Stryker Blog -- When Dr. Shabibi Speaks We Should Listen.
In this article Dr. Sinan Shabibi is talking about how the auction works and how the dinar should be closer to the value of the dollar so there is no waste according to the balance sheets but analysts can't see it. He says the daily auctions of selling dinar and buying dollars is a floatation of orbit.
See the de facto fixed exchange rate has served Iraq well and the float of orbit (sell of dollars for dinars (daily auctions) should maintain the market price within 2% of each other.
Iraq has an appearance (de facto) of a fix rate (1166:1) but yet uses another exchange rate regime to stabilize their parallel market rate through this float of orbit (daily auctions) as I will point out in his own statements.
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But before I get started I want to point out a few things that may help you understand what is in the IRAQ 2013 ARTICLE IV CONSULTATION report dated July 2013.
The CBI has been conducting foreign exchange auction on a daily basis since October 4, 2003. The CBI followed a policy of exchange rate stability which has translated in a de facto peg of the exchange rate since early 2004.
However, from November 2006 until end 2008, the CBI allowed the exchange rate to gradually appreciate. As a result, the exchange rate arrangement of Iraq was reclassified to the category of crawling peg effective November 1, 2006.
Since the start of 2009, the CBI returned to its earlier policy of maintaining a stable dinar. Consequently, the exchange rate arrangement of Iraq was reclassified effective January 1, 2009 as a stabilized arrangement.
Iraq continues to avail itself of the transitional arrangements under Article XIV. Eight exchange restrictions (plus one exchange restriction maintained for national or international security) and one multiple currency practice (MCP) are subject to IMF jurisdiction and approval.
The exchange restrictions are (i) the limitation that corporates can purchase foreign exchange in the auction for import transactions only;
(ii) limitation on the availability of foreign exchange cash for individuals (i.e., one request per month);
(iii) maximum limits on the availability of foreign exchange cash in the auction for banks;
(iv) maximum limits on the availability of foreign exchange cash in the auction for money transfer companies and money exchange bureaus;
(v) the requirement to pay all obligations and debts to the government before proceeds of investments of investors, and salaries and other compensation of non-Iraqi employees may be transferred out of Iraq;
(vi) the requirement to submit a tax certificate and a letter of non-objection stating that the companies do not owe any taxes to the government before non-Iraqi companies may transfer proceeds of current international transactions out of the country;
(vii) the requirement that before non-Iraqis may transfer proceeds in excess of ID 15 million out of Iraq, the banks are required to give due consideration of legal obligations of these persons with respect to official entities, which must be settled before allowing any transfer; and
(viii) an Iraqi balance owed to Jordan under an inoperative bilateral payments agreement. In addition, one exchange restriction maintained for security reasons should be notified to the IMF under the framework of Decision 144-(52/51).
The MCP arises from the absence of a mechanism to ensure that the official exchange rate and the market exchange rate do not deviate by more than 2 percent.
This one is very interesting as it says to continue to use the DFI as a de facto (not as it appears) oil stabilization. At any time IMO these DFI funds could become added as part of the reserves themselves.
They agreed that the two tier architecture of prudent management of CBI reserves and use of the Development Fund for Iraq (DFI) as a de facto oil stabilization fund is appropriate.
They consider that the DFI has been operating as a de facto stabilization fund, allowing the government to accumulate reserves through strong fiscal performance in boom years, and financing spending when oil revenues fall short.
OK, and here is the UIMF staff saying that
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.
OK, on to my break down of Dr. Shabibi's comments in this article now that you have those facts.....
This tells you that they withdraw the Iraqi currency through the auction process:
Quote: the auction process and mechanism begins to withdraw the Iraqi currency and ease pressure on the market and is being done through swap cash dinars dollar
Here he talks about the float of orbit within the Iraqi market (driven by the auctions). They are not going to a float of orbit like some meathead would like you to believe because as Dr. Shabibi is telling you by the following statement, they are using the float of orbit now.
Quote: We maintain monetary stability through the float of the dinar in the market mainly with monitoring for the purpose of his administration as needed so that it serves the Iraqi economy, so we follow the orbit and flotation system because of the large reserves around this flotation to stabilize the situation.
This next part tells you that the official price (1166:1) and the market price should not exceed 2%, this is the stability they need.
Quote: The difference between the bank rate and the market price should not exceed 2%, according to the Convention on the International Monetary Fund and signed by Iraq in 1945.
Quote: the central bank is keen to keep the relationship free from fluctuations with the dollar whenever possible as he is keen to reduce the difference between the official price and the market price, which as mentioned should not exceed 2%.
Float of orbit again through the swap of dinars for dollars:
Quote: we can deduce the conclusion that when the central bank swap dinar sell the dollar and freely as is the case in Iraq,
Here he talks about the currency being an asset backed currency that is backed 100% by the Iraqi reserves
Quote: the central bank takes Iraqi currency fully covered by foreign currency reserves,
Then he goes on to say, according to the balance sheet of the bank why analysts consider that the dinar has less or is less than the dollar
Quote: according to the balance sheet of the bank, why analysts consider that the dinar has a value less or is less than the dollar affair.
Is he saying the dinar should have a value closer to the dollar now, according to the balance sheet and the analysts can't see this?
I believe he is saying that because the last time I looked 1166 to $1 is less than the dollar affair.
So then, is he saying that these analysts do not know how to read the balance sheet and it is close to the value of the dollar and it has no waste?
Let's look at this next part....just follow me through this next quote:
Quote: If dinar was covered with 100% foreign currency and enjoy the stability of long-term and there is a central bank watching closely all developments and maintains the stability and addresses variability, this dinar be difficult meaning when we sell the dollar we receive something matched in strength (where waste then?).
He is saying, If when they sell the dollar they should receive the dinar back matching in strength than there is no waste. Here once again:
Quote: meaning it when we sell the dollar we receive something matched in strength (where waste then?).
He is not preannouncing anything, he is just pointing out the facts and that there needs to be a change, this is backed up by the IMF staff themselves in this statement I pointed out above:
Quote: staff encouraged the authorities to consider creating the conditions which would make possible a move to a more flexible exchange rate policy
Link to the Staff Report for the 2013 Article IV Consultation: