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The Exchange Rate of Foreign Currency in Economic Feasibility Studies

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The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by Neno on Wed 27 Mar 2013, 2:26 pm

Shared with me today from another member and we would like to read all comments and thoughts. TY ~Neno

The Exchange Rate of Foreign Currency in Economic Feasibility Studies


Below
are the central controls related to the exchange rate of the foreign
currency to convert the project inputs and outputs from foreign currency
to its equivalent in the local currency, and that is by calculating the
net discounted present value standard and the internal return on
investments in economic analysis that governs investment projects that
costs excess one million dinars.




Estimate the shadow price of foreign currency:



1. It
is necessary to put central controls to amend the official exchange
rate * to reflect the shadow price of the foreign currency
, and that is considered one of the necessary requirements to implement the
net discounted present value standard and the internal return rate on
investment in the economic calculation stated in the instructions,
paragraph nine.



The
central controls for adjusting market prices distinguished a group of
outputs and inputs traded internationally, where the projects production
or usage of them is reflected on the abundance of foreign currency in
the economy and thus project outputs or inputs used of such are
considered purely foreign currency outputs or inputs.








* What is meant by exchange rate: the number of units of foreign currency, expressed in dollar per one dinar.

In particular the following outputs and inputs of foreign currency were distinguished:




· Export-outputs.

· Outputs marketed locally that substitute imports.

· Imported inputs.

· Inputs produced locally that usually go to exports.

· Foreign labor.


According
to the pricing rules the value of the output and input (traded) is
calculated using export prices (FOB) and import prices (CIF), according
to what is listed in the pricing rules.



In
other words the pricing rules calculate what the project produces from
foreign currency (quantity of exports multiplied by the export price
(FOB) in foreign currency or the quantity of
substitute
imports multiplied by the import price (CIF) in foreign currency, as
well as what the project uses from foreign currency and imported inputs
multiplied by the import price (CIF) in foreign currency .... etc.).


In
a later step, project outputs and inputs must be converted from the
foreign currency to its equivalent in local currency (dinars) by using a
specific exchange rate for the foreign currency.





2. Justifications for exchange-rate adjustment:
there are a number of important and powerful arguments which support
the view that the official exchange rate reduces the real value of
foreign currency for purposes of calculating the economic
national profitability for investment projects and hence for the
purposes of investment planning. It is demonstrated in this context to
call for assessing the dinar for less than (3.208) dollar (official
exchange rate) when assessing project outputs and inputs of traded goods
of exports,
substitute imports and imports... etc.



The justifications to call for the use of an exchange rate that is lower than the official exchange rate are:



· The
use of an exchange rate that is lower than the official rate is the
appropriate action at the investment planning level to translate the
country’s economic strategy aiming at stimulating central investments in
the sectors that encourage the development of non-oil exports, as well
as sectors that encourage the expansion of domestic production base in
order to reduce imports and compensate it with local
commodities.
This helps to reduce reliance on foreign exchange earnings from crude
oil exports and increases the share of non-oil sectors in the local
production.




· The
application of the amended exchange rate on project imported inputs
will assist in directing investments away from aggregated sectors
dependent on imported inputs and the preference of those sectors that
rely on locally produced inputs.




· The
use of the amended exchange rate helps to correct the balance in favor
of the traded goods sectors compared to non-traded goods.




· The
real exchange rate has declined rapidly since the early seventies,
through rapid rise of the level of prices and local costs which led by
the steadiness of the official exchange rate to change in prices and
actual local rate costs that gave an advantage for imported goods at the
expense of locally produced goods, meaning that it led to deterioration
of the competitiveness of alternative replacement goods and export
commodities.




· This
action shows that the official exchange rate overestimates the value of
the dinar, compared to the foreign currency and from the promoting
goods substituting imports and export commodities point of view of.




And in support to this view is the state’s utilization and in a broad approach to the customs
and quantitative protection policies especially for consumer goods, as
well as export subsidies that exports have through an amended export
exchange rate.






