AdminBob: Two new IMF documents are out and published in the Research Library.
20/7/2013 Article IV Consultations July 2013 Selected Issues 2013
Just go to the Research Library tab and scroll down to these documents.
Dr. Nan: Here is the section from the July 2013 Report that deals with monetary policy (pages 17 & 18). It states that the IMF is advising "liberalizing the foreign exchange market". I dont know that this report tells us anything we didn't already know; however, Kap, or someone more familiar with this information, please highlight important information for us.
Read More Link On Right
"B. Monetary, Exchange Rate, and Financial Policies - With a severely underdeveloped financial system, high bank liquidity, and administered interest rates, the usual channels of transmission of monetary policy are largely ineffective.
Therefore, the principal instrument available to the CBI is foreign exchange intervention, but its effectiveness has been hampered by CBI regulations. Discussions focused on (a) distortions in the foreign exchange market, (b) exchange rate policy, (c) foreign asset management, and (d) banking system restructuring.
14. The de facto fixed exchange rate has served Iraq well. The authorities agreed that a stable nominal exchange rate provides a valuable anchor for inflation expectations in an uncertain environment, and intend to continue implementing this policy for the foreseeable future.
In the medium term, staff encouraged the authorities to consider creating the conditions which would make possible a move to a more flexible exchange rate policy.
Such flexibility could allow a predictable and gradual appreciation of the nominal exchange rate, triggered by strong oil revenues and the Balassa-Samuelson effect, to accommodate a possible real exchange rate appreciation while keeping domestic inflation low.
15. However, the authorities have been limiting foreign exchange supply to address concerns related to money laundering and terrorism financing.
The CBI has recently taken steps to simplify foreign exchange market regulations, but has not eliminated all existing exchange restrictions and the multiple currency practice.
3 The CBI continues to rely on controls to ration the supply of foreign exchange, which have contributed to the increase in the spread between the official auction and parallel market rate.
The authorities aim to liberalize the foreign exchange market over the medium term. However, given the limited capacity of the financial sector to implement Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) preventive measures, they consider restricting the supply of foreign currency necessary to stem illegal outflows triggered by regional developments and increased import demand financed by illegal sources.
16. In contrast, staff recommended liberalizing the foreign exchange market and improving the AML/CFT regime. Staff noted that effectively limiting supply might be inconsistent with a de facto fixed exchange rate regime.
The CBI has ample international reserves to maintain the de facto peg.
Furthermore, AML/CFT standards do not contemplate ex-ante controls on foreign currency transactions, but focus on customer due diligence and reporting suspicious transactions to an operational and fully independent Financial Intelligence Unit.
In staff’s view, accelerating the liberalization of payments for current transactions would therefore be the best approach to eliminating distortions in the foreign exchange market, the exchange rate spread, and the rents it creates.
It would also allow removing the exchange restrictions and 3 See Section IX of Annex I of the Informational Annex for a list of the exchange restrictions and multiple currency practice subject to Fund jurisdiction. the multiple currency practice, with a view to accepting the obligations under Article VIII.
The improvement of the AML/CFT framework, in line with the MENA-Financial Action Task Force (FATF) recommendations, and FATF standards, together with the ongoing efforts in strengthening AML/CFT supervision by the CBI, would help address money laundering and terrorism financing concerns.
17. The size of Iraq’s foreign assets (both CBI and DFI) is fueling a domestic debate on their most productive use. Staff projections show that, while CBI reserves are broadly appropriate over the forecast period, fiscal buffers will achieve an adequate level only in the medium term.
Furthermore, the legal framework and governance arguments do not support pooling of CBI and DFI reserves. Moreover, the low execution rates of public investment, owing to limited administrative capacity and domestic absorptive capacity, suggest that there is little scope for accelerating the spending of foreign assets in the domestic economy.
Increasing the returns to sovereign foreign assets might imply adopting some form of sovereign wealth fund (SWF) as exemplified by international experience (see accompanying Selected Issues paper).
On balance, in light of the need to preserve the independence of the CBI and maintain a high level of liquid reserves to address possible pressures on the Iraqi dinar, and given Iraq’s weak capacity and governance, it seems appropriate to maintain the current two-tier architecture composed of CBI reserves (invested following prudent guidelines) and fiscal reserves held in the DFI.
Should the DFI reserves increase beyond the recommended level of fiscal buffers, it should be possible to modify the DFI structure to allow for a more active management of excess fiscal reserves.
The authorities agreed that the management of Iraq’s sovereign assets should continue to be cautious, and that a separate SWF would not be appropriate at this stage." (End of section on monetary policy)
DarbSalad: Dr. Nan, Makes you wonder if Turki and/or Maliki is defying the IMF. Turki was begging the U.S. to extend the protection of the DFI funds during his visit to Washington, D.C. a few months ago. The Iraqi citizenry appears to be in the same boat as the Egyptians.
They elected politicians into office which are extremely repressive and a central bank that displays those same characteristics. I believe the government claimed that an array of employees would finally be compensated in the month of July.
I presume they are still waiting on compensation for their services rendered? Many have gone over a year without compensation.
I saw that Hakim stated today for the them to serve the citizens and solve their problems.
Dr. Nan: It appears that the other paper "Selected Issues 2013" is mostly background for the Report just issued. It deals primarily with Oil Production, the DF! and Fiscal Policy. I didn't see anything about Monetary Policy, but it is worth looking over for a "big picture" view.
I don't see anything significant that most of us don't already know: they need to broaden their economic base so they are not relying almost totally on oil reserves.
Begs the question: how can anyone work and not get paid for a year? How does that continue?
DarbSalad: Turki stated nearly two weeks ago prepare to be surprised. I guess we will find out rather shortly if his word has real meaning.
Tobyboy: DardSalad, Guess what your surprise is we are not going to RV this year Keep buying those dinars to help support the Iragi CBI we love you for your American Money
Kaperoni: These statements are troubling...
"Given that the current legal framework precludes CBI lending to the government, and that Iraq still does not enjoy access to international capital markets, DFI reserves can be seen as an insurance against the impact of oil price shocks or export volume shortfalls."
"14. The de facto fixed exchange rate has served Iraq well. The authorities agreed that a stable nominal exchange rate provides a valuable anchor for inflation expectations in an uncertain environment, and intend to continue implementing this policy for the foreseeable future."
In other words, until the CBI accepts IMF Article VIII, its status quo.
Here is a great comment from the IMF...They are telling Iraq to "float" the dinar! Now if that is not proof, I don't know what is....
"In the medium term, staff encouraged the authorities to consider creating the conditions which would make possible a move to a more flexible exchange rate policy. Such flexibility could allow a predictable and gradual appreciation of the nominal exchange rate, triggered by strong oil revenues and the Balassa-Samuelson effect, to accommodate a possible real exchange rate appreciation while keeping domestic inflation low."
Another good one from the IMF...
"In staff’s view, accelerating the liberalization of payment for current transactions would therefore be the best approach to eliminating distortions in the foreign exchange market, the exchange rate spread, and the rents it creates. It would also allow removing the exchange restrictions and the multiple currency practice, with a view to accepting the obligations under Article VIII."
Terry: Now, if they would just listen to the IMF! Wouldn't it be nice if that was the surprise Turki was talking about
Tony: Important article about the budget imo
BAGHDAD / JD / .. announced the Finance Committee in the House of Representatives that the budget of 2015 will be increased by 157 trillion and 285 billion dinars,
said committee member Magda Abdel-Latif al-Tamimi told the reporter / JD / he was forming a committee to prepare a budget strategy for the coming years, including the budget of 2015 will be Total revenues have increased by 157 trillion and 285 billion dinars, while it will be the total expenditure of $ 168 trillion and 837 billion.
added that budget deficit that year would be increased by 11 trillion and 552 billion, noting that he will be calculated per barrel of oil at $ 90 in quantities oil source is estimated at 3.85 million barrels per day.
alerted Tamimi that calculated the exchange rate of the dollar will be increased by 1.16 dinars, pointing out that the Commission had not received the report of a central location around the dinar exchange rate against the dollar, prompting the Commission to adopt the exchange rate on previous years and such a thing It is not permitted at all. / End / / 23 http://dananernews.com/News_Details.php?ID=3605
Enorrste: I tend to agree with KAP that this is a mixed bag ("troubling" was his word). I'm pleased that the IMF thinks the fixed rate has been a success. Whoopee. At the same time, I hate it when they say the status quo should be maintained "for the foreseeable future." Let's hope they cannot see very far!
On the positive side, though, they are clearly calling for Iraq to prepare to float its currency. It really can't get much clearer than that. Furthermore, although KAP did not highlight this part, I found this quite interesting:
"to accommodate a possible real exchange rate appreciation."
It would appear that the IMF is expecting a gradual rise over time to some level, after which they will do an actual RV to a "real exchange rate." How cool would that be?
I just wish we knew what they mean by "middle term." Is that a few months, or a few years? Only time will tell. Let's just hope the Turki brings the "surprise" he promised and that it is the beginning of the float process. Once that starts, anything could happen.
Heck, we could get to $1 by January and then the CBI could RV to $3.50. Wouldn't that be cool?
I don't suggest cooking the eggs until they've left the chicken, however. Enorrste
Tomceejay: Enorrste, middle term is simply somewhere between here and there. Or, between the beginning and the end.
Samuel the Prophet: "middle term" is simply a hallway...a nowhere between two somewheres! It is that place of metathesis, where everything that can be shaken is indeed shaken; then it can restrain you no longer from proceeding to the future...that hallway is indeed a place of radical disorientation.
Punisher: I would guess middle-term means middle of the year which we are in...but I could be wrong. Thanks Dr. Nan, Kap, Enorrste and all!
Samuel the Prophet: Disorientation and Creative Transformation...mid-term is the time period when we exit one door and it closes behind us and we enter the new opened door~"let it come to us"..
ZenMav: Enorrste, What if "in the medium term" only meant "mean while"? The article says medium, not middle. Medium can be average, a mean.
The theory might apply if the documents required the trusty Arabish google translation.
As far as the "foreseeable future" comment, they had to say something intelligent and ambiguous. We Don't Know isn't really an option.
Bondtl: re-read the article with this in mind , authority is the cbi and staff is the imf . clearly it sounds as if the imf agrees that what the cbi has been doing was good but not for much longer and it's time to get off the dime and move to article 8 with a float and possible rv later.
KellySue: I'm happy to see the words "accepting the conditions of IMF Article VIII" in print!! This is where everything on this DA site is leading too. Come on Turki, pull Article VIII off the back burner.....get those laws passed!!
Dr. Nan: I'd like to call everyone's attention to two items from the cover page of the IMF Report:
"Staff Report for the 2013 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on March 12, 2013, with the officials of Iraq on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on April 30, 2013.
The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF."
"Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its May 13, 2013 discussion of the staff report that concluded the Article IV consultation."
Notice the dates. This is the IMF staff report following the March 2013 Article IV consultation with input from the Executive Board during its discussion of the staff report at their May 2013 meeting.
The report is dated July 2013 because it is now being published. I am not looking at this in a negative light because this is based on circumstances and information from 4 months ago, before the release of Chapter 7, before Mailki had his obvious epiphany and is playing nicey-nice with Barzani and everyone else, before all the positive steps we have seen.
Is most of the hard data used in this report still current? Yes. However, there are things that have changed, and those changes have been positive, I think. Again, this is a published report of a meeting back in March. There have been some forward steps.
Tlar: "14. The de facto fixed exchange rate has served Iraq well. The authorities agreed that a stable nominal exchange rate provides a valuable anchor for inflation expectations in an uncertain environment, and intend to continue implementing this policy for the foreseeable future."
Again me thinks we worry to much. A fixed rate is what the 2008 study suggested when they recommended a rate and suggested that the CBI hold and defend that rate for up to two years.
It is identical to what the CBI did in January 2009 when in response to the IMF they held 1170 as the fixed rate. A fixed rate does not mean keeping it at 1166. I just says fixed.
If they RV the currency at say 1 to 1, that would be the rate that they need to fix the exchange rate at and then defend, defend, defend.
Floating Exchange Rate
The exchange rate in which the value of the currency is determined by the free market.
That is, a currency has a floating exchange rate when its value changes constantly depending on the supply and demand for that currency, as well as the amount of the currency held in foreign reserves.
An advantage to a floating exchange rate is that it tends to be more economically efficient. However, floating exchange rates tend to be more volatile depending on the particular currency.
A currency with a floating exchange rate may undergo currency appreciation or currency depreciation, depending on market fluctuations. A floating exchange rate is also called a flexible exchange rate.
See also: Fixed exchange rate, Crawling peg, Managed float.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
It looks to me like they are speaking of first getting a rate. Next stabilizing it in the interim/medium/short term for an acceptable period of time, then letting the currency value be determined by the market once oil production and free markets are more developed.
ReVbo: I was thinking the same thing, Zen. They can't tell us when they're going to do it, right? So, "foreseeable future" is about as useful a statement as "soon." It could mean a year, five years, or tomorrow, so I'd say that's a throwaway part of the article