiced speculation.
The margin of the exchange rate gap, rather than the trading margins of their activity. This behavior is consistent with the state of profit allowed by the market and the prevailing nature of control.
This stage witnessed a gap of up to (1320 - 1550), meaning a margin of 230 points and an exchange gap of (approximately 17%).
- Participation stage: After the banking and non-banking financial units that buy the dollar from the Central Bank (1310 dinars/dollar) became certain that the gap between what they sell (1320 dinars/dollar) and what their merchant customers sell for
(1500-1550), began intervening to share the margin with these clients, and by imposing commissions amounting to
(3%-7%) on dollar sales to customers, whether in cash or promotions. Rather, it was transferred to cards and Western Union under the name of commissions.
So, the price of the dollar moved from (1320 to 1500) and thereabouts, being shared between banking and non-banking financial units and merchants, and it was almost (1320-1400) the share of financial outlets (so 1400 is the cost of purchasing the new dollar instead of 1320.
More than 1,400 are owned by merchants.
Therefore, the natural and legal public is faced with:
- The official price is 1320.
The price for banks is about 1,400 for transfers and credits.
The price for banking companies is slightly higher than 1,400 for cash and transfer.
The price for merchants is between 1400 and 1500.
Therefore, the exchange system became fixed (by cap) (not fixed) and the cost became approximately 1400 dinars / dollar, due to the cap set by the banking and non-banking financial outlets, and in this situation the fixed exchange system was lost (1310-1320).
Therefore, the continuous stabilization has become dependent on the mutual pressure forces between the merchants’ margin of the currency and the margin of the financial outlets of the currency:
Leaving the real margin represented by the added value resulting from financial and commercial activity.
The reflection of this does not stop at the crack in the fixed exchange system adopted by the monetary authority, which is published in the IMF documents through the Fund’s annual (ARERE) report, but rather goes beyond that to the disparity in the exceptional profits achieved by financial outlets compared to others (due to commissions) in a way that approaches monopoly. For the banking market, which is based on the difference in market share, due to the availability of important correspondents for this outlet compared to the other.
Returning to stability has become limited to the efforts of the following:
• Follow up on commissions (Central Bank).
• Follow up with customs for the entry of goods.
• Follow up with the authorities responsible for financial crime (reporting office, economic crime) to follow up on unregistered commissions for fear of their incorrect use. LINK