3. Estimate
the amended exchange rate of the Iraqi dinar to be used in technical
and economical feasibility studies and for (1.134) dollar per dinar
. This price should be approved for 3 years until re-appreciation by the competent authorities.

http://www.mop.gov.iq/mop/index.jsp?sid=1&id=308&pid=295&lng=en


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Re: The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by Neno on Wed 27 Mar 2013, 2:57 pm

If I haven't messed with your head to bad here with this, then lay the thoughts out that are roaming around up there. Always told you that there is two rates, the "Real Rate" and the "Program Rate". This piece from the Iraq GOV "MOP", uses yet a new design called "Amended Exchange Rate at the borders sort of say. What ever the case, they are contemplating the figures here and making them public knowledge... lol!


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Re: The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by csd9013 on Wed 27 Mar 2013, 3:09 pm

If I'm understanding right and I'm probably not, they are changing the rate to $1.13? Please explain, you know I failed Dinar 101.

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Re: The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by jbowhunter on Wed 27 Mar 2013, 3:17 pm

I believe that the $1.13 rate is what they will use internally to justify capital projected within the country. It is an internal Iraqi accounting philosophy for coming up with ROI on in country capital investments. Correct me if I am wrong.

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Re: The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by Neno on Wed 27 Mar 2013, 3:35 pm

Cool, I am steadily thanking the thoughts here on the piece. Little shocked there is only two with over 150 views already but hey, some just like to keep it all balled up inside.... ;)


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Re: The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by Screwball on Wed 27 Mar 2013, 3:50 pm

Yep interesting I agree that they make reference to real rate and program rate. I see them being two rates 3.02 and 1.13 either way it if it doesn't start at 1 it won't be there long and this I have seen before over 3 years ago! Doesn't matter on rate it will be all shits and giggles!

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Re: The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by Neno on Wed 27 Mar 2013, 4:16 pm

Screwball says that he seen this over 3 years ago.
I have a friend that traced it to just resent in 2012.

I was able to go to the Ministry of Planning, it is dated 2012 - THAT'S
GOOD ENOUGH FOR ME, LET'S KEEP PRAISING THE LORD AND KEEPING THE PRAYERS
GOING, THANKS AGAIN FOR ALL YOU DO

By the below then , it must of never happened yet.
I have never seen it but that doesn't mean anything.
Only thing I remember is a hard peg for at least
a year at first.. ;)



3. Estimate
the amended exchange rate of the Iraqi dinar to be used in technical
and economical feasibility studies and for (1.134) dollar per dinar
. This price should be approved for 3 years until re-appreciation by the competent authorities.


Last edited by Neno on Wed 27 Mar 2013, 4:23 pm; edited 2 times in total (Reason for editing : added the friends message of the find)


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Re: The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by fonz1951 on Wed 27 Mar 2013, 4:22 pm

only thing i know for sure is that i am just as confused as ever! is this leading us to think there will be 2 different rates, for 2 different reasons?

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Re: The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by Jetsa on Wed 27 Mar 2013, 4:46 pm

I can do better than "I've seen this before". This is from a meeting in London from 3 or so years ago. At the time, we assumed that rate was for the implementation of the projects between big oil companies and Iraq because the meeting was titlted something like "Business in Iraq". The $1.34 (or whatever that rate was in the post), we assumed at the time, was the rate that the businesses would use to conduct business in Iraq until the real rate was revealed because at this time, Iraq was promoting businesses to come into Iraq, as in Iraq is now open for business. Someone had even posted the link for an invitation to the event if you desired to go.



Old stuff but good stuff. Maybe reposted but I would have no idea why an official reposting of it would occur.

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Re: The Exchange Rate of Foreign Currency in Economic Feasibility Studies

Post by Neno on Wed 27 Mar 2013, 4:56 pm


Old stuff but good stuff. Maybe reposted but I would have no idea why an official reposting of it would occur.
How about for the amended exchange rate?


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