Post Emailed To Recaps
Tomorrow Is A New Mechanism For Buying And Selling The Dollar
Enorrste - Here is a summary of what I think all of this means.
First, a brief quote from the article:
“Governor of the Central Bank, explained that "It is not true that the central stays busy selling the currency like ATM daily", stressing that "the transition to a new phase is to conduct foreign remittances through the banking system within the mechanism developed for it."
Second, a repeat of the definition of foreign remittances:
Foreign remittance can be defined as ‘the purchase and sale of freely convertible foreign currencies.
Now, what does is all mean?
The CBI is stopping the auctions, effective tomorrow morning. This is a fact. We know that the auctions were the primary monetary tool that the CBI used to hold the exchange rate on the street within 2% of the official CBI rate for the dinar. With the Parliament intervening with Article 50 in the new budget, the CBI became hamstrung.
First, they said they would go to court to overturn this illegal intervention in their ability to perform their proper function.
After consideration, however, they decided to move up the plan to move toward a freely floating currency and entrance into Article 8 of the IMF charter.
I personally suspect that eliminating the auctions entirely was always a part of the CBI plan.
The Parliamentary intrusion, however, has forced them, apparently, to move up the plan somewhat. I see this as a very good thing for us.
Moving from currency auctions run by the CBI to allowing foreign remittances at the bank level is nothing short of huge. Why do I say that? Simply this: foreign remittances only work when the sale and purchase is between “freely convertible foreign currencies” as the definition above states.
The term “freely convertible foreign currencies” .
“Freely convertible currencies have immediate value on the foreign exchange market, and few restrictions on the manner and amount that can be traded for another currency. Free convertibility is a major feature of a hard currency.”
From this definition we see that the dinar will be moving to the foreign exchange market and that it will be seeking to become a “hard currency.”
This, folks, is the true impact of this article. The dinar is about to become internationally recognized, tomorrow. It is just that simple.
Now, the question arises: will they also move to a float, or will they keep the dinar locked into the dollar at 1166 to 1?
There is nothing in and of itself that will require the CBI to move to a float tomorrow, or even in two or three weeks.
However, over the long run, not allowing the dinar to float will have serious inflationary pressure come to bear on the economy of Iraq. Here is a statement from a research study on this very matter. This study had to do with Bangladesh:
"Applying Vector Autoregressive (VAR) techniques, the empirical results find that a one percent increase in remittances inflows increases inflation rate by 2.48 percent in the long run, whereas no significant relationship is evident between these two variables in the short-run in Bangladesh."
From another study I give this summary quotation:
“The analysis considers yearly and quarterly data for seven Latin American countries. Our theoretical model predicts that remittances should be inflationary and generate an increase in the domestic money supply under a fixed regime but deflationary and generate no change in the money supply under a flexible regime. These differences are borne out in the data.”
We see, therefore, that it will not be in the interest of the CBI to stay under the fixed rate regime. Iraq is very leary of increases in the inflation rate. Therefore, I predict that they will change their exchange rate regime to a flexible regime (float).
The result, as I have already stated in numerous posts, and as is born out in this quote just above, is that there will be “deflationary pressure” in Iraq rather than inflation in Iraq once they move to the float.
The reasons for this are simple to enumerate. First, Iraq has none of the problems of Bangladesh, Ukraine, or the other countries that have left a fixed rate regime for a floating currency.
For instance, Iraq has enormous reserves in relation to the total outstanding money supply (over 150% coverage at this time).
Second, Iraq does not have an inflation problem (in spite of articles that confuse “inflation” with a “weak dinar”). Third, Iraq has enormous natural resources. Fourth, Iraq is the “wild west” in terms of investment opportunity from abroad. All of these forces will ensure that the dinar value rises rather than falls.
The rise in the value of the dinar means that imports will become less expensive for local Iraqis. Iraq imports most of its goods and services at this time.
Therefore, with lower import prices Iraq will have lower prices overall, or deflation. This is consistent with what I have taught for some time now and is also consistent with the summary of research in Latin America mentioned just above.
To summarize: the auctions are ending, being replaced with foreign remittances. Foreign remittances are only possible with a freely convertible currency.
Freely convertible currency is one that is internationally recognized. In order for this to work, the CBI will have to move from a fixed rate regime to a floating currency or suffer from inflation.
Therefore, I predict that they will do so sooner rather than later. I predict within the next 15 to 45 days, consistent with my earlier prediction of 30 to 60 days.
I hope you have all made a drink!
Subject: More Enorste
Date: Sun, 22 Feb 2015 12:59:51 -0700
Tobyboy, here is your answer:
(1) A member of Parliament recently stated that the process to delete the zeros would begin at the beginning of the next quarter (April 1). The float must be initiated prior to removing the zeros This member was a part of the Finance Committee, as I recall.
(2) The IMF has called for Iraq to drop its peg and move to a floating exchange rate mechanism. The calls have been repeated several times and most recently have suggested that they "get on with it."
(3) Six or seven Middle East countries have stated that they will move to flexible exchange rate system in the near future. Included in that list was Iraq.
(4) PM Abadi has stated recently that he is about to initiate major changes in Iraq that will allow increased foreign investment and improve the economic conditions in Iraq. I believe that the rules change of the CBI is a part of that plan
(5) The CBI has dropped the daily auctions in favor of moving to foreign remittances. Foreign remittances require a freely convertible currency. Freely convertible currencies are a major feature of hard currency.
(6) The CBI (Saleh, actually) is on record that they intend for the dinar to be a hard currency. Therefore, the move today away from the auctions is a part of the initiation of that plan.
(7) The CBI is on record that it will eliminate the disparity between the official rate and the street rate for the dinar. The limits placed on them by Parliament were threatening to destroy their control of the street rate.
Moving to foreign remittances eliminates the need for the auctions but at the same time opens the currency to the world. The CBI would be foolish, having started this ball rolling, to fail to follow through with the float in short order. Otherwise, inflation will ensue.
(8)) Moving to a floating exchange rate regime eliminates, overnight, the disparity between the official rate and the street rate, thereby setting up conditions favorable for entry into Article VIII of the IMF Charter.
(9) The talk of Abadi about increasing foreign investment, and the fact that a number of large companies have made big commitments in this regard, tells me that Abadi has already made a promise to open the currency to the world. Otherwise, these countries would not have stepped forward. The action today of the CBI is a "down payment" on that promise.
(10) Some of our members have noted that a few countries have recently moved from a pegged currency to a floating regime. I believe this is a part of the large overall plan by the IMF.
(11) In 1976 there were 86 countries that had pegged currencies and only 14 that had some degree of flexibility. By 1996 that number had changed significantly: only 45 were still pegged, while 55 had moved to a flexible exchange rate system.
This is consistent with the IMF stated goal. Today the number of countries with either floating or freely floating currencies is now 66 countries (2/3 of the total). The ball is moving in this direction.
(12) The CBI, Parliament, and GOI are now all on the same page with respect to making the change.
Having made all of these points, I am not naive. There are still issues to be resolved, including especially insurance for deposits and banking laws to protect investors.
However, these need not necessarily be passed prior to a change in the exchange rate regime.
As I noted earlier, it appears that the Article 50 budget rule has forced the CBI to step up its implementation of the plan. Today's action is only the beginning, but it must be followed up in order for it to work properly. The next step, IMO, is moving to the float.