Dr. Haidar Hussein Al-Tuma'*
Al-Furat Center for Development and Strategic Studies
The Iraqi economy is facing dangerous economic challenges that will threaten the levels of development and stability in the country.
The chronic decline in oil prices and the increasing expenditures for anti-Da'ish (ISIS) war, as well as the rehabilitation of destroyed liberated areas, the oil production levels of the new oil exports agreement, the continued corrosion in the reserves of the Central Bank, the dangers of floating the Iraqi dinar and the increase in the un-controlled inflation … all these are indications that foreshadow future loopholes that will necessitate that the economic decision-makers should seriously deal with the reality of post-oil economy.
In this context, it is believed that the monetary policy has a pivotal role in making the Iraqi economy avoid this part of the crisis, because the monetary policy is one arm of the overall economic arms used to achieve development, financial and economic stability and to overcome the reverse economic rounds through controlling their qualitative and quantitative tools.
In Iraqi oil-economy, the monetary policy and its tools have special and extraordinary privileges, due to the control of the general budget, which is basically financed by oil revenues, on the decisions taken by the monetary power, despite the independence of the Central Bank of Iraq according to its Law No. 56 of 2004, where the Iraqi government gets its dollar revenues through exporting huge quantities of oil to international markets, where the Iraqi oil ministry remits these dollars to the account of the finance ministry.
Due to the fact that most of the Iraqi governmental expenditures are spent in Iraqi dinars, the Iraqi finance ministry resorts to exchange the oil dollar with the Iraqi dinar, which is , already, available at the Central Bank of Iraq.
This results in getting the dollar into the Central Bank and the exit of the Iraqi dinar out.
The bank will accumulate the governmental dollars within the category of the foreign currency reserves.
This reserve of foreign currency shall be used in financing the demands of the services sectors (businessmen and others) and the family sector (citizens) in the exchange markets, which will, consecutively, result in the exit of the dollar and entering the Iraqi dinar again.
The above-mentioned mechanism denotes an important and dangerous fact that will framework the monetary policy in Iraq; namely, "the levels of the local monetary liquidity is an indication of the volume of governmental expenditures, which is , basically, connected with oil revenues, while the levels of monetary liquidity should be under the control and supervision of the Central Bank and subject to its designated goals".
The surplus of oil assets extends to cover the independence of the Central Bank of Iraq, disabling the functions of the monetary policy's tools in achieving the normal goals, like development and financial and economic stability.
In this regard, we can mention some of the modern challenges which the Central Bank suffered from lately, mostly of importance are:
1. To achieve the financial stability in the country is to get the balance between the non-oil budget and the local revenues in Iraqi dinars (taxes, fees, state's properties revenues… and others) with the local expenditures (the current and investment expenditures). As for the dollar revenues (basically from crude oil exports) should be devoted to pay foreign debts and cover governmental purchases from abroad. But the disrupted economic reality in the country indicates different and dangerous percentages, where the local income revenues do not cover only 10% of the total local expenditures, taking into consideration that the oil revenues and loans will assist covering the non-oil deficit in the general budget, on the account of paying foreign debts of the country. In times of oil flourishment and the abundance of oil revenues (till 2013), the general budget devoured about 70% of oil exports after being exchanged at the Central bank into Iraqi dinars, while the remaining part (30%) was used to pay foreign debts and cover the imports of the state.
During the decline in oil prices, 90% of oil revenues were directed to finance the general budget, and only 10% of the remaining part was used for paying foreign debts and covering governmental purchases from abroad.
2. The excessive dependence on oil generated reverse directions for the paths of the monetary and financial policies of the country, the general budget will have its inflationary pressures and direct effects on the reserves of the Central Bank, particularly when the latter comes to buy treasury transfers from secondary markets.
Lately, the Central Bank was obliged, due to the decline in oil revenues and the increase in the military expenditures to combat Da'ish organization, to make governmental discount transfers with the amount of 16 trillion Iraqi dinars to finance the general budget on the account of the decline of Central Bank's dollars in foreign exchange markets, which should be maintained to preserve the exchange prices and levels consecutively.
The decline in the reserves of the Central Bank is clearly manifested in these facts, where that loss of proportionality between governmental expenditures, which it is used by the Iraqi economy, and the receding oil revenues in 2014, resulted in the decline in the Central Bank's reserves of the dollar from about 77 billion in 2013 (before oil decline) to about 45 billion dollars in 2017, due to the greater demand on the dollar and the commitment of the monetary power to feed the local market with foreign currency to preserve the stability of the Iraqi dinar exchange and to avoid inflation and daily speculations on the dollar rates.
3. Generally, the monetary policy uses its traditional tools to control the money supply through the operations of the open market (sales and purchase of bonds, weekly and monthly deposits), in addition to discount prices for discounting commercial deals and the treasury transfers, as well as the price of the interests.
But due to the non-availability of effective stock market and the decline in financial depth (the capital of the joint stock companies in comparison with the Gross Domestic Product which reached not more than 2%), the phenomenon of the monetary economy and the inclination to keep the funds at home instead of saving them, lack of banking awareness… all these led to weakening the tools of the monetary policy in implementing their roles and objectives in controlling the levels of cash flow or directing it in the service of economic goals.
Ways to restore effectiveness
For restoring the effectiveness of the tools of the monetary policy and granting the monetary power more of real independence in directing policy compass, the Governor of the Iraqi Central Bank Dr. Ali al-Alaq pointed in a seminar held by al-Bayyan Center for Researches and Studies, a number of points, the most important are:
1. Necessity to achieve the optimum financial and monetary stability through minimizing non-oil deficit, increasing local revenues, controlling local expenditures and putting certain limits for operations costs.
2. Adaptation with the low oil prices through preparing a general budget on a certain and conservative oil price due to the expectations that the oil prices will not be recovered to past figures.
3. Determine an annual limited and narrow ceiling for the deficit of the general budget, as well as having effective control on the implementation of the budget and effective administration for the cash assets in treasury department (currently dispersed).
4. The management and control of the public debt in a manner that will sustain the financial position (The local public debt reached to about 48 trillion Iraqi dinars till July, 2017), should take into consideration the non-availability of other resources, as well as the sources of the public debts for the coming years.
5. Calculate the potential effects on foreign reserves when organizing the general budget, taking into consideration that it should be kept to the level of sufficiency limits and not endangering them to acute decline.
6. The Central Bank should continue its initiatives in supporting the development of the (real) sectors through agricultural, industrial and housing loans to stimulate the non-oil sectors and absorbing the momentum of the economic recession in the country.
7. Limit the accumulation of the local private and foreign debts that implementing the governmental projects, because this state of affairs will create an unstable and unsafe milieu for work and investment in Iraq.
8. The importance of the participation of the Central Bank in preparing the annual budget to ease the pressures on its reserves, as well as facing the financial and monetary challenges jointly and properly.
9. To attain the monetary stability, the imports shall be limited, controlling border outlets, encouraging and stimulating foreign investments and providing suitable conditions for their developments, in addition to imposing political, security, social and legal stability to stop the immigration of the national funds abroad.