The Potential and Balances of Monetary Policy in Iraq Haidar Hussein Al-Tohma / Al-Furat Center for Development and Studies
05:36 PM March, 24 2018
Monetary policy plays many roles and economic tasks to stimulate growth and economic, financial and monetary stability of any country. In Iraq, the central bank made significant progress in guiding the monetary policy compass after the entry into force of the Bank's law in 2004 and the establishment of the rules of monetary independence in accordance with article 56 of the said law. Where the monetary authority succeeded in achieving relative stability in price levels over the past ten years (after the shock of fuel prices in 2007), which contributed to reducing the cost of living and achieve relative stability in the real rates of cash entry for all social segments, including employees in particular because of the stability of their incomes in the short term . The policies of the Central Bank of Iraq to secure a financial and monetary stability umbrella was necessary for the start of investment and the resumption of development efforts and reconstruction, which was included in the national development plans.However, the opportunity for price stability in the country has not been exploited properly, and the investment and economic development rates have deteriorated over the past years due to the fragile political situation, the internal and regional security turmoil and the ongoing conflict between the center and the northern Iraqi region, as well as other obstacles, including the collapse of oil prices and weak coordination and harmony between policies. Macroeconomic and unilateral national economy and the penetration of financial, administrative, economic and political corruption in most governmental and non-governmental institutions. Obstacles of monetary policy The most important challenges that hinder the Central Bank of Iraq to implement an optimal monetary policy in the context of economic growth and sustainable financial stability can be:1- The unilateralism of the Iraqi economy and the dominance of the rent-model in the generation of GDP at the expense of the decline of the contribution of other economic sectors such as industry, agriculture and tourism, which increases the depth of structural imbalances and increases the difficulties of monetary policy in achieving their monetary, financial and economic objectives. 2 - Loss of the function of the Iraqi banking sector as a base link between surplus units (savings) and deficit units (investment) in favor of its involvement in the dollar auction and currency smuggling, which weakened the effectiveness of the impact of monetary instruments in the banking sector and directing funds towards development and investment. 3 - The weakness of the banking awareness of the citizen and the prevalence of distorted monetary phenomena such as currency, dollarization and currency speculation have contributed significantly to the weakening of the levels of financial and banking development in the country compared to most countries in the region and the world.4 - Lack of coordination and harmony between economic policies, especially monetary policy and fiscal policy, given the different trends and economic and financial visions. Monetary policy was more disciplined and regulated in achieving its objectives, while fiscal policy did not have clear features and did not reflect specific economic programs and policies as much as it was a mirror of the flow and decline of oil revenues. 5 - The dominance of the oil resource on the trends of monetary policy and swallow the monetary independence of the Central Bank, in the technical sense, given the shift of money supply from the local currency to a function of government oil revenues, rather than a function of monetary policy objectives.6 - The rigidity of the work of monetary instruments (discount rate, open market operations, legal reserve) in favor of adopting the exchange rate as a key tool in achieving price stability. The weakness of the productive apparatus in meeting the needs of the commodity public, relying on imports to provide all kinds of commodities and other requirements, has been required by the Central Bank of Iraq to focus on stabilizing the exchange rate as a single tool to stabilize price levels and combat inflation. 7 - The nature of Iraq's oil economy turned the central bank into a currency store by providing Iraqi dinars to the government in exchange for oil dollars. In contrast, the existing monetary equation obliged the Central Bank of Iraq to be the only bidder for the dollar in exchange for many parties wishing to acquire the dollar, such as traders, individuals and others. This has led to the accumulation of foreign reserves at the bank during periods of oil recovery, and its decline sharply with the collapse of oil prices.8 - The aggravation of corruption in the auction of foreign currency sale and the dominance of Mafiat politics and money on a large part of the dollar sold at official prices and resale in the parallel market market prices to achieve profit margins amounting to nearly millions of dollars per month at the expense of erosion of dollar reserves at the Central Bank. Features deviation correctionThe previous challenges reveal the nature of the brakes that hinder the CBI in achieving optimal monetary policy, due to the imbalance of the economic environment in the country and the excessive reliance on oil in funding the budget as well as the spread of corruption and other challenges inherent in the structure of the Iraqi economy. However, some measures may help to activate the monetary policy and its success in achieving its monetary, financial and economic objectives. The most important is to create a channel for coordination, consultation and co-operation between the finance policy and the monetary policy in order to swallow trends and maintain financial deficits (As in 2016), on the one hand, and the depletion of the dollar reserve in the bank (a decline due to worsening fiscal deficits) on the other.On the other hand, finding a new outlet to feed demand for the dollar without going through the foreign currency auction will be a long step towards eliminating the whales of corruption and maintaining the bank's foreign currency reserves. The development of the Iraqi market for securities can also increase the absorption of savings and individual reserves and re-pump them into projects Development and investment, as well as the role of the financial market in re-feasibility and effectiveness of monetary instruments and provide funding for the government and companies. * Researcher at Al-Furat Center for Development and Strategic Studies / 2004-Ⓒ2017 http: // http: [You must be registered and logged in to see this link.]
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