The Exchange Rate of Foreign Currency in Economic Feasibility Studies

First topic message reminder :

The Exchange Rate of Foreign Currency in Economic Feasibility Studies


 
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.

 

 
1.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.

 

 
1.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.

   The Ministry In Brief
|
COSQC
|
CSO
|
NCCMD
Home I Site Map I FAQ I Newsletters I Contact Us I INQUIRIES / COMMENTS I DISCUSSION FORUM I Login Copyright © MoP Iraq 2012
 

 

This article is new.  The 2012 copyright is for the site.

 

 
..
[You must be registered and logged in to see this link.]

fonz1951 wrote:imo i think that is the best way to do it because, a lot of people will cash in some immediately,then set on the rest until later at a higher rate, at least that's what i would do.

I'm not saying I don't want the $3.20 rate but I can't help but wonder if Iraq immediately goes from nothing to $3.20 will it cause chaos within the country.

I'm good with either rate.

(3.208) dollar (official exchange rate) wrote:

Notice "OFFICIAL"...

"BUT WHEN"....?

Soon

bajachaser wrote:"BUT WHEN"....?

I think  the "when" will be when it shows up on the CBI. I don't think they will ever give advance notice that it is going to happen. I know if I knew when I would be a lot happier but they are not trying to please me. ;)

csd9013 wrote:I'm not saying I don't want the $3.20 rate but I can't help but wonder if Iraq immediately goes from nothing to $3.20 will it cause chaos within the country.

I'm good with either rate.

that is a good question.and one i'm certainly not qualified to answer, but like you, i will most certainly take either rate. after all i'm not greedy, just needy 

bajachaser wrote:"BUT WHEN"....?

Will put together a post this evening that will show that. Stay tuned.... ;)

jan 2014-jun 2014

This article got me to thinking and I remembered LIT posting this article. 

[You must be registered and logged in to see this link.]

What's my point? I guess I really don't have one except maybe this rate is somewhere in the middle of the rates in this article.