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

Originally Posted by Adster

Great find kiko, you da man.

We are close Adster!

The next 2 weeks will be very exciting to watch!

Originally Posted by Wm.Knowles

This is a very interesting question. I have read a couple of opinions over the last couple of years that stated that the US and other western countries intend to use Iraqi oil to break OPEC. I remember the OPEC oil embargo of 1973 and everyone knows how we have been under their control since then. A non-member who can produce 6 to 8 MBD might "upset" the apple cart. Especialy when SA has past peakoil production. Thank You.

Agreed,

I have been told the same thing, and although Iraq was a member of OPEC, they wanted to be sure to get the debt forgiven from OPEC member countries before openly discussing the issue of an alternative. My insiders say this is what is going on behind the scenes, but cannot be openly discussed since a backlash could result given the debt relief.

Think about, which nations were reluctant to commit to debt relief when other non OPEC countries had done so months back? As I have said many times, this is a far more complex situation than any of us can imagine. Sure is interesting seeing all the variables in this deal. I for one think Iraq should dump OPEC and form their own alliance with other regions not tied to the radical OPEC thugs. They have just admitted Sudan, and we all know what this will lead to with Darfur killings increasing even more than they are now.

The article below will enlighten you to the issues with OPEC, so I hope U.S. and alliance members can cut a deal with Iraq's oil and put the pressure on OPEC to mind their ways. It will also disclose peak oil concerns, which puts Iraq in an even higher value than most will ever know. Sure is interesting subject directly related to the dinar.

OPEC Admits New Member: More May Follow
By Luke Burgess

BALTIMORE, MD-For the first time in over two decades, theOrganization of Petroleum Exporting Countries (OPEC), which already produces over a third of the world's oil supply, extended its influence by admitting a new member, Angola, into the oil cartel.

There's no denying that OPEC is the eight-hundred-pound gorilla of the oil game. Member countries currently hold about two thirds of the world's total oil reserves. And in 2005, OPEC accounted for 41.7% of the world's oil production, compared with 23.8% from OECD members and 14.8% from the former Soviet Union.
And because oil is fundamental to nearly every aspect of modern life, OPEC has become incredibly influential on the geopolitical stage.
The following cartoon sums up the world oil situation nicely . . .

But OPEC's reign can't last forever. And because of seriously aging oil fields leading a peak in oil production and subsequent decline, the mighty OPEC may soon begin to lose its stranglehold on the world.

Get a load of this . . .Six of the cartel's nine largest oil fields are in confirmed production declines.

These include:

• Saudi Arabia's Ghawar, the world's largest known conventional oil field, in an 8% decline
• Kuwait's Burgan, the world's second-largest oil field, in a 14% decline
• Iran's Ahwaz, where production is declining at an alarming rate of 64% per year. Ouch!

On top of that, the water cut levels on some of these old elephant oil fields is unbelievable. Saudi Aramco, the national oil company of Saudi Arabia, is producing about five million barrels of oil a day (MMbbls/d) from Ghawar. But to get the five MMbbls/d out of the field, they are injecting seven million barrels of sea water per day back into Ghawar in order to prop up the pressure. It's the same story with several other OPEC fields. The bottom line is this: OPEC simply cannot organically grow production. The organization is tapped out. They can, however, procure growth.

OPEC Admits New Member

Yesterday, the Republic of Angola was unanimously admitted as the twelfth member during OPEC's 143rd conference in Abuja, Nigeria.
Angola's membership will be effective January 1, but the country won't be bound by production limits until March.

The African nation will be the first country to join OPEC since Gabon, which became a member in 1975, only to exit in 1994.

With current production of 1.4 MMbbls/d-an 18% increase for the year-Angola is the second major oil producer in Africa after Nigeria and now rivals Algeria as the ninth largest producer in OPEC. State oil representatives, however, expect production to further increase to 2 MMbbls/d by April and nearly double by the end of 2007, thanks to the exploration of new wells.
How?

The maritime zone along the Angolan coast is divided into 74 exploration blocks in shallow, deep and ultradeep waters. Of these, only about 30 are currently in operation. So a significant increase in production is feasible.
The addition of Angola to OPEC will boost the organization's clout. But with only 22.88 billion barrels of proved reserves, Angola will add only some 2.5% to OPEC's total reserves of over 882 billion barrels. So OPEC may consider admitting more new members.

OPEC May Grow More

Two more countries are knocking on OPEC's door in Vienna with membership applications in hand.

Sudan and Ecuador, which have proven oil reserves of 1.6 billion barrels and 4.5 billion barrels, respectively, have recently expressed their intention to bid for entry into the oil cartel.

Sudan is Africa's third largest crude producer. An oil ministry spokesman was quoted recently saying that his country was waiting for President Omar Hassan al-Bashir to greenlight the move to join OPEC, but that they were confident of his approval.

Sudan is under fire for a conflict in its western region of Darfur. Joining OPEC would give it leverage in its confrontation with the UN over atrocities and its refusal to allow peacekeepers into the area. Sudan currently produces about 330,000 barrels a day, and that figure is expected to increase considerably in the near future.

Ecuador, a former member of the cartel, is looking to get back in. In December of 1992 the country's government decided to secede from OPEC, saying membership didn't boost revenue. But now they may rejoin the group, adding to a shift towards nationalization of resources as espoused by current member Venezuela.

Ecuador pumps about 530,000 barrels a day, which would make it OPEC's smallest member. The country trails Venezuela, Brazil, Argentina and Colombia among South American producers.

Ecuador is planning to boost oil production to 900,000 barrels a day by 2010. Oil is the country's largest export, making up about 60% of overseas sales.
Ecuador's newly elected leftist President, Rafael Correa, has signaled his willingness to follow Venezuela in negotiating more advantageous deals with foreign oil groups.

If approved, the new OPEC additions shouldn't have much immediate effect on oil prices. However, I see this as a sign of the times.

OPEC as a whole may already have peaked, meaning the world has peaked. If this is the case, oil prices are poised for massive gains, underscoring our investment position.

I read this week that the World Bank is expecting oil prices to fall to $56 a barrel in 2007 and then to $53 in 2008.

Let me be the first to tell you that this prediction is a load of crap.
First of all, the World Bank couldn't predict snowfall in a blizzard. This was the same organization that told us oil prices were going to top out at $60 and average $56 in 2006. Here's proof.

In reality, oil prices topped out at $81.14 on July 14 and averaged $66.10. The fact is, oil prices are just taking a breather.

I fully expect a continuing rally in crude to push oil over the $80 mark again in 2007

Good work guys and thanks to everyone. We have such a great group on this forum that work together, care, help and are striving together to make our goals for the future happen.

We have all the news hounds, CP, kiko, Susie, Day Dreamer, cigarman, and lots of others. Then we have the analysts in WM, Mike Offshore, wardy, Susie, GK, paynes and many others. The original dinar girls in franny, tiff, chooch amongst others.

Fortunately we have no trolls and that's the way it should be. We are positive here, and always will be until the day it revals and that is closer than ever.

I frequent 6 forums in total, not only dinar forums but trading forums and none of them come close to this place for friendliness and a family atmosphere. A lot has to do with the mods, neno, whom I've not always seen eye to eye, lol, but he does a great job along with Raddy, Marek and co, so thanks to them too.

Let's keep it up guys and bring this ship into port. All our dreams WILL come true.

Mrs A and I are looking forward to meeting and spending time with you ALL in the Caymans next year.

The political forces constitute four committees to formulate its decisions final
Baghdad - (Voices of Iraq)

The Minister of State for National Dialogue Akram Al Hakim today, Saturday, the formation of four committees working on the final decisions of the political forces and parties, which started its work today in the capital, Baghdad.

Hakim said during the second meeting of the Conference "decided to form four committees for the drafting of resolutions to come out of the conference, the first name of the Constitution and its amendments, one of the most important committees."

He added that the committee is the second of the dissolved entities, specifically the military and the proposed re-designation of the officers "and will develop studies for the return of former officers and use them in the restructuring of the current military."

The Minister of State for the national dialogue that is the Third Committee of the "complete sovereignty elements, and how to deal with ending the foreign presence in Iraq and the termination of the militias through a study of the roots of the phenomenon, and put an end to it."

He pointed out that the Fourth Committee is the national balance and expanding political participation.

And today began the work of the political forces and parties attended by more than 200 Iraqi political personalities, including Prime Minister Nuri al-Maliki and members of the Baath party disbanded, and leaders of the political blocs and the President of the Kurdistan region Masoud Barzani, and the absence of the President Jalal Talabani because of his poor health and was attended by his representative.

Business will continue conference, which is the third in the framework of national reconciliation for two days.

ãÄÊãÑ-áÌÇä :: Aswat al Iraq :: Aswat al Iraq


Or the parliament has voted behind closed door on the Hydrocarbon Law and
Mr. Talabani needs the time to ratify the HCL!

Originally Posted by Adster

Good work guys and thanks to everyone. We have such a great group on this forum that work together, care, help and are striving together to make our goals for the future happen.

We have all the news hounds, CP, kiko, Susie, Day Dreamer, cigarman, and lots of others. Then we have the analysts in WM, Mike Offshore, wardy, Susie, GK, paynes and many others. The original dinar girls in franny, tiff, chooch amongst others.

Fortunately we have no trolls and that's the way it should be. We are positive here, and always will be until the day it revals and that is closer than ever.

I frequent 6 forums in total, not only dinar forums but trading forums and none of them come close to this place for friendliness and a family atmosphere. A lot has to do with the mods, neno, whom I've not always seen eye to eye, lol, but he does a great job along with Raddy, Marek and co, so thanks to them too.

Let's keep it up guys and bring this ship into port. All our dreams WILL come true.

Mrs A and I are looking forward to meeting and spending time with you ALL in the Caymans next year.

Good post Adster!

I agree with you, this is far away the best place to be!

Originally Posted by Hope Full

This was brought up as an opinion (by osw) in Oct. around the 28th I believe, I can tell you they won't re-introduce the old smaller bills because they were buried with all the other old dinar under the Baghdad airport landing strip. You may ask how I know, well my cousin was actually there and he buried it I spoke to him in great detail about this, about the same time that this opinion came about. He also helped with exchanging the new for the old. And his brother happens to be there now setting up there banking systems and so on, he recently came home (for a funeral) with millions of dinar and said the buzz is soon. And said he wasn’t at liberty to say much more. He said he let me know as soon as he gets wind of smaller dinar

Interesting,

Yes, there were several small denom notes which did not have Saddam's mug on them, and we know they were never counterfeited, so it would be logical move since these notes were familar with Iraqi's, and that is another reason to reintroduce them as needed.

As to the buried old Saddam notes, well, if they did so under the airstrip, this would have been a monumental engineering mistake. Being in the road remediation and construction industry, you neve want paper, an organic material under an air strip, or any road for it will deteriorate in time and compress causing major structural strengh issues. Landing stips, in particular are more critical given load extremes and the maintenance interuptions, so I would say this reported disposal method is a myth, or worse, a major mistake. (g)

Happy Holiday Seasons to all, Mike

Here you go: http://www.iraqdirectory.com/DisplayNews.aspx?id=2778

[QUOTE="GK";150091]The 15:1 Heavy Dinar means that they're recommending the release of the new IQD with supporting minor units per the major monetary unit, which is the 1 Dinar. Iraq's monetary unit of 1 dinar has always been supported by 1000 fils. Hence the term "Heavy Dinar." So back in 2003, when they recommended the 15:1 ratio, they're really saying to reintro the new IQD at $.06. Now we know that has not happened, yet. Nor has Iraq released the fils. At the program exchange rate of 1500, it really makes perfect sense with no fils being released. I believe, the 2003 think tank that the UN hired was talking about releasing the IQD initially with 100 fils as back-up, hence the 15:1 rate. This will also mimic the USD's 100 cents support per USD. Remember back in 2003, the price of oil was just half of what it is now, that's why I believe the think tank was pretty conservative in their recommendation. So at present with no fils yet released by the CBI, the dinar can only be in parity with the US cent not to the dollar. In short, the program exchange rate is really 1500 IQD/ 100 US cents or 15 IQD/$.01. I'd say the IQD is currently at the 15:1 "Light Dinar" stage, and it's about to get heavy.[/QUOTE]

[FONT="Book Antiqua"]
Great info. So is what this is saying in layman's terms, that when they introduce smaller fils and lower denomanations that the dinar with automatically go to .06 per USD and possible higher? GK what is your take on a intro rate once these fils are introduced? [/FONT]

Thought this was good info on how the CBI auctions work. Had not seen it before and thought it may help our members here understand it a little better.



Middle East Economic Survey


VOL. XLVIII

No 18

2-May-2005


The Foreign Exchange Auction In Iraq

By Simon Gray



Simon Gray is Adviser, Markets and Financial Infrastructure, Centre for Central Banking Studies (CCBS), Bank of England. During his secondment to the Coalition Provisional Authority (CPA) in Baghdad, he was Senior Advisor to the Central Bank of Iraq. He wrote this article for MEES.


