Why you should not use Central Bank reserves (cover dinar) in the treatment of the budget deficit?

Why you should not use Central Bank reserves (cover dinar) in the treatment of the budget deficit?

12.03.2014 (0:01 pm)

D. Mohammad Reza Sinan Shabibi


During the ongoing discussions on the 2014 budget show that there is a large deficit in the estimates of about 30 trillion dinars.








And the inability of such funding be processed (internal or external) or adaptation (spending cuts). Details of these topics is beyond the scope of this article, but we noticed on the other hand that there are some proposals from the House of Representatives has taken some form of media statements by using Central Bank reserves to plug the deficit.

What is the problem with such a proposal? Because this view depicts the Central Bank reserves like a supplier or financier of the budget, it has to be clear to us that the difference between them. There is no doubt that the budget revenues that go to the Ministry of Finance and Revenue consists of well-known, such as taxes and any other income. In Iraq occupies oil revenues within the larger space budget revenues. The Central Bank reserves it consists, basically, as a result of the government's purchase of the Iraqi dinar foreign currency from the central bank. Currency reserves is the cover of the national currency and protector, ie it covers at least the currency of the people and the banks that are guaranteed reserve. This keeps the lid on the value of the currency and ensure its stability, which is an important condition for development. So the emphasis is not to be used to ensure that the currency in circulation and stability on the one hand and because it covers imports in the case of complete interruption of financial resources. Through the reserve also we can achieve exchange rate stability through any interview request on the dollar completely. We have started to apply this system in 2004 and is still applied by the current management of the bank. The use of currency reserves to defend it is what the so-called foreign currency auction, if the auction did not meet this demand for the dollar to form the basis for the collapse of the dinar. Russia has used a similar method recently, where the central bank there to sell 10 billion dollars of reserves to defend the Russian ruble.

It is dangerous to be manipulated reserves for commercial purposes, only His goal is to achieve price stability through exchange rate stability and not to finance the budget, for example. This reserve is not money frozen in international banks as I have already told some members of the House of Representatives, it is used for the management of the currency in the short-term cash investments in addition to providing safety in case of disruption of financial resources fully. When measuring the number of analysts reserve the months where we can manage the economy without resources from abroad, this reserve will provide a significant degree of reassurance and stability.

This is a fundamental issue that has to be estimated by the brothers of the House of Representatives and the government that they will be assured they are going to discuss and economic decision-making. In addition, this cover up or block a possible attack on the currency, which could come through a sudden increase in the demand for reserves of Iraq, which requires our full readiness to do so. Must be the reserve liquid and ready for quick use.

The economic war used to influence the exchange rate, for example, it is possible for a hostile state that you subtract large quantities of the Iraqi dinar in the local or regional market for use in buying the dollar. The changes under globalization systems are very large and we must be prepared her all the time, especially as we yield economy open to the world and do not have the resource or another substitute for oil. There are some central banks allow the temporary borrowing of reserves from the central bank and these are rare cases, but that this borrowing must be retrieved through Thelathochehr as is the case in Malaysia, for example.

The only case in which it is used up or the cover is a state final stop to the flow of financial resources as a result of wars or disasters and reserve in this case differs from the savings, which is used in the case of insufficient resources. On the whole and in normal circumstances may the central bank using the Reserve in short-term investments and the ratio used in this area is very small, because the reserve must remain liquid on the whole.

It is important to keep the bulk of the reserve is ready to use to protect the owner of this country's currency reserves. In general, the central bank lending to the government can help to inflation, this means that the central bank is working against its main objective of reducing inflation. On the other hand that the budget deficit is the deficit Schematic and our past experiences show that this deficit can not be achieved, so it is not inconceivable that they can be to take from the reserve and syste thier negatively on the balance sheet of the central bank and block the achievement of its objectives with the result. The Iraqi government has the financial asset that can be exploited by well productively in creating the budget. So it has focused the Central Bank Law in Article 26 on the prohibition of lending to the government.

Any lending that would put the Department of the Central Bank in violation of the law. The direct lending requires serious action to amend the law on the central bank can be here studying international experience in this field.

The damage to the truncation of the reserve will receive all of the economy, especially in regard to its impacts inflation and the inability of monetary policy to contribute to economic stability. The cash market sensitive and rapidly changing, and the Iraqi economy does not have the infrastructure to cope with the strong rapid changes because it does not have control over the resources in general, but it can control up and use it in a timely manner.

The reserve is not used to address the budget deficit. This is the duty of government resources or government savings or borrowing internal or external. It should not be considered a large budget deficit Essentially, this would have required a great deal of negotiations between the government and the relevant provinces.

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