Thread: Iraq/Dinar News. 09/05 to 01/14/07

They better get that reval done this week because Al-Shabibi is out of town next week. He is keynote speaker and all big banks and "money people" are expected to be there...he better reval this week if he wants something impressive to talk about at the conference.

Commonwealth – Middle East –
North Africa Business Forum
Strategic Alliances, Financial Flows and Islamic Banking
30th - 31st October 2006, The Hilton Canary Wharf - London, England

Day One - 30th October 2006 Day Two - 31st October 2006


Close of day one

19:00
Gala Dinner Hosted by : Bloomberg
Keynote Speakers:
Dr Sinan Al-Shibibi, Governor, Central Bank of Iraq
HE Dr Adib Mayaleh Governor Central Bank of Syria

Commonwealth Business Council

Monetary Policy And Oil Production

It is indisputable that maximization of crude oil production is required in the short and medium term as oil revenues are essential for financing public expenditures and imports10. This policy is also in line with the interests of both the oil consumer and OPEC countries, regardless of the pricing factors of oil exports in global markets. But while the macroeconomic policy and oil production should be consistent in order to rationalize the allocation of resources, especially oil revenues, for increasing economic growth as well as providing social services and public utilities, the present monetary policy and especially the FXR have misled economic efforts.

In Iraq, while dependence on oil revenues has been increasing, the contribution of non-oil sectors to investment, imports, and public finance has been deteriorating for more than three decades. The post-war experience has also shown that mismanagement of public finance and widespread corruption, as well as the application of irrelevant economic policies, have contributed to the prevailing miserable socio-economic and political situation11. A significant irrational aspect of the post-war experience has been the provision of (indirect) subsidies for financing increasing imports that have eroded a substantial share of oil revenues, and the elimination of the state’s support for non-oil potential exports. These policies have added to the weakness of indigenous industrial and agricultural activities. In fact, the hasty liberalization of foreign trade imposed by the orders (Laws) of the former CPA and the resulting FXR led to negative interactions with the interests of nascent domestic industries and agriculture. It has been claimed, however, that the new FXR maintains economic stability, and the apparent stable (fixed) exchange rate of the ID/$ reflects a sound monetary policy12. This affirmation needs more examination to expose the real cost of utilizing oil revenues which would justify the demand for considering oil production policy as an integrated part of the state economic strategy and government policies.

By utilizing oil’s comparative advantages, public investment for the construction of infrastructure and petrochemicals and basic industries was the major factor for economic growth and employment during the period 1953-80. At present, using oil revenues to finance intensive public programs for rehabilitation of manpower and the implementation of a wide labor intensive public works program is also essential for dealing with the socially explosive unemployment problem and improving the labor market environment. If successfully performed, the task of building the required free trade and industrial zones, seaports, transportation and communication network through the IDRC, and improving the productivity of manpower would help the private sector to expand its investment capacities. Here lies the crux of the matter. In Iraq, the requirements and policies for the expansion of production (physical and manpower) capacities are very different from the policies dealing with the likely variations of short-term business cycles as practiced by developed countries. Therefore, monetary policy should be considered as a complementary part of the fiscal and public investment policies rather than a superior factor that influences the aggregate demand. Obviously, this proposition is in contrast to the present monetary policy which assumes that economic stability and private investment are necessary and sufficient conditions for economic growth; ie the independent CBI restricts the likely expansion of government fiscal policy. As Iraq’s experience has shown, inefficient public enterprises during the 1970s, 80s and 90s misused public financial resources and benefited from the easy credit facilities provided by the government which owned the commercial and investment banks.

But it is also misleading to stipulate that economic stability, ie controlling inflation and the fluctuation of foreign exchange rates, can be achieved without exploitation of the generous oil revenues. In addition, the present FXR has inferiorly linked the domestic interest rate to the US rate, determined by the US monetary authorities. What domestic economic factor justifies this policy? And why is the interest rate on ID deposits in domestic banks (12%) more than twice that for investment in dollars (5.25%) under fixed rate of ID/$? Who are the beneficiaries from the difference? Does this policy really help to check the inflation hike (70%)? Also, with a static policy, the weak (strong) US$ in the world market would induce more government spending and lead to more excess (insufficient) money supply. Does this practice support the sterilization of foreign currency flow? Unfortunately, neither the MOF nor the CBI has taken the trouble to explain these ambiguous monetary policies. In this context, it is essential to highlight the current mismanagement of the oil cash revenues by the MOF and CBI13, especially when the post-war Law of the CBI does not permit the public to question the monetary authorities’ crucial decisions14. In a democratic Iraq, it is hard to understand how the authority glorifies the accumulation of foreign reserves as if the economy were in good shape and was the result of the application of sound economic policy. Is it not a deception of public opinion on the part of the policy makers and advocates?

The NDS ascertains clearly two main issues; first, the national economy has two main characteristics: high dependence on the oil sector and imports, and an insignificant contribution of non-oil sectors and non-oil exports to GDP; secondly, oil revenues are the main source of public finance15 and, therefore, constitute the principal source of money liquidity. Analysis of the GDP composition reveals that the government’s consumption and investment demand and imports are the dominant factors that stimulate production and exports. It also constitutes the main source of money liquidity and foreign currency. Since the role of the private sector is limited in terms of its contribution to GDP and public finance, its influence in determining money liquidity is limited too. However, while the NDS appraised the independence and performance of monetary policy, it did not mention how nascent industries and agriculture activities would increase their productivity and competitiveness vis-à-vis the dumping of cheap imports and increasing cost of production. Also, while oil revenues are the main financial source of NDS, its passive policy towards the unemployment problem and the provision of public services can not be justified. Indeed, the inconsistency and shortcomings of NDS’s objectives and policies reflect the irrelevancy of the applied macroeconomic policies16. The effectiveness of the fiscal and monetary policies, however, does not mean that they are efficient and progressively leading to increase economic growth and employment and liberalize the economy from its high dependence on oil.

Efficiency Price Of Oil Production And FXR

In Iraq, there are many domestic and international economic, political, technological, and physical factors that determine crude oil production. Three main issues are of significance: first, the absorptive capacity of the national economy and the ability of the authorities to expand non-oil production capacities while maintaining economic stability; secondly, oil production should satisfy the need of energy’s consumer countries; and thirdly, in determining the level of investment in oil industry, ie expansion of production capacities and reserves, there is always the possibility of non-oil energy alternative – at least in the long run – and the uncertainty associated with the production peak of the existing oil aquifers. Such factors influence optimal production and the national investment decisions in oil industry.

Given these circumstances, the policy of maintaining optimal production of crude oil is theoretically linked to the state’s overall objective of maximum increase of economic growth, but must be practically qualified by the diversification of production activities and the production capacity peak. However, in view of the present global oil supply and demand conditions, the given analysis should be widened to include the prevailing measures and arrangements that were set to coordinate the oligopoly practice of OPEC countries. That is to say, it is also essential to evaluate the cost-benefit outcome of the collective oil price and production policies of OPEC as well as the likely role of Iraq being (another) swing player in OPEC. Such an approach would not, however, change the basic assumptions that determine the necessary oil production (revenues) which would help to modify the oil production policy and ensure effective macroeconomic policies17. It would only act as a yardstick to limit oil revenues extravagance that leads to the over-relaxation of domestic saving and constrains non-oil exports.

Now, how can then we arrive at such practical strategy and policy that compromises the reality requirements with the theoretical conditions?

It is our understanding that the (estimated) shadow price of oil production would perform this task since it expresses the relationship between the crude oil production level and Iraq’s economic growth conditions. In technical terms, the shadow or efficiency price of oil resources reflects the relative scarcity of oil that constitutes (in the practical sense) the most binding constraint on economic growth and social development. Given the exceptionally high dependence of the economy on oil exports (revenues), the foreign exchange rate of ID/US$ plays a strategic role in influencing (determining) the economic efficiency of oil production policy. Consequently, a new (adjusted) FXR must be established in order to facilitate the implementation of new economic strategy and policies that is based on a national inspiring long-term future vision18.