The Central Bank of Iraq (CBI) introduced a foreign exchange auction on 4 October 2003, just under a fortnight before the start of the currency exchange (which replaced the old banknotes, and ran from 15 October to 15 January 2004). The timing was to a large extent dictated by that of the currency exchange, but the underlying need reflects Iraq’s position as a major oil-exporting country.


Background

The government’s revenue is predominantly in US dollars, from oil sales. To this extent, Iraq’s position is similar to that of many countries in the region. And in common with many countries in the region, its expenditure is largely in domestic currency, in this case Iraqi dinar. The Ministry of Finance therefore needs to sell dollars for dinar.


Typically, a Ministry of Finance with foreign currency revenues will sell surplus foreign exchange (it will use some for the purchase of imports for government projects etc; and may keep some in a separate oil stabilization fund) to the central bank; and the central bank will on-sell dollars to the market, via the banking system. Under a fixed exchange rate regime – and many oil-exporting countries in the region operate such a policy – it is clear at what rate the Ministry should sell to the central bank. The central bank can then on-sell, at the same rate, whenever banks request dollars. Prior to the war, Iraq operated a fixed exchange rate regime (albeit with a hopelessly non-market exchange rate), supported by exchange controls. But post war, the central bank was not in a position to operate a fixed exchange rate regime, and in any case did not want to lock into the exchange rate prevailing at the time.1


From the end of the war though summer 2003, the exchange rate was purely market-determined – the market in question being a street market for physical cash in three main locations in Baghdad. But the Ministry and central bank did not need to make use of this market, as official expenditure at that time was mostly in US dollar bills.2 From October, things had to change. Once the currency exchange was under way (from 15 October), it was clearly important – if only from a political point of view – for the government to make disbursements in the new Iraqi dinar, rather than predominantly in dollars as had been the case since May. This meant that the Ministry needed a reference rate at which it could sell dollars to the central bank; and the central bank needed a mechanism for on-selling dollars to the market.


Without a mechanism to rechannel dollars to the economy, there would have been two consequences:

*

A shortage of dollars could hit the dinar exchange rate, leading potentially to a very sharp depreciation;

*

A dollar shortage would also cut off import supply, pushing up prices sharply. (Large amounts of dollar expenditure by the CPA and MoF had, predictably, fed through to a huge increase in imports, as previously suppressed demand could now be satisfied.)

Associating the introduction of the ‘new’ currency with sharp depreciation, cutting of the supply of consumer goods, and a hike in prices for those goods still available would have been disastrous.


An Auction As The Solution

The solution was to introduce a foreign exchange auction. This was kick-started by the CBI selling a small amount of its foreign exchange reserves to the market. Thereafter, the auction rate could be used for MoF dollar sales to the CBI (so that it would be a genuine market rate, rather than something based on a straw poll of street exchanges); and the market could bid for dollars in the auction to meet the level of demand. If demand was excessive, the rate would adjust.


We were aware that, once the new currency was available, the MoF would be selling several hundred million dollars a month to the CBI, and that auctions could easily exceed $10mn a time as the domestic demand generated by government expenditure (payment of salaries, pensions etc) fed though to import demand (since many consumer goods had to be imported), and thus demand for foreign currency. It was important to prepare the market for the auction system, and ideally to have a mechanism up and running, before the amounts became large. This meant starting in early October at the latest.


The full details of the auction need not be covered here. Importantly, several meetings were held with the commercial banks and the non-bank licensed foreign exchange dealers to discuss the mechanics and the purpose of the auction. Three dry runs of the auction were held, to give participants a better feel and ensure the mechanics worked. The first dry run was very messy; but by the end everyone understood not only how to complete bidding forms correctly, but how to participate in the price formation process and learn from the previous auctions.


All the banks and foreign exchange dealers also understood how the CBI would participate. It would look at the volume and price of bids from the market before deciding on its own participation, so that it could choose the cut-off rate. Clearly, no central bank can have full freedom in this: trying to keep the dinar too strong could lead to an unsustainable drain on limited reserves, while trying to hold back appreciation could have an inflationary impact. But at the margin, and for a time, the CBI could influence the rate. Since the market is allowed to participate in the auction in either direction (buying or selling dollars), it is possible that the central bank will not need to participate at all. But in practice there will nearly always be a large net demand for foreign currency by the market.


Banks and licensed foreign exchange dealers were allowed to submit bids directly to the central bank; but the dealers had to accompany their bids by a confirmation from their bank that funds were available to honor the bid, if successful. Settlement is book-entry only, across accounts at the central bank. Most bids are made in the 15-30 minutes before the cut-off time for the auction; and results are published 30 minutes after the close of bidding. Details can be found on the CBI website (www.cbiraq.org). Settlement is same-day. The short time-scale – only possible with book-entry settlement – helps to keep the auction and the rest of the market in line with each other.


The Auction, Exchange Rate Policy And Inflation

The first auction was held on 4 October 2003, and received a single bid, for $20,000. There was some debate about whether to accept it, since it was arguably below the market rate. But the CBI decided it was important to give a positive signal to the banks, to encourage participation in the future, and the bid was accepted. Within a couple of weeks, the bid rate at the auction and the street price – CBI staff went out three times a day to check prices at a range of locations (preferring those where prices were displayed, rather than given in response to a request) – had merged; and volumes were soon close to $10mn3. The majority of Iraqi banks participate regularly.


The CBI has said regularly in the auction result announcements that its aim is to achieve broad exchange rate stability, in order to support domestic price stability. There is no exchange rate target or band. The CBI has been able to meet demand, and there is not enough economic information for the market to take a strong view on what an ‘appropriate’ level of the exchange rate might be, certainly not to push for change in the rate.


But while the ‘right level’ was not clear, the CBI could be confident that excessive volatility was harmful. After the massive shocks to the economy and to society more widely in the previous months, it was important as far as possible to engender an atmosphere of stability – particularly in the early days of the currency exchange, when many Iraqis would see their income switching from dollar cash to new dinars. In any case, in view of the upward stickiness of some prices, it was likely that exchange rate volatility would tend to increase the level of inflation.



Especially in the early days, it was not clear what a ‘normal’ level of day to day volatility might be, since there was no ‘normal’ period to compare with. The chart above shows the daily returns on holdings of new Iraqi dinar, and clearly indicates much more volatility in the early days of the auction, and of the currency exchange, than more recently. Two particular spikes in the chart – in early December and mid January – can be linked to the announcement of Saddam’s capture (when it was not clear what the long term impact would/should be), and the end of the currency exchange, when the trend appreciation of the dinar (arguably starting with Saddam’s capture) led to ‘irrational exuberance’.


In the former case, the CBI made no attempt to stand against the trend, but did help to smooth it by the level and rate of its participation in the auctions. By contrast, the very sharp appreciation of the dinar in early January seemed unwarranted and almost certainly unsustainable; and it was clearly upsetting the market4. On this occasion – on 15 January 2004 – the CBI bought a small amount of dollars at the auction, and indicated that the recent appreciation of the dinar ‘was not supported by any recent political or economic announcements’. In other words, the CBI again avoided taking a stance on the appropriate level of the exchange rate, but merely noted that nothing had changed recently which would justify the very sharp movements in preceding days. This worked, as the chart below indicates.



Similar action in January 2005, just ahead of the national elections, was also undertaken in response to an increase in volatility, but otherwise the market has been remarkably quiet.


Reducing exchange rate volatility, and then supporting a remarkably stable nominal exchange rate since the beginning of 2004, has proved to be a very powerful tool in meeting the CBI’s objective of low domestic inflation (formalized in the new CBI law, dated 6 March 2004). In Iraq, as in many commodity-exporting open economies, there is a rapid pass-through from the exchange rate to domestic inflation. The correlation is bound to be unstable, as it will be affected by expectations, changes in the level of demand (eg reflecting changes in the security situation), changes in the direct costs of importing goods in an unsafe environment, and periodic supply disruptions. But prima facie, there is strong evidence that a stable exchange rate has helped to support price stability.


1. In fact, there were differing exchange rates depending on the denomination of note used (with a difference of 25-30%); and the rate was very unstable.

2. The ID10,000 note was not widely accepted at face value, in part because of (legitimate) counterfeit concerns; and the smaller-denomination ID250 notes (worth around $0.12 at the time) could not be printed fast enough.

3. Within a year of the first auction daily turnover was regularly over $25mn.

4. In the words of a senior official at Rafidain on the evening of 14 January: “The market is going crazy. People are offering 1,000 for the dollar. What are you doing about it?”


**Note the info is from 2005, but the "how it works" premise is good info.

The Foreign Exchange Auction In Iraq

Found this article..few months old but very interesting...

Monetary Policy And Oil Production

Source: By Sabri Zire Al-Saadi

10/24/06

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.


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.



Cheers!
DayDream