[therealbubbie] Shredd .. Why Two Exchange Rates?
Posted on 02 April 2014. Tags: CBI, Dinar Exchange Rate, IQD, ISX,
------ By Mark DeWeaver.
Since the Central Bank of Iraq (CBI) began changing the rules for its USD auctions in 2012, Iraq has been operating a de facto dual exchange rate system.
(There’s a summary of some of the CBI’s recent rule changes on pages 12-14 of this report from Sansar Capital.) For those with access to the CBI auction—mainly banks and (as of March, 2013) importers using letters of credit—the rate has been fixed at IQD 1,166: USD 1.00.
For the rest of us, the dinar has ranged from 1,194 to 1,292, with two major episodes of depreciation in mid-2012 and mid-2013 (see chart).
[therealbubbie] The ostensible purpose for this arrangement is to limit illicit outflows of foreign exchange to Iran and Syria.
In practice, it serves mainly as a subsidy to banks, large importers, and anyone in a position to generate phony trade documents. The losers include everyone from foreign investors in Iraqi stocks to the government itself, which gets the CBI rate on its oil-export revenues.
Iraq is unusual in this regard. Dual (or even multiple) exchange rates are usually only found in countries suffering from chronic trade deficits and foreign exchange shortages.
Typically the objective is to make foreign exchange available for “essential” imports or to control inflation by lowering import prices. Examples include Hitler’s Germany, China in the 1980’s and early ‘90’s, Burma prior to 2012, and Venezuela today. (See this note from the Asian Development Bank for an excellent introduction to this topic.)
[therealbubbie] It’s hard to see why Iraq belongs on this list. The country has a trade surplus, inflation is low, and the central bank has ample foreign exchange reserves. Even USD outflows to Iran are presumably no longer a major issue. One exchange rate should be enough.
[Shredd] official rate vs market price plus, Iraq being a dual currency country adds to the fluctuations in market trading
[Shredd] we've seen articles on this where people would need a passport and say they are traveling, then exchange on street for different rate this is to limit flow of notes but is being manipulated
[Shredd] once Iraq moves to a strong dinar, this will not be an issue but don't forget, the spread will always differ depending on bank trading to street trading which applies to exchange only, once Iraq comes off a managed rate, they will be off the list but they aren't considered a true currency manipulator like China
[Shredd] for the reasons mentioned above....they are strong, healthy and an emerging economy
[therealbubbie] Shredd how do they continue to grow there GDP and there currency is at 1166 !!
[Shredd] easy, managed the rate, it doesn't have to reflect true value like a free float but once Iraq is a market economy it will need to. imo, there is a process for Iraq to get there
[therealbubbie] Shredd but the question might be . how long will the process take
[Shredd] right, well the project to delete the zeros is a big part of the timing
[waitingondinar] Are they still talking "mid" year
[Shredd] last we heard, yes
[waitingondinar] Shredd wouldn't it benefit Iraq to expedite the whole plan so they can start getting investment money in play?
[Shredd] what do you mean
[Shredd] the new ISX platform will expand investment trading which is good but doesn't need an RV'd dinar for that. The CBI is making money in the auctions, so not sure what you mean
[waitingondinar] Shredd how can money be traded when the country you are doing business with a country with currency that is not worth anything
[Shredd] it's not that the dinar is not exchangeable, it's legal tender the key to differentiate is this...
[Shredd] the dinar is largely not "recognized" meaning trade, for example, if you and i agreed on a trade today and the rate was managed like it is now, it could massively change tomorrow, thus benefiting one of us and hurting the other
[Shredd] for a market driven rate, the fluctuations are small and acceptable that is the difference, too many people equate recognized with legal tender, a dinar is a dinar....just with a low exchange rate against other currencies
[waitingondinar] Shredd I see, Do you think their plan is still to get things rolling "bigtime" this month