To justify such a proposition, we should recall the relevant basic theoretical assumptions of free market economy. The optimal distribution of the available resources of any production entity aimed at maximum profit will be achieved by equalizing profit realized from producing and selling one extra (marginal) unit from its production at a certain price with the cost of resources used in the production of this unit valued at efficiency prices, or, when abnormal profit is equal to zero, ie the prevalence of the optimal condition19. However, less efficient distribution or distribution below the optimal level leads to less normal profit. This means that if the optimality condition can not be realized, then the economic activities of the firm will be reduced and therefore utilize less of the available economic resources. Also, the summation of optimal activities of all production entities in a society means optimal distribution of the available resources and hence they will achieve maximum economic growth. However, it is not unknown for state intervention in economic affairs or any disturbance of the perfect competition in the free market mechanism being reflected in the resource distribution pattern at which the prevailing prices would are far away from the real efficiency prices.

In Iraq and elsewhere, the economic, social, and political reality needs a practical and more suitable way than the theoretical mechanism for mobilizing and distributing economic resources. The existence of widespread market imperfections resulting from the prevailing underdeveloped economic and technological infrastructures and social necessities distort the values of real prices. The price of oil is no exception, ie it does not reflect the scarcity of oil resource in relation to Iraq’s main objectives and constraints, where the surplus of the balance of payment is the key factor for economic growth and social development. Theoretically, real foreign exchange is directly linked to optimal crude oil production at which the balance of payment would be at equilibrium or at the level of where full utilization of foreign currency reserves as well as higher economic growth are achieved.

In reality, however, if oil production is less than the optimal (theoretical) level, then public oil revenues should be utilized only in financing infrastructure and public services and utilities. If oil production exceeds the optimal level, then public oil revenues must be utilized in investment projects guided by profit criterion and regulated by free market conditions.

Crucial Economic Policy Changes

The virtue of free market economy, ie optimal mobilization and distribution of resources that maximize economic growth, has been one of the main objectives for Iraq policy-makers since the fall of Saddam’s dictatorial regime. However, actual economic strategy and policies have miserably failed to revive the economy and rebuild the infrastructure, or establish a solid foundation for an efficient market economy despite the huge cost of thousands of human lives, and security, social, political, and financial spending. The mismanagement of the country’s abundant oil revenues, weak government institutions, and widespread corruption are symptoms of this failure. Since the fall of the former regime in April 2003, the growth of agriculture, non-oil industrial activities, and non-oil exports have been almost zero. The substantial accumulation in dollar reserves at the CBI have been generated only by the fortune of oil revenues. Therefore, maintaining the FXR and FER of US$/ID does not reflect sound macroeconomic, fiscal, and monetary policy nor keep up the real value of oil revenues from continuous deterioration resulting from hidden cost of free flow of imports.

In Iraq, increasing the contribution of non-oil sectors and private sector to the GDP and public finance is essential for transforming the oil-rentier economy to an efficient market economy. To achieve this long-term target, oil revenues (production) must be utilized to bring about the required economic growth, diversification, and the construction of infrastructure. However, the present policies are not efficient in utilizing oil revenues (production). Increasing oil production is essential, but to ensure macroeconomic efficiency, oil production policy should be linked to the fiscal and monetary policy so far as they reflect the scarcity of oil resources in relation to the country’s need for the reconstruction of public infrastructure. This can be achieved by the application of a flexible FXR aiming for both economic stability and economic growth. Therefore, using oil revenues to sustain a fixed exchange rate of ID/US$ and consequently associate the domestic interest rate to the US one would reduce the economic efficiency of utilization of oil revenues as well as restrict the role of monetary policy.

Essentially, Iraq needs an economic strategy and macroeconomic policies guided by a national long-term vision that aims to increase economic growth, employment, diversification, and the role of private sector, rather than rigid fiscal and tight monetary policies to regulate the (imaginary) short-term business cycle fluctuations through money-supply and interest rates as applicable to developed countries. The following economic policy issues have to be considered:

Reformulation of a macroeconomic policy to maintain both stability and promote economic growth, especially for non-oil industries and agriculture.

A gradual liberalization of the foreign exchange regime, ie the fixed exchange rate of ID/US$.

Gradual, but firm implementation of coherent structural economic reforms.

Limited and temporary import protection measures as well as export promotion incentives have to be taken to support the competitive capacities of infant indigenous industries and low-productivity agriculture.

Provision of investment incentives for the indigenous private sector and foreign corporations.

Initiation of a new economic strategy guided by a national vision, institutionalized through wide economic, social, and political public debate. Abbreviations CBI: Central Bank of Iraq

IDRC: Iraqi Development and Reconstruction Council

CPA: Coalition Provisional Authority

IMF: International Monetary Fund

FER: Foreign Exchange Regime

MOF: Ministry of Finance

FXR: Foreign Exchange Rate

NDS: National Development Strategy (2005-07)

GDP: Gross Domestic Product

USAID: US Agency for International Development

ID: Iraqi Dinar

WB: World Bank


Notes:

10. During 2005, Iraq’s cash receipts from export sales of petroleum amounted to $21.914bn. (http://www.iamb.info/auditrep/iambpres123105.pdf.). Total USAID assistance to Iraq from 2003 – 6 September 2006) amounted to $5.004bn (http://www.usaid.gov/iraq/accomplishments/econgov.html).

11. See; Sabri Zire Al-Saadi, “Iraq's Post-War Economy: A Critical Review”, MEES, 5 April 2005, and “Iraq's National Vision, Economic Strategy, and Policies”, Strategic Insight, CCC, Vol 5 Issue 3, March 2006. (www.ccc.nps.navy.mil/si/mar/SaadiMar06.asp).

12. On the claimed economic accomplishments in Iraq, see; US National Security Council, “National Strategy for Victory in Iraq”, November 2005, Republic of Iraq, "National Development Strategy 2005-07", Iraq Strategic Review Board, Ministry of Planning and Development Cooperation, 30 June 2005, CPA, “An Historical Review of CPA accomplishments (2003-04), June 2004, Baghdad, Iraq. (www.cpa.org), and USAID accomplishments in Iraq. (www.usaid.gov/iraq). Critical views of this policy were given in; Sabri Zire Al-Saadi, “Oil Revenues and the Foreign Exchange Regime in Iraq”, MEES, 6 September 2004.

13. The International Advisory and Monitoring Board on the Development Fund for Iraq (IAMB) concurred with the audit reports by Ernst & Young covering Iraq’s oil export sales and the DFI operations for 2005 in which “the audit reports continue to be critical of the financial and accounting systems in place in spending ministries, the US agencies in respect of the outstanding commitments using DFI resources, and the Iraqi administration of DFI resources”. Press release, 10 August 2006. (www.iamb.info). The audit reports highlighted MOF and CBI responsibility for “ ineffective control systems” and “inadequate corporate governance and organization structure” as there is no designated executive and financial controller to direct the DFI’s overall activities at the entity level”. Moreover, there is “no formal authority matrix and authorization (of cash payments) limits. Ernst & Young “Summary of Preliminary Findings for the six months ended 31 December 2005, Pending the Finalization and Approval of the Audit”. (http://www.iamb.info/auditrep/iambpres123105.pdf).

14. CPA” Central Bank Law”, No 56 of 1 March 2004.

15. Republic of Iraq, "National Development Strategy 2005-07", Iraq Strategic Review Board, Ministry of Planning and Development Cooperation, 30 June 2005.

16. Assessment of the NDS policies was given in; Sabri Zire Al-Saadi, “Iraq’s National Vision, Economic Strategy, and Policies”, Strategic Insight, Vol 5 Issue 3 (March 2006), CCC (http://www.ccc.nps.navy.mil/si/2006/Mar/saadiMar06.asp).

17. A mathematical analysis on the issue was given in; Sabri Zire Al-Saadi, “Foreign Exchange Rates and Optimal Crude Oil Production in Developing Oil-Exporting Countries”, ibid.

18. A general definition of the vision was given in; “Iraq’s National Vision, Economic Strategy, and Policies”, ibid.

19. Theoretical analysis of the concept “zero-profit requirements” was given in: Dorfman, R Sameulson, P and Solow, R “Linear Programming and Economic Analysis”, Rand Corporation, Tokyo, Japan, 1958.


This article was written for MEES by economic advisor Sabri Zire al-Saadi, a UN former employee who held senior economic posts in Iraq. Email: [email protected]. Part 1 was published last week.

Liberalization Strategy For Iraq's Oil-Hostage Economy | Iraq Updates

Gen. George W. Casey Jr., left, and U.S. Ambassador to Iraq Zalmay Khalilzad address reporters Tuesday in Baghdad.

U.S. Ambassador to Iraq Zalmay Khalilzad on Tuesday said "success in Iraq is possible and can be achieved on a realistic timetable."

The outcome in Iraq will "profoundly shape" the wider regional struggle against extremism, he said.

He made the remarks in a news conference with Gen. George W. Casey, Jr., the top U.S. commander in Iraq.

The appearance comes as the United States reassesses its tactics and strategy in Iraq, where sectarian and insurgent violence persists.

Khalilzad said Iraqi leaders have agreed to a timeline to resolve a range of issues.

He cited three initiatives: inducing political and religious leaders who can influence various groups in Iraq, helping Iraqi leaders develop a national compact, and persuading Sunni insurgents to lay down arms and accept national reconciliation.

"Iraqi leaders must step up to achieve key political and security milestones on which they have agreed," the ambassador said.

Casey, who said the situation "remains difficult and complex," said al Qaeda in Iraq has "an active strategy of fomenting sectarian violence."

He said "death squads" and "illegal armed groups" are causing security problems. The commander said the "resistance" is another problem, and described Iran and Syria as "decidedly unhelpful."

U.S. envoy: 'Success in Iraq is possible' - CNN.com

Originally Posted by opps50

Susie have you heard anything from the lawyer

"ok, heres my newest scoop i got when i came home tonight. a friend talked to a lawyer who works in some capacity for the cbi and was told that everything is done and must be announced before the 1st. so somebody needs to get that countdown clock fired up again and get us a countdown goin here!!!

woOt!!!!!!!!!"""

Is susie's lawyer contact and your lawyer one of the same. How reliable is this information.

(Voice of Iraq) - 10-24-2006 | This issue was sent to a friend

Fayhaa channel pleased to announce the Mtabaiha viewers that it would revert to the broadcast frequencies following new beginning on 11-1-2006

Satellite : Hot-bird 6
At 13 East
Section 11013 :
Pol : Horizontal
SR : 27,500
FEC April 3

Nile Sat Satellite :
At 7 West
Section 10911 :
Pol : Vertical
SR : 27,500
FEC : April 3

Originally Posted by Hardwood

This is the calm before the storm!

Tomorrow should be a day of reckoning for all of us!

CBI Curtain Unfolds revealing.........?????
( A Reval!!! )

Has anyone noticed the CBI has not updated today?

Exchange Rates

Originally Posted by Caddieman

Has anyone noticed the CBI has not updated today?

Exchange Rates

I believe they are still closed for the Holiday....

Originally Posted by Hardwood

This is the calm before the storm!

Tomorrow should be a day of reckoning for all of us!

CBI Curtain Unfolds revealing.........?????
( A Reval!!! )

I second that....getting rested up for the big reval....(no link just gut-feeling).

(Voice of Iraq) - 10-24-2006 | This issue was sent to a friend

BAGHDAD (Reuters) - Zalmay Khalilzad had asked the American ambassador in Iraq, Iraqi leaders on Tuesday advancement of their responsibilities to achieve political objectives and major security and said that success in Iraq is possible through "a realistic timetable."

Khalil was speaking during the joint press conference with General George Casey, commander of the American forces in Iraq.

Casey accused Iran and Syria of supporting militant groups in Iraq and said they were "Ttamdan lack of cooperation."

Sotaliraq.com

Originally Posted by CharmedPiper

(Voice of Iraq) - 10-24-2006 | This issue was sent to a friend

BAGHDAD (Reuters) - Zalmay Khalilzad had asked the American ambassador in Iraq, Iraqi leaders on Tuesday advancement of their responsibilities to achieve political objectives and major security and said that success in Iraq is possible through "a realistic timetable."

Khalil was speaking during the joint press conference with General George Casey, commander of the American forces in Iraq.

Casey accused Iran and Syria of supporting militant groups in Iraq and said they were "Ttamdan lack of cooperation."

Sotaliraq.com

O.K. I was up all night with a sick 5 year old, so my deciphering skills are not up to snuff. Can someone help me out here and tell me what this says? Thanks so